Bank of Marin Bancorp 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management's discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our 2021 Annual Report on Form 10-K. 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 September 30, 2022 and June 30, 2022 throughout the Management's Discussion and Analysis sections, where applicable. Forward-Looking Statements This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "1934 Act"). Those sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results. Our forward-looking statements include descriptions of plans or objectives of management for future operations, products or services, and forecasts of revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs preceded by "will," "would," "should," "could" or "may." Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues that may 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; competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; natural disasters (such as wildfires and earthquakes in our area); adverse weather conditions; interruptions of utility service in our markets for sustained periods; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting our operations, pricing, products and services; 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. Page-30 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. 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 We generated record earnings of $12.2 million for the third quarter of 2022, compared to $11.1 million for the second quarter of 2022. Diluted earnings per share were $0.76 for the third quarter, compared to $0.69 for the preceding quarter. Earnings for the first nine months of 2022 totaled $33.7 million, compared to $23.5 million for the same period last year. Diluted earnings per share were $2.11 and $1.69 for the first nine months of 2022 and 2021, respectively. Certain periods of earnings presented were impacted by the costs associated with our acquisition of American River Bankshares ("AMRB"), the details of which are discussed in this report. In particular, non-GAAP diluted earnings per share for the first nine months of 2022 would have increased by 16 cents per share over 2021 without those co sts (refer to page 34 for a discussion of this non-GAAP financial measure). The following are highlights of our operating and financial performance for the periods presented: • Return on average assets ("ROA") of 1.11% and return on average equity ("ROE") of 11.65% for the three months ended September 30, 2022, increased from 1.03% and 10.74% for the three months ended June 30, 2022. ROA of 1.04% and ROE of 10.65% for the nine months ended September 30, 2022 also compared favorably to the same period in 2021, with ROA of 0.96% and ROE of 8.40%. • Our declining efficiency ratios quarter-over-quarter and year-over-year are a testament to the improved operating leverage of our larger post-merger organization. The efficiency ratios of 52.24% for the third quarter of 2022 and 55.60% year-to-date 2022 compared favorably to 55.73% and 65.65% for the second quarter of 2022 and year-to-date 2021, respectively. The improvement in both periods was pri marily due to a significant increase in net interest income and reduced merger-related expenses in 2022. • The third quarter tax-equivalent net interest margin improved 11 basis points over the preceding quarter from 3.05% to 3.16%, as rising interest rates positively impacted the Bank's earning asset portfolio while the cost of deposits remained flat. The tax-equivalent net interest margin for the first nine months of 2022 of 3.06% decreased 17 basis points from 3.23% for the same period in 2021. The decrease was largely due to higher average investment securities in proportion to the larger balance sheet in 2022, as compared to 2021. This shift was mostly the result of deposit growth in 2022 contributing to a larger investment portfolio and the assumption of AMRB's balance sheet with a lower loan-to-deposit ratio in the third quarter of 2021. • Deposits increased by $94.2 million to $3.903 billion at September 30, 2022, compared to $3.809 billion at December 31, 2021. Non-interest bearing deposits made up 53% of total deposits as of September 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 third quarter of 2022 was 0.06%, unchanged from the preceding quarter. The cost of average deposits in the first nine months of 2022 was 0.06%, a decrease from 0.07% in the same period of the prior year. • Loan balances of $2.158 billion at September 30, 2022 decreased modestly from $2.256 billion at December 31, 2021, but increased $6.3 million excluding PPP loans. Year-to-date originations of $204.1 million in the first nine months of 2022 were double when compared to the first nine months of 2021 and included $52.2 million in the third quarter. Year-to-date payoffs were concentrated in expected construction project completions, borrowers’ sales of underlying commercial real estate, and third-party refinancing of acquired loans outside the Bank’s credit risk appetite. Page-31 • Credit quality remains strong, with non-accrual loans representing 