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Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-09 · 218 added, 153 removed, 304 unchanged (55% of the section changed)

5 unchanged sentences

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.

Accordingly, we have compared the results for the three months ended June 30, 2022 and March 31, 2022 throughout the Management's Discussion and Analysis sections, where applicable.

Forward-Looking Statements

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They often include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs preceded by "will," "would," "should," "could" or "may."

Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues that may affect our earnings in future periods.

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

Such factors include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including 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;

Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues that may impact Bancorp's earnings in future periods.

Factors that could cause future results to vary materially from current management expectations 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 (including the actions taken by the Federal Reserve to control inflation), California's unemployment rate, deposit flows, real estate values, and expected future cash flows on loans and securities;

costs or effects of acquisitions;

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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;

natural disasters (such as wildfires and earthquakes in our area);

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Executive Summary

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.

We generated record net income for the second quarter of 2022 totaled $11.1 million, compared to $10.5 million in the first quarter of 2022.

Diluted earnings per share were $0.69 in the second quarter of 2022, compared to $0.66 in the immediately preceding quarter.

Earnings for the first six months of 2022 totaled $21.5 million, compared to $18.2 million in the same period last year.

Diluted earnings per share were $1.35 and $1.37 in the first six months of 2022 and 2021, respectively.

All periods of earnings presented were impacted by the costs associated with our most recent acquisition, the details of which are discussed throughout this report.

In particular, diluted earnings per share for the first half of 2022 would have increased by one cent per share over 2021 without those costs.

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

• 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 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.

• Return on assets of 1.03% and return on equity of 10.74% for the three months ended June 30, 2022, would have been 1.05% and 10.95%, respectively, without one-time and conversion costs related to the 2021 merger with American River Bankshares ("ARB").

That compares to 0.98% and 9.61% (GAAP) and 1.01% and 9.96% (non-GAAP), respectively, for the three months ended March 31, 2022.

As shown in the reconciliation of GAAP to non-GAAP financial measures on page 35, merger-related costs reduced net income by $219 thousand, net of taxes, or $0.02 per share in the second quarter.

• The second quarter tax-equivalent net interest margin improved 9 basis points over the preceding quarter despite the 7 basis point drag of declining PPP loan fee recognition.

Rising interest rates had a positive impact on the Bank's asset sensitive portfolio, as did the deployment of excess cash into securities and flat deposit costs.

• Deposits increased by $22.1 million to $3.831 billion at June 30, 2022, compared to $3.809 billion at December 31, 2021.

Non-interest bearing deposits made up 53% of total deposits as of June 30, 2022 versus 50% as of December 31, 2021, representing one of the strongest deposit franchises among peers.

The cost of average deposits in the second quarter of 2022 was 0.06%, unchanged from the preceding quarter.

The cost of average deposits in the first half of 2022 was 0.06%, a decrease from 0.07% in the first half of prior year.

• Loan balances of $2.163 billion at June 30, 2022 reflected record second quarter originations of $102.2 million and first half of the year originations of $152.0 million.

While our production was strong and more than double the first half of 2021, total loans decreased modestly from December 31, 2021 balances driven by payoffs including expected construction project completions, borrowers' sales of underlying real estate and business assets, PPP loan payoffs, and third-party refinancing of acquired loans outside the Bank's credit risk appetite.

• Credit quality remains strong, with non-accrual loans representing 0.37% of total loans as of June 30, 2022, and December 31, 2021.

There was not a significant change in classified loans.

There was no provision made to the allowance for credit losses on loans or to the allowance for credit losses on unfunded loan commitments this quarter as an improvement in the California unemployment rate forecast decreased the quantitative portion of estimated credit losses while ongoing supply chain issues, inflation and recession risks increased qualitative factors.

The preceding quarter's provision reversals were due primarily to the improved economic forecast at the time.

• Our declining efficiency ratios quarter-over-quarter and year-over-year are a testament to the improved operating leverage attained through the ARB acquisition.

The efficiency ratios of 55.73% for the second quarter and 57.40% year-to-date compare to 59.13% and 61.43% for the first quarter of 2022 and year to date 2021, respectively.

