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Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2021-11-09 · 186 added, 286 removed, 271 unchanged (64% of the section changed)

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

In November 2020, the SEC issued Final Rule 33-10890, Management’s Discussion and Analysis, Selected Financial Data and Supplementary Financial Information, which modernized and simplified certain disclosure requirements of Regulation S-K.

The update to Item 303 of Regulation S-K related to interim period disclosures beginning with the first quarter of 2022 allows registrants to compare the results of the most recently completed quarter to the results of either the immediately preceding quarter or the corresponding quarter of the preceding year.

Management believes that comparing current quarter results to those of the immediately preceding quarter is more useful in identifying current business trends and provides a more meaningful comparison.

Accordingly, we have compared the results for the three months ended March 31, 2022 and December 31, 2021 throughout the Management's Discussion and Analysis sections, where applicable.

Forward-Looking Statements

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A number of factors, many of which are beyond management’s control, could cause future results to vary materially from current management expectations.

Such factors include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including changes interest rates, California unemployment rate, deposit flows, real estate values, and expected future cash flows on loans and securities;

Such factors include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including economic or other disruptions to financial markets caused by acts of terrorism, war or other conflicts such as Russia's military action in Ukraine, impacts from inflation, supply change disruptions, changes in interest rates, California's unemployment rate, deposit flows, real estate values, and expected future cash flows on loans and securities;

costs or effects of acquisitions;

changes in accounting principles, policies or guidelines;

changes in legislation or regulation (including the Coronavirus Aid, Relief and Economic Security Act of 2020, as amended, and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act of 2020);

changes in legislation or regulation;

our borrowers’ actual payment performance as loan deferrals related to the COVID-19 pandemic expire, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance;

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and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting our operations, pricing, products and services;

In addition, events or factors that could cause results or performance to materially differ from those expressed in the forward-looking statements concerning the AMRB acquisition include, but are not limited to:

• the businesses of Bancorp and AMRB may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected;

• expected cost savings from the acquisition may not be fully realized or realized within the expected time frame;

• revenues following the Merger may be lower than expected;

• customer and employee relationships and business operations may be disrupted by the acquisition;

• the ability to obtain required regulatory and shareholder approvals, and the ability to complete the acquisition within the expected timeframe may be more difficult, time-consuming or costly than expected.

Important factors that could cause results or performance to materially differ from those expressed in our prior forward-looking statements are detailed in the Risk Factors section of our 2020 Form 10-K as filed with the SEC, copies of which are available from us at no charge.

and successful integration of acquisitions.

Important factors that could cause results or performance to materially differ from those expressed in our prior forward-looking statements are detailed in ITEM 1A, Risk Factors section of our 2021 Form 10-K as filed with the SEC, copies of which are available from us at no charge.

Forward-looking statements speak only as of the date they are made.

We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.

Critical Accounting Policies and Estimates

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.

There have been no material changes to our critical accounting policies previously reported, which include:

Allowance for Credit Losses on Loans and Unfunded Commitments, Allowance for Credit Losses on Investments Securities, Accounting for Income Taxes, and Fair Value Measurements .

For a detailed discussion of these accounting policies, refer to Note 1, Summary of Significant Accounting Policies, in the Consolidated Financial Statements included in our 2020 Form 10-K filed with the SEC on March 15, 2021.

In addition, as a result of the acquisition of American River Bankshares in the third quarter of 2021, we consider the accounting policies and estimates for the following to be critical for this reporting period.

Business Combinations

Bancorp accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations .

ASC 805 requires assets and liabilities in a business combination to be recorded at their fair values as of the date of acquisition.

This method often involves estimates based on third party or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective.

Business acquisition-related costs, including conversion and restructuring charges, are expensed as incurred.

For further information, refer to Note 10, Merger, herein, and Note 1, Summary of Significant Accounting Policies;

and Item 1A, Risk Factors, in the Consolidated Financial Statements included in our 2020 Form 10-K filed with the SEC on March 15, 2021.

Our critical estimates include:

Allowance for Credit Losses on Loans and Unfunded Commitments, Income Taxes, and Fair Value Measurements .

For a detailed discussion, refer to the Critical Accounting Estimates section of our 2021 Form 10-K filed with the SEC on March 15, 2022.

Executive Summary

Bancorp completed its merger with American River Bankshares ("AMRB") on August 6, 2021 (the "merger date"), with Bancorp continuing as the surviving entity, followed thereafter at 12:05 a.m.

on August 7, 2021 by the Merger of American River Bank ("ARB") with and into Bank of Marin (collectively, the "Merger"), with Bank of Marin surviving.

AMRB shareholders received a fixed exchange ratio of 0.575 shares of Bancorp common stock for each share of AMRB common stock outstanding.

Based on Bancorp's closing stock price of $36.15 on August 6, 2021 (merger date), the transaction was valued at $124.5 million (with 3.4 million of additional shares of Bancorp common stock issued), or $20.80 per share of AMRB common stock, which includes the value of AMRB options paid in cash.

For other important factors regarding the AMRB acquisition, please see Note 10, Merger, and the Forward-Looking Statements section of this Form 10-Q.

Net income for the first quarter of 2022 totaled $10.5 million, compared to $9.7 million in the fourth quarter of 2021 and $8.9 million in the first quarter of 2021.

Diluted earnings per share were $0.66 in the first quarter of 2022, $0.61 in the prior quarter and $0.66 in the same quarter a year ago.

First quarter 2022 and fourth quarter 2021 earnings were impacted by the costs associated with our recent acquisition.

The following are highlights of our operating and financial performance for the periods presented:

• Net income for the third quarter of 2021 totaled $5.3 million, compared to $7.5 million in the third quarter of 2020.

Diluted earnings per share were $0.35 in the third quarter of 2021, compared to $0.55 in the same quarter a year ago.

Net income for the first nine months of 2021 totaled $23.5 million, compared to $22.1 million in the same period a year ago.

Diluted earnings per share were $1.69, compared to $1.62 in the first nine months of 2020.

Merger-related one-time and conversion costs reduced net income by $3.9 million, net of taxes, or 26 cents per share in the quarter and by $4.1 million, net of taxes, or 30 cents per share year-to-date.

See reconciliation of GAAP to non-GAAP financial measures on page 36.

• Loan balances of $2.317 billion at September 30, 2021 increased by $228.5 million compared to $2.089 billion at December 31, 2020.

The increase was largely due to $419.4 million in loans from the acquisition of ARB on August 6, 2021 and new non-PPP related loan originations totaling $101.7 million.

These increases were partially offset by non-PPP loan payoffs totaling $145.3 million, and a $126.8 million decrease in Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans outstanding.

• Credit quality remains strong, with non-accrual loans representing 0.36% of total loans as of September 30, 2021, compared to 0.44% at December 31, 2020.