0.49% of total loans at September 30, 2022, compared to 0.37% at December 31, 2021. Classified loans totaled $33.4 million at September 30, 2022, compared to $36.2 million at December 31, 2021. Shortly after quarter end, non-accrual and classified loans decreased $7.1 million due to the resolution and payoff of a long-standing substandard credit. • In the third quarter of 2022, there was a provision for credit losses on loans of $422 thousand and no provision for credit losses on unfunded commitments. The provision for credit losses on loans was primarily due to an increase in qualitative factors to account for the ongoing deterioration in the economic outlook not captured in the quantitative portion of the allowance. • All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 15.1% at September 30, 2022, compared to 14.6% at December 31, 2021. Bancorp's tangible common equity to tangible assets was 7.5% at September 30, 2022, compared to 8.8% at December 31, 2021 (refe r to footnote 4 on page 35 f or a discussion of this non-GAAP financial measure). The total risk-based capital ratio for the Bank was 14.7% at September 30, 2022, compared to 14.4% at December 31, 2021. The Bank's tangible common equity to tangible assets was 7.3% at September 30, 2022, compared to 8.6% at December 31, 2021. Declines in the Bank's and Bancorp's tangible common equity were primarily related to a $78.0 million increase in after-tax unrealized losses on available-for-sale securities associated with interest rate increases since December 31, 2021, partially offset by earnings. • Given the strength and durability of the Bank's financial performance, the Board of Directors declared a cash dividend of $0.25 per share on October 21, 2022, which represents the 70 th consecutive quarterly dividend paid by Bancorp. The dividend is payable on November 14, 2022, to shareholders of record at the close of business on November 7, 2022. Page-32 Statement Regarding use of Non-GAAP Financial Measures 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. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below. Reconciliation of GAAP and Non-GAAP Financial Measures Three months ended Nine months ended (in thousands, unaudited) September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 Net income Net income (GAAP) $ 12,174 $ 11,066 $ 33,705 $ 23,514 Merger-related one-time and conversion costs: Personnel and severance — 58 393 2,668 Professional services — — 67 1,979 Data processing — 29 77 433 Other — 224 321 279 Total merger costs before tax benefits — 311 858 5,359 Income tax benefit of merger-related expenses — (92) (254) (1,239) Total merger-related one-time and conversion costs, net of tax benefits — 219 604 4,120 Comparable net income (non-GAAP) $ 12,174 $ 11,285 $ 34,309 $ 27,634 Diluted earnings per share Weighted average diluted shares 15,974 15,955 15,959 13,881 Diluted earnings per share (GAAP) $ 0.76 $ 0.69 $ 2.11 $ 1.69 Merger-related one-time and conversion costs, net of tax benefits — 0.02 0.04 0.30 Comparable diluted earnings per share (non-GAAP) $ 0.76 $ 0.71 $ 2.15 $ 1.99 Return on average assets Average assets $ 4,334,842 $ 4,312,919 $ 4,330,968 $ 3,280,505 Return on average assets (GAAP) 1.11 % 1.03 % 1.04 % 0.96 % Comparable return on average assets (non-GAAP) 1.11 % 1.05 % 1.06 % 1.13 % Return on average equity Average stockholders' equity $ 414,619 $ 413,271 $ 423,073 $ 374,445 Return on average equity (GAAP) 11.65 % 10.74 % 10.65 % 8.40 % Comparable return on average equity (non-GAAP) 11.65 % 10.95 % 10.84 % 9.87 % Efficiency ratio Non-interest expense (GAAP) $ 18,678 $ 18,906 $ 56,959 $ 53,654 Merger-related expenses — (311) (858) (5,359) Non-interest expense (non-GAAP) $ 18,678 $ 18,595 $ 56,101 $ 48,295 Net interest income $ 33,027 $ 31,197 $ 94,122 $ 74,318 Non-interest income $ 2,723 $ 2,728 $ 8,318 $ 7,413 Efficiency ratio (GAAP) 52.24 % 55.73 % 55.60 % 65.65 % Comparable efficiency ratio (non-GAAP) 52.24 % 54.81 % 54.76 % 59.09 % Page-33 RESULTS OF OPERATIONS Highlights of the financial results are presented in the following tables: Three months ended Nine months ended (dollars in thousands, except per share data) September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 Selected operating data: Net interest income $ 33,027 $ 31,197 $ 94,122 $ 74,318 Provision for (reversal of) credit losses on loans 422 — (63) (2,049) Reversal of credit losses on unfunded loan commitments — — (318) (1,202) Non-interest income 2,723 2,728 8,318 7,413 Non-interest expense 18,678 18,906 56,959 53,654 Net income 12,174 11,066 33,705 23,514 Net income per common share: Basic $ 0.76 $ 0.70 $ 2.12 $ 1.70 Diluted $ 0.76 $ 0.69 $ 2.11 $ 1.69 Performance and other financial ratios: Return on average assets 1.11 % 1.03 % 1.04 % 0.96 % Return on average equity 11.65 % 10.74 % 10.65 % 8.40 % Tax-equivalent net interest margin 1 3.16 % 3.05 % 3.06 % 3.23 % Cost of deposits 0.06 % 0.06 % 0.06 % 0.07 % Efficiency ratio 52.24 % 55.73 % 55.60 % 65.65 % Net (recoveries) charge-offs $ (2) $ 8 $ (3) $ (83) Cash dividend payout ratio on common stock 2 32.89 % 34.29 % 34.43 % 