Changes from the prior quarter were primarily visible in salaries, benefits and professional services expenses.

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

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.

The total risk-based capital ratio for Bancorp was 14.7% at June 30, 2022, compared to 14.6% at December 31, 2021.

Bancorp's tangible common equity to tangible assets was 7.8% at June 30, 2022, compared to 8.8% at December 31, 2021 (refer to footnot e 4 on page 36 for a discussion of this non-GAAP financial measure).

The total risk-based capital ratio for the Bank was 14.2% at June 30, 2022, compared to 14.4% at December 31, 2021.

The Bank's tangible common equity to tangible assets was 7.5% at June 30, 2022, compared to 8.6% at December 31, 2021.

Declines in the Bank's and Bancorp's tangible common equity and book value per share were primarily related to an increase in after-tax unrealized losses on available-for-sale securities associated with interest rate increases during 2022.

• Given the strength and durability of the Bank's financial performance, the Board of Directors declared a cash dividend of $0.25 per share, an increase from $0.24 per share in the prior quarter, on July 22, 2022, which represents the 69 th consecutive quarterly dividend paid by Bancorp.

The dividend is payable on August 12, 2022, to shareholders of record at the close of business on August 5, 2022.

Statement Regarding use of Non-GAAP Financial Measures

In this Form 10-Q, Bancorp's financial results are presented in accordance with GAAP and refer to certain non-GAAP financial measures.

Management believes that presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of Bancorp's core operating results and comparison of operating results across reporting periods.

In this Form 10-Q, Bancorp's financial results are presented in accordance with GAAP and with reference 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.

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Reconciliation of GAAP and Non-GAAP Financial Measures

Three months ended

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

Three months ended Six months ended

(in thousands, unaudited) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021

Net income (GAAP) $ 11,066 $ 10,465 $ 21,531 $ 18,232

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

Three months ended

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

Three months ended Six months ended

(dollars in thousands, except per share data) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021

Selected operating data:

Net interest income $ 31,197 $ 29,898 $ 61,095 $ 46,565

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

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

Reversal of credit losses on loans — (485) (485) (3,849)

Reversal of credit losses on unfunded loan commitments

— (318) (318) (1,202)

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Efficiency ratio 55.73 % 59.13 % 57.40 % 61.43 %

Net charge-offs (recoveries) $ 8 $ (9) $ (1) $ (75)

Cash dividend payout ratio on common stock 2

34.29 % 36.36 % 35.56 % 33.33 %

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

(dollars in thousands, except per share data) June 30, 2022 December 31, 2021

Selected financial condition data:

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1.05 % 1.07 %

Allowance for credit losses on loans to non-accrual loans 2.94x 2.75x

Allowance for credit losses on loans to non-performing loans 2.81x 2.75x

Non-accrual loans to total loans 0.37 % 0.37 %

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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.

SBA PPP loans at June 30, 2022 and December 31, 2021 totaled $17.0 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.

Tangible common equity of $331 million and $371 million at June 30, 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 $78.6 million and $79.4 million at June 30, 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 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

Three months ended Three months ended

June 30, 2022 March 31, 2022

Interest Interest

Average Income/ Yield/ Average Income/ Yield/

(dollars in thousands) Balance Expense Rate Balance Expense Rate

Interest-earning deposits with banks 1

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Tax-equivalent net interest rate spread 2.98 % 2.90 %

Six months ended Six months ended

June 30, 2022 June 30, 2021

Interest Interest

Average Income/ Yield/ Average Income/ Yield/

(in thousands) Balance Expense Rate Balance Expense Rate

Interest-earning deposits with banks 1

$ 163,064 $ 286 0.35 % $ 179,846 $ 96 0.11 %

Investment securities 2, 3

1,717,624 15,340 1.79 % 601,498 6,948 2.31 %

Loans 1, 3, 4

2,211,062 47,403 4.26 % 2,081,069 42,437 4.06 %

Total interest-earning assets 1

4,091,750 63,029 3.06 % 2,862,413 49,481 3.44 %

Cash and non-interest-bearing due from banks 62,679 45,059

Bank premises and equipment, net 7,305 4,786

Interest receivable and other assets, net 167,265 132,675

Total assets $ 4,328,999 $ 3,044,933

Liabilities and Stockholders' Equity

Interest-bearing transaction accounts $ 297,734 $ 109 0.07 % $ 170,943 $ 78 0.09 %