The ratio of the allowance for credit losses on loans to total loans was 0.97% at September 30, 2021, compared to 1.10% at December 31, 2020.

Excluding SBA PPP loans, the ratio of allowance to loans would have been 1.04% and 1.27% at September 30, 2021 and December 31, 2020, respectively (see Results of Operations for a definition of this non-GAAP financial measure).

• The allowance for credit losses increased by $3.3 million in the third quarter and was comprised of a $1.8 million provision, mainly related to purchased ARB loans without credit deterioration, and a $1.5 million merger-date allowance established for purchased credit deteriorated loans.

There was no provision for credit losses on unfunded loan commitments in the third quarter of 2021.

• Total deposits of $3.728 billion at September 30, 2021 increased by $1.224 billion from $2.504 billion at December 31, 2020, mainly due to the ARB acquisition.

Non-interest bearing deposits were 49% of total deposits as of September 30, 2021, versus 54% as of December 31, 2020.

The decrease in this ratio was primarily due to an increase in interest bearing deposits from existing customers and a lower ratio of non-interest-bearing deposits acquired from ARB.

The cost of average deposits for the quarter and nine months ended September 30, 2021 was 0.06% and 0.07%, respectively, compared to 0.09% and 0.13% for the comparable periods in 2020.

• ROA and ROE ratios were significantly impacted by provisions for credit losses on acquired loans and shares issued in conjunction with the Merger.

• Conversion of our core systems occurred in March of 2022, bringing acquired ARB accounts and key systems under the umbrella of Bank of Marin.

For a smooth end-user experience in line with standards of legendary service, extra resources were deployed to assist our customers with the transition.

• Merger-related one -time and conversion costs reduced net income by $385 thousand, net of taxes, or $0.02 per share in the quarter.

As shown in the reconciliation of GAAP to non-GAAP financial measures on page 31, without those acquisition related components, return on average assets ("ROA") of 0.98% and return on average equity ("ROE") of 9.61% would have been 1.01% and 9.96%, respectively, compared to 0.97% and 9.19% for the quarter ended December 31, 2021.

ROA and ROE were 1.21% and 10.22% for the first three months of 2021.

• A good indicator of the merger's positive impact on operating earnings is the efficiency ratio, as it neither includes provisions for losses on loans and unfunded commitments, nor is it impacted by changes in share counts.

As shown in the reconciliation of GAAP to non-GAAP financial measures on page 36 the efficiency ratio excluding merger-related one-time and conversion costs of 56.02% for the quarter ended September 30, 2021, improved from 56.88% for the quarter a year ago.

The comparable year-to-date non-GAAP efficiency ratio for the first nine months of 2021 was 59.09%, compared to 55.45% in 2020, and was not as good an indicator of the positive effects of the acquisition because it was impacted by a significant decline in interest rates.

As shown in the reconciliation of GAAP to non-GAAP financial measures on page 31, the efficiency ratios excluding merger-related one-time and conversion costs were 57.46% and 53.63% for the quarters ended March 31, 2022 and December 31, 2021, respectively, as compared to 59.13% and 56.92%.

The change over the prior quarter was primarily due to typical first quarter increases in salaries, related benefits and professional services expenses as discussed in the Non-Interest Expense section below.

The significant improvement in operating leverage generated by the acquisition is evident in the decline in efficiency ratio from 64.60% in first quarter of 2021, which was not impacted by merger costs.

• Loan balances of $2.202 billion at March 31, 2022 included an increase of $16.6 million in traditional commercial loans and a decrease of $70.6 million in PPP loans forgiven and paid off, resulting in a net decrease in loans of $53.8 million from December 31, 2021.

First quarter loan originations of $49.8 million represented a six year peak for first quarter originations, and commercial line utilization increased to 38% of total commitments as of March 31, 2022, from 34% at December 31, 2021.

• Credit quality remains strong, with non-accrual loans representing 0.35% of total loans as of March 31, 2022, compared to 0.37% at December 31, 2021.

While classified loans did not change significantly from the prior quarter end, special mention loans decreased by $10.0 million, the majority of which was due to payoffs and upgrades to pass risk ratings.

• Reversals of $485 thousand to the allowance for credit losses on loans and $318 thousand to the allowance for credit losses on unfunded loan commitments in the first quarter of 2022 resulted from improved economic forecasts.

• Deposits grew by $52.8 million to $3.861 billion at March 31, 2022 compared to $3.809 billion at December 31, 2021, with most of the growth coming from non-interest bearing balances.

Non-interest bearing deposits made up 51% of total deposits as of March 31, 2022 versus 50% as of December 31, 2021.

The cost of average deposits was 0.06% in the first quarter, consistent with the fourth quarter of 2021 at 0.06%, compared to 0.07% in the first quarter of 2021.

Additionally, as part of our liquidity management, the Bank maintained $180.0 million in deposits off-balance sheet with deposit networks at March 31, 2022.

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

The total risk-based capital ratio for Bancorp was 15.0% at September 30, 2021, compared to 16.0% at December 31, 2020.

Bancorp's tangible common equity to tangible assets was 9.1% at September 30, 2021, compared to 11.3% at December 31, 2020 (see Results of Operations for a definition of this non-GAAP financial measure).

The Bank's total risk-based capital ratio was 14.4% at September 30, 2021, compared to 15.8% at December 31, 2020.

• The Board of Directors declared a cash dividend of $0.24 per share on October 22, 2021, which represents the 66th consecutive quarterly dividend paid by Bank of Marin Bancorp.

The dividend is payable on November 12, 2021, to shareholders of record at the close of business on November 5, 2021.

• On October 22, 2021, the Board of Directors approved an amendment to the current share repurchase program which increased the total authorization from $25.0 million to $57.0 million.

The July 31, 2023 expiration date of the program remained unchanged.

• Effective October 31, 2021, Russell A.

Colombo retired as Chief Executive Officer of Bank of Marin and Bank of Marin Bancorp and the Board of Directors named Tim Myers, previously President and Chief Operating Officer, as his successor.

Colombo will remain on the Boards of Bancorp and the Bank, and Mr.

Myers will join both Boards.

Bank of Marin's strong balance sheet is built from our core values - relationship banking, disciplined fundamentals and commitment to the communities that we serve.

We believe that our robust liquidity and capital positions, high credit quality loan portfolio, excellent credit metrics, and low-cost deposit base, as well as our acquisition of AMRB will reinforce the long-term success of the bank and position us well for the remainder of 2021.

The total risk-based capital ratio for Bancorp was 14.4% at March 31, 2022, compared to 14.6% at December 31, 2021.

Bancorp's tangible common equity to tangible assets was 8.0% at March 31, 2022, compared to 8.8% at December 31, 2021 (see Results of Operations for a definition of this non-GAAP financial measure).

