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Item 7. Management’s Discussion and Analysis

2022-03-15 compared with 2021-03-15 · 403 added, 287 removed, 434 unchanged (61% of the section changed)

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of financial condition as of December 31, 2020 and 2019 and results of operations for each of the years in the two-year period ended December 31, 2020 should be read in conjunction with our consolidated financial statements and related notes thereto, included in Part II ITEM 8 of this report.

Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

All share and per share data have been adjusted to reflect the stock split effective November 27, 2018.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of financial condition as of December 31, 2021 and 2020 and results of operations for each of the years in the three-year period ended December 31, 2021 should be read in conjunction with our consolidated financial statements and related notes thereto, included in Part II ITEM 8 of this report.

Forward-Looking Statements

The disclosures set forth in this item are qualified by important factors detailed in Part I captioned Forward-Looking Statements and ITEM 1A captioned Risk Factors of this report and other cautionary statements set forth elsewhere in the report.

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.

Critical Accounting Estimates

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation and uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.

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.

Management has determined the following accounting policies to be critical:

Allowance for Credit Losses on Loans and Unfunded Commitments - For information regarding critical estimates related to our allowance methodology, the provision for credit losses, and risks to asset quality and lending activity, including the transition from the incurred loss method to the current expected credit loss ("CECL") method under ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326) and related amendments , which we adopted as of December 31, 2020, see ITEM 1A - Risk Factors, the Allowance for Credit Losses section in ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, Note 1 - Summary of Significant Accounting Policies, and Note 3 - Loans and Allowance for Credit Losses in ITEM 8 - Financial Statements and Supplementary Data of this Form 10‑K.

Allowance for Credit Losses on Investment Securities - For information regarding our investment securities and risks associated with identifying impairment and estimating the allowance for credit losses under the new CECL method, see ITEM 1A - Risk Factors, Note 1 - Summary of Significant Accounting Policies, and Note 2 - Investment Securities in ITEM 8 - Financial Statements and Supplementary Data of this Form 10‑K.

Accounting for Income Taxes - For information on our tax assets and liabilities, and related provision for income taxes, see Note 1 - Summary of Significant Accounting Policies and Note 11 - Income Taxes in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.

Fair Value Measurements - For information on our use of fair value measurements and our related valuation methodologies, see Note 1 - Summary of Significant Accounting Policies and Note 9 - Fair Value of Assets and Liabilities in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.

Management has determined the following accounting estimates and related policies to be critical:

Allowance for Credit Losses on Loans and Unfunded Commitments

The allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis at the balance sheet date to present the net amount of loans expected to be collected.

The allowance for losses on unfunded loan commitments is based on estimates of probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity and loss rates as determined for pooled funded loans.

The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities.

Management estimates these allowances quarterly using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Credit loss experience among the Bank and peer groups provides the basis for the estimation of expected credit losses.

The allowance for credit losses ("ACL") model utilizes a discounted cash flow ("DCF") method to measure the expected credit losses on loans collectively evaluated that are sub-segmented by loan pools with similar credit risk characteristics, which generally correspond to federal regulatory reporting codes.

In addition, the DCF method incorporates assumptions for probability of default ("PD"), loss given default ("LGD"), and prepayments and curtailments over the contractual terms of the loans.

Under the DCF method, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows using the loan's effective rate.

Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable and supportable forecasts of economic conditions to differ from the conditions that existed during the historical period included in the development of PD and LGD.

Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which decreased to 6.5% at December 31, 2021 from 9.3% at December 31, 2020.

The ACL model incorporates a one-year forecast.

For periods beyond the forecast horizon the economic factors revert to historical averages on a straight-line basis over a one-year period.

We performed a sensitivity analysis as of December 31, 2021 and determined that a 1% change (e.g., 5.5% to 6.5%) in the forecasted quarterly unemployment rates over the next four quarters resulted in an 8% change to our allowance for credit losses on loans.

This impact does not consider other assumption changes to either the quantitative factors, such as probability of default, loss given

default, loan mix or cash flows, prepayment/curtailment rates, and individually analyzed loans, or qualitative factors as discussed in Note 1 - Summary of Significant Accounting Policies.

Additionally, because current economic conditions and forecasts can change, as future events are inherently difficult to predict, the estimated credit losses on loans and unfunded commitments could change significantly.

While we believe we use the best information available to determine the allowance for credit losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance.

For information regarding critical estimates related to our allowance for credit losses methodology, the provision for credit losses, and risks to asset quality and lending activity, see ITEM 1A - Risk Factors, the Allowance for Credit Losses section in ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations,

We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate.

These tax laws are complex and subject to different interpretations by us and the government taxing authorities.

We review our provision for income tax expense monthly and calculate the carrying value of deferred tax assets and liabilities quarterly.

In establishing a provision for income tax expense, we make judgments and interpretations about the application of these inherently complex tax laws.

In addition, our estimates include making judgements about when future items will affect taxable income.

Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.

For further information on our tax assets and liabilities, and related provision for income taxes, see Note 1 - Summary of Significant Accounting Policies and Note 11 - Income Taxes in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.

Fair Value Measurements

We use fair value measurements to record certain financial instruments and to determine fair value disclosures.

Available-for-sale securities and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis.

Additionally, we record at fair value other financial assets on a nonrecurring basis such as collateral dependent loans and other real estate owned.

These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets.

We group our assets and liabilities that are measured at fair value into 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.

The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable.

Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data.

For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value.

When observable market prices and data are not fully available, management judgment is necessary to estimate fair value.

In addition, changes in the market conditions may reduce the availability of quoted prices or observable data.

Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement.

Fair value is discussed further in Note 1 - Summary of Significant Accounting Policies and Note 9 - Fair Value of Assets and Liabilities in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.

Business Combinations

Business combinations are accounted for using the acquisition method of accounting where the assets and liabilities of the acquired entities have been recorded at their estimated fair values at the date of acquisition.

Goodwill represents the excess of the purchase price over the fair value of net assets acquired.

The purchase price allocation process requires significant judgment in the estimation of the fair values of the assets acquired and the liabilities assumed.

Management may obtain third-party valuations such as appraisals or discounted cash flow analyses, or we may derive fair values internally using techniques as discussed in Fair Value Measurements above.

Management assesses qualifications of third-party valuation specialists, reviews assumptions applied and takes responsibility for the results of fair value estimates.

Merger-related expenses include costs directly related to

merger activity such as legal and professional fees, system consolidation and conversion costs, and compensation costs associated with employee severance and retention incentives.

We account for merger-related costs as expenses in the periods in which the costs are incurred and the services received.

Accounting policies and estimates are discussed further in Note 1 - Summary of Significant Accounting Policies and Note 18 - Merger in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.

RESULTS OF OPERATIONS

Financial Highlights

The following are highlights of our financial condition and results of operations.

The data was derived from the audited consolidated financial statements of Bank of Marin Bancorp.

At December 31,

(dollars in thousands, except per share data) 2021 2020

Selected financial condition data:

Total assets $ 4,314,209 $ 2,911,926

Loans, net allowance for credit losses on loans 1

$ 2,232,622 $ 2,065,682

Deposits $ 3,808,550 $ 2,504,249

Borrowings and other obligations $ 419 $ 58

Subordinated debenture $ — $ 2,777

Stockholders' equity $ 450,368 $ 358,253

Asset quality ratios:

Allowance for credit losses to total loans 1.02 % 1.10 %

Allowance for credit losses to total loans, excluding SBA PPP loans 2

1.07 % 1.27 %

Allowance for credit losses to non-accrual loans 3

Non-accrual loans to total loans 3

0.37 % 0.44 %

Capital ratios:

Tangible common equity to tangible assets 4

8.76 % 11.27 %

Total capital (to risk-weighted assets) 14.58 % 16.03 %

Tier 1 capital (to risk-weighted assets) 13.70 % 14.82 %

Tier 1 capital (to average assets) 8.85 % 10.80 %

Common equity Tier 1 capital (to risk-weighted assets) 13.70 % 14.69 %

Loan-to-deposit ratio 59.23 % 83.40 %

Number of branches 31 22

Full time equivalent employees 328 289

For the Years Ended December 31,

(dollars in thousands, except per share data) 2021 2020 2019

Selected operating data:

Net interest income $ 104,951 $ 96,659 $ 95,680

Provisions for (reversals of) credit losses on loans and unfunded loan commitments, net (2,441) 6,164 1,029

Non-interest income 10,132 8,550 9,084

Non-interest expense 2 5

72,638 58,458 57,841

33,228 30,242 34,241

Net income per common share:

Basic $ 2.32 $ 2.24 $ 2.51

Diluted $ 2.30 $ 2.22 $ 2.48

Performance and other financial ratios:

Return on average assets 0.94 % 1.04 % 1.34 %

Return on average equity 8.43 % 8.60 % 10.49 %

Tax-equivalent net interest margin 6

3.17 % 3.55 % 3.98 %

Cost of deposits 0.07 % 0.11 % 0.20 %

Efficiency ratio 63.12 % 55.56 % 55.21 %

Cash dividend payout ratio on common stock 7

40.52 % 41.07 % 31.87 %

Cash dividends per common share $ 0.94 $ 0.92 $ 0.80

1 Includes SBA PPP loans of $111.2 million at December 31, 2021 and $291.6 million at December 31, 2020.

2 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.

Refer to footnote 1 above for SBA PPP totals.

3 Non-performing loans include loans on non-accrual status.

4 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 $371million, $324 million and $302 million at December 31, 2021, 2020 and 2019, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets of $79million, $34 million and $35 million at December 31, 2021, 2020, and 2019, respectively.

Tangible assets excludes goodwill and core deposit intangible assets.

5 2021 included $6.5 million (or $4.9 million, net of taxes) in merger-related one-time and conversion costs.

6 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% in 2021, 2020 and 2019, by total average interest-earning assets.

7 Calculated as dividends on common shares divided by basic net income per common share.

Executive Summary

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The following are highlights of operating and financial performance for the year ended December 31, 2021:

• The Bank achieved total loan growth of $245.3 million, or 13% in 2020, to $2.089 billion at December 31, 2020, from $1.843 billion at December 31, 2019.