Savings accounts 343,333 61 0.04 % 220,946 40 0.04 %

Money market accounts 1,099,439 916 0.17 % 719,769 598 0.17 %

Time accounts including CDARS 146,061 81 0.11 % 95,849 177 0.37 %

Borrowings and other obligations 1

384 1 0.62 % 50 — 1.46 %

Subordinated debenture 1, 5

— — — % 1,076 1,361 251.54 %

Total interest-bearing liabilities 1,886,951 1,168 0.12 % 1,208,633 2,254 0.38 %

Demand accounts 1,963,832 1,442,320

Interest payable and other liabilities 50,846 42,753

Stockholders' equity 427,370 351,227

Total liabilities & stockholders' equity $ 4,328,999 $ 3,044,933

Tax-equivalent net interest income/margin 1

$ 61,861 3.01 % $ 47,227 3.28 %

Reported net interest income/margin 1

$ 61,095 2.97 % $ 46,565 3.24 %

Tax-equivalent net interest rate spread 2.94 % 3.06 %

1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.

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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 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

Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one more day in the three months ended June 30, 2022 compared to March 31, 2022.

Three Months Ended June 30, 2022 Compared to Three Months Ended

March 31, 2022 Six Months Ended June 30, 2022 Compared to Six Months Ended

June 30, 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 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.

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

Second Quarter of 2022 Compared to the First Quarter of 2022

Net interest income totaled $31.2 million in the second quarter of 2022, compared to $29.9 million in the first quarter of 2022.

The $1.3 million increase from the prior quarter was primarily attributable to higher average balances and yields on investment securities driving an increase of $1.6 million, quarter-over-quarter in investment interest income.

The tax-equivalent net interest margin was 3.05% in the second quarter of 2022, compared to 2.96% in the first quarter of 2022.

The increase from the prior quarter was primarily due to continued deployment of cash into higher yielding investment securities and higher interest rates on non-PPP loans, partially offset by lower interest and fee income on PPP loans.

Average yields on the investment portfolio increased from 1.69% in the first quarter of 2022 to 1.87% in the second quarter reflecting recent increases in market interest rates, and the average rate on gross loans increased 10 basis points, which excludes the impact of loan origination fees/costs and purchase discounts/premiums.

First Six Months of 2022 Compared to the First Six Months of 2021

Net interest income totaled $61.1 million for the six months ended June 30, 2022, compared to $46.6 million for the same period in the prior year.

The $14.5 million increase from the prior year was primarily due to the larger investment portfolio generating an incremental $8.3 million, and $4.9 million related to higher balances and yields on the loan portfolio (net of a $3.7 million decrease in interest and fees on PPP loans).

Additionally, 2021 included a $1.3 million accelerated discount from the early redemption of a subordinated debenture.

The tax-equivalent net interest margin was 3.01% in the six months ended June 30, 2022, compared to 3.28% in the same period in the prior year.

The decrease 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 over the period.

The decrease was partially offset by a shift to a higher percentage of non-PPP loans within the loan portfolio and the absence of trust preferred securities redemption that occurred in 2021.

Market Interest Rates

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other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC").

In response to the evolving risks to economic activity posed by the COVID-19 pandemic, the 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% 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.

In response to economic risks 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% a nd 0.25% after March 15, 2020 through the beginning of 2022, putting downward pressure on our asset yields and net interest margin through early 2022.

I n 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.

C ontinued evolving economic risks exacerbated by global economic contraction and international political unrest, have resulted in shortages of oil, other supply

chain disruptions, and elevated inflation.

In response, the FOMC increased the federal funds rate by 75 basis points twice effective June 16, 2022 and July 28, 2022 to a range of 2.25% - 2.50% .

It is widely anticipated that additional increases in the target range will occur in 2022.

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

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The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off.