The decline in tangible equity from December 31, 2021 was primarily due to the $37.3 million other comprehensive loss, net of taxes, related to significant increases in interest rates during the quarter.

The Bank's total risk-based capital ratio was 14.3% at March 31, 2022, compared to 14.4% at December 31, 2021.

• The Board of Directors declared a cash dividend of $0.24 per share on April 22, 2022, which represents the 68 th consecutive quarterly dividend paid by Bank of Marin Bancorp.

The dividend is payable on May 13, 2022 to shareholders of record at the close of business on May 6, 2022.

Statement Regarding use of Non-GAAP Financial Measures

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Reconciliation of GAAP and Non-GAAP Financial Measures

(in thousand, unaudited) Three months ended Nine months ended

Net income September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Three months ended

(in thousands, unaudited) March 31, 2022 December 31, 2021 March 31, 2021

Net income (GAAP) $ 10,465 $ 9,714 $ 8,947

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Other 97 67 —

Total merger costs before tax benefits 547 1,098 —

Income tax benefit of merger-related expenses (162) (307) —

Total merger-related one-time and conversion costs, net of taxes 3,920 — 4,120 —

Total merger-related one-time and conversion costs, net of tax benefits 385 791 —

Comparable net income (non-GAAP) $ 10,850 $ 10,505 $ 8,947

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Diluted earnings per share (GAAP) $ 0.66 $ 0.61 $ 0.66

Merger-related one-time and conversion costs, net of tax benefits 0.02 0.05 —

Comparable diluted earnings per share (non-GAAP) $ 0.68 $ 0.66 $ 0.66

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Highlights of the financial results are presented in the following tables:

(dollars in thousands) September 30, 2021 December 31, 2020

Three months ended

(dollars in thousands, except per share data) March 31, 2022 December 31, 2021 March 31, 2021

Selected operating data:

Net interest income $ 29,898 $ 30,633 $ 22,031

(Reversal of) provision for credit losses on loans (485) 600 (2,929)

(Reversal of) provision for credit losses on unfunded loan commitments

(318) 210 (590)

Non-interest income 2,867 2,719 1,826

Non-interest expense 19,375 18,984 15,412

Net income 10,465 9,714 8,947

Net income per common share:

Basic $ 0.66 $ 0.61 $ 0.67

Diluted $ 0.66 $ 0.61 $ 0.66

Performance and other financial ratios:

Return on average assets 0.98 % 0.90 % 1.21 %

Return on average equity 9.61 % 8.50 % 10.22 %

Tax-equivalent net interest margin 1

2.96 % 3.03 % 3.19 %

Cost of deposits 0.06 % 0.06 % 0.07 %

Efficiency ratio 59.13 % 56.92 % 64.60 %

Cash dividend payout ratio on common stock 2

36.36 % 39.34 % 34.33 %

(dollars in thousands, except per share data) March 31, 2022 December 31, 2021

Selected financial condition data:

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Borrowings and other obligations 388 419

Subordinated debenture — 2,777

Stockholders' equity 420,408 450,368

Book value per share 26.27 28.27

Asset quality ratios:

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Common equity Tier 1 capital (to risk weighted assets) 13.52 % 13.70 %

Three months ended Nine months ended

(dollars in thousands, except per share data) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Selected operating data:

Net interest income $ 27,753 $ 24,566 $ 74,318 $ 73,060

Provision for (reversal of) credit losses on loans 1,800 1,250 (2,049) 5,450

Provision for (reversal of) credit losses on unfunded loan commitments

— 248 (1,202) 610

Non-interest income 3,565 1,790 7,413 6,723

Non-interest expense 22,686 14,990 53,654 44,238

Net income 5,282 7,491 23,514 22,125

Net income per common share:

Basic $ 0.35 $ 0.55 $ 1.70 $ 1.64

Diluted $ 0.35 $ 0.55 $ 1.69 $ 1.62

Performance and other financial ratios:

Return on average assets 0.56 % 0.98 % 0.96 % 1.03 %

Return on average equity 4.99 % 8.37 % 8.40 % 8.47 %

Tax-equivalent net interest margin 3

3.15 % 3.44 % 3.23 % 3.61 %

Cost of deposits 0.06 % 0.09 % 0.07 % 0.13 %

Efficiency ratio 72.44 % 56.88 % 65.65 % 55.45 %

Cash dividend payout ratio on common stock 4

68.57 % 41.82 % 41.18 % 42.07 %

1 The allowance for credit losses on loans to total loans, excluding SBA-guaranteed PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for credit losses on loans.

SBA PPP loans at September 30, 2021 and December 31, 2020 totaled $164.8 million and $291.6 million, respectively.

2 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses.

Tangible common equity of $379 million and $324 million at September 30, 2021 and December 31, 2020, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets.

Tangible assets exclude goodwill and intangible assets of $79.8 million and $34.0 million at September 30, 2021 and December 31, 2020, respectively.

1 Tax-equivalent net interest margin is computed by dividing taxable equivalent net interest income, which is adjusted for taxable equivalent income on tax-exempt loans and securities based on Federal statutory rate of 21 percent, by total average interest-earning assets.

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

3 The allowance for credit losses on loans to total loans, excluding SBA-guaranteed PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for credit losses on loans.

SBA PPP loans at March 31, 2022 and December 31, 2021 totaled $40.6 million and $111.2 million, respectively.

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 $341 million and $371 million at March 31, 2022 and December 31, 2021, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets.

Tangible assets exclude goodwill and intangible assets of $79.0 million and $79.4 million at March 31, 2022 and December 31, 2021, respectively.

Net Interest Income

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The table also presents net interest income, net interest margin and net interest rate spread for each period reported.

Three months ended Three months ended

September 30, 2021 September 30, 2020

Interest Interest

Average Income/ Yield/ Average Income/ Yield/

(dollars in thousands) Balance Expense Rate Balance Expense Rate

Interest-earning deposits with banks 1

$ 456,405 $ 178 0.15 % $ 184,883 $ 50 0.11 %

Investment securities 2, 3

845,127 4,249 2.01 % 527,077 3,481 2.64 %

Loans 1, 3, 4

2,189,563 24,229 4.33 % 2,117,679 21,957 4.06 %

Total interest-earning assets 1

3,491,095 28,656 3.21 % 2,829,639 25,488 3.52 %

Cash and non-interest-bearing due from banks 68,680 55,353

Bank premises and equipment, net 6,468 5,412

Interest receivable and other assets, net 177,725 138,938

Total assets $ 3,743,968 $ 3,029,342

Liabilities and Stockholders' Equity

Interest-bearing transaction accounts $ 237,883 $ 41 0.07 % $ 153,089 $ 41 0.11 %