SBA PPP loans outstanding at December 31, 2020 were $291.6 million.

• Credit quality remains strong with non-accrual loans representing 0.44% of the Bank's loan portfolio as of December 31, 2020.

The adoption of CECL in the fourth quarter of 2020 resulted in an increase to the allowance for credit losses on loans of $748 thousand and a $1.1 million increase to the allowance for unfunded loan commitments.

See Note 1, Summary of Significant Accounting Policies, for additional information.

• Deposits grew $167.8 million, or 7%, to $2.504 billion at December 31, 2020, compared to $2.336 billion at December 31, 2019.

Non-interest bearing deposits grew by $225.8 million in 2020, or 20%, and made up 54% of total deposits at year-end.

Cost of deposits remained low at 0.11% in 2020, compared to 0.20% in 2019.

• Merger-related one-time and conversion costs reduced net income by $4.9 million, net of taxes, or 34 cents per share for the year ended December 31, 2021.

Return on average assets ("ROA") and return on average equity ("ROE") were also significantly impacted by provisions for credit losses on acquired loans and shares issued in conjunction with the merger.

As shown in the reconciliation of GAAP to non-GAAP financial measures on pag e 28, year-to-date ROA of 0.94% and ROE 8.43% would have been 1.08% and 9.67%, respectively, compared to 1.04% and 8.60% in the prior year.

• Loans increased $167.1 million in 2021, or 8%, to $2.256 billion at December 31, 2021, from $2.089 billion at December 31, 2020.

Year-over-year growth was largely attributable to $419.4 million in loans from the American River Bank ("ARB") acquisition on August 6, 2021.

Non-PPP loan originations of $181.7 million for the year were concentrated in commercial and real estate loans and compared to $165.5 million in 2020.

Payoffs included $218.1 million non-PPP loans compared to $169.2 million in 2020.

In 2021, PPP loan originations were $136.2 million and PPP loans forgiven and paid off were $328.5 million.

• Credit quality remains strong with non-accrual loans representing 0.37% of the Bank's loan portfolio as of December 31, 2021, compare to 0.44% at December 31, 2020.

During 2021, we reversed $1.4 million in credit losses on loans and $992 thousand in credit losses on unfunded commitments.

These reversals compared to provisions for credit losses on loans of $4.6 million and provisions for credit losses on unfunded commitments of $1.6 million in the prior year.

2021 activity included the effects of the business combination with ARB, partially offset by ongoing improvements in the underlying economic forecasts.

2020 credit loss provisions included significant qualitative adjustments for uncertainties associated with the COVID-19 pandemic as well as the adoption of the current expected credit loss methodology.

• Deposits grew $1.304 billion, or 52%, to $3.809 billion at December 31, 2021, compared to $2.504 billion at December 31, 2020.

Growth was comprised of $790.0 million related to the August 6, 2021 ARB acquisition, new accounts and growth in the existing customer base.

Non-interest bearing deposits grew by $555.6 million, or 41%, in 2021 and made up 50% of total deposits at year end.

Cost of deposits remained low at 0.07% for the full year of 2021, down from 0.11% in 2020.

Additionally, as part of our liquidity management, the Bank maintained $173.1 million and $173.4 million in off-balance sheet deposits with deposit networks at December 31, 2021 and 2020, respectively.

• Net interest income totaled $105.0 million and $96.7 million in 2021 and 2020, respectively.

The $1.0 million increase in 2020 was primarily due to SBA PPP loans and lower rates on interest-bearing deposits, largely offset by lower yields on earning-assets.

The tax-equivalent net interest margin decreased to 3.55% in 2020, compared to 3.98% in 2019.

The 43 basis point decrease was primarily due to lower yields across interest-earning asset categories, partially offset by lower rates on interest-bearing deposits.

The $8.3 million increase in 2021 was primarily due to higher average loan and investment securities balances and higher SBA PPP loan fee accretion income.

These 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 yields on investment securities.

The tax-equivalent net interest margin decreased by 38 basis points to 3.17% in 2021, compared to 3.55% in 2020 for the reasons already mentioned.

• The efficiency ratio was 63.12% in 2021, up from 55.56% in 2020.

Contributing to this increase was the decrease in net interest margin, higher provision for credit losses on unfunded loan commitments, and lower income from s ervice charges on deposit accounts and ATM fees in 2020.

• For the year ended December 31, 2020, return on assets and return on equity were 1.04% and 8.60%, respectively, compared to 1.34% and 10.49% in the prior year.

• All capital ratios exceeded regulatory requirements.

The total risk-based capital ratio for Bancorp was 16.0% at December 31, 2020 up from 15.1% at December 31, 2019.

Tangible common equity to tangible assets was 11.3% at both December 31, 2020 and December 31, 2019 (See footnote 8, ITEM 6, Selected Financial Data, for the definition of this non-GAAP financial measure).

As shown in the reconciliation of GAAP to non-GAAP financial measures on pa ge 28, t he 2021 efficiency ratio excluding merger-related one-time and conversion costs would have been 57.51%.

• All capital ratios were above regulatory requirements for a well-capitalized institution.

The total risk-based capital ratio for Bancorp was 14.6% at December 31, 2021 and 16.0% at December 31, 2020.

Tangible common equity to tangible assets declined to 8.8% at December 31, 2021 from 11.3% at December 31, 2020 primarily due to share repurchases and growth in excess liquidity from an increase in legacy Bank of Marin deposits (refer to footnote 4 on page 26 for definition of this non-GAAP financial measure).

The total risk-based capital ratio for the Bank was 14.4% at December 31, 2021 and 15.8% at December 31, 2020.

• The Board of Directors declared a cash dividend of $0.24 per share on January 21, 2022.

This was the 63 rd consecutive quarterly dividend paid by Bank of Marin Bancorp.

The cash dividend was paid on February 12, 2021 to shareholders of record at the close of business on February 5, 2021.

• Our strong capital and liquidity position afforded us the opportunity to eliminate a high cost funding source.

On March 15, 2021 we redeemed the $2.8 million subordinated debenture, which carried a rate of 5.68% in 2020.

The redemption consisted of $4.1 million principal balance, quarterly interest due, and $1.3 million in accelerated accretion of purchase discount.

The contractual interest rate on the subordinated debenture was 3-month LIBOR plus 1.40%, or 1.62% as of December 31, 2020.

COVID-19 Pandemic-Related Response Update - We have remained open and responded to customer needs throughout 2020.

We more than doubled our charitable contributions to non-profit organizations in our community to over $1.0 million in 2020.

In March 2020, we began waiving all ATM and overdraft fees and cancelling early withdrawal penalties for time certificate of deposits when allowed by law.

We accommodated loan payment relief requests for borrowers with financial hardships and lowered interest rate floors on commercial Prime Rate loans.

Under the provisions of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") of 2020, Bank of Marin originated over 1,800 PPP loans to small businesses, reaching nearly 28,000 employees in our markets.

In 2021, we are once again diligently working with our customers to accommodate requests for round two of PPP

loans under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act ("Economic Aid Act"), which became law in December of 2020.

Paycheck Protection Program - While the PPP affords us an opportunity to assist our customers and community and requires a large of amount of human resources, the PPP loans do not pose a significant amount of risk of loss to the Bank as they are 100% guaranteed by the SBA.

As of December 31, 2020, there were 1,777 PPP loans outstanding totaling $291.6 million, net of $5.4 million in unearned fees.

During the fourth quarter Bank of Marin opened a secure PPP loan forgiveness application portal and gave all PPP borrowers access to apply.

As of December 31, 2020 we received SBA loan forgiveness payments totaling $10.9 million for 35 loans that were forgiven.

Of the total PPP loans rem aining, 74% (1,309 loans) totaling $58.7 million are less than or equal to $150 thousand and have access to streamlined forgiveness processing.

On January 19, 2021, the Bank launched the application process and began accepting loan requests for the second round of PPP, as revised by the Economic Aid Act.

As of March 11, 2021, we have received 974 loan applications totaling $131.6 million.

Payment Relief - During 2020, in accordance with section 4013 of the CARES Act, subsequently amended by 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 as TDRs under existing GAAP.

Of the 269 loans totaling $402.9 million granted payment relief since the onset of the pandemic, 222 loans or $324.2 million have resumed normal payments and 18 loans or $7.7 million paid off.

As of December 31, 2020, 21 borrowing relationships with 29 loans totaling $71.0 million had requested additional payment relief.

We know each of these clients very well and monitor their loans closely, and anticipate that the vast majority will work through current adverse conditions and resume making full payments.

The following table summarizes these loans by industry or collateral type.

Payment Relief by Type

Industry/Collateral Type Outstanding Loan Balance

(in thousands) Weighted Average LTV

Education $ 17,580 26 %

Health Clubs 16,551 38 %

Office and Mixed Use 15,883 44 %

Hospitality 12,439 49 %

Retail Related CRE 6,899 52 %

Auto Dealership 393 49 %

Non-CRE Related 121 N/A

Residential Real Estate 1,130 60 %

Payment Relief Totals $ 70,996 40 %

Looking forward into the new year, with a low cost and stable deposit base, opportunities for loan growth, and our unwavering commitment to relationship banking, we believe we are well-positioned to navigate the remaining stages of the pandemic and build new capabilities.

We have ample liquidity and capital to support organic growth and acquisitions in coming years.

Acquisitions remain a component of our strategic plan and we will continue to evaluate merger and acquisition opportunities that fit with our culture and add value for our shareholders.

Our disciplined credit culture and relationship-focused banking continue to be critical components of our success.

RESULTS OF OPERATIONS

This is the 67 th consecutive quarterly dividend paid by Bank of Marin Bancorp.

The cash dividend is payable on February 11, 2022 to shareholders of record at the close of business on February 4, 2022.