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

Three months ended

(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.

The following table shows the activity for the periods presented.

Three months ended Six months ended

(dollars in thousands) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021

Reversal of credit losses on loans $ — $ (485) $ (485) $ (3,849)

There was no provision made to the allowance for credit losses on loans in the second quarter.

An improvement in the California unemployment rate forecast decreased the quantitative portion of estimated credit losses while ongoing supply chain issues, inflation and recession risks increased qualitative factors.

The reversal of the allowance for credit losses on loans in the prior quarter primarily resulted from improved forecasted economic conditions at the time.

The provision reversals in the six months ended June 30, 2021 were primarily due to improvements in the forecasted California unemployment rates at the time and decrease in non-PPP loan balances.

Loans designated special mention, which are not considered adversely classified, decreased year-to-date by $14.7 million to $58.6 million at June 30, 2022 from $73.3 million at December 31, 2021.

The decrease was largely due to $22.3 million in upgrades to pass risk ratings because of the borrowers' improved financial condition, which was offset by $11.5 million in downgrades from pass to special mention.

Additionally, there were $3.6 million in downgrades from special mention to substandard, and $908 thousand in paydowns and payoffs.

Classified assets (loans with risk ratings of substandard or doubtful) totaled $36.9 million at June 30, 2022, compared to $36.2 million at December 31, 2021.

The $815 thousand increase was primarily related to $5.1 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 $1.5 million in additional advances in 2022) and the downgrade of two well-secured owner occupied commercial real estate loans totaling $2.3 million and two home equity loans totaling $128 thousand.

Additionally, there were $5.2 million in upgrades to pass and $832 thousand in paydowns and payoffs.

Classified loans also included one $106 thousand loan acquired from ARB with a doubtful risk rating as of June 30, 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 1.04% and 1.02% at June 30, 2022 and December 31, 2021, respectively.

Non-accrual loans decreased $358 thousand to $8.0 million, or 0.37% of total loans at June 30, 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 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

Three months ended Amount Change Percent Change

(dollars in thousands) June 30, 2022 March 31, 2022

Wealth Management and Trust Services $ 630 $ 600 $ 30 5.0 %

4 unchanged sentences

Merchant interchange fees, net 149 140 9 6.4 %

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

Other income 406 462 (56) (12.1) %

Total non-interest income $ 2,728 $ 2,867 $ (139) (4.8) %

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.

Six months ended Amount Change Percent Change

(dollars in thousands) June 30, 2022 June 30, 2021

Wealth Management and Trust Services $ 1,230 $ 1,018 $ 212 20.8 %

Debit card interchange fees, net 1,036 785 251 32.0 %

Service charges on deposit accounts 953 598 355 59.4 %

Earnings on bank-owned life insurance, net 711 490 221 45.1 %

Dividends on Federal Home Loan Bank stock 508 326 182 55.8 %

Merchant interchange fees, net 289 118 171 144.9 %

Other income 868 513 355 69.2 %

Total non-interest income $ 5,595 $ 3,848 $ 1,747 45.4 %

Second Quarter of 2022 Compared to First Quarter of 2022

Non-interest income totaled $2.7 million in the second quarter of 2022, compared to $2.9 million in the preceding quarter.

The $139.0 thousand decrease was primarily related to payments on bank-owned life insurance in the prior quarter.

First Six Months of 2022 Compared to the First Six Months of 2021

Non-interest income totaled $5.6 million in the six months ended June 30, 2022, compared to $3.8 million in the same period of the prior year.

The $1.7 million improvement from the prior year period was evident in all categories and mostly attributable to increased activity associated with the ARB acquisition and higher Wealth Management and Trust Services income.

Non-interest Expense

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

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

Three months ended Amount Change Percent Change

(dollars in thousands) June 30, 2022 March 31, 2022

Salaries and related benefits $ 10,341 $ 11,548 $ (1,207) (10.5) %

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Total non-interest expense $ 18,906 $ 19,375 $ (469) (2.4) %

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.