Savings accounts 293,434 26 0.03 % 191,915 17 0.04 %

Money market accounts 911,294 417 0.18 % 802,585 377 0.19 %

Time accounts including CDARS 124,247 44 0.14 % 97,465 133 0.54 %

Borrowings and other obligations 1, 6

3,010 8 1.09 % 113 — 2.51 %

Subordinated debenture 1, 5

2,751 35 4.97 %

Total interest-bearing liabilities 1,569,868 536 0.14 % 1,247,918 603 0.19 %

Demand accounts 1,707,142 1,380,708

Interest payable and other liabilities 46,834 44,486

Stockholders' equity 420,124 356,230

Total liabilities & stockholders' equity $ 3,743,968 $ 3,029,342

Tax-equivalent net interest income/margin 1

$ 28,120 3.15 % $ 24,885 3.44 %

Reported net interest income/margin 1

$ 27,753 3.11 % $ 24,566 3.40 %

Tax-equivalent net interest rate spread 3.07 % 3.33 %

Nine months ended Nine months ended

September 30, 2021 September 30, 2020

Interest Interest

Average Income/ Yield/ Average Income/ Yield/

(in thousands) Balance Expense Rate Balance Expense Rate

Three months ended Three months ended Three months ended

March 31, 2022 December 31, 2021 March 31, 2021

Interest Interest Interest

Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/

(dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate

Interest-earning deposits with banks 1

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5 2021 interest on subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.

6 Average balances and rate consider $13.9 million in FHLB borrowings acquired from American River Bank that were redeemed on August 25, 2021.

Analysis of Changes in Net Interest Income

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Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances.

Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one more day in the nine months ended September 30,2020.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including two more days in the three months ended March 31, 2022 compared to December 31, 2021.

Three Months Ended March 31, 2022 Compared to Three Months Ended

December 31, 2021 Three Months Ended March 31, 2022 Compared to Three Months Ended

March 31, 2021

(in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total

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1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.

2 Nine months ended September 30, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.

Third Quarter of 2021 Compared to Third Quarter of 2020

Net interest income totaled $27.8 million in the third quarter of 2021, compared to $24.6 million in the same quarter a year ago.

The $3.2 million increase was primarily due to the addition of ARB interest earning balances, higher yield on acquired ARB loans, and higher income from SBA PPP loans.

Increases were partially offset by lower yields on acquired ARB investment securities balances.

The tax-equivalent net interest margin was 3.15% in the third quarter of 2021 compared to 3.44% in the same quarter of last year.

The decrease in tax-equivalent net interest margin was primarily attributed to both $271.5 million increase in low yielding due from banks interest-earning balances and the lower interest rate environment.

SBA PPP loans added 13 basis points to the third quarter 2021 net interest margin as compared to a 4 basis points reduction to the net interest margin in the third quarter of 2020 due to higher fee income accretion in the third quarter of 2021 as more PPP loans were forgiven and paid off by the SBA.

First Nine Months of 2021 Compared to First Nine Months of 2020

Net interest income totaled $74.3 million in the first nine months ended September 30, 2021, compared to $73.1 million in the same period a year ago.

The $1.3 million increase was primarily attributed to the addition of ARB interest-earning assets and higher income from SBA PPP loans.

Increases were partially offset by $1.3 million in accelerated discount accretion on the early redemption of a subordinated debenture in the first quarter of 2021 and lower yielding interest-earning assets.

We recognized $6.6 million in SBA PPP fees, net of cost in the first nine months of 2021, compared to $2.8 million in the first nine months a year ago.

As of September 30, 2021 $4.2 million PPP fees, net of deferred costs remain outstanding and will be recognized into income in future periods.

The tax-equivalent net interest margin was 3.23% in the first nine months ended June 30, 2021, compared to 3.61% in the same period a year ago.

The decrease was primarily attributed to $1.3 million in accelerated discount accretion from the early redemption of a subordinated debenture in the first quarter of 2021, the lower interest rate environment and higher cash balances, partially offset by higher income from PPP loans.

SBA PPP loans added 9 basis points to the first nine months' net interest margin as compared to a 3 basis points reduction to net interest margin in the comparable period in 2020.

2 Three months ended March 31, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.

First Quarter of 2022 Compared to the Fourth Quarter of 2021

Net interest income totaled $29.9 million in the first quarter of 2022, compared to $30.6 million in the prior quarter.

The $735 thousand decrease from the prior quarter was primarily attributable to changes in amortization and accretion on acquired loans, lower loan prepayment fees, lower PPP fee recognition and fewer days in the quarter, partially offset by higher average balances and yields on investment securities.

The tax-equivalent net interest margin was 2.96% in the first quarter of 2022, compared to 3.03% in the fourth quarter of 2021.

The decrease from the prior quarter was primarily due to changes in amortization and accretion on acquired loans, lower loan prepayment fees, lower PPP fee recognition, and a higher proportion of investment securities from balance sheet growth.

Average yields on the non-PPP portion of the loan portfolio and the investment portfolio are beginning to reflect recent increases in interest rates, particularly commercial loans.

First Quarter of 2022 Compared to the First Quarter of 2021

Net interest income totaled $29.9 million in the first quarter of 2022, compared to $22.0 million in the first quarter of 2021.

The $7.9 million increase from the comparative quarter a year ago was reflective of the ARB merger, a larger allocation of the loan portfolio to higher rate loans, deployment of cash into investment securities, and costs associated with the early redemption of subordinated debt in the first quarter of 2021.

Increases were partially offset by a lower average yield on the investment portfolio.

The tax-equivalent net interest margin was 2.96% in the first quarter of 2022 compared to 3.19% in the same quarter last year.

The decrease in tax-equivalent net interest margin from the same period a year ago was primarily attributed to a higher proportion of investment securities in the larger balance sheet associated with ARB's lower loan-to-deposit ratio and other deposit growth with average yields 74 basis points lower.

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 has resided between 0.0% and 0.25% since March 15, 2020, putting downward pressure on our asset yields and net interest margin.

A low interest rate environment will continue to put downward pressure on our asset yields and net interest margin.

The federal funds target rate

range resided between 0.0% a nd 0.25% after March 15, 2020 through the beginning of 2022, putting downward pressure on our asset yields and net interest margin.

In its March 16, 2022 meeting, the FOMC raised the target federal funds by 25 basis points followed by a 50 basis point increase on May 4, 2022 to a range of 75% - 1.00% and anticipates that ongoing increases in the target range will be appropriate in 2022.

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

Quantitative and Qualitative Disclosure about Market Risk for further information.

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The following table shows the provision for credit losses activity for the periods presented.

Three months ended Nine months ended

(dollars in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Provision for (reversal of) credit losses on loans $ 1,800 $ 1,250 $ (2,049) $ 5,450

The $1.8 million provision for the three months ended September 30, 2021 was mainly related to purchased ARB loans without credit deterioration.