41.18 % (dollars in thousands, except per share data) September 30, 2022 December 31, 2021 Selected financial condition data: Total assets $ 4,348,653 $ 4,314,209 Loans, net 2,135,373 2,232,622 Deposits 3,902,710 3,808,550 Borrowings and other obligations 365 419 Stockholders' equity 396,592 450,368 Book value per share 24.74 28.27 Asset quality ratios: Allowance for credit losses on loans to total loans 1.06 % 1.02 % Allowance for credit losses on loans to total loans, excluding SBA PPP loans 3 1.07 % 1.07 % Allowance for credit losses on loans to non-performing loans 2.16x 2.75x Non-accrual loans to total loans 0.49 % 0.37 % Capital ratios: Equity to total assets ratio 9.12 % 10.44 % Tangible common equity to tangible assets 4 7.45 % 8.76 % Total capital (to risk-weighted assets) 15.06 % 14.58 % Tier 1 capital (to risk-weighted assets) 14.21 % 13.70 % Tier 1 capital (to average assets) 9.21 % 8.85 % Common equity Tier 1 capital (to risk weighted assets) 14.21 % 13.70 % 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 September 30, 2022 and December 31, 2021 totaled $7.6 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 $318 million and $371 million at September 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 $78.2 million and $79.4 million at September 30, 2022 and December 31, 2021, respectively. Page-34 Net Interest Income Net interest income is the interest earned on loans, investments and other interest-earning assets minus the interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in the net interest income and/or margin due to an imbalance in the timing of repricing and maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income. For more information, refer to Item 3. Quantitative and Qualitative Disclosure about Market Risk in this Form 10-Q. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders’ equity. Average Statements of Condition and Analysis of Net Interest Income The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for each period reported. Three months ended Three months ended September 30, 2022 June 30, 2022 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Interest-earning deposits with banks 1 $ 94,963 $ 546 2.24 % $ 95,326 $ 180 0.75 % Investment securities 2, 3 1,875,660 9,875 2.11 % 1,807,710 8,469 1.87 % Loans 1, 3, 4 2,166,879 23,540 4.25 % 2,194,810 23,522 4.24 % Total interest-earning assets 1 4,137,502 33,961 3.21 % 4,097,846 32,171 3.21 % Cash and non-interest-bearing due from banks 44,597 56,408 Bank premises and equipment, net 7,052 7,182 Interest receivable and other assets, net 145,691 151,483 Total assets $ 4,334,842 $ 4,312,919 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 293,296 $ 121 0.16 % $ 300,258 $ 53 0.07 % Savings accounts 341,468 32 0.04 % 343,338 32 0.04 % Money market accounts 1,025,722 268 0.10 % 1,076,912 438 0.16 % Time accounts including CDARS 142,341 128 0.36 % 144,432 67 0.19 % Borrowings and other obligations 1 337 1 0.93 % 370 — 0.61 % Total interest-bearing liabilities 1,803,164 550 0.12 % 1,865,310 590 0.13 % Demand accounts 2,069,476 1,984,629 Interest payable and other liabilities 47,583 49,709 Stockholders' equity 414,619 413,271 Total liabilities & stockholders' equity $ 4,334,842 $ 4,312,919 Tax-equivalent net interest income/margin 1 $ 33,411 3.16 % $ 31,581 3.05 % Reported net interest income/margin 1 $ 33,027 3.12 % $ 31,197 3.01 % Tax-equivalent net interest rate spread 3.09 % 2.98 % Page-35 Nine months ended Nine months ended September 30, 2022 September 30, 2021 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (in thousands) Balance Expense Rate Balance Expense Rate Assets Interest-earning deposits with banks 1 $ 140,114 $ 832 0.78 % $ 273,045 $ 274 0.13 % Investment securities 2, 3 1,770,882 25,214 1.90 % 683,600 11,196 2.18 % Loans 1, 3, 4 2,196,173 70,944 4.26 % 2,117,631 66,665 4.15 % Total interest-earning assets 1 4,107,169 96,990 3.11 % 3,074,276 78,135 3.35 % Cash and non-interest-bearing due from banks 56,585 53,020 Bank premises and equipment, net 7,220 5,353 Interest receivable and other assets, net 159,994 147,856 Total assets $ 4,330,968 $ 3,280,505 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 296,239 $ 230 0.10 % $ 193,502 $ 119 0.08 % Savings accounts 342,704 93 0.04 % 245,374 66 0.04 % Money market accounts 1,074,597 1,184 0.15 % 784,313 1,015 0.17 % Time accounts including CDARS 144,807 209 0.19 % 105,419 221 0.28 % Borrowings and other obligations 1 368 2 0.71 % 1,047 8 1.10 % Subordinated debenture 1, 5 — — — % 713 1,361 251.54 % Total interest-bearing liabilities 1,858,715 1,718 0.12 % 1,330,368 2,790 0.28 % Demand accounts 1,999,433 1,531,564 Interest payable and other liabilities 49,747 44,128 Stockholders' equity 423,073 374,445 Total liabilities & stockholders' equity $ 4,330,968 $ 3,280,505 Tax-equivalent net interest income/margin 1 $ 95,272 3.06 % $ 75,345 3.23 % Reported net interest income/margin 1 $ 94,122 3.02 % $ 74,318 3.19 % Tax-equivalent net interest rate spread 2.99 % 3.07 % 1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable. 2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly. 3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21 percent in 2022 and 2021. 