Statement Regarding Use of Non-GAAP Financial Measures

In this Form 10-K, 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 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

Year ended December 31,

(in thousands, except share data;

unaudited) 2021 2020 2019

Net income (GAAP) $ 33,228 $ 30,242 $ 34,241

Merger-related one-time and conversion costs:

Personnel and severance 3,005 — —

Professional services 1,976 — —

Data processing 1,127 — —

Other 350 — —

Total merger costs before tax benefits 6,458 — —

Income tax benefit of merger-related expenses (1,547) — —

Total merger-related one-time and conversion costs, net of tax benefits 4,911 — —

Comparable net income (non-GAAP) $ 38,139 $ 30,242 $ 34,241

Diluted earnings per share

Weighted average diluted shares 14,422 13,617 13,794

Diluted earnings per share (GAAP) $ 2.30 $ 2.22 $ 2.48

Merger-related one-time and conversion costs, net of tax benefits 0.34 — —

Comparable diluted earnings per share (non-GAAP) $ 2.64 $ 2.22 $ 2.48

Return on average assets

Average assets $ 3,537,163 $ 2,897,165 $ 2,550,707

Return on average assets (GAAP) 0.94 % 1.04 % 1.34 %

Comparable return on average assets (non-GAAP) 1.08 % 1.04 % 1.34 %

Return on average equity

Average stockholders' equity $ 394,363 $ 351,494 $ 326,441

Return on average equity (GAAP) 8.43 % 8.60 % 10.49 %

Comparable return on average equity (non-GAAP) 9.67 % 8.60 % 10.49 %

Efficiency ratio

Non-interest expense (GAAP) $ 72,638 $ 58,458 $ 57,841

Merger-related expenses (6,458) — —

Non-interest expense (non-GAAP) $ 66,180 $ 58,458 $ 57,841

Net interest income $ 104,951 $ 96,659 $ 95,680

Non-interest income $ 10,132 $ 8,550 $ 9,084

Efficiency ratio (GAAP) 63.12 % 55.56 % 55.21 %

Comparable efficiency ratio (non-GAAP) 57.51 % 55.56 % 55.21 %

Net Interest Income

Net interest income is the interest earned on loans, investment securities and other interest-earning assets minus the interest expense incurred on deposits and other interest-bearing liabilities.

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Interest rate changes can create fluctuations in net interest income and/or margin due to an imbalance in the timing of repricing or maturity of assets or liabilities.

We manage interest rate risk exposure with the goal of minimizing the effect of interest rate volatility on net interest income.

We manage interest rate risk exposure with the goal of optimizing the effect of interest rate volatility on net interest income.

Net interest margin is expressed as net interest income divided by average interest-earning assets.

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The table also presents net interest income, net interest margin and net interest rate spread for the years indicated.

Table 1 Average Statements of Condition and Analysis of Net Interest Income

Average Statements of Condition and Analysis of Net Interest Income

Year ended Year ended Year ended

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892 9 1.08 % 174 4 2.16 % 2,935 77 2.57 %

Subordinated debentures 1

Subordinated debenture 1, 5

534 1,361 251.54 % 2,741 158 5.68 % 2,673 229 8.44 %

15 unchanged sentences

The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.

Table 2 Analysis of Changes in Net Interest Income

5 2021 interest on the 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 ARB 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 years indicated.

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Net interest income totaled $105.0 million and $96.7 million in 2021 and 2020, respectively.

The $1.0 million increase in 2020 was primarily due to SBA PPP loans and lower rates on interest-bearing deposits, largely offset by lower yields on earning-assets, except for investment securities where we collected prepayment penalties on called securities in 2020.

Notable balance increases occurred in interest-earning deposits with other banks, commercial real estate loans and deposits.

The tax-equivalent net interest margin decreased 43 basis points to 3.55% in 2020, from 3.98% in 2019 for the reasons already mentioned and as shown in the above table.

Additionally, the SBA PPP loans lowered the 2020 net interest margin by 6 basis points.

The $8.3 million increase in 2021 was primarily due to higher average loan and investment securities balances and higher SBA PPP loan income.

We recognized $8.3 million in SBA PPP fees, net of cost in 2021, compared to $3.8 million in 2020.

As of December 31, 2021, $2.5 million SBA PPP fees, net of deferred costs remained outstanding and will be recognized into income in future periods.

On March 15, 2021, we redeemed the $2.8 million subordinated debenture.

The redemption consisted of $4.1 million principal balance, quarterly interest due, and $1.3 million in accelerated accretion of purchase discount.

The contractual interest rate on the subordinated debenture was 3-month LIBOR plus 1.40%, or 1.62% as of December 31, 2020.

The subordinated debenture carried an average interest rate of 5.68% in 2020.

The tax-equivalent net interest margin decreased 38 basis points to 3.17% in 2021, from 3.55% in 2020 for the reasons already mentioned and as shown in the above table.

T he SBA PPP loans improved the 2021 net interest margin by 10 basis points, and the early redemption of the subordinated debenture reduced it by 4 basis points.

2020 Compared to 2019

Net interest income totaled $96.7 million and $95.7 million in 2020 and 2019, respectively.

The increase of $4.2 million in 2019 was primarily due to higher average loan balances and assets yields across all categories and the early redemption of a high-rate subordinated debenture in the fourth quarter of 2018.

Positive variances were partially offset by higher balances and rates on money market accounts.

The tax-equivalent net interest margin increased eight basis points to 3.98% in 2019 compared to 3.90% in 2018 for the same reasons.

Notable balance increases occurred in interest-earning deposits with other banks, commercial real estate loans and deposits.

The tax-equivalent net interest margin decreased 43 basis points to 3.55% in 2020, from 3.98% in 2019 for the reasons already mentioned and as shown in the above table.

Additionally, the SBA PPP loans lowered the 2020 net interest margin by 6 basis points.

Market Interest Rates

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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 resided between 0.0% to 0.25% for the majority of 2020, putting downward pressure on our asset yields and net interest margin.

In each of its July, September and October 2019 meetings, the FOMC lowered the federal

funds target rate by 0.25% to a range of 1.50% to 1.75% at the end of 2019.

During 2018, the FOMC made four 25-basis-point increases to a range of 2.25% to 2.50% as of December 2018.

A low interest rate environment will continue to put downward pressure on asset yields and net interest margin to be fully seen in future periods.

The federal funds target rate range resided between 0.0% to 0.25% in 2021 and 2020, putting downward pressure on our asset yields and net interest margin.

In its January 26, 2022 meeting the FOMC kept the federal funds target rate range between 0.0% to 0.25%, but signaled that it will raise interest rates in 2022 to combat inflation.

Our net interest margin should benefit from a rising interest rate environment.

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.

For additional information about the allowance for credit losses and transition from the incurred loss method to the CECL method in 2020, see Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

We recorded a $4.6 million provision for credit losses in 2020, compared to a $900 thousand provision in 2019 and no provision for credit losses in 2018.

The provision for credit losses in 2020 was largely due to the impact of the COVID-19 pandemic and its effect on the local and regional economies and economic outlook.

We recorded a $1.4 million reversal of the provision for credit losses on loans in 2021, compared to a $4.6 million provision for credit losses in 2020 and $900 thousand provision for credit losses in 2019.

The net provision reversal in 2021 was primarily due to continued improvements in Moody's Analytics' Baseline Forecast of California unemployment rates and adjustments to qualitative risk factors due to a decline in the volume of loans downgraded to substandard classification, fewer delinquencies, and the elimination of an allowance related to a commercial real estate loan that had been individually analyzed for potential credit losses in the previous periods and paid off in 2021.

These reversals were partially offset by an increase in the allowance for credit losses related to qualitative risk factor adjustments for recent changes in executive leadership and senior lending positions, and integration of ARB.

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.

In addition, under the CECL method, we increased our allowance for credit losses by approximately $925 thousand for previously acquired loans (i.e., non-purchased credit deteriorated or "non-PCD" loans);

whereas, under previous GAAP (incurred loss method) we did not record an allowance on our unimpaired previously acquired non-PCD loans.

Our allowance model is particularly sensitive to current and forecasted California unemployment rates, which increased from 3.7% at December 31, 2019 to 8.8% at December 31, 2020.

The pandemic also negatively affected the financial condition of many of our borrowers, which was partially alleviated by our payment relief program under the 2020 CARES Act and the SBA PPP.

Additionally, with the adoption of ASC 326 in 2020, our provision for credit losses may become more volatile in the future due to changes in macroeconomic conditions and forecasts, CECL model assumptions, and loan composition, which affect the allowance for credit losses balance.

The provision for credit losses in 2019 was consistent with loan growth.

The lack of a provision for credit losses in 2018 was primarily due to a $15.3 million decrease in classified loans, resulting from two borrowing relationships whose risk grades were upgraded from substandard to special mention in the second quarter of 2018.

The provision for credit losses in 2019 accounted for under the incurred loss methodology was consistent with loan growth.

For additional information about the allowance for credit losses and transition from the incurred loss method to the CECL method in 2020, see the Critical Accounting Estimates section above and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

Non-interest Income

The table below details the components of non-interest income.

Table 3 Components of Non-Interest Income

2021 compared to 2020 2020 compared to 2019

2 unchanged sentences

unaudited) 2021 2020 2019

Service charges on deposit accounts $ 1,314 $ 1,865 $ 1,891 $ (551) (29.5) % $ (26) (1.4) %

Wealth Management and Trust Services $ 2,222 $ 1,851 $ 1,907 $ 371 20.0 % $ (56) (2.9) %

Debit card interchange fees 1,438 1,586 1,561 (148) (9.3) % 25 1.6 %

Earnings on bank-owned life insurance, net 973 1,196 913 (223) (18.6) % 283 23.7 %

Gains on investment securities, net 915 55 876 860 1,563.6 % (821) (1,492.7) %

Earnings from bank-owned life insurance, net 2,194 973 1,196 1,221 125.5 % (223) (18.6) %

Debit card interchange fees, net 1,812 1,438 1,586 374 26.0 % (148) (9.3) %

Service charges on deposit accounts 1,593 1,314 1,865 279 21.2 % (551) (29.5) %

Dividends on FHLB stock 760 654 799 106 16.2 % (145) (18.1) %

Merchant interchange fees 239 331 378 (92) (27.8) % (47) (14.2) %

Merchant interchange fees, net 422 239 331 183 76.6 % (92) (27.8) %

(Losses) gains on investment securities, net (16) 915 55 (931) (101.7) % 860 1,563.6 %

Other income 1,145 1,166 1,345 (21) (1.8) % (179) (13.3) %

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Non-interest income totaled $10.1 million and $8.6 million in 2021 and 2020, respectively.