The net provision reversal for the first nine months in 2021 was primarily due to continued improvements in the forecasted California unemployment rates over the next four quarters, partially offset by the provision in the third quarter.

Our allowance model is particularly sensitive to current and forecasted California unemployment rates, which decreased to 6.4% at September 30, 2021 from 9.1% at December 31, 2020.

The provision for credit losses in 2020 calculated under the incurred loss method (prior to the adoption of the excepted credit loss method on December 31, 2020) was largely due to the uncertainty about the impact of the COVID-19 pandemic on the local and regional economies and our customers at that time.

Loans designated special mention, which are not considered adversely classified, increased year-to-date by $16.6 million to $103.4 million at September 30, 2021 from $86.9 million at December 31, 2020.

The increase was largely due to the downgrading from pass to special mention several well-secured commercial real estate loans totaling $41.2 million and one borrowing relationship with three commercial loans totaling $5.4 million, also well collateralized.

In addition, we upgraded several borrowing relationships from substandard to special mention totaling $13.2 million because of their improved financial condition and assumed $13.7 million in special mention loans in the Merger.

These increases were partially offset by $32.7 million in upgrades to pass due to improved financial condition, $18.8 million in paydowns and payoffs and $5.4 million in downgrades to substandard comprised primarily of one well secured commercial real estate loan.

Classified assets (loans with risk ratings of substandard or doubtful) totaled $19.0 million at September 30, 2021, compared to $25.8 million at December 31, 2020.

The $6.8 million decrease was primarily due to the upgrading of $13.2 million in loans mentioned above and paydowns and payoffs totaling $1.9 million.

These decreases were primarily offset by the $5.4 million in downgrades mentioned above and $2.3 million in substandard loans assumed in the Merger.

Classified loans also included one $118 thousand loan acquired from ARB with a doubtful risk rating as of September 30, 2021, which is well-secured by real estate collateral.

There were no loans considered doubtful at December 31, 2020.

The ratio of allowance for credit losses on loans to total loans was 0.97% at September 30, 2021, compared to 1.10% at December 31, 2020.

Non-accrual loans totaled $8.4 million, or 0.36% of total loans at September 30, 2021, and remained largely unchanged from $9.2 million, or 0.44% of total loans at December 31, 2020.

Three months ended

(dollars in thousands) March 31, 2022 December 31, 2021 March 31, 2021

(Reversal of) provision for credit losses on loans $ (485) $ 600 $ (2,929)

The reversals of the allowance for credit losses on loans in the quarters ended March 31, 2022 and 2021 primarily resulted from improved economic conditions.

The $600 thousand provision for credit losses on loans in the fourth quarter of 2021 resulted from increases to qualitative risk factors primarily impacted by changes in executive leadership, senior lending positions, and integration of the ARB lending staff and loan portfolio as well as further refinements to the discounted cash flow assumptions applied to acquired loans within the allowance model.

These increases were partially offset by reductions in 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 the fourth quarter.

Additionally, there was an overall improvement in the underlying economic forecasts.

Loans designated special mention, which are not considered adversely classified, decreased year-to-date by $10.0 million to $63.3 million at March 31, 2022 from $73.3 million at December 31, 2021.

The decrease was largely due to $15.0 million in upgrades to pass risk ratings because of the borrowers' improved financial condition, $3.6 million in downgrades from special mention to substandard, and $706 thousand in paydowns and payoffs.

These decreases were partially offset by $8.7 million in downgrades from pass to special mention.

Classified assets (loans with risk ratings of substandard or doubtful) totaled $36.6 million at March 31, 2022, compared to $36.2 million at December 31, 2021.

The $224 thousand increase was primarily related to $6.8 million in commercial loans to one borrowing relationship that were downgraded from special mention to substandard (comprised of $3.6 million as of December 31, 2021 and $3.2 million in additional advances in 2022).

The increase was largely offset by $5.2 million in upgrades to pass and $684 thousand in paydowns and payoffs.

Classified loans also included one $110 thousand loan acquired from ARB with a doubtful risk rating as of March 31, 2022 and December 31, 2021, which is well-secured by real estate collateral.

The ratio of allowance for credit losses on loans to total loans was 1.02% at March 31, 2022 and December 31, 2021.

Non-accrual loans decreased $698 thousand to $7.7 million, or 0.35% of total loans at March 31, 2022 from $8.4 million, or 0.37% of total loans at December 31, 2021.

For more information, refer to Note 5 to the consolidated financial statements in this Form 10-Q.

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

Three months ended Amount Increase (Decrease Percent Increase (Decrease)

(dollars in thousands) September 30, 2021 September 30, 2020

Earnings on bank-owned life insurance, net 1,402 232 1,170 504.3 %

Three months ended Quarter over quarter Year over year

(dollars in thousands) March 31, 2022 December 31, 2021 March 31, 2021 Amount Change Percent Change Amount Change Percent Change

Wealth Management and Trust Services $ 600 $ 607 $ 488 $ (7) (1.2) % $ 112 23.0 %

Debit card interchange fees 483 383 100 26.1 %

Debit card interchange fees, net 505 544 366 (39) (7.2) % 139 38.0 %

Service charges on deposit accounts 488 531 281 (43) (8.1) % 207 73.7 %

Dividends on Federal Home Loan Bank stock 179 149 30 20.1 %

Merchant interchange fees 129 63 66 104.8 %

Gains on sale of investment securities, net 1 — 1 NM

Other income 310 229 81 35.4 %

Total non-interest income $ 3,565 $ 1,790 $ 1,775 99.2 %

NM - not meaningful

Nine months ended Amount Increase (Decrease Percent Increase (Decrease)

(dollars in thousands) September 30, 2021 September 30, 2020

Earnings on bank-owned life insurance, net 413 302 257 111 36.8 % 156 60.7 %

Wealth Management and Trust Services $ 1,615 $ 1,375 $ 240 17.5 %

Debit card interchange fees 1,268 1,051 217 20.6 %

Service charges on deposit accounts 1,062 1,028 34 3.3 %

Dividends on Federal Home Loan Bank stock 259 255 149 4 1.6 % 110 73.8 %

Merchant interchange fees 247 183 64 35.0 %

Gains on sale of investment securities, net 1 915 (914) (99.9) %

Merchant interchange fees, net 140 175 57 (35) (20.0) % 83 145.6 %

Losses on sale of investment securities, net — (17) — 17 NM — NM

Other income 462 322 228 140 43.5 % 234 102.6 %

Total non-interest income $ 2,867 $ 2,719 $ 1,826 $ 148 5.4 % $ 1,041 57.0 %

Third Quarter of 2021 Compared to Third Quarter of 2020

Non-interest income increased by $1.8 million in the third quarter of 2021 to $3.6 million, compared to $1.8 million in the same quarter a year ago.