4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield. 5 2021 interest on subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021. The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the periods indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one more day in the three months ended September 30, 2022 compared to June 30, 2022. Page-36 Three Months Ended September 30, 2022 Compared to Three Months Ended June 30, 2022 Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 (in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total Interest-earning deposits with banks $ (1) $ 361 $ 6 $ 366 $ (133) $ 1,345 $ (654) $ 558 Investment securities 1 318 1,048 40 1,406 17,808 (1,462) (2,328) 14,018 Loans 1 (299) 63 254 18 2,473 1,742 64 4,279 Total interest-earning assets 18 1,472 300 1,790 20,148 1,625 (2,918) 18,855 Interest-bearing transaction accounts (1) 70 (1) 68 63 31 17 111 Savings accounts — — — — 26 1 — 27 Money market accounts (21) (160) 11 (170) 376 (151) (56) 169 Time accounts, including CDARS (1) 61 1 61 83 (69) (26) (12) Borrowings and other obligations — — 1 1 (6) (3) 3 (6) Subordinated debenture 2 — — — — — (1,361) — (1,361) Total interest-bearing liabilities (23) (29) 12 (40) 542 (1,552) (62) (1,072) Changes in tax-equivalent net interest income $ 41 $ 1,501 $ 288 $ 1,830 $ 19,606 $ 3,177 $ (2,856) $ 19,927 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 2022 Compared to the Second Quarter of 2022 Net interest income totaled $33.0 million in the third quarter of 2022, compared to $31.2 million in the second quarter of 2022. The $1.8 million increase from the prior quarter was primarily attributable to higher average balances and yields on investment securities. In addition, higher interest rates increased income from other interest-earning assets while the cost of interest-bearing liabilities went down slightly. The tax-equivalent net interest margin was 3.16% in the third quarter of 2022, compared to 3.05% in the second quarter of 2022. The increase from the prior quarter was primarily due to continued deployment of cash into higher yielding investment securities and higher yields on loans and Federal Reserve balances, partially offset by lower interest and fee income on PPP loans and lower construction loan balances. The average yield on the investment portfolio increased 24 basis points in the third quarter. First Nine Months of 2022 Compared to the First Nine Months of 2021 Net interest income totaled $94.1 million for the nine months ended September 30, 2022, compared to $74.3 million for the same period in the prior year. The $19.8 million increase from the prior year was primarily due to the larger balance sheet resulting from the AMRB acquisition and deposit growth. The Bank also benefited from its asset sensitivity in the rising interest rate environment. Additionally, 2021 included a $1.3 million accelerated discount from the early redemption of a subordinated debenture. The tax-equivalent net interest margin was 3.06% in the nine months ended September 30, 2022, compared to 3.23% in the same period in the prior year. The decrease resulted from a higher proportion of investment securities in the larger balance sheet associated with the acquisition and AMRB's lower loan-to-deposit ratio. Additionally, other deposit growth over the period contributed to the larger investment portfolio. Reductions were partially offset by the shift to a higher percentage of non-PPP loans within the loan portfolio and the absence of a subordinated debenture that was redeemed in 2021. Market Interest Rates Market interest rates are, in part, based on the target federal funds interest rate (the interest rate banks charge each other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC"). In response to 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% and 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. 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. Continued evolving economic risks exacerbated by global economic contraction and international political unrest have resulted in oil shortages and other supply chain disruptions, and elevated inflation. In response, the FOMC increased the federal funds rate by 75 basis Page-37 points four additional times this year effective June 16, 2022, July 28, 2022, September 21, 2022, and November 2, 2022 to a range of 3.75% - 4.00%. 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. See ITEM 3. Quantitative and Qualitative Disclosure about Market Risk for further information. Provision for Credit Losses on Loans Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors including growth of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans. The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off. The following table shows the activity for the periods presented. Three months ended Nine months ended (dollars in thousands) September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 Provision for (reversal of) credit losses on loans $ 422 $ — $ (63) $ (2,049) We recorded a $422 thousand provision for credit losses on loans in the third quarter. The provision was due primarily to an increase in qualitative factors to account for the ongoing deterioration in the economic outlook not captured in the quantitative portion of the allowance. 