Six months ended Amount Change Percent Change

(dollars in thousands) June 30, 2022 June 30, 2021

Salaries and related benefits $ 21,889 $ 18,096 $ 3,793 21.0 %

Occupancy and equipment 3,803 3,502 301 8.6 %

Data processing 2,476 1,639 837 51.1 %

Professional services 1,578 1,849 (271) (14.7) %

Information technology 946 609 337 55.3 %

Depreciation and amortization 845 848 (3) (0.4) %

Amortization of core deposit intangible 754 408 346 84.8 %

Directors' expense 605 405 200 49.4 %

Federal Deposit Insurance Corporation insurance 586 361 225 62.3 %

Charitable contributions 556 493 63 12.8 %

Other non-interest expense

Advertising 568 414 154 37.2 %

Other expense 3,675 2,344 1,331 56.8 %

Total other non-interest expense 4,243 2,758 1,485 53.8 %

Total non-interest expense $ 38,281 $ 30,968 $ 7,313 23.6 %

Second Quarter of 2022 Compared to First Quarter of 2022

Non-interest expense totaled $18.9 million in the second quarter of 2022, compared to $19.4 million in the prior quarter.

The decrease from the prior quarter was primarily due to a $1.2 million reduction in salaries and benefits after the completion of the acquisition-related conversion in March 2022 and 22 fewer full-time equivalent employees.

Decreases were partially offset by a $466 thousand increase in charitable contributions in the quarter due to the annual distribution of grant funding related to the Bank's corporate giving program.

First Six Months of 2022 Compared to the First Six Months of 2021

Non-interest expense totaled $38.3 million in the six months ended June 30, 2022, compared to $31.0 million in the same period of prior year.

The largest increases over prior year expenses came from salaries and related benefits, which rose $3.8 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 (the first six months of 2021 included PPP round two origination activity).

Higher expenses across most other categories reflect the acquisition, including one-time and conversion costs of $858 thousand, an increase in other data processing of $762 thousand, and an additional $346 thousand in amortization associated with the ARB core deposit intangible asset in the first half 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 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.

The provision for income taxes for the second quarter of 2022 totaled $4.0 million at an effective tax rate of 26.3%, compared to $3.7 million at an effective tax rate of 26.3% in the prior quarter.

The provision for income taxes for the first half of 2022 totaled $7.7 million at an effective tax rate of 26.3%, compared to $6.3 million at an effective tax rate of 25.6% for the first half of 2021.

The increase in the provision in the second quarter of 2022 reflected higher pre-tax income as compared to the prior quarter.

The 70 basis point increase in the effective tax rate in the first half of 2022 as compared to the first half of 2021 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 March 31, 2022, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

At June 30, 2022, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

FINANCIAL CONDITION SUMMARY

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 $170.9 million at March 31, 2022, compared to $347.6 million at December 31, 2021.

Total cash, cash equivalents and restricted cash were $115.9 million at June 30, 2022, compared to $347.6 million at December 31, 2021.

The $231.7 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.

Cash and cash equivalents do not include $152.4 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 June 30, 2022 and December 31, 2021, respectively.

Investment Securities

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.

The investment securities portfolio totaled $1.825 billion at June 30, 2022, an increase of $314.9 million from December 31, 2021.

The increase was primarily due to purchases of $492.5 million to deploy excess cash into interest earning assets in a more favorable interest rate environment in 2022, partially offset by paydowns, maturities and calls of $93.1 million.

Additionally, the unrealized losses on available-for-sale securities increased $80.1 million as a result of higher interest rates in the first six months of 2022.

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 March 31, 2022 and December 31, 2021.

March 31, 2022 December 31, 2021

The following table summarizes our investment in obligations of state and political subdivisions at June 30, 2022 and December 31, 2021.

June 30, 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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We have $6.0 million in obligations of Texas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from PSF.

We have little or no exposure to municipal sectors such as health care that are most vulnerable to credit risks posed by the COVID-19 pandemic.

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

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• Credit ratings by major credit rating agencies

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.

During the first six months of 2022, loans decreased by $93.0 million and totaled $2.163 billion at June 30, 2022, primarily due to $94.2 million in PPP loans being forgiven and paid off.

New non-PPP related loan originations totaled $152.0 million in the first six months of 2022.