The increase was mostly attributed to the collection of $1.1 million in death benefits on bank-owned life insurance ("BOLI") policies and increases in fee income from deposit accounts and debit card interchange activity.

First Nine Months of 2021 Compared to First Nine Months of 2020

Non-interest income increased by $0.7 million in the first nine months of 2021 to $7.4 million, from $6.7 million in the first nine months of 2020.

The increase was primarily due to BOLI payments noted above, increases in Wealth Management and Trust Services income generated from new accounts and favorable market performance, and fees from deposit accounts and debit card interchange activity.

In March 2020, we implemented temporary waivers for all ATM fees, overdraft fees and early withdrawal penalties for time deposits to help ease the financial burden customers began experiencing due to the pandemic.

We reinstituted the fees in May 2021.

The increase was partially offset by the absence of gains on investment securities, as $915 thousand in gains were recognized in the comparative period a year ago.

NM - not meaningful

First Quarter of 2022 Compared to Fourth Quarter of 2021

Non-interest income increased by $148 thousand in the first quarter of 2022 to $2.9 million, compared to $2.7 million in the prior quarter.

The increase from the prior quarter was primarily due to a payment on bank-owned life insurance.

First Quarter of 2022 Compared to the First Quarter of 2021

Non-interest income increased by $1.0 million in the first quarter of 2022 to $2.9 million, compared to $1.8 million in the same quarter a year ago.

The increase from the first quarter of 2021 was mostly attributable to increased activity associated with the ARB acquisition in the first quarter of 2022.

Non-interest Expense

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

Three months ended Amount Increase (Decrease) Percent Increase (Decrease)

(dollars in thousands) September 30, 2021 September 30, 2020

Three months ended Quarter over quarter Year over year

(dollars in thousands) March 31, 2022 December 31, 2021 March 31, 2021 Amount Change Percent Change Amount Change Percent Change

Salaries and related benefits $ 11,548 $ 10,716 $ 9,208 $ 832 7.8 % $ 2,340 25.4 %

Occupancy and equipment 1,909 1,929 1,751 (20) (1.0) % 158 9.0 %

Professional services 2,472 655 1,817 277.4 %

Data processing 1,277 1,887 819 (610) (32.3) % 458 55.9 %

Depreciation and amortization 431 539 (108) (20.0) %

Information technology 496 256 240 93.8 %

Amortization of core deposit intangible 334 213 121 56.8 %

Directors' expense 255 184 71 38.6 %

Federal Deposit Insurance Corporation insurance 236 181 55 30.4 %

Charitable contributions 4 481 (477) (99.2) %

Other non-interest expense

Advertising 189 163 26 16.0 %

Other expense 1,658 1,082 576 53.2 %

Total other non-interest expense 1,847 1,245 602 48.4 %

Total non-interest expense $ 22,686 $ 14,990 $ 7,696 51.3 %

Nine months ended Amount Increase (Decrease) Percent Increase (Decrease)

(dollars in thousands) September 30, 2021 September 30, 2020

Salaries and related benefits $ 31,223 $ 25,979 $ 5,244 20.2 %

Occupancy and equipment 5,373 5,100 273 5.4 %

Professional services 913 653 863 260 39.8 % 50 5.8 %

Data processing 3,252 2,437 815 33.4 %

Depreciation and amortization 1,279 1,591 (312) (19.6) %

Information technology 478 445 313 33 7.4 % 165 52.7 %

Depreciation and amortization 452 461 459 (9) (2.0) % (7) (1.5) %

Amortization of core deposit intangible 380 393 204 (13) (3.3) % 176 86.3 %

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Total non-interest expense $ 19,375 $ 18,984 $ 15,412 $ 391 2.1 % $ 3,963 25.7 %

Third Quarter of 2021 Compared to Third Quarter of 2020

Non-interest expense increased by $7.7 million to $22.7 million in the third quarter of 2021, compared to $15.0 million in the same period a year ago.

The increase was primarily due to a $5.1 million increase in merger-related one-time and conversion costs (mostly related to professional services, data processing contract termination, and personnel costs), salaries and benefits for retained ARB employees and other ARB-related operating expenses incurred since the merger date.

The increase was partially offset by a $477 thousand decrease in charitable contributions as the bank has transitioned to a more defined contributions disbursement schedule with funding occurring in the second and fourth quarters, and large pandemic-related contributions in 2020.

First Nine Months of 2021 Compared to First Nine Months of 2020

Non-interest expense increased by $9.4 million to $53.7 million in the first nine months of 2021, compared to $44.2 million in the first nine months of 2020.

Higher salaries and related benefits of $5.2 million included $2.7 million in personnel costs related to the Merger.

The increase in salaries and benefits was also attributed to fewer deferred

SBA PPP loan origination costs.

Professional services increased by $2.6 million and data processing expenses increased by $815 thousand, mainly due to merger-related expenses.

In addition, FDIC deposit insurance expenses were $298 thousand higher.

Charitable contributions were lower than 2020 for the reasons mentioned above.

First Quarter of 2022 Compared to Fourth Quarter of 2021

Non-interest expense increased by $391 thousand to $19.4 million in the first quarter of 2022, compared to $19.0 million in the prior quarter.

The increase from the prior quarter is primarily due to seasonal increases related to annual incentives, share-based compensation and 401(k) contributions included in salaries and related benefits.

Additionally, the cost of professional services increased due to audit work performed in the first quarter related to both the year-end financial statement audit and the ARB acquisition.

Increases were partially offset by a decrease in acquisition-related one-time data processing expenses.

First Quarter of 2022 Compared to the First Quarter of 2021

Non-interest expense increased by $4.0 million to $19.4 million in the first quarter of 2022, compared to $15.4 million in the same period a year ago.

The largest increases over prior year first quarter expense came from salaries and related benefits, which rose $2.3 million due to increased numbers of employees in acquired branch and loan offices, regularly scheduled annual merit and related increases, and lower deferred loan origination costs.

Higher expenses across most other categories reflect the ARB acquisition, including one-time and conversion costs of $547 thousand and additional amortization associated with the ARB core deposit intangible asset in the first quarter of 2022.

Provision for Income Taxes

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Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).

The provision for income taxes for the third quarter of 2021 totaled $1.6 million at an effective tax rate of 22.7%, compared to $2.4 million at an effective tax rate of 24.1% in the same quarter last year.

The provision for income taxes for the first nine months of 2021 totaled $7.8 million at an effective tax rate of 24.9%, compared to $7.4 million at an effective tax rate of 25.0% for the first nine months of 2020.

The decrease in the provision reflected lower pre-tax income for the third quarter of 2021 compared to the same quarter a year ago.