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 net provision reversal for the first nine months in 2022 resulted from a provision reversal in the first quarter due to improvements in the economic forecasts, partially offset by the provision in the third quarter as discussed above. The provision reversal for the first nine months in 2021 was primarily due to continued improvements in the forecasted California unemployment rates at the time, partially offset by a provision in the third quarter related to the purchased AMRB loans without credit deterioration. Loans designated special mention, which are not considered adversely classified, decreased year-to-date by $9.1 million to $64.2 million at September 30, 2022 from $73.3 million at December 31, 2021. The decrease was largely due to $30.1 million in upgrades to pass risk ratings because of the borrowers' improved financial condition, which was partially offset by $26.1 million in downgrades from pass to special mention. Additionally, there were $3.6 million in downgrades from special mention to substandard and $2.1 million in paydowns and payoffs. Classified assets (loans with risk ratings of substandard or doubtful) totaled $33.3 million at September 30, 2022, compared to $36.1 million at December 31, 2021. The $2.8 million decrease was primarily due to $5.2 million in upgrades to pass risk rating and $3.2 million in paydowns and payoffs. These decreases were partially offset by $1.4 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, net of $2.3 million in paydowns 2022) and the downgrade of two well-secured owner occupied commercial real estate loans totaling $2.3 million. Classified loans also included one $101 thousand loan acquired from AMRB with a doubtful risk rating as of September 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 1.06% and 1.02% at September 30, 2022 and December 31, 2021, respectively. Non-accrual loans increased $2.2 million to $10.6 million, or 0.49% of total loans at September 30, 2022 from $8.4 million, or 0.37% of total loans at December 31, 2021. The increase was mainly due to the $3.0 million in non-accrual loans designated during 2022, partially offset by the removal of a $695 thousand commercial real estate loan from non-accrual status and paydowns of $88 thousand. Over 90% of the non-accrual loans as of September 30, 2022 were well secured by commercial real estate. In addition, s ubsequent to quarter end, $7.1 million of the substandard non-accrual loans paid off. For more information, refer to Note 5 to the consolidated financial statements in this Form 10-Q. Page-38 Non-interest Income The following table details the components of non-interest income. Three months ended Amount Change Percent Change (dollars in thousands) September 30, 2022 June 30, 2022 Wealth Management and Trust Services $ 507 $ 630 $ (123) (19.5) % Debit card interchange fees, net 502 531 (29) (5.5) % Service charges on deposit accounts 535 465 70 15.1 % Earnings on bank-owned life insurance, net 222 298 (76) (25.5) % Dividends on Federal Home Loan Bank stock 251 249 2 0.8 % Merchant interchange fees, net 141 149 (8) (5.4) % Losses on sale of investment securities, net (63) — (63) NM Other income 628 406 222 54.7 % Total non-interest income $ 2,723 $ 2,728 $ (5) (0.2) % NM - not meaningful Nine months ended Amount Change Percent Change (dollars in thousands) September 30, 2022 September 30, 2021 Wealth Management and Trust Services $ 1,737 $ 1,615 $ 122 7.6 % Debit card interchange fees, net 1,538 1,268 270 21.3 % Service charges on deposit accounts 1,488 1,062 426 40.1 % Earnings on bank-owned life insurance, net 933 1,892 (959) (50.7) % Dividends on Federal Home Loan Bank stock 759 505 254 50.3 % Merchant interchange fees, net 430 247 183 74.1 % (Losses) gains on sale of investment securities, net (63) 1 (64) NM Other income 1,496 823 673 81.8 % Total non-interest income $ 8,318 $ 7,413 $ 905 12.2 % NM - not meaningful Third Quarter of 2022 Compared to the Second Quarter of 2022 Non-interest income totaled $2.7 million in the third quarter of 2022, substantially unchanged from the preceding quarter. The reduction in Wealth Management and Trust Services income related to stock market volatility and losses on investment securities sold were generally offset by increased fees for off-balance sheet deposits within other income. The $63 thousand loss on sale of investment securities was related to the sale of short-term municipal bonds. The sales proceeds were reinvested into higher yielding securities with an expected loss earnback period of less than four months. First Nine Months of 2022 Compared to the First Nine Months of 2021 Non-interest income totaled $8.3 million in the nine months ended September 30, 2022, compared to $7.4 million in the same period of the prior year. The $905 thousand improvement from the prior year period