The $534 thousand decline was primarily due to $551 thousand lower service charges on deposit accounts and ATM fees, as these fees were waived during the pandemic, lower income from bank-owned life insurance (" BOLI") policies due to a $562 thousand benefit collected on BOLI policies in the third quarter of 2019 (partially offset by $283 thousand underwriting expenses for two new BOLI policies in the first quarter of 2019), $182 thousand lower fee income from

one-way deposit sales to third-party deposit networks and $145 thousand lower dividends on FHLB stock, partially offset by $860 thousand net gains on the sale of investment securities.

The $1.5 million increase was primarily due to the collection of $1.1 million in benefits on bank-owned life insurance policies and an increase in service charges and interchange fees related to the expanded deposit base.

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.

Additionally, Wealth Management and Trust income increased due to the addition of new accounts and favorable market performance in 2021.

Increases were partially offset by the $931 thousand reduction in gains on sales of investment securities.

2020 Compared to 2019

Non-interest income totaled $8.6 million and $9.1 million in 2020 and 2019, respectively.

The decrease compared to the prior year primarily related to a $956 thousand pre-tax gain on the sale of 6,500 shares of Visa Inc.

Class B restricted common stock, a $180 thousand Federal Home Loan Bank special dividend, and higher fee income from one-way deposit sales to third-party networks in 2018.

The decrease in non-interest income was partially offset by a $562 thousand gain from the settlement of death benefits on bank-owned life insurance in 2019, net of underwriting costs associated with two new bank-owned life insurance policies.

Non-interest Expense

The table below details the components of non-interest expense.

Table 4 Components of Non-Interest Expense

2021 compared to 2020 2020 compared to 2019

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Depreciation and amortization 1,740 2,149 2,228 (409) (19.0) % (79) (3.5) %

Provision for credit losses on unfunded loan commitments 1,570 129 — 1,441 1,117.1 % 129 100.0 %

Information technology 1,550 1,050 1,065 500 47.6 % (15) (1.4) %

Charitable contributions 1,034 508 463 526 103.5 % 45 9.7 %

Amortization of core deposit intangible 1,135 853 887 282 33.1 % (34) (3.8) %

1 unchanged sentence

Federal Deposit Insurance Corporation insurance 889 474 361 415 87.6 % 113 31.3 %

Charitable contributions 587 1,034 508 (447) (43.2) % 526 103.5 %

Other non-interest expense:

5 unchanged sentences

Non-interest expense increased $14.1 million to $72.6 million in 2021 from $58.5 million in 2020.

The largest increases came from the provision for unfunded loan commitments, occupancy expenses (primarily due to lease renewals for our existing headquarters offices and new lease for a loan production office in San Mateo , common area maintenance and janitorial expenses), and charitable contributions due to our outreach to nonprofit organizations in our community during the pandemic.

The largest increase of $6.5 million came from acquisition related one-time and conversion costs.

In addition to $3.0 million in one-time merger cost, salaries and related benefits rose another $4.5 million due to increased numbers of employees, regularly scheduled annual merit and related increases, and lower deferred loan origination costs.

Professional services included $817 thousand more in consulting expenses for PPP loan forgiveness application processing, investment advisory services, and legal costs.

Data processing increased by an additional $828 thousand primarily due to increases core processing and mobile banking systems charges, and other categories increased due to the larger size of the bank.

FDIC insurance increased by $415 thousand due to an increase in our deposit base.

Charitable contributions decreased due to supplemental contributions in 2020 related to the pandemic.

2020 Compared to 2019

In 2020, non-interest expense increased by $617 thousand to $58.5 million from $57.8 million.

The largest increases came from the occupancy expenses (primarily due to lease renewals for our existing headquarters offices and new lease for a loan production of fice in San Mateo , common area maintenance and janitorial expenses), and charitable contributions due to our outreach to nonprofit organizations in our community during the pandemic.

The decrease in data processing costs was due to our digital platform conversion in 2019.

While salaries and related benefits were relatively unchanged year-over-year, annual merit and related increases were mostly offset by $915 thousand in SBA PPP-related deferred loan origination costs.

The increase in the provision for credit losses on unfunded loan commitments was mainly attributed to a $75.3 million increase in unfunded loan commitments, an increase in expected loss rates due to the COVID-19 pandemic, and changes in certain allowance model assumptions in the transition from the incurred loss method to the CECL method in 2020 (refer to Note 1, Summary of Significant Accounting Policies, for additional information).

2019 Compared to 2018

In 2019, non-interest expense decreased by $296 thousand to $58.0 million.

The decrease was primarily due to $1.0 million in consulting expenses related to core processing contract negotiations in 2018, lower data processing expenses in 2019 as a result of the renegotiation of the Bank's core systems contract, and lower Federal Deposit Insurance Corporation ("FDIC") deposit insurance expenses due to the FDIC Deposit Insurance Fund reserve exceeding its billing threshold in 2019.

The decreases in non-interest expense were partially offset by $918 thousand higher salaries and related benefits as a result of annual merit increases, three additional full-time equivalent employees (on average), and personnel severance, as well as higher recruiting fees recorded in other expenses.

Provision for Income Taxes

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The provision for income taxes totaled $11.7 million at an effective tax rate of 26.0% in 2021, compared to $10.3 million at an effective tax rate of 25.5% in 2020 and $11.7 million at an effective tax rate of 25.4% in 2019.

The decrease in the provision in 2020 compared to 2019 reflected lower pre-tax income and higher tax-exempt interest income on municipal securities.

The slight increase in the effective tax rate in 2020 as compared to 2019 was due to a favorable deferred tax liability true-up recognized in 2019 and a lower tax benefit from BOLI income in 2020.

The increase in the effective tax rate in 2019 compared to 2018 was due to a higher level of tax benefits in 2018 from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options by former employees of Bank of Napa post-acquisition.

The increase in the provision in 2021 compared to 2020 reflected higher pre-tax income.

The 50 basis point increase in the effective tax rate in 2021 as compared to 2020 was primarily due to non-deductible merger expenses and executive compensation, partially offset by higher BOLI income and tax exempt loan and investment securities interest income.

The slight increase in the effective tax rate in 2020 compared to 2019 was due to a favorable deferred tax liability true-up recognized in 2019 and a lower tax benefit from BOLI income in 2020.

We file a consolidated return in the U.S.

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FINANCIAL CONDITION

Our assets increased $204.6 million from December 31, 2019 to December 31, 2020, mainly due to loan growth of $245.3 million, primarily driven by PPP loan originations, which were offset by a $68.3 million decrease in investment security balances.

Our assets increased $1.4 billion from December 31, 2020 to December 31, 2021.

Increases reflected both the acquisition of ARB and organic growth.

Investment Securities

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Management determines the maturities and types of securities to be purchased based on liquidity and interest rate risk position, and the desire to attain a reasonable investment yield balanced with risk exposure.

Table 5 shows the composition of the debt securities portfolio by expected maturity at December 31, 2020 and 2019.

The table below shows the composition of the debt securities portfolio by expected maturity at December 31, 2021 and 2020.

Expected maturities differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

We estimate and update expected maturity dates regularly based on current and historical prepayment speeds.

The weighted average life of the investment portfolio at December 31, 2020 and 2019 was approximately five and six years, respectively.

Table 5 Investment Securities

The weighted average life of the investment portfolio at December 31, 2021 and 2020 was approximately six and five years, respectively.

December 31, 2021 Within 1 Year 1-5 Years 5-10 Years After 10 Years Total

8 unchanged sentences

Average Yield 2

AmortizedCost 1

Amortized Cost 1

Fair Value Average Yield 2

3 unchanged sentences

SBA-backed securities — — 4,840 3.17 — — — — 4,840 5,038 3.17

Obligations of state and political subdivisionsl 3

Debentures of government-sponsored agencies — — — — 19,973 1.67 31,499 1.89 $ 51,472 50,571 1.80

Obligations of state and political subdivisions - tax-exempt 3

— — — — 16,686 1.92 — — 16,686 16,794 1.92

Obligations of state and political subdivisions - taxable 101 4.58 — — 25,327 2.17 5,089 2.39 $ 30,517 30,496 2.22

Total held-to-maturity 1,651 1.27 103,902 2.08 178,651 1.84 58,018 1.96 342,222 342,755 1.93

3 unchanged sentences

SBA-backed securities 7 2.21 30,502 2.45 2,131 0.16 — — 32,640 33,478 2.30

Obligations of state and political subdivisions 3

3,653 2.68 18,616 3.01 82,618 2.73 — — 104,887 110,652 2.78

Debentures of government sponsored agencies 6,000 2.62 120,115 1.11 16,411 1.39 48,923 1.88 191,449 188,527 1.38

Treasury securities — — — — 11,886 1.00 — — 11,886 11,630 1.00

Obligations of state and political subdivisions - tax-exempt 3

1,322 3.73 21,026 2.69 92,375 2.60 — — 114,723 119,970 2.63

Obligations of state and political subdivisions - taxable 1,128 2.86 1,011 3.24 12,147 1.56 — — 14,286 14,030 1.78

Corporate bonds 2,013 2.73 31,000 1.03 5,988 1.23 — — 39,001 38,495 1.15

Asset-backed securities — — — — 1,866 0.72 — — 1,866 1,862 0.72

Total available-for-sale 23,732 1.93 406,502 1.57 602,740 1.87 136,546 1.48 1,169,520 1,167,568 1.72