The 140 basis point decrease in the effective tax rate in the third quarter of 2021 as compared to the same quarter a year ago was primarily due to higher BOLI and tax exempt loan and investment securities interest income from the ARB acquisition, partially offset by the non-deductible merger expenses incurred in the third quarter of 2021.

The provision for income taxes for the first quarter of 2022 totaled $3.7 million at an effective tax rate of 26.3%, compared to $3.8 million at an effective tax rate of 28.4% in the prior quarter and $3.0 million at an effective tax rate of 25.2% in the same quarter last year.

Although pretax income was higher in the first quarter of 2022 compared to the prior quarter, the higher provision in the prior quarter reflects non-deductible merger expenses and executive compensation, which also accounted for the higher effective tax rate.

The increase in the provision in the first quarter of 2022 reflected higher pre-tax income as compared to the same quarter a year ago.

The 110 basis point increase in the effective tax rate in the first quarter of 2022 as compared to the same quarter a year ago was primarily due to a higher level of tax benefits in 2021 from the disqualifying dispositions of incentive stock options.

We file a consolidated return in the U.S.

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There were no ongoing federal or state income tax examinations at the issuance of this report.

At September 30, 2021, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

At March 31, 2022, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

FINANCIAL CONDITION SUMMARY

At September 30, 2021, assets totaled $4.261 billion, an increase of $1.349 billion, from $2.912 billion at December 31, 2020, mainly due to the acquisition of ARB in August 2021, which added approximately $898.4 million in assets, as well as increases in deposit inflows as discussed below.

For additional information on the merger, refer to Note 10, Merger, in this Form 10-Q.

At March 31, 2022, assets totaled $4.330 billion, an increase of $16.2 million, from $4.314 billion at December 31, 2021, mainly due to organic growth.

Cash, Cash Equivalents and Restricted Cash

Total cash, cash equivalents and restricted cash were $584.7 million at September 30, 2021, compared to $200.3 million at December 31, 2020.

The increase was mainly due to the acquisition of ARB, SBA PPP loan forgiveness and an increase in deposits.

Cash and cash equivalents do not include $179.9 million and $173.4 million in temporary one-way sale transfers of deposits to third-party deposit networks as part of our liquidity management at September 30, 2021 and December 31, 2020, respectively.

Total cash, cash equivalents and restricted cash were $170.9 million at March 31, 2022, compared to $347.6 million at December 31, 2021.

The $176.7 million decrease was primarily due to the deployment of funds into investment securities, as noted below.

Cash and cash equivalents do not include $180.0 million and $173.1 million in temporary one-way sale transfers of deposits to third-party deposit networks as part of our liquidity management at March 31, 2022 and December 31, 2021, respectively.

Investment Securities

The investment securities portfolio totaled $1.160 billion at September 30, 2021, an increase of $658.4 million from December 31, 2020.

The increase was primarily due to purchases of $508.6 million to deploy excess cash into interest earning assets in a more favorable interest rate environment in 2021, and securities of $297.8 million acquired from ARB, partially offset by paydowns, calls and maturities of $132.5 million.

Additionally, the fair value of available-for-sale securities decreased $8.6 million as a result of the higher interest rate environment in the first nine months of 2021.

Security sales in the first nine months of 2021 totaled $4.1 million.

The investment securities portfolio totaled $1.746 billion at March 31, 2022, an increase of $235.9 million from December 31, 2021.

The increase was primarily due to purchases of $339.4 million to deploy excess cash into interest earning assets in a more favorable interest rate environment in 2022, partially offset by paydowns, calls and maturities of $48.0 million.

Additionally, the fair value of available-for-sale securities decreased $53.0 million as a result of higher interest rates in the first three months of 2022.

As part of our ongoing review of the investment securities portfolio and because of our strong liquidity position, we reassessed the classification of certain securities issued by government sponsored agencies in the context of recent changes in market expectations for future interest rates.

In March 2022, we transferred $357.5 million securities at fair value from available-for-sale to held-to-

maturity to reduce the effect of future rate increases on the available-for-sale portfolio mark-to-market, other comprehensive income and equity.

See Note 4, Investment Securities, for additional information.

The following table summarizes our investment in obligations of state and political subdivisions at September 30, 2021 and December 31, 2020.

September 30, 2021 December 31, 2020

The following table summarizes our investment in obligations of state and political subdivisions at March 31, 2022 and December 31, 2021.

March 31, 2022 December 31, 2021

(dollars in thousands) Amortized Cost Fair Value % of Total State and Political Subdivisions Amortized Cost Fair Value % of Total State and Political Subdivisions

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Total obligations of state and political subdivisions $ 180,407 $ 170,724 100.0 % $ 176,212 $ 181,290 100.0 %

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

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (39.7%), Washington (18.8%) and Maryland (4.4%).

Percent of investment portfolio 10.1 % 10.0 % 11.7 % 12.0 %

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (37.4%), Washington (16.0%) and Wisconsin (6.6%).

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).

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• Credit ratings by major credit rating agencies

During the first nine months of 2021, loans increased by $228.5 million and totaled $2.317 billion at September 30, 2021, primarily due to $419.4 million in loans from the acquisition of ARB on August 6,2021.

New non-PPP related loan originations totaled $101.7 million in the first nine months of 2021.

Non-PPP loan payoffs totaled $145.3 million during the first nine months of 2021.

Loan payoffs in the third quarter of 2021 consisted largely of commercial borrower cash paydowns as part of ongoing deleveraging, real estate asset sales and third-party refinancing.

A significant portion of the commercial third-party refinancing was attributable to price or structural elements outside the bank's desired credit profile.

As of September 30, 2021, there were 871 PPP loans outstanding totaling $164.8 million (net of $4.2 million in unrecognized fees and costs), including 31 loans totaling $9.6 million acquired from ARB.

Of the 2,876 PPP loans totaling $444.1 million funded by Bank of Marin, 2,036 loans for $284.7 million have been forgiven and paid off.

Of the remaining PPP loans, 580 loans or $25.5 million are less than or equal to $150 thousand and have access to streamlined forgiveness.

As of September 30, 2021, 2 borrowing relationships with 5 loans totaling $23.6 million were continuing to benefit from payment relief.

We monitor the financial situation of these clients closely and expect the majority to resume payments as the economy continues to recover.

During the first nine months of 2021, total liabilities increased by $1.248 billion to $3.803 billion.

Deposits increased $1.223 billion in the first nine months of 2021, primarily driven by the acquisition of ARB and normal fluctuations in some of our larger commercial accounts.

Non-interest bearing deposits increased $482.9 million in the first nine months of 2021 to $1.838 billion, and represented 49.3% of total deposits at September 30, 2021, compared to 54.1% at December 31, 2020.

The decrease in this ratio was primarily due to an increase in interest-bearing deposits for a large existing customer and a lower ratio of non-interest bearing deposits from the ARB acquisition.