was mostly attributable to higher activity associated with the AMRB acquisition and higher fees on deposit balances held off balance sheet with deposit networks, partially offset by a decrease in benefits year-over-year associated with bank-owned life insurance payments. Page-39 Non-interest Expense The following table details the components of non-interest expense. Three months ended Amount Change Percent Change (dollars in thousands) September 30, 2022 June 30, 2022 Salaries and related benefits $ 10,557 $ 10,341 $ 216 2.1 % Occupancy and equipment 1,941 1,891 50 2.6 % Data processing 1,093 1,199 (106) (8.8) % Professional services 736 665 71 10.7 % Information technology 573 468 105 22.4 % Depreciation and amortization 414 393 21 5.3 % Amortization of core deposit intangible 370 374 (4) (1.1) % Federal Deposit Insurance Corporation insurance 300 296 4 1.4 % Directors' expense 233 294 (61) (20.7) % Charitable contributions 49 511 (462) (90.4) % Other real estate owned 350 3 347 NM Other non-interest expense Advertising 221 221 — — % Other expense 1,841 2,250 (409) (18.2) % Total other non-interest expense 2,062 2,471 (409) (16.6) % Total non-interest expense $ 18,678 $ 18,906 $ (228) (1.2) % NM - Not Meaningful Nine months ended Amount Change Percent Change (dollars in thousands) September 30, 2022 September 30, 2021 Salaries and related benefits $ 32,446 $ 31,223 $ 1,223 3.9 % Occupancy and equipment 5,739 5,373 366 6.8 % Data processing 3,569 3,252 317 9.7 % Professional services 2,314 4,321 (2,007) (46.4) % Information technology 1,519 1,105 414 37.5 % Depreciation and amortization 1,259 1,279 (20) (1.6) % Amortization of core deposit intangible 1,124 742 382 51.5 % Federal Deposit Insurance Corporation insurance 886 597 289 48.4 % Directors' expense 838 660 178 27.0 % Charitable contributions 605 497 108 21.7 % Other real estate owned 355 — 355 NM Other non-interest expense Advertising 789 603 186 30.8 % Other expense 5,516 4,002 1,514 37.8 % Total other non-interest expense 6,305 4,605 1,700 36.9 % Total non-interest expense $ 56,959 $ 53,654 $ 3,305 6.2 % NM - Not Meaningful Third Quarter of 2022 Compared to the Second Quarter of 2022 Non-interest expense totaled $18.7 million in the third quarter of 2022, compared to $18.9 million in the prior quarter. The decrease from the prior quarter was primarily from $462 thousand less in charitable contributions due to the annual distribution of grant funding related to the Bank's corporate giving program primarily occurring in the second quarter. In addition, the third quarter included a partial reversal of a vendor contract termination fee accrual originally recorded in the second quarter, for a net quarter-over-quarter effect of $200 thousand. These decreases were partially offset by a $345 thousand valuation adjustment to other real estate owned. First Nine Months of 2022 Compared to the First Nine Months of 2021 Almost all expense categories increased over 2021 due primarily to a full nine months of operating expenses attributable to the 2021 AMRB acquisition. In addition, salaries and benefits reflected annual merit and other incentive increases, data processing and information technology expenses were elevated due to the systems conversions associated with the merger and systems upgrades in 2022, and other expense reflected higher Page-40 recruiting fees. These increases were partially offset by a $2.0 million decrease in professional services expense, as 2021 included merger-related legal and other professional fees. Provision for Income Taxes Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards). The provision for income taxes for the third quarter of 2022 totaled $4.5 million at an effective tax rate of 26.9%, compared to $4.0 million at an effective tax rate of 26.3% in the prior quarter. The provision for income taxes for the first nine months of 2022 totaled $12.2 million at an effective tax rate of 26.5%, compared to $7.8 million at an effective tax rate of 24.9% for the first nine months of 2021. The increase in the provision in the third quarter of 2022 reflected higher pre-tax income as compared to the prior quarter. The 160 basis point increase in the effective tax rate in the first nine months of 2022 as compared to the same period in 2021 was primarily due to lower BOLI income in 2022 and a higher level of tax benefits in 2021 from the disqualifying dispositions of incentive stock options, partially offset by the non-deductible merger expenses incurred in 2021. We file a consolidated return in the U.S. Federal tax jurisdiction and a combined return in the State of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the issuance of this report. At September 30, 2022, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits. FINANCIAL CONDITION SUMMARY Cash, Cash Equivalents and Restricted Cash Total cash, cash equivalents and restricted cash were $185.6 million at September 30, 2022, compared to $347.6 million at December 31, 2021. The $162.0 million decrease was primarily due to the deployment of funds into investment securities, as noted below. Cash and cash equivalents do