16 unchanged sentences

SBA-backed securities — — — — 6,547 3.17 — — 6,547 6,947 3.17

Obligations of state and political subdivisions 3

Obligations of state and political subdivisions - tax-exempt 3

247 3.73 — — — — — — 247 251 3.73

Obligations of state and political subdivisions - taxable 1,214 5.82 206 4.58 — — — — 1,420 1,437 5.64

Total held-to-maturity 1,461 5.46 76,584 1.89 30,991 2.65 — — 109,036 115,185 2.16

December 31, 2020 Within 1 Year 1-5 Years 5-10 Years After 10 Years Total

(dollars in thousands;

unaudited) AmortizedCost 1

Average Yield 2

AmortizedCost 1

Average Yield 2

AmortizedCost 1

Average Yield 2

AmortizedCost 1

Average Yield 2

AmortizedCost 1

Fair Value Average Yield 2

Available-for-sale:

2 unchanged sentences

SBA-backed securities — — 16,994 2.40 13,947 3.43 — — 30,941 32,862 2.86

Obligations of state and political subdivisionsl 3

2,082 2.67 16,619 2.82 47,341 3.03 — — 66,042 67,282 2.96

Debentures of government sponsored agencies 9,993 2.18 5,984 2.62 1,976 1.42 1,991 1.39 19,944 20,186 2.16

Corporate bonds 1,497 3.54 — — — — — — 1,497 1,502 3.54

Obligations of state and political subdivisions - tax-exempt 3

1,011 2.28 16,437 3.00 82,618 2.73 — — 100,066 105,681 2.77

Obligations of state and political subdivisions - taxable 2,642 2.83 2,179 3.06 — — — — 4,821 4,971 2.93

Total available-for-sale 18,411 2.13 136,438 2.46 216,198 2.76 1,991 1.39 373,038 392,351 2.61

3 unchanged sentences

3 Yields on tax-exempt municipal bonds are presented on a taxable equivalent basis, using federal tax rate of 21%.

The amortized cost of our investment securities portfolio decreased $79.3 million or 14% during 2020.

The amortized cost of our investment securities portfolio increased $1.03 billion or 214% during 2021.

We purchased $620.2 million in securities in 2021 designated as available-for-sale to provide flexibility for liquidity and interest rate risk management.

We also purchased $305.3 million in securities in 2021 designated as held-to-maturity.

These purchases were offset by $181.7 million of paydowns, calls and maturities, and $6.6 million of sales during 2021.

During 2020, we purchased $57.6 million in obligations of state and political subdivisions, $31.0 million in collateralized mortgage obligations ("CMOs") and $9.0 million in debentures of government sponsored agencies.

We also acquired $297.8 million in securities from ARB.

The weighted average yield on the purchases of securities was 1.68% for the 2021 year and 1.60% for the fourth quarter of 2021.

During 2021, we purchased $287.6 million in agency mortgage-backed securities ("MBSs"), $271.7 million in debentures of government sponsored agencies, $268.6 million in agency collateralized mortgage obligations ("CMOs"), $60.7 million in obligations of state and political subdivisions and $37.0 million in corporate bonds.

We consider agency debentures and CMOs issued by U.S.

2 unchanged sentences

The debentures, CMOs and MBS issued by U.S.

government sponsored agencies, state and municipal securities, and SBA-backed securities made up 70.1%, 22.1% and 7.8% of the portfolio at December 31, 2020, compared to 79.6%, 12.4% and 7.8%, respectively at December 31, 2019.

government sponsored agencies, SBA-backed securities and U.S.

Treasury securities made up 85.6% of the portfolio at December 31, 2021, compared to 77.9% at December 31, 2020.

See the discussion in the section captioned “Securities May Lose Value due to Credit Quality of the Issuers” in ITEM 1A Risk Factors above.

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Total obligations of state and political subdivisions $ 176,212 $ 181,290 100.0 % $ 106,554 $ 112,340 100.0 %

The portion of the portfolio outside the state of California is distributed among 10 states.

The largest concentrations outside California are in Texas (55.3%), Washington (9.3%), and Maryland (6.4%).

During March 2020, we strategically increased our credit exposure to obligations issued by high credit quality issuers in Texas that 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 believe the healthy level of reserves and excess guarantee capacity at the PSF sufficiently mitigates any potential credit issues posed by the issuers' exposure to the oil and gas industry, as well as the negative effects of the recent winter storms in Texas.

In addition, 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.

Percent of investment portfolio 11.7% 12.0% 22.1% 22.1%

The portion of the portfolio outside the state of California is distributed among thirteen states.

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside California are in

Texas (38.4%), Washington (16.4%), and Wisconsin (6.7%).

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 the PSF.

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

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• Credit ratings by major credit rating agencies

Table 6 Loans Outstanding by Class at December 31

Loans Outstanding by Class at December 31

(in thousands;

unaudited) 2021 2020

Commercial and industrial loans $ 498,408 $ 246,687 $ 230,739 $ 235,835 $ 218,615

Commercial and industrial $ 301,602 $ 498,408

Commercial owner-occupied 392,345 304,963

3 unchanged sentences

Other residential 114,558 123,395

Installment and other consumer loans 22,723 27,682 27,472 27,410 25,495

Installment and other consumer 49,533 22,723

Total loans, at amortized cost 2,255,645 2,088,556

2 unchanged sentences

Loans increased $167.1 million in 2021, or 8%, to $2.256 billion at December 31, 2021, from $2.089 billion at December 31, 2020.

SBA PPP loans outstanding at December 31, 2020 totaled $291.6 million and were included in commercial and industrial loans.

For the year ended December 31, 2020, new non-PPP-related loan originations were $165.5 million, compared to $259.6 million in 2019.

The decrease in non-PPP loan originations was largely due a decrease in conventional loan demand as a result of the pandemic and shelter-at-home orders.

New loan originations were more than offset by payoffs of $180.1 million and reduction in line usage.

Loan payoffs were concentrated in consumer and retail loans (mostly tenant in common and HELOC) and commercial loans on which underlying assets were sold, loans refinanced with other banks, or loans that were paid off with cash.

Payoffs as a percentage of beginning of the year loan balances were 9.8%, 8.3% and 9.4% in 2020, 2019 and 2018, respectively.

Year-over-year growth was largely attributable to $419.4 million in loans from the ARB acquisition on August 6, 2021.

Non-PPP loan originations of $181.7 million for the year were concentrated in commercial and real estate loans and compared to $165.5 million in 2020.

2021 payoffs included $218.1 million non-PPP loans, compared to $169.2 million in 2020.

In 2021, PPP loan originations were $136.2 million and PPP loans forgiven and paid off were $328.5 million.

Non-PPP payoffs as a percentage of beginning of the year loan balances were 10.4% in 2021 and 9.2% in 2020.

Approximate ly 86% and 77%, of total loans were secured by real estate at December 31, 2021 and 2020, respectively.

The decrease in the percentage in 2020 was due to PPP loans, which are not secured by real estate.

The increase in the percentage secured by real estate from 2020 to 2021 was primarily due to a $180.4 million reduction in unsecured loans guaranteed by the SBA under the PPP, which are included in commercial and industrial loans.

For additional information on loan concentration risk, see ITEM 1A, Risk Factors.

The following table summarizes our commercial real estate loan portfolio by the county in which the property was located as of December 31, 2020 and 2019.

Table 7 Commercial Real Estate Loans Outstanding by County

The following table summarizes our commercial real estate loan concentrations by the county in which the property was located as of December 31, 2021 and 2020.

Commercial Real Estate Loans Outstanding by County

(dollars in thousands;

4 unchanged sentences

Napa 188,643 11.9 181,054 14.3

San Francisco 169,902 13.4 165,205 13.2

Alameda 176,871 11.2 164,921 13.0

San Francisco 172,120 10.9 169,902 13.4

Sacramento 113,120 7.2 11,970 0.9

Contra Costa 69,656 4.4 49,155 3.9

San Mateo 26,306 2.1 22,278 1.8

Solano 40,837 2.6 21,380 1.7

San Mateo 28,119 1.8 26,306 2.1

Santa Clara 20,070 1.3 10,505 0.8

Other 191,745 12.0 74,127 5.9

1 unchanged sentence

Commercial real estate loans increased $315.2 million in 2021, compared to a $68.5 million increase in 2020.

The increase was primarily due to the ARB acquisition and expanded footprint in Northern California.

Of the commercial real estate loans at December 31, 2021, 75% were investor-owned and 25% were owner-occupied.

5 unchanged sentences

All of these loans were current with their payments as of December 31, 2021.

Except for two TDR loans to one borrowing relationship totaling $7.1 million as of December 31, 2020, all were considered to have low credit risk (graded "Pass").

Except for three substandard classified loans to two borrowing relationships totaling $24.7 million (or 1.6%) as of December 31, 2021, all were considered to have low credit risk (graded "Pass").

The following table shows an analysis of construction loans by type and county as of December 31, 2021 and 2020.

Table 8 Construction Loans Outstanding by Type and County

Construction Loans Outstanding by Type and County

(dollars in thousands;

11 unchanged sentences

San Francisco $ 55,826 46.6 % $ 41,707 57.1 %

Sonoma 10,058 13.8 8,808 14.4

Solano 16,367 13.7 9,020 12.3

Marin 8,858 12.1 18,600 30.5

Sonoma 13,640 11.4 10,058 13.8

Alameda 12,908 10.8 1,862 2.5

San Mateo — — 5,323 8.7

Napa — — 4,284 7.0

Marin 6,074 5.1 8,858 12.1

Sacramento 5,897 4.9 — —

Contra Costa 5,613 4.7 1,541 2.2

Other 3,515 2.8 — —

Total $ 119,840 100.0 % $ 73,046 100.0 %

Construction loans increased by $12.0 million in 2020, compared to a $15.3 million decrease in 2019.

Construction loans increased by $46.8 million in 2021, compared to an increase of $12.0 million in 2020.

The increase in 2021 was primarily due to $48.8 million advanced on existing construction loans, $13.2 million in loans assumed in the ARB acquisition and $7.2 million in new financing.

These increases were partially offset by $19.5 million in payoffs and $2.9 million in conversions to commercial real estate financing.