The cost of average deposits was 0.06% in the third quarter and 0.07% in the first nine months of 2021, respectively, a decrease of 2 basis points and 6 basis points from the equivalent periods a year ago.

During the first three months of 2022, loans decreased by $53.8 million and totaled $2.202 billion at March 31, 2022, primarily due to $70.6 million in PPP loans being forgiven and paid off.

New non-PPP related loan originations totaled $49.8 million in the first three months of 2022, representing a six year peak for first quarter originations.

Non-PPP loan payoffs were $49.3 million in the first quarter 2022, which were largely driven by borrower sales of real estate assets and cash payoffs due to excess liquidity, as well as investor commercial real estate loans with structures outside the Bank’s risk appetite or in locations beyond our market area.

Offsetting the decreases are increases in credit line utilization, net of normal loan amortization, of $16.3 million.

As of March 31, 2022, there were 191 PPP loans outstanding totaling $40.6 million (net of $993 thousand in unrecognized fees and costs) compared to 368 loans outstanding December 31, 2021 for a total of $111.2 million (net of $2.5 million in unrecognized fees and costs).

In the first quarter of 2022, Bank of Marin recognized $1.5 million in PPP fees, net of costs, compared to $1.8 million in the prior quarter and $1.7 million in the same quarter of 2021.

As of March 31, 2022, two borrowing relationships w ith three loans totaling $23.6 million we re continuing to benefit from payment relief under the provisions of the 2020 CARES Act.

We will continue to work closely with both of these clients and monitor their performance.

During the first three months of 2022, total liabilities increased by $46.2 million to $3.910 billion.

Deposits increased $52.8 million in the first three months of 2022, which is consistent with activity experienced throughout 2021 from larger business clients.

Non-interest bearing deposits increased $50.4 million in the first three months of 2022 to $1.961 billion, and represented 50.8% of total deposits at March 31, 2022, compared to 50.2% at December 31, 2021.

The average cost of deposits remained consistent in the first quarter at 0.06%.

Capital Adequacy

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For all periods presented, the Bank’s ratios exceed the regulatory definition of “well capitalized” under the regulatory framework for prompt corrective action and Bancorp’s ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company.

In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of September 30, 2021.

In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of March 31, 2022.

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

In August 2018, the Board of Governors of the Federal Reserve System changed the definition of a "Small Bank Holding Company" by increasing the asset threshold from $1.0 billion to $3.0 billion.

As a result, Bancorp was not subject to separate minimum capital requirements as of December 31, 2020.

However, we disclosed comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been subject to the same minimum capital requirements in 2020.

The Bancorp’s and Bank’s capital adequacy ratios as of September 30, 2021 and December 31, 2020 are presented in the following tables.

The decrease in capital ratios as of September 30, 2021 from December 31, 2020 was largely attributable to shares repurchased totaling $35.2 million during the first nine months of 2021.

Tier 1 Capital to average assets was also reduced by an increase in cash driven by deposit growth over and above that attributable to the Merger.

In addition, as of December 31, 2020, Bancorp's Tier 1 capital included a subordinated debenture, which was not included at the Bank level.

On March 15, 2021, Bancorp redeemed in full our last subordinated debenture due to NorCal Community Bancorp Trust II.

Partially offsetting those factors, the Merger served to increase capital ratios as the proportion of risk-weighted assets to total assets was lower for ARB, and the full effect of the Merger will not reflect in average assets until the fourth quarter.

The Bancorp’s and Bank’s capital adequacy ratios as of March 31, 2022 and December 31, 2021 are presented in the following tables.

Capital Ratios for Bancorp

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Actual Ratio Adequately Capitalized Threshold Ratio to be a Well Capitalized Bank Holding Company

September 30, 2021 Amount Ratio Amount Ratio Amount Ratio

March 31, 2022 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 404,039 14.35 % ≥ $ 295,720 ≥ 10.50 % ≥ $ 281,638 ≥ 10.00 %

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Actual Ratio Adequately Capitalized Threshold Ratio to be Well Capitalized under Prompt Corrective Action Provisions

September 30, 2021 Amount Ratio Amount Ratio Amount Ratio

March 31, 2022 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 402,918 14.31 % ≥ $ 295,688 ≥ 10.50 % ≥ $ 281,607 ≥ 10.00 %

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Common Equity Tier 1 (to risk-weighted assets) $ 367,109 13.48 % ≥ $ 190,673 ≥ 7.00 % ≥ $ 177,053 ≥ 6.50 %

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.

We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report.

Our Asset Liability Management Committee ("ALCO"), which is comprised of independent Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies.

ALCO has adopted a contingency funding plan that provides early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis.

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We also have relationships with third-party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash management strategy.

We maintained $180.0 million in one-way-sale deposits off-balance sheet with deposit networks at March 31, 2022.

We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations.

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

The most significant source of liquidity during 2021 was an increase in deposits of $433.4 million.

The increase was primarily due to SBA PPP loan forgiveness and other increases in customer deposits.

Proceeds from loans collected net of loan originations was $193.3 million.

Proceeds from principal paydowns and maturities of securities totaled $136.6 million, and $32.3 million in net cash was provided by operating activities.

Significant uses of liquidity during 2021 were $488.6 million in investment securities purchased, $35.5 million in common stock repurchases, $9.2 million in cash dividends paid on common stock to our shareholders, and $4.1 million in repayment of a subordinated debenture.

Our cash and cash equivalents decreased $176.7 million in the first three months of 2022.

Significant uses of liquidity during 2022 were $339.4 million in investment securities purchased, $3.8 million in cash dividends paid on common stock to our shareholders, and $1.2 million in common stock repurchases.

Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity.

Management anticipates that our current strong liquidity position and core deposit base are adequate to fund our operations.

Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $602.6 million at September 30, 2021.

The most significant source of liquidity during 2022 was proceeds from loans collected net of loan originations of $54.5 million, and a net increase in deposits totaling $52.8 million.

Proceeds from principal paydowns and maturities of securities totaled $48.0 million, and $11.5 million in net cash was provided by operating activities.

Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $581.4 million at March 31, 2022.

We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth and liquid assets.

Over the next twelve months, $99.0 million of time deposits will mature.

Over the next twelve months, $106.5

million of time deposits will mature.

We expect to replace these funds with new deposits.

3 unchanged sentences

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

Bancorp held $16.2 million of cash at September 30, 2021, which is sufficient to cover Bancorp's operational needs and cash dividends to shareholders through 2022.

Bancorp held $1.1 million of cash at March 31, 2022, and is in the process of obtaining regulatory approval to distribute a dividend from the Bank to the Bancorp to cover Bancorp's operational needs and cash dividends to shareholders through 2022.

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

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-Q

Item 2. Management’s Discussion and Analysis