not include $11.3 million and $173.1 million in one-way sale transfers of deposits to third-party deposit networks as part of our liquidity management at September 30, 2022 and December 31, 2021, respectively. Investment Securities The investment securities portfolio totaled $1.772 billion at September 30, 2022, an increase of $262.6 million from December 31, 2021. The increase was primarily due to purchases of $537.2 million to deploy excess cash into interest earning assets in a more favorable interest rate environment in 2022, partially offset by paydowns, sales, maturities and calls of $156.7 million. Additionally, the unrealized losses on available-for-sale securities increased $97.0 million as a result of higher interest rates in the first nine 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. Page-41 The following table summarizes our investment in obligations of state and political subdivisions at September 30, 2022 and December 31, 2021. September 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 Within California: General obligation bonds $ 25,831 $ 20,560 14.3 % $ 25,036 $ 25,020 14.2 % Revenue bonds 3,722 2,961 2.1 5,249 5,185 3.0 Tax allocation bonds — — — 503 510 0.3 Total within California 29,553 23,521 16.4 30,788 30,715 17.5 Outside California: General obligation bonds 122,244 103,209 68.0 117,278 121,303 66.5 Revenue bonds 27,978 22,614 15.6 28,146 29,272 16.0 Total outside California 150,222 125,823 83.6 145,424 150,575 82.5 Total obligations of state and political subdivisions $ 179,775 $ 149,344 100.0 % $ 176,212 $ 181,290 100.0 % Percent of investment portfolio 9.6 % 9.1 % 11.7 % 12.0 % Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (39.7%), Washington (14.4%) and Wisconsin (8.9%). Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). We have $6.0 million in obligations of Texas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from PSF. Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring. Key considerations include: • The soundness of a municipality’s budgetary position and stability of its tax revenues • Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer • Local demographics/economics including unemployment data, largest taxpayers and local employers, income indices and home values • For revenue bonds, the source and strength of revenue for municipal authorities including the obligor’s financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer’s strength and collateral in escrow accounts) • Credit ratings by major credit rating agencies Loans During the first nine months of 2022, loans decreased by $97.3 million and totaled $2.158 billion at September 30, 2022, primarily due to $103.6 million in PPP loans forgiven and paid off. New non-PPP related loan originations totaled $204.1 million in the first nine months of 2022. Non-PPP loan payoffs were $204.2 million in the first nine months of 2022. These payoffs reflected construction project completions, 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 September 30, 2022, there were 42 PPP loans outstanding totaling $7.6 million (net of $161 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 nine months of 2022, Bank of Marin recognized $2.3 million in PPP fees, net of costs, compared to $6.6 million in the same period of 2021. As of the date of this report, there were no loans benefiting from payment relief under the provisions of the 2020 CARES Act. During the onset of the pandemic, Bank of Marin granted payment relief for 269 loans totaling $402.9 million. Of the three loans outstanding for $23.6 million as of June 30, 2022, one resumed payments and was removed from payment relief prior to September 30, 2022, and the others paid off in early October. Page-42 Liabilities During the first nine months of 2022, total liabilities increased by $88.2 million to $3.952 billion. Deposits increased $94.2 million in the first nine months of 2022 to $3.903 billion. Non-interest bearing deposits increased $141.7 million while money market deposits decreased $41.7 million in the first nine months of 2022. The decrease in m oney market deposits was primarily due to seasonal fluctuations in some of our large clients' business accounts. The net increase in total deposits was primarily due to the replacement of expected deposit outflows with deposits held off balance sheet. Additionally, as part of our liquidity management, the Bank maintained $11.3 million in deposits off-balance sheet with d eposit networks at September 30, 2022, compared to $173.1 million at December 31, 2021. Non-interest bearing deposits represented 52.6% of total deposits at September 30, 2022, compared to 50.2% at December 31, 2021. The average cost of deposits was 0.06% in the first nine months of 2022 compared to 0.07% in the same period of 2021. Capital Adequacy We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank’s prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors. Management reviews capital ratios on a regular basis 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 September 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. Tangible common equity to