The increase in 2020 primarily resulted from additional borrowings under existing construction loans as well as advances on six new construction loans to well-known, experienced builders.

The increase was partially offset by the successful completion of projects, one of which converted to a permanent commercial real estate loan.

The decrease in 2019 was primarily due to a $14.8 million loan that converted to a commercial real estate loan and one payoff from a completed apartment building construction project.

The following table presents the maturity distribution of our commercial and construction loans as of December 31, 2020 based on their contractual maturity dates and does not include scheduled payments or potential prepayments.

Table 9A Commercial and Industrial and Construction Loan Maturity Distribution

Due within Due after 1 but Due after

The following table presents the amortized costs and maturity distribution of our loans by class as of December 31, 2021 based on their contractual maturity dates.

Maturities do not include scheduled payments or potential prepayments.

Loan Maturity Distribution

Due within 1 year Due after 1 through 5 years Due after 5 through 15 years Due after 15 years Total

(in thousands;

unaudited) 1 year within 5 years 5 years Total

Commercial and industrial 1

$ 97,719 $ 161,730 $ 36,111 $ 6,042 $ 301,602

Commercial owner-occupied 26,036 98,920 259,867 7,522 392,345

Commercial investor-owned 33,656 329,994 794,920 30,451 1,189,021

Construction 2

64,319 15,322 40,199 — 119,840

Home equity 1,799 25,870 58,498 2,579 88,746

Other residential 608 2,161 1,929 109,860 114,558

Installment and other consumer loans 1,699 5,925 41,640 269 49,533

Total $ 225,836 $ 639,922 $ 1,233,164 $ 156,723 $ 2,255,645

1 Commercial and industrial due after 1 but within 5 years includes SBA PPP loans totaling $291.6 million, the majority of which are expected to be forgiven by the SBA in 2021.

1 Commercial and industrial due after 1 but within 5 years includes SBA PPP loans totaling $111.2 million (net of $2.5 million in unrecognized fees and costs) , the majority of which are expected to be forgiven by the SBA in 2022.

2 Construction loans that mature after 5 years are structured to convert to permanent financing after the initial construction period.

The following table shows the mix of variable-rate loans to fixed-rate loans for commercial and construction loans.

The following table shows the mix of variable-rate loans to fixed-rate loans due after one year by class as of December 31 2021.

The large majority of the variable-rate loans are tied to independent indices (such as the Prime Rate or a Treasury Constant Maturity Rate).

1 unchanged sentence

These loans are included in variable-rate balances below.

Table 9B Commercial and industrial and Construction Loan Interest Rate Sensitivity

Loan Interest Rate Sensitivity - Due After One Year

(in thousands;

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$ 175,697 $ 28,186 $ 203,883

Real estate —

Commercial owner-occupied 184,142 182,167 366,309

Commercial investor-owned 677,655 477,710 1,155,365

Construction 33,626 21,895 55,521

Home equity — 86,947 86,947

Other residential 3,465 110,485 113,950

Installment and other consumer loans 31,041 16,793 47,834

Total $ 1,105,626 $ 924,183 $ 2,029,809

1 Commercial and industrial includes SBA PPP 1% fixed rate loans totaling $291.6 million, the majority of which are expected to be forgiven by the SBA in 2021.

1 Commercial and industrial includes SBA PPP 1% fixed rate loans totaling $111.2 million (net of $2.5 million in unrecognized fees and costs), the majority of which are expected to be forgiven by the SBA in 2022.

Allowance for Credit Losses on Loans

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All specifically identifiable and quantifiable losses are charged off against the allowance.

The ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the real estate market, changes in interest rates and economic and political environments.

Based on the current conditions of the loan portfolio and reasonable and supportable forecasts, management believes that the $22.9 million allowance for credit losses at December 31, 2020 is adequate to absorb expected credit losses in our loan portfolio, but provides no assurance that adverse changes in economic conditions or other circumstances over the remaining terms of our loans will not result in increased losses in the portfolio.

The ultimate adequacy of the allowance depends on a variety of factors beyond our control, including the real estate market, changes in interest rates and economic and political environments.

Based on the current conditions of the loan portfolio and reasonable and supportable forecasts, management believes that the $23.0 million allowance for credit losses at December 31, 2021 was adequate to absorb expected credit losses in our loan portfolio, but provides no assurance that adverse changes in economic conditions or other circumstances over the remaining terms of our loans will not result in increased losses in the portfolio.

For information on our allowance for credit losses methodology and adoption of FASB ASU No.

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Measurement of Credit Losses on Financial Instruments , effective December 31, 2020, refer to Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

The allowance for credit losses to loans was 1.10% at December 31, 2020 and 0.90% at both December 31, 2019 and 2018.

The allowance for credit losses to loans, excluding SBA PPP loans and previously acquired loans was 1.27%, 0.96% and 0.98% at year-end 2020, 2019, and 2018, respectively (for a discussion of this non-GAAP financial measure, refer to ITEM 6, Selected Financial Data of this report).

As stated in the Provision for Credit Losses section above, the increase in allowance for credit losses in 2020 was almost entirely due to the impact of the COVID-19 pandemic and its effect on the local and regional economies and economic outlook coupled with the transition to the CECL method.

The allowance for credit losses to loans was 1.02% at December 31, 2021 and 1.10% at December 31, 2020.

The allowance for credit losses to loans, excluding SBA PPP loans and previously acquired loans was 1.07 an d 1.27% at year-end 2021 and 2020, respectively (for a discussion of this non-GAAP financial measure, refer to ITEM 7, Reconciliation of GAAP and Non-GAAP Financial Measures section of this report).

The $149 thousand increase in the allowance for credit losses on loans in 2021 was largely due to loans acquired from ARB, partially offset by improvements in economic factors that drive the quantitative portion of the allowance.

The $6.2 million increase in the allowance for credit losses in 2020 was almost entirely due to the impact of the COVID-19 pandemic and its effect on the local and regional economies and economic outlook coupled with the transition to the CECL method.

For further information, refer to the Provision for Credit Losses section above, and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

Due to the high credit quality of our loan portfolio, net charge-offs have been minimal for the past several years.

Net charge-offs totaled $1 thousand in 2020 and $44 thousand in 2019, compared to net recoveries of $54 thousand in 2018.

Table 10 shows the allocation of the allowance by loan class as well as the per centage of total loans in each of the same loan classes.

Table 10 Allocation of Allowance for Credit Losses

December 31, 2020 December 31, 2019 December 31, 2018 December 31, 2017 December 31, 2016

Net recoveries totaled $93 thousand in 2021, compared to net charge-offs of $1 thousand in 2020 and $44 thousand in 2019.

The following table shows the allocation of the allowance by loan class as well as the per centage of total loans in each of the same loan classes.

Allocation of Allowance for Credit Losses

December 31, 2021 December 31, 2020

(dollars in thousands;

unaudited) Allowance balance allocation Loans as a percent of total loans Allowance balance allocation Loans as a percent of total loans Allowance balance allocation Loans as a percent of total loans Allowance balance allocation Loans as a percent of total loans Allowance balance allocation Loans as a percent of total loans

unaudited) Allowance balance allocation Loans as a percent of total loans Allowance balance allocation Loans as a percent of total loans

Commercial and industrial $ 1,709 13.4 % $ 2,530 23.9 %

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Installment and other consumer 621 2.2 291 1.1

Unallocated allowance 1,300 N/A 653 N/A 494 N/A 718 N/A 1,541 N/A

Unallocated allowance 2,286 N/A 1,300 N/A

Total allowance for credit losses $ 23,023 $ 22,874

Total percent 100.0% 100.0%

Table 11 shows the activity in the allowance for credit losses for each of the five years presented below.

Table 11 Allowance for Credit Losses Rollforward

The table below shows the activity in the allowance for credit losses for each of the five years presented below.

Allowance for Credit Losses Rollforward

(dollars in thousands;

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Provision for (reversal of) credit losses (1,449) 4,594 900

Initial allowance for PCD loans 1,505

Loans charged-off:

Commercial and industrial — (30) (75)

Commercial real estate, owner-occupied — — — — (20)

Installment and other consumer (5) (1) (3)

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Home equity 50 — —

Installment and other consumer — — 42 7 27

Total loans recovered 98 30 34

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Ratio of allowance for credit losses to total loans at end of year 1.02 % 1.10 % 0.90 %

Net (charge-offs) recoveries to average loans NM NM NM (0.01) % 0.16 %

Net recoveries (charge-offs) to average loans NM NM NM

NM - Not meaningful.

Net charge-offs and recoveries for the years ended December 31, 2021, 2020 and 2019 were considered insignificant.

Charge-offs in 2017 primarily included a $283 thousand unsecured commercial loan.

Recoveries in 2016 primarily resulted from the resolution and pay-off of a commercial real estate credit.

Table 12 shows non-performing assets and loans modified in a troubled debt restructuring ("TDR") for each of the years in the five-year period ended December 31, 2020.

Table 12 Non-Performing and Underperforming Assets and Troubled Debt Restructurings

The following shows non-performing assets and loans modified in a troubled debt restructuring ("TDR") for each of the years in the five-year period ended December 31, 2021.

Non-Performing and Loans and Troubled Debt Restructurings

(dollars in thousands;

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Non-accrual loans:

Commercial and industrial $ — $ — $ 319 $ — $ —

Commercial, owner-occupied 7,269 7,147

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Total non-accrual loans 8,376 9,233

Other real estate owned 1

Total non-performing assets $ 9,233 $ 226 $ 697 $ 406 $ 553

Accruing TDR loans:

Commercial and industrial $ 1,183 $ 1,021

Commercial, owner-occupied — 6,998 6,993 6,999 6,993

Commercial, investor-owned 179 3,305

Construction — — 2,688 2,969 3,245

Home equity 130 10

Other residential — 452 462 1,148 1,965

Installment and other consumer 607 735

Total accruing TDR loans $ 2,099 $ 5,071

Total non-performing assets and accruing TDR loans $ 14,304 $ 11,500 $ 15,038 $ 16,926 $ 18,721

Total non-accrual and accruing TDR loans $ 10,475 $ 14,304

Criticized and classified loans:

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Substandard $ 36,121 $ 25,829

Allowance for credit losses to non-accrual loans 2.48x 73.86x 22.71x 38.88x 106.50x

Doubtful $ 114 $ —

Allowance for credit losses to non-accrual loans 2.75x 2.48x

Non-accrual loans to total loans 0.37 % 0.44 %

1 Other real estate owned decreased in 2017 from the sale of two properties obtained in a bank acquisition in 2013.

1 Excludes TDR loans on non-accrual status that are included above.

Non-Accrual and TDR

Non-accrual loans decreased by $857 thousand primarily due to $1.0 million in payoffs and paydowns, partially offset by a $114 thousand well-secured investor-owned commercial real estate loan assumed in the ARB acquisition and one $67 thousand home equity loan placed on non-accrual status in 2021.