Non-PPP loan payoffs were $159.1 million in the first six months of 2022, including construction project completions of $34.6 million.

These payoffs also reflected borrowers' sales of underlying real estate and business assets and third-party refinancing of acquired loans outside the Bank's credit risk appetite.

As of June 30, 2022, there were 112 PPP loans outstanding totaling $17.0 million (net of $420 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 half of 2022, Bank of Marin recognized $2.1 million in PPP fees, net of costs, compared to $4.3 million in the same period of 2021.

As of June 30, 2022, two borrowing relationships with three loans totaling $23.6 million were 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%.

During the first six months of 2022, total liabilities increased by $53.5 million to $3.917 billion.

Deposits increased $22.1 million in the first six months of 2022 to $3.831 billion.

Non-interest bearing deposits increased $124.5 million while money market deposits decreased $103.5 million in the first six months of 2022, and was partially related to a large transfer to non-interest bearing deposits by a significant customer in preparation for withdrawals in early July consistent with that customer's normal business activity.

Non-interest bearing deposits represented 53.1% of total deposits at June 30, 2022, compared to 50.2% at December 31, 2021.

The average cost of deposits was 0.06% in the first half of 2022 compared to 0.07% in the same period of 2021.

Additionally, as part of our liquidity management, the Bank maintained $152.4 million in deposits off-balance sheet with deposit networks at June 30, 2022, compared to $173.1 million at December 31, 2021.

Capital Adequacy

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The capital amounts and the Bank’s prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.

Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.

Management reviews capital ratios on a regular basis and produces a five-year capital plan semi-annually to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.

Stress tests are performed on capital ratios and include scenarios such as additional unrealized losses on the investment portfolio, additional deposit growth and potential share repurchases.

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

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

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

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

The Bancorp’s and Bank’s capital adequacy ratios as of June 30, 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

March 31, 2022 Amount Ratio Amount Ratio Amount Ratio

June 30, 2022 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 412,325 14.67 % $ 295,112 ≥ 10.50 % $ 281,059 ≥ 10.00 %

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

March 31, 2022 Amount Ratio Amount Ratio Amount Ratio

June 30, 2022 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 399,228 14.21 % $ 295,078 ≥ 10.50 % $ 281,027 ≥ 10.00 %

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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 maintained $152.4 million in one-way-sale deposits off-balance sheet with deposit networks at June 30, 2022, compared to $173.1 million at December 31, 2021.

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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T he most significant component of our daily liquidity position is customer deposits.

The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength.

The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and

convenience, rates paid to customers, and our financial strength.

The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.

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

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

Our cash and cash equivalents decreased $231.7 million in the first six months of 2022.

Significant uses of liquidity during 2022 were $452.2 million in investment securities purchased, $7.7 million in cash dividends paid on common stock to our shareholders, and $1.2 million in common stock repurchases.

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

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.

The most significant source of liquidity during the first six months of 2022 was proceeds from loans collected (net of loan originations) of $93.9 million, principal paydowns, maturities and calls of investment securities of $93.1 million, a net increase in deposits of $22.1 million (primarily related to $25 million of one-way sell deposits that was previously placed in third-party deposit networks being brought back on balance sheet), and $19.6 million in net cash provided by operating activities.

Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $592.5 million at June 30, 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, $106.5

million of time deposits will mature.

We expect to replace these funds with new deposits.

Over the next twelve months, $107.5 million of time deposits will mature.

We expect to replace these funds with new deposits or excess liquidity.

Our emphasis on local deposits, combined with our liquid investment portfolio, provides a very stable funding base.

While we had no borrowings under our credit facilities at June 30, 2022 or December 31, 2021, as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report, the available credit lines with FHLB and FRB SF have declined by $71.4 million from December 30, 2021 to June 30, 2022, primarily because the rising market interest rates in the first half of 2022 have unfavorably affected the market value of the loans collateralizing these lines.

Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank.

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

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.

Bancorp held $13.0 million in cash at June 30, 2022, which is expected to be sufficient to cover Bancorp's operational needs and cash dividends to shareholders through 2022.

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

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