tangible assets was 7.5% at September 30, 2022, compared to 8.8% at December 31, 2021 for Bancorp and 7.3% at September 30, 2022, compared to 8.6% at December 31, 2021 for the Bank (refer to footnote 4 on page 35 for a discussion of this non-GAAP financial measure). Declines in the Bank's and Bancorp's tangible common equity ratios were primarily related to a $78.0 million increase in after-tax unrealized losses on available-for-sale securities associated with interest rate increases since December 31, 2021, partially offset by earnings. As mentioned above, our substantial liquidity position enabled us to transfer $357.5 million of securities at fair value from available-for-sale to held-to-maturity in March 2022, to reduce the effect of future rate increases on other comprehensive income and equity. Page-43 The Bancorp’s and Bank’s capital adequacy ratios as of September 30, 2022 and December 31, 2021 are presented in the following tables. Capital Ratios for Bancorp (dollars in thousands) Actual Ratio Adequately Capitalized Threshold Ratio to be a Well Capitalized Bank Holding Company September 30, 2022 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 422,110 15.06 % $ 294,306 ≥ 10.50 % $ 280,292 ≥ 10.00 % Tier 1 Capital (to risk-weighted assets) $ 398,412 14.21 % $ 238,248 ≥ 8.50 % $ 224,233 ≥ 8.00 % Tier 1 Capital (to average assets) $ 398,412 9.21 % $ 172,967 ≥ 4.00 % $ 216,209 ≥ 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 398,412 14.21 % $ 196,204 ≥ 7.00 % $ 182,190 ≥ 6.50 % December 31, 2021 Total Capital (to risk-weighted assets) $ 397,101 14.58 % ≥ $ 286,035 ≥ 10.50 % ≥ $ 272,414 ≥ 10.00 % Tier 1 Capital (to risk-weighted assets) $ 373,286 13.70 % ≥ $ 231,552 ≥ 8.50 % ≥ $ 217,931 ≥ 8.00 % Tier 1 Capital (to average assets) $ 373,286 8.85 % ≥ $ 168,750 ≥ 4.00 % ≥ $ 210,937 ≥ 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 373,286 13.70 % ≥ $ 190,690 ≥ 7.00 % ≥ $ 177,069 ≥ 6.50 % Capital Ratios for the Bank (dollars in thousands) Actual Ratio Adequately Capitalized Threshold Ratio to be Well Capitalized under Prompt Corrective Action Provisions September 30, 2022 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 413,236 14.74 % $ 294,282 ≥ 10.50 % $ 280,269 ≥ 10.00 % Tier 1 Capital (to risk-weighted assets) $ 389,538 13.90 % $ 238,228 ≥ 8.50 % $ 224,215 ≥ 8.00 % Tier 1 Capital (to average assets) $ 389,538 9.01 % $ 172,957 ≥ 4.00 % $ 216,197 ≥ 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 389,538 13.90 % $ 196,188 ≥ 7.00 % $ 182,175 ≥ 6.50 % December 31, 2021 Total Capital (to risk-weighted assets) $ 390,924 14.35 % ≥ $ 286,009 ≥ 10.50 % ≥ $ 272,390 ≥ 10.00 % Tier 1 Capital (to risk-weighted assets) $ 367,109 13.48 % ≥ $ 231,531 ≥ 8.50 % ≥ $ 217,912 ≥ 8.00 % Tier 1 Capital (to average assets) $ 367,109 8.70 % ≥ $ 168,724 ≥ 4.00 % ≥ $ 210,905 ≥ 5.00 % 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, which are subject to projection and stress testing over a two-year horizon. ALCO has adopted a contingency funding plan that provides early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis. Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs. We also have relationships with third-party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash management strategy. We maintained $11.3 million in one-way-sale deposits off-balance sheet with deposit networks at September 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. Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, and dividends to common stockholders. T he most significant component of our daily liquidity position is customer deposits. The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and Page-44 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. Our cash and cash equivalents decreased $162.0 million in the first nine months of 2022. Significant uses of liquidity during 2022 were $537.2 million in investment securities purchased, $11.7 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. The most significant source of liquidity during the first nine months of 2022 was proceeds from principal paydowns, maturities, sales and calls of investment securities of $156.7 million, loans collected (net of loan originations) of $97.9 million, a net increase in deposits of $94.2 million (primarily related to $162 million of one-way sell deposits brought back on the balance sheet that were previously placed in third-party deposit networks), and $39.0 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 $561.7 million at September 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, $106.2 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 September 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 $97.5 million from December 31, 2021 to September 30, 2022, primarily because the rising market interest rates in the first nine months 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. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period. The primary uses of funds for Bancorp are shareholder dividends and ordinary operating expenses. Bancorp held $8.8 million in cash at September 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.