Non-accrual loans increased $9.0 million in 2020, primarily due to the placement of two existing well-secured owner-occupied commercial real estate TDR loans, secured by one property, totaling $7.1 million on non-accrual, as well as two well-secured investor-owned commercial loans totaling $1.6 million that were placed on non-accrual in 2020.

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These increases were partially offset by approximately $1.0 million in paydowns and payoffs of non-accrual and TDR loans.

The decrease in total non-accrual and accruing TDR loans from 2018 to 2019 primarily related to payoffs (including a $2.7 million TDR land development loan) and paydowns, partially offset by advances on existing impaired loans and the addition of one non-accrual home equity loan.

The decrease in total non-accrual and accruing TDR loans from 2017 to 2018 primarily related to payoffs, paydowns, and two loans that were removed from TDR status.

Total accruing TDR loans were $2.1 million and $5.1 million as of December 31, 2021 and 2020, respectively.

The $3.0 million decrease in 2021 was primarily due to $4.0 million in paydowns and payoffs, partially offset by two loans totaling $1.0 million that were designated as TDRs during 2021.

The $6.2 million decrease from 2019 to 2020 primarily related to the two existing well-secured commercial real estate TDR loans totaling $7.1 million that were transferred to non-accrual status coupled with payoffs and paydowns, partially offset by the $2.1 million in new TDR loans mentioned above.

The decreases from 2018 to 2019 and from 2017 to 2018 primarily related to the same reasons mentioned in the preceding paragraph.

For information regarding temporary relief from TDR accounting afforded by the CARES Act, refer to the Executive Summary section above and Note 3 to the Consolidated Financial Statements in ITEM 8, under “Troubled Debt Restructuring."

Criticized and Classified Loans

Loans designated special mention increased by $13.5 million in 2020, driven by loan downgrades totaling $31.0 million.

Loans designated as special mention decreased by $13.6 million in 2021, primarily due to $18.9 million in paydowns and payoffs, $33.1 million in upgrades to a pass risk rating and two loans that were downgraded from special mention to substandard totaling $5.4 million.

These decreases were partially offset by $17.2 million in loans that were downgraded from pass/watch, $13.5 million in loans assumed in the ARB acquisition, and $13.2 million in loans that were upgraded from substandard to special mention during 2021.

Of the $17.2 million in downgrades, $13.2 million were well-secured by commercial real estate and the remaining $4.0 million in commercial loans had strong support.

Loans designated special mention increased by $13.5 million in 2020, driven by loan downgrades

totaling $31.0 million.

Of these downgrades, approximately $24.5 million were loans to borrowers that were impacted by the pandemic, all of which were well-secured by commercial real estate.

These additions to special mention were mostly offset by $15.8 million in upgrades to pass risk ratings, paydowns and payoffs, and $2.2 million in loans downgraded from special mention to substandard in 2020.

Loans designated special mention increased by $56.1 million during 2019 due primarily to new commercial loan originations to three borrowing relationships totaling $17.7 million that were experiencing temporary financial conditions that warranted the initial designation, and downgrades of existing commercial real estate loans to two borrowing relationships totaling $26.7 million.

Loans designated as special mention exhibit potential weakness that deserve close attention.

Loans classified substandard increased by $13.3 million in 2021, primarily due to downgrades totaling $25.4 million and $2.3 million in substandard loans assumed in the ARB acquisition.

Of the downgraded loans, $24.2 million were secured by commercial real estate.

The downgrades were partially offset by $13.2 million in upgrades to special mention and $4.2 million in paydowns and payoffs.

Loans classified substandard increased by $15.9 million in 2020, primarily due to downgrades totaling $18.5 million.

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BOLI totaled $61.5 million at December 31, 2021, compared to $43.6 million at December 31, 2020, and is recorded in other assets.

The increase of $1.9 million was due to the purchase of $943 thousand in new policies and a $973 thousand increase in the cash surrender value from net investment earnings.

Other assets also included net deferred tax assets of $6.9 million and $8.2 million at December 31, 2020 and 2019, respectively.

The increase of $17.9 million was primarily due to the acquisition of $15.7 million in ARB policies and the purchase of $1.9 million in new policies.

Interest receivable and other assets totaled $51.4 million and $36.5 million at December 31, 2021 and 2020, respectively.

The $14.9 million increase was primarily due to a $6.4 million increase in net deferred tax assets, a $4.9 million increase in FHLB stock and a $2.6 million increase in accrued interest on investment securities as discussed below.

Net deferred tax assets totaled $13.3 million and $6.9 million at December 31, 2021 and 2020, respectively.

Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to temporary differences such as the allowances for credit losses and unfunded loan commitments, net operating loss carryforwards, and deferred compensation and salary continuation plans.

The $1.2 million decrease in net deferred tax assets in 2020 was primarily due to an increase in deferred tax liabilities related to unrealized gains on available-for-sale investment securities, partially offset by an increase in deferred tax assets related to the change in allowance for credit losses on loans and unfunded loan commitments.

The $6.4 million increase in net deferred tax assets in 2021 was primarily due to a $4.5 million decrease in deferred tax liabilities related to changes in unrealized gains on available-for-sale investment securities, a $1.6 million increase in deferred tax assets related to the change in deferred compensation plan and salary continuation plan, a $781 thousand increase in deferred tax assets related to accrued but unpaid expenses and a $640 thousand increase in deferred tax assets related to fair value adjustments on acquired loans.

These increases were partially offset by a $820 thousand increase in deferred tax liabilities related to the increase in core deposit intangibles.

Management believes deferred tax assets will be realizable due to our consistent record of earnings and the expectation that earnings will continue at a level adequate to realize such benefits.

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For additional information, refer to Note 11 to the Consolidated Financial Statements in ITEM 8 of this report.

In addition, we held $11.9 million and $11.7 million of FHLB stock recorded at cost in other assets at December 31, 2020 and 2019, respectively.

The increase in 2020 resulted from the purchase of $176 thousand in FHLB stock.

We held $ 16.7 million and $11.9 million of FHLB stock recorded at cost in other assets at December 31, 2021 and 2020, respectively.

The increase in 2021 resulted from the acquisition of $4.9 million of ARB's FHLB stock.

The FHLB paid $760 thousand, $654 thousand and $799 thousand in cash dividends in 2021, 2020 and 2019, respectively.

FHLB dividends in 2018 included a special dividend of $180 thousand.

For additional information, refer to Note 2 to the Consolidated Financial Statements in ITEM 8 of this report.

Deposits grew by $167.8 million, to $2.504 billion at December 31, 2020, compared to $2.337 billion at December 31, 2019.

Non-interest bearing deposits grew by $225.8 million in 2020 and made up 54% of total deposits at year end.

See ITEM 1A, Risk Factors, for a discussion of potential risks associated with concentrations and volatility due to activity of our large deposit customers and impact of the PPP.

Table 13 Distribution of Average Deposits

Table 13 shows the relative composition of our average deposits for 2020 and 2019.

For average rates paid on deposits, refer to Table 1 in ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations.

Years ended December 31,

(dollars in thousands;

unaudited) Amount Percent Amount Percent

Accrued interest on investment securities totaled $4.8 million and $2.2 million at December 31, 2021 and 2020, respectively.

The increase was primarily due to purchases of $925.6 million in securities and acquisition of $297.8 million in securities from ARB.

Deposits grew b y $1.304 billion, to $3.809 billion at December 31, 2021, compared to $2.504 billion at December 31, 2020.

Non-interest bearing deposits grew by $555.6 million in 2021 and made up 50% of total

deposits at year-end.

See ITEM 1A, Risk Factors, for a discussion of potential risks associated with concentrations and volatility due to activity of our large deposit customers and impact of the SBA PPP loans.

Our relationship banking model is the foundation for the strong deposit base and allows us to proactively and strategically address changes in the interest rate environment and technology adoption by our customers.

Distribution of Average Deposits

The table below shows the relative composition of our average deposits for 2021 and 2020.

For average rates paid on deposits, refer to Average Statements of Condition and Analysis of Net Interest Income table in ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations.

As of December 31,

(in thousands;

unaudited) Average Amount Percent of Total Average Amount Percent of Total

Non-interest bearing $ 1,628,289 52.7 % $ 1,308,199 52.3 %

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Time deposits, including CDARS:

Less than $100,000 28,643 1.1 32,035 1.5

$100,000 or more 67,914 2.7 74,748 3.4

Total time deposits 96,557 3.8 106,783 4.9

115,393 3.7 96,558 3.9

Total average deposits $ 3,094,628 100.0 % $ 2,501,409 100.0 %

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Demand Deposit Marketplace SM ("DDM") and ICS balances are discussed in Note 6 to the Consolidated Financial Statements in ITEM 8 of this report.

Table 14 Maturities of Time Deposits of $100,000 or More

Table 14 below shows the maturity groupings for time deposits of $100,000 or more at December 31, 2020 and 2019.

Total estimated uninsured deposits as of December 31, 2021 and December 31, 2020 were $1.830 billion and $1.116 billion, respectively.

Maturities of Uninsured Time Deposits

The following table shows time deposits by account that are in excess of $250,000 by time remaining to maturity at December 31, 2021.

December 31, 2021

(in thousands;

unaudited) 2020 2019

unaudited) Total Uninsured Portion

Three months or less $ 17,568 $ 10,568

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We also had $150.0 million and $135.0 million in unsecured lines with correspondent banks to cover any short or long-term borrowing needs at December 31, 2021 and 2020, respectively.

There were no FHLB overnight borrowings at December 31, 2020 and 2019.

There were no FHLB overnight borrowings at December 31, 2021 or 2020.

The FRBSF and correspondent bank lines were not utilized at December 31, 2021 or 2020.

As part of a bank acquisition in 2013, we assumed two subordinated debentures due to the NorCal Community Bancorp Trusts I and II at fair values totaling $5.0 million at the acquisition date and contractual balances totaling $8.2 million.

On October 7, 2018, Bancorp redeemed in full the subordinated debenture due to NorCal Community Bancorp Trust I.

The remaining subordinated debenture due to Trust II had been accreted up to $2.8 million and $2.7 million as of December 31, 2020 and 2019, respectively.

On March 15, 2021, we redeemed the $2.8 million subordinated debenture due to Trust II, which carried an average interest rate of 5.68% in 2020.

As part of a bank acquisition in 2013, we assumed a subordinated debenture due to the NorCal Community Bancorp Trust II with a contractual balance of $4.1 million.

On March 15, 2021, we redeemed the $2.8 million subordinated debenture (accreted value), which carried an average interest rate of 5.68% in 2020.

For additional information, see Note 7, Borrowings and Other Obligations, in ITEM 8 of this report.

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We maintain a non-qualified, unfunded deferred compensation plan for certain key management personnel.

Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for up to fifteen years commencing upon retirement, death, disability or termination of employment.

Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for

up to fifteen years commencing upon retirement, death, disability or termination of employment.

The participating employee may elect to receive payments over periods not to exceed fifteen years.

At December 31, 2020 and 2019, our aggregate payment obligations under this plan totaled $4.7 million and $4.4 million, respectively.

Our Salary Continuation Plan ("Plan") provides a percentage of salary continuation benefits to a select group of executive management upon retirement at age sixty-five and reduced benefits upon early retirement.

At December 31, 2020 and 2019, our liability under the Plan was $3.2 million and $3.0 million, respectively, and is

recorded in interest payable and other liabilities in the Consolidated Statements of Condition.

A similar Deferred Director Fee Plan entitles participating members of the Board of Directors to receive payments as elected by the participant upon separation from service, death, disability or termination of service.

At December 31, 2021 and 2020, our aggregate payment obligations under both plans totaled $7.9 million and $4.7 million, respectively.

Our Salary Continuation Plan ("SERP") provides a percentage of salary continuation benefits to a select group of executive management upon retirement at age sixty-five and reduced benefits upon early retirement.

At December 31, 2021 and 2020, our liability under the SERP was $5.3 million and $3.2 million, respectively, and is recorded in interest payable and other liabilities in the Consolidated Statements of Condition.

The Plan is unfunded and non-qualified for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974.

For additional information, see Note 10 to the Consolidated Financial Statements in ITEM 8 of this report.

Table 15 Off-Balance Sheet Arrangements, Commitments and Contractual Obligations

We make commitments to extend credit in the normal course of business to meet the financing needs of our customers.

For additional information, see Note 16 to the Consolidated Financial Statements in ITEM 8 of this report.

Payments due by period

(in thousands;

unaudited) <1 year 1-3 years 4-5 years >5 years Total

Operating leases $ 4,612 $ 8,428 $ 6,179 $ 9,869 $ 29,088

Finance leases 42 17 — — 59

Certificates of deposit 71,852 15,934 9,646 — 97,432

Other long term liabilities (salary continuation payments) 1

113 377 404 1,341 2,235

Total $ 76,577 $ 24,739 $ 16,229 $ 11,210 $ 128,755

1 Represents future benefit payments under executive salary continuation agreements for retired Bank of Marin employees and for agreements assumed in a bank ac quisition whereby participants receive payments upon reaching retirement age.

Amounts exclude future benefit payment obligations totalin g $3.6 million under Bank of Marin executive salary continuation agreements whereby participants will begin receiving payments upon reaching retirement age and fulfilling their service requirements.

Salary continuation obligations are based on retirement date assumptions and may be adjusted upon actual retirement.

Increases in obligations under both the deferred compensation plan and SERP in 2021 were due to the assumption of the liabilities from the ARB acquisition.

For additional information, see Note 10 to the Consolidated Financial Statements in ITEM 8 of this report.

The contractual amount of unfunded loan commitments not reflected on the consolidated statements of condition was $604.4 million and $529.1 million at December 31, 2020 and 2019, respectively.

As permitted or required under California law and to the maximum extent allowable under that law, we have certain obligations to indemnify our current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity.

These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in, or not opposed to, our best interests, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.

The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited;

however, we have a director and officer insurance policy that mitigates our exposure and enables us to recover a portion of any future amounts paid.

As we believe the possibility of potential claims to be remote and any amounts under the indemnifications would be covered by the insurance policy, we have not recorded an indemnification obligation.

Capital Adequacy

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For further discussion of bank capital requirements refer to the SUPERVISION AND REGULATION section in ITEM 1 of this report.

The Bank's total risk-based capital ratio increased from 14.6% at December 31, 2019 to 15.8% at December 31, 2020, primarily due to the Bank's $31.3 million net income in 2020, partially offset by $16.2 million in dividends paid to Bancorp to cover share repurchases, quarterly common stock dividends, and operating costs.

The Bank's total risk-based capital ratio decreased from 15.8% at December 31, 2020 to 14.4% at December 31, 2021, primarily due to $64.0 million in dividends paid to Bancorp to cover share repurchases, quarterly common stock dividends, and operating costs, partially offset by the Bank's $37.4 million net income in 2021.

Bancorp's total risk-based capital ratio was 16.0% at December 31, 2020 and 14.6% at December 31, 2021.

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Bancorp's share repurchase program and activity are discussed in detail in ITEM 5 and in Note 8 to the Consolidated Financial Statements in ITEM 8 of this report.

We expect to maintain strong capital levels and do not

expect that we will be required to raise additional capital in 2021.

We expect to maintain strong capital levels and do not expect that we will be required to raise additional capital in 2022.

Our anticipated sources of capital in 2022 include future earnings and shares issued under the stock-based compensation program.

Liquidity and Capital Resources

The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals.

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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.

In 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.

Since 2020 the banking industry has experienced abundant liquidity driven by pandemic-related government programs such as PPP and stimulus checks as well as an elevated savings rate system-wide.

Our cash and cash equivalents increased $147.3 million from December 31, 2020.

Significant sources of liquidity during 2020 included $176.9 million in paydowns, maturities and sales of investment securities, an increase in deposits of $167.8 million, and $40.8 million in net cash provided by operating activities (including $10.7 million in processing fees received from the SBA for the origination of PPP loans).

Significant uses of liquidity during 2020 were $249.3 million in loan originations and advances, net of principal collected, $97.5 million in investment securities purchased, $12.5 million in cash dividends paid on common stock to our shareholders, and $6.9 million in common stock repurchases.

The most significant source of liquidity during 2021 was deposit growth of $514.3 million (exclusive of deposits added through the ARB acquisition).

Proceeds from loans collected net of origination was $256.9 million, mainly due to SBA PPP loan forgiveness.

Proceeds from principal paydowns, maturities and sales of investment securities totaled $188.4 million.

In addition, $140.6 million of cash was acquired from ARB, and $45.3 million in net cash was provided by operating activities.

Significant uses of liquidity during 2021 were $925.6 million in investment securities purchased, $40.8 million in common stock repurchases, 13.9 million for a repayment of an FHLB loan acquired from ARB, $13.1 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-K for additional information on our sources and uses of liquidity.

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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.

The primary uses of funds for Bancorp are stock repurchases, shareholder dividends and ordinary operating expenses.

Bancorp held $6.6 million of cash at December 31, 2021 .

In January 2021, Bancorp obtained a dividend distribution from the Bank totaling $30.0 million, which is deemed sufficient to cover Bancorp's operational needs, share repurchases, repayment of a subordinated debenture 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.

Quarterly Financial Data

Table 16 Summary of Quarterly Financial Data

2020 Quarters Ended 2019 Quarters Ended

(dollars in thousands;

unaudited) Dec.

Interest income $ 24,088 $ 25,169 $ 24,997 $ 25,384 $ 25,233 $ 25,332 $ 24,941 $ 24,931

Interest expense 489 603 622 1,265 1,339 1,181 1,152 1,085

Net interest income 23,599 24,566 24,375 24,119 23,894 24,151 23,789 23,846

(Reversal of) provision for credit losses on loans (856) 1,250 2,000 2,200 500 400 — —

Net interest income after provision for

credit losses 24,455 23,316 22,375 21,919 23,394 23,751 23,789 23,846

Non-interest income 1,827 1,790 1,813 3,120 2,318 2,721 2,274 1,771

Non-interest expense 15,180 15,238 14,141 15,469 13,326 14,200 14,916 15,528

Income before provision for income taxes 11,102 9,868 10,047 9,570 12,386 12,272 11,147 10,089

Provision for income taxes 2,985 2,377 2,641 2,342 3,307 2,824 2,912 2,610

Net income $ 8,117 $ 7,491 $ 7,406 $ 7,228 $ 9,079 $ 9,448 $ 8,235 $ 7,479

Net income available to common stockholders $ 8,117 $ 7,491 $ 7,406 $ 7,228 $ 9,079 $ 9,448 $ 8,235 $ 7,479

Net income per common share:

Basic $ 0.60 $ 0.55 $ 0.55 $ 0.53 $ 0.67 $ 0.70 $ 0.60 $ 0.54

Diluted $ 0.60 $ 0.55 $ 0.55 $ 0.53 $ 0.66 $ 0.69 $ 0.60 $ 0.54

Refer to the Executive Summary section above for a discussion of items that affected the financial results for the quarter ended December 31, 2020.

Manag ement anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis