UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2021~~2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission File Number 001-33572

Bank of Marin Bancorp

(Exact name of Registrant as specified in its charter)

California

20-8859754

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

504 Redwood Blvd.

Suite 100

Novato

94947

(Address of principal executive office)

(Zip Code)

Registrant’s telephone number, including area code: (415) 763-4520

Not Applicable

(Former name, former address and formal fiscal year, if changed since last report)


Securities registered pursuant to 12(b) of the Act:
Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value and attached Share Purchase Rights	BMRC	The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

~~(Do not check if a smaller reporting company)~~

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of October 31, ~~2021,~~2022, there were ~~16,013,255~~16,028,623 shares of common stock outstanding.

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION	3

ITEM 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Condition	3
	Consolidated Statements of Comprehensive (Loss) Income	4
	Consolidated Statements of Changes in Stockholders' Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3330

ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk	4845

ITEM 4.	Controls and Procedures	4946

PART II	OTHER INFORMATION	4947

ITEM 1.	Legal Proceedings	4947

ITEM 1A.	Risk Factors	5047

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5047

ITEM 3.	Defaults Upon Senior Securities	5047

ITEM 4.	Mine Safety Disclosures	5047

ITEM 5.	Other Information	5047

ITEM 6.	Exhibits	5148

SIGNATURES

Page-2

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CONDITION


(in thousands, except share data; unaudited)	(in thousands, except share data; unaudited)	September 30, 2021		December 31, 2020		(in thousands, except share data; unaudited)	September 30, 2022		December 31, 2021
Assets	Assets					Assets
Cash, cash equivalents and restricted cash	Cash, cash equivalents and restricted cash	$	584,739	$	200,320	Cash, cash equivalents and restricted cash	$	185,552	$	347,641

Investment securities	Investment securities					Investment securities
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at September 30, 2021 and December 31, 2020 )		196,801		109,036
Available-for-sale, at fair value (net of zero allowance for credit losses at September 30, 2021 and December 31, 2020 )		963,033		392,351
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at September 30, 2022 and December 31, 2021)						Held-to-maturity, at amortized cost (net of zero allowance for credit losses at September 30, 2022 and December 31, 2021)	959,867		342,222
Available-for-sale, at fair value (net of zero allowance for credit losses at September 30, 2022 and December 31, 2021)						Available-for-sale, at fair value (net of zero allowance for credit losses at September 30, 2022 and December 31, 2021)	812,493		1,167,568
Total investment securities	Total investment securities	1,159,834		501,387		Total investment securities	1,772,360		1,509,790
Loans, at amortized cost	Loans, at amortized cost	2,317,019		2,088,556		Loans, at amortized cost	2,158,336		2,255,645
Allowance for credit losses on loans	Allowance for credit losses on loans	(22,414)		(22,874)		Allowance for credit losses on loans	(22,963)		(23,023)
Loans, net of allowance for credit losses on loans	Loans, net of allowance for credit losses on loans	2,294,605		2,065,682		Loans, net of allowance for credit losses on loans	2,135,373		2,232,622
Goodwill	Goodwill	72,754		30,140		Goodwill	72,754		72,754
Bank-owned life insurance	Bank-owned life insurance	61,171		43,552		Bank-owned life insurance	62,056		61,473
Operating lease right-of-use assets	Operating lease right-of-use assets	24,776		25,612		Operating lease right-of-use assets	25,006		23,604
Bank premises and equipment, net	Bank premises and equipment, net	7,807		4,919		Bank premises and equipment, net	7,102		7,558
Core deposit intangible		6,998		3,831
Core deposit intangible, net						Core deposit intangible, net	5,481		6,605
Other real estate owned	Other real estate owned	800		—		Other real estate owned	455		800
Interest receivable and other assets	Interest receivable and other assets	47,578		36,483		Interest receivable and other assets	82,514		51,362
Total assets	Total assets	$	4,261,062	$	2,911,926	Total assets	$	4,348,653	$	4,314,209

Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity					Liabilities and Stockholders' Equity
Liabilities	Liabilities					Liabilities
Deposits	Deposits					Deposits
Non-interest bearing	Non-interest bearing	$	1,837,595	$	1,354,650	Non-interest bearing	$	2,051,975	$	1,910,240
Interest bearing	Interest bearing					Interest bearing
Transaction accounts	Transaction accounts	288,401		183,552		Transaction accounts	293,722		290,813
Savings accounts	Savings accounts	336,867		201,507		Savings accounts	342,630		340,959
Money market accounts	Money market accounts	1,124,660		667,107		Money market accounts	1,074,568		1,116,303
Time accounts	Time accounts	140,173		97,433		Time accounts	139,815		150,235
Total deposits	Total deposits	3,727,696		2,504,249		Total deposits	3,902,710		3,808,550
Borrowings and other obligations	Borrowings and other obligations	451		58		Borrowings and other obligations	365		419
Subordinated debenture		—		2,777

Operating lease liabilities	Operating lease liabilities	26,637		27,062		Operating lease liabilities	26,744		25,429
Interest payable and other liabilities	Interest payable and other liabilities	47,753		19,527		Interest payable and other liabilities	22,242		29,443
Total liabilities	Total liabilities	3,802,537		2,553,673		Total liabilities	3,952,061		3,863,841

Commitments and contingent liabilities (Note 8)						Commitments and contingent liabilities (Note 8)
Stockholders' Equity	Stockholders' Equity					Stockholders' Equity
Preferred stock, no par value, Authorized - 5,000,000 shares, none issued	Preferred stock, no par value, Authorized - 5,000,000 shares, none issued	—		—		Preferred stock, no par value, Authorized - 5,000,000 shares, none issued	—		—
Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,066,889 and 13,500,453 at September 30, 2021 and December 31, 2020, respectively		217,680		125,905
Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,029,048 and 15,929,243 at September 30, 2022 and December 31, 2021, respectively						Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,029,048 and 15,929,243 at September 30, 2022 and December 31, 2021, respectively	214,720		212,524
Retained earnings	Retained earnings	233,997		219,747		Retained earnings	261,907		239,868
Accumulated other comprehensive income, net of taxes		6,848		12,601
Accumulated other comprehensive loss, net of taxes						Accumulated other comprehensive loss, net of taxes	(80,035)		(2,024)
Total stockholders' equity	Total stockholders' equity	458,525		358,253		Total stockholders' equity	396,592		450,368
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	4,261,062	$	2,911,926	Total liabilities and stockholders' equity	$	4,348,653	$	4,314,209

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

Page-3


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
	Three months ended						Nine months ended
(in thousands, except per share amounts; unaudited)	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Interest income
Interest and fees on loans	$	23,357	$	23,334	$	24,027	$	70,368	$	66,117
Interest on investment securities	9,674		8,273		4,084		24,640		10,717
Interest on federal funds sold and due from banks	546		180		178		832		274
Total interest income	33,577		31,787		28,289		95,840		77,108
Interest expense
Interest on interest-bearing transaction accounts	121		53		41		230		119
Interest on savings accounts	32		32		26		93		66
Interest on money market accounts	268		438		417		1,184		1,015
Interest on time accounts	128		67		44		209		221
Interest on borrowings and other obligations	1		—		8		2		8
Interest on subordinated debenture	—		—		—		—		1,361
Total interest expense	550		590		536		1,718		2,790
Net interest income	33,027		31,197		27,753		94,122		74,318
Provision for (reversal of) credit losses on loans	422		—		1,800		(63)		(2,049)
Reversal of credit losses on unfunded loan commitments	—		—		—		(318)		(1,202)
Net interest income after provision for (reversal of) credit losses	32,605		31,197		25,953		94,503		77,569
Non-interest income
Wealth Management and Trust Services	507		630		597		1,737		1,615
Debit card interchange fees, net	502		531		483		1,538		1,268
Service charges on deposit accounts	535		465		464		1,488		1,062
Earnings on bank-owned life insurance, net	222		298		1,402		933		1,892
Dividends on Federal Home Loan Bank stock	251		249		179		759		505
Merchant interchange fees, net	141		149		129		430		247
(Losses) gains on sale of investment securities, net	(63)		—		1		(63)		1
Other income	628		406		310		1,496		823
Total non-interest income	2,723		2,728		3,565		8,318		7,413
Non-interest expense
Salaries and related benefits	10,557		10,341		13,127		32,446		31,223
Occupancy and equipment	1,941		1,891		1,871		5,739		5,373
Data processing	1,093		1,199		1,613		3,569		3,252
Professional services	736		665		2,472		2,314		4,321
Information technology	573		468		496		1,519		1,105
Depreciation and amortization	414		393		431		1,259		1,279
Amortization of core deposit intangible	370		374		334		1,124		742
Federal Deposit Insurance Corporation insurance	300		296		236		886		597
Directors' expense	233		294		255		838		660
Charitable contributions	49		511		4		605		497
Other real estate owned	350		3		—		355		—
Other expense	2,062		2,471		1,847		6,305		4,605
Total non-interest expense	18,678		18,906		22,686		56,959		53,654
Income before provision for income taxes	16,650		15,019		6,832		45,862		31,328
Provision for income taxes	4,476		3,953		1,550		12,157		7,814
Net income	$	12,174	$	11,066	$	5,282	$	33,705	$	23,514
Net income per common share:
Basic	$	0.76	$	0.70	$	0.35	$	2.12	$	1.70
Diluted	$	0.76	$	0.69	$	0.35	$	2.11	$	1.69
Weighted average shares:
Basic	15,939		15,921		14,922		15,912		13,798
Diluted	15,974		15,955		14,993		15,959		13,881
Comprehensive (loss) income:
Net income	$	12,174	$	11,066	$	5,282	$	33,705	$	23,514
Other comprehensive (loss) income:
Change in net unrealized (losses) gains on available-for-sale securities	(31,816)		(27,050)		(2,274)		(97,094)		(8,558)
Reclassification adjustment for losses (gains) on available-for-sale securities included in net income	63		—		(1)		63		(1)
Net unrealized losses on securities transferred from available-for-sale to held-to-maturity	—		—		—		(14,847)		—
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity	510		472		104		1,126		385
Other comprehensive loss, before tax	(31,243)		(26,578)		(2,171)		(110,752)		(8,174)
Deferred tax benefit	(9,236)		(7,857)		(641)		(32,741)		(2,421)
Other comprehensive loss, net of tax	(22,007)		(18,721)		(1,530)		(78,011)		(5,753)
Total comprehensive (loss) income	$	(9,833)	$	(7,655)	$	3,752	$	(44,306)	$	17,761

BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended Nine months ended
(in thousands, except per share amounts; unaudited) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Interest income
Interest and fees on loans $ 24,027 $ 21,776 $ 66,117 $ 63,880
Interest on investment securities 4,084 3,343 10,717 11,249
Interest on federal funds sold and due from banks 178 50 274 421
Total interest income 28,289 25,169 77,108 75,550
Interest expense
Interest on interest-bearing transaction accounts 41 41 119 146
Interest on savings accounts 26 17 66 50
Interest on money market accounts 417 377 1,015 1,731
Interest on time accounts 44 133 221 436
Interest on borrowings and other obligations 8 — 8 3
Interest on subordinated debenture — 35 1,361 124
Total interest expense 536 603 2,790 2,490
Net interest income 27,753 24,566 74,318 73,060
Provision for (reversal of) credit losses on loans 1,800 1,250 (2,049) 5,450
Provision for (reversal of) credit losses on unfunded loan commitments — 248 (1,202) 610
Net interest income after provision for (reversal of) credit losses 25,953 23,068 77,569 67,000
Non-interest income
Earnings on bank-owned life insurance, net 1,402 232 1,892 741
Wealth Management and Trust Services 597 450 1,615 1,375
Debit card interchange fees 483 383 1,268 1,051
Service charges on deposit accounts 464 284 1,062 1,028
Dividends on Federal Home Loan Bank stock 179 149 505 503
Merchant interchange fees 129 63 247 183
Gains on sale of investment securities, net 1 — 1 915
Other income 310 229 823 927
Total non-interest income 3,565 1,790 7,413 6,723
Non-interest expense
Salaries and related benefits 13,127 8,638 31,223 25,979
Occupancy and equipment 1,871 1,776 5,373 5,100
Professional services 2,472 655 4,321 1,749
Data processing 1,613 822 3,252 2,437
Depreciation and amortization 431 539 1,279 1,591
Information technology 496 256 1,105 758
Amortization of core deposit intangible 334 213 742 639
Directors' expense 255 184 660 533
Federal Deposit Insurance Corporation insurance 236 181 597 299
Charitable contributions 4 481 497 921
Other expense 1,847 1,245 4,605 4,232
Total non-interest expense 22,686 14,990 53,654 44,238
Income before provision for income taxes 6,832 9,868 31,328 29,485
Provision for income taxes 1,550 2,377 7,814 7,360
Net income $ 5,282 $ 7,491 $ 23,514 $ 22,125
Net income per common share:
Basic $ 0.35 $ 0.55 $ 1.70 $ 1.64
Diluted $ 0.35 $ 0.55 $ 1.69 $ 1.62
Weighted average shares:
Basic 14,922 13,539 13,798 13,526
Diluted 14,993 13,610 13,881 13,617
Comprehensive income (loss):
Net income $ 5,282 $ 7,491 $ 23,514 $ 22,125
Other comprehensive income (loss):
Change in net unrealized (losses) gains on available-for-sale securities (2,274) 299 (8,558) 11,605
Reclassification adjustment for gains on available-for-sale securities included in net income (1) — (1) (915)
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity 104 149 385 394
Other comprehensive income (loss), before tax (2,171) 448 (8,174) 11,084
Deferred tax (benefit) expense (641) 132 (2,421) 3,277
Other comprehensive income (loss), net of tax (1,530) 316 (5,753) 7,807
Total comprehensive income $ 3,752 $ 7,807 $ 17,761 $ 29,932

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

Page-4


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended September 30, ~~2021~~2022 and ~~2020~~2021


(in thousands, except share data; unaudited)	(in thousands, except share data; unaudited)	Common Stock			Retained Earnings		Accumulated Other Comprehensive Income, Net of Taxes		Total		(in thousands, except share data; unaudited)	Common Stock			Retained Earnings		Accumulated Other Comprehensive (Loss) Income, Net of Taxes		Total
		Shares	Amount									Shares	Amount
		Three months ended September 30, 2021										Three months ended September 30, 2022
Balance at July 1, 2022											Balance at July 1, 2022	16,009,600	$	213,864	$	253,737	$	(58,028)	$	409,573
Net income											Net income	—	—		12,174		—		12,174
Other comprehensive loss, net of tax											Other comprehensive loss, net of tax	—	—		—		(22,007)		(22,007)

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings											Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	363	—		—		—		—
Stock issued under employee stock purchase plan											Stock issued under employee stock purchase plan	574	16		—		—		16
Stock issued under employee stock ownership plan											Stock issued under employee stock ownership plan	13,000	404		—		—		404

Stock-based compensation - stock options											Stock-based compensation - stock options	—	106		—		—		106
Stock-based compensation - restricted stock											Stock-based compensation - restricted stock	—	151		—		—		151
Cash dividends paid on common stock ($0.25 per share)											Cash dividends paid on common stock ($0.25 per share)	—	—		(4,004)		—		(4,004)
Stock purchased by directors under director stock plan											Stock purchased by directors under director stock plan	515	16		—		—		16
Stock issued in payment of director fees											Stock issued in payment of director fees	4,996	163		—		—		163

Balance at September 30, 2022											Balance at September 30, 2022	16,029,048	$	214,720	$	261,907	$	(80,035)	$	396,592
												Three months ended September 30, 2021
Balance at July 1, 2021	Balance at July 1, 2021	13,055,105	$	108,430	$	231,841	$	8,378	$	348,649	Balance at July 1, 2021	13,055,105	$	108,430	$	231,841	$	8,378	$	348,649
Net income	Net income	—	—		5,282		—		5,282		Net income	—	—		5,282		—		5,282
Other comprehensive income		—	—		—		(1,530)		(1,530)
Other comprehensive income, net of tax											Other comprehensive income, net of tax	—	—		—		(1,530)		(1,530)

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	3,098	72		—		—		72		Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	3,098	72		—		—		72
Stock issued under employee stock purchase plan	Stock issued under employee stock purchase plan	508	18		—		—		18		Stock issued under employee stock purchase plan	508	18		—		—		18
Stock issued under employee stock ownership plan	Stock issued under employee stock ownership plan	9,100	332		—		—		332		Stock issued under employee stock ownership plan	9,100	332		—		—		332

Stock-based compensation - stock options	Stock-based compensation - stock options	—	115		—		—		115		Stock-based compensation - stock options	—	115		—		—		115
Stock-based compensation - restricted stock	Stock-based compensation - restricted stock	—	98		—		—		98		Stock-based compensation - restricted stock	—	98		—		—		98
Cash dividends paid on common stock ($0.24 per share)	Cash dividends paid on common stock ($0.24 per share)	—	—		(3,126)		—		(3,126)		Cash dividends paid on common stock ($0.24 per share)	—	—		(3,126)		—		(3,126)
Stock purchased by directors under director stock plan	Stock purchased by directors under director stock plan	515	17		—		—		17		Stock purchased by directors under director stock plan	515	17		—		—		17
Stock issued in payment of director fees	Stock issued in payment of director fees	3,063	99		—		—		99		Stock issued in payment of director fees	3,063	99		—		—		99
Stock issued to American River Bankshares shareholders	Stock issued to American River Bankshares shareholders	3,441,235	124,401		—		—		124,401		Stock issued to American River Bankshares shareholders	3,441,235	124,401		—		—		124,401
Stock repurchased, net of commissions		(445,735)	(15,902)		—		—		(15,902)
Stock repurchased, including commissions											Stock repurchased, including commissions	(445,735)	(15,902)		—		—		(15,902)
Balance at September 30, 2021	Balance at September 30, 2021	16,066,889	$	217,680	$	233,997	$	6,848	$	458,525	Balance at September 30, 2021	16,066,889	$	217,680	$	233,997	$	6,848	$	458,525
		Three months ended September 30, 2020
Balance at July 1, 2020		13,591,835	$	128,633	$	211,613	$	11,994	$	352,240
Net income		—	—		7,491		—		7,491
Other comprehensive income		—	—		—		316		316

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings		207	—		—		—		—
Stock issued under employee stock purchase plan		728	20		—		—		20
Stock issued under employee stock ownership plan		10,200	319		—		—		319

Restricted stock forfeited / cancelled		(1,466)	—		—		—		—
Stock-based compensation - stock options		—	88		—		—		88
Stock-based compensation - restricted stock		—	99		—		—		99
Cash dividends paid on common stock ($0.23 per share)		—	—		(3,128)		—		(3,128)
Stock purchased by directors under director stock plan		746	25		—		—		25
Stock issued in payment of director fees		3,113	100		—		—		100

Balance at September 30, 2020		13,605,363	$	129,284	$	215,976	$	12,310	$	357,570

The accompanying notes are an integral part of these consolidated financial statements (unaudited).


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2022 and 2021

(in thousands, except share data; unaudited)	Common Stock			Retained Earnings		Accumulated Other Comprehensive (Loss) Income, Net of Taxes		Total
	Shares	Amount
	Nine months ended September 30, 2022
Balance at January 1, 2022	15,929,243	$	212,524	$	239,868	$	(2,024)	$	450,368
Net income	—	—		33,705		—		33,705
Other comprehensive loss, net of tax	—	—		—		(78,011)		(78,011)

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	40,674	821		—		—		821
Stock issued under employee stock purchase plan	1,510	46		—		—		46
Stock issued under employee stock ownership plan	38,000	1,233		—		—		1,233
Restricted stock granted	46,672	—		—		—		—
Restricted stock surrendered for tax withholdings upon vesting	(1,169)	(40)		—		—		(40)
Restricted stock forfeited / cancelled	(13,267)	—		—		—		—
Stock-based compensation - stock options	—	221		—		—		221
Stock-based compensation - restricted stock	—	421		—		—		421
Cash dividends paid on common stock ($0.73 per share)	—	—		(11,666)		—		(11,666)
Stock purchased by directors under director stock plan	515	16		—		—		16
Stock issued in payment of director fees	10,145	355		—		—		355

Stock repurchased, including commissions	(23,275)	(877)		—		—		(877)
Balance at September 30, 2022	16,029,048	$	214,720	$	261,907	$	(80,035)	$	396,592
	Nine months ended September 30, 2021
Balance at January 1, 2021	13,500,453	$	125,905	$	219,747	$	12,601	$	358,253
Net income	—	—		23,514		—		23,514
Other comprehensive loss, net of tax	—	—		—		(5,753)		(5,753)

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	34,278	423		—		—		423
Stock issued under employee stock purchase plan	2,117	72		—		—		72
Stock issued under employee stock ownership plan	27,400	999		—		—		999
Restricted stock granted	29,454	—		—		—		—
Restricted stock surrendered for tax withholdings upon vesting	(3,961)	(156)		—		—		(156)
Restricted stock forfeited / cancelled	(3,848)	—		—		—		—
Stock-based compensation - stock options	—	315		—		—		315
Stock-based compensation - restricted stock	—	636		—		—		636
Cash dividends paid on common stock ($0.70 per share)	—	—		(9,264)		—		(9,264)
Stock purchased by directors under director stock plan	1,034	34		—		—		34
Stock issued in payment of director fees	6,410	216		—		—		216
Stock issued to American River Bankshares shareholders	3,441,235	124,401		—		—		124,401
Stock repurchased, including commissions	(967,683)	(35,165)		—		—		(35,165)
Balance at September 30, 2021	16,066,889	$	217,680	$	233,997	$	6,848	$	458,525
The accompanying notes are an integral part of these consolidated financial statements (unaudited).


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
~~For the nine months ended September 30, 2021 and 2020~~

(in thousands, except share data; unaudited) Common Stock Retained
Earnings Accumulated Other
Comprehensive (Loss) Income,
Net of Taxes Total
Shares Amount
Nine months ended September 30, 2021
Balance at January 1, 2021 13,500,453 $ 125,905 $ 219,747 $ 12,601 $ 358,253
Net income — — 23,514 — 23,514
Other comprehensive (loss) — — — (5,753) (5,753)
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 34,278 423 423
Stock issued under employee stock purchase plan 2,117 72 — — 72
Stock issued under employee stock ownership plan 27,400 999 — — 999
Restricted stock granted 29,454 — — — —
Restricted stock surrendered for tax withholdings upon vesting (3,961) (156) — — (156)
Restricted stock forfeited / cancelled (3,848) — — — —
Stock-based compensation - stock options — 315 — — 315
Stock-based compensation - restricted stock — 636 — — 636
Cash dividends paid on common stock ($0.70 per share) — — (9,264) — (9,264)
Stock purchased by directors under director stock plan 1,034 34 — — 34
Stock issued in payment of director fees 6,410 216 — — 216
Stock issued to American River Bankshares shareholders 3,441,235 124,401 — — 124,401
Stock repurchased, net of commissions (967,683) (35,165) — — (35,165)
Balance at September 30, 2021 16,066,889 $ 217,680 $ 233,997 $ 6,848 $ 458,525
Nine months ended September 30, 2020
Balance at January 1, 2020 13,577,008 $ 129,058 $ 203,227 $ 4,503 $ 336,788
Net income — — 22,125 — 22,125
Other comprehensive income — — — 7,807 7,807
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 64,022 1,277 — — 1,277
Stock issued under employee stock purchase plan 1,812 53 — — 53
Stock issued under employee stock ownership plan 29,600 967 — — 967
Restricted stock granted 29,100 — — — —
Restricted stock surrendered for tax withholdings upon vesting (2,200) (73) — — (73)
Restricted stock forfeited / cancelled (8,184) — — — —
Stock-based compensation - stock options — 299 — — 299
Stock-based compensation - restricted stock — 673 — — 673
Cash dividends paid on common stock ($0.69 per share) — — (9,376) — (9,376)
Stock purchased by directors under director stock plan 1,146 43 — — 43
Stock issued in payment of director fees 5,723 217 — — 217
Stock repurchased, net of commissions (92,664) (3,230) — — (3,230)
Balance at September 30, 2020 13,605,363 $ 129,284 $ 215,976 $ 12,310 $ 357,570

~~The accompanying notes are an integral part of these consolidated financial statements (unaudited).~~

Page-5


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, ~~2021~~2022 and ~~2020~~2021


(in thousands; unaudited)	(in thousands; unaudited)	September 30, 2021		September 30, 2020		(in thousands; unaudited)	2022		2021
Cash Flows from Operating Activities:	Cash Flows from Operating Activities:					Cash Flows from Operating Activities:
Net income	Net income	$	23,514	$	22,125	Net income	$	33,705	$	23,514
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
(Reversal of) provision for credit losses on loans		(2,049)		5,450
(Reversal of) provision for credit losses on unfunded loan commitments		(1,202)		610
Reversal of credit losses on loans						Reversal of credit losses on loans	(63)		(2,049)
Reversal of credit losses on unfunded loan commitments						Reversal of credit losses on unfunded loan commitments	(318)		(1,202)

Noncash contribution expense to employee stock ownership plan	Noncash contribution expense to employee stock ownership plan	999		967		Noncash contribution expense to employee stock ownership plan	1,233		999
Noncash director compensation expense	Noncash director compensation expense	347		226		Noncash director compensation expense	355		216
Stock-based compensation expense	Stock-based compensation expense	951		972		Stock-based compensation expense	642		951
Amortization of core deposit intangible	Amortization of core deposit intangible	742		639		Amortization of core deposit intangible	1,124		742
Amortization of investment security premiums, net of accretion of discounts	Amortization of investment security premiums, net of accretion of discounts	3,222		864		Amortization of investment security premiums, net of accretion of discounts	7,139		3,222
Accretion of discounts on acquired loans		(201)		(101)
Amortization of premiums (accretion of discounts) on acquired loans, net						Amortization of premiums (accretion of discounts) on acquired loans, net	143		(201)
Accretion of discount on subordinated debenture	Accretion of discount on subordinated debenture	1,347		52		Accretion of discount on subordinated debenture	—		1,347
Net change in deferred loan origination costs/fees	Net change in deferred loan origination costs/fees	(1,135)		6,132		Net change in deferred loan origination costs/fees	(2,484)		(1,135)

Gain on sale of investment securities		(1)		(915)
Write-down of other real estate owned						Write-down of other real estate owned	345		—
Losses (gains) on sale of investment securities, net						Losses (gains) on sale of investment securities, net	63		(1)
Depreciation and amortization	Depreciation and amortization	1,279		1,591		Depreciation and amortization	1,259		1,279

Earnings on bank-owned life insurance policies	Earnings on bank-owned life insurance policies	(1,892)		(741)		Earnings on bank-owned life insurance policies	(933)		(1,892)

Net changes in Interest receivable and other assets		5,615		(5,347)
Net changes in Interest payable and other liabilities		790		(1,207)
Net changes in interest receivable and other assets						Net changes in interest receivable and other assets	2,230		5,615
Net changes in interest payable and other liabilities						Net changes in interest payable and other liabilities	(5,489)		921
Total adjustments	Total adjustments	8,812		9,192		Total adjustments	5,246		8,812
Net cash provided by operating activities	Net cash provided by operating activities	32,326		31,317		Net cash provided by operating activities	38,951		32,326
Cash Flows from Investing Activities:	Cash Flows from Investing Activities:					Cash Flows from Investing Activities:

Purchase of held-to-maturity securities	Purchase of held-to-maturity securities	(133,493)		—		Purchase of held-to-maturity securities	(293,720)		(133,493)
Purchase of available-for-sale securities	Purchase of available-for-sale securities	(355,156)		(71,744)		Purchase of available-for-sale securities	(243,459)		(355,156)
Proceeds from sale of available-for-sale securities	Proceeds from sale of available-for-sale securities	4,099		33,756		Proceeds from sale of available-for-sale securities	10,664		4,099
Proceeds from paydowns/maturities of held-to-maturity securities	Proceeds from paydowns/maturities of held-to-maturity securities	65,497		19,880		Proceeds from paydowns/maturities of held-to-maturity securities	33,198		65,497
Proceeds from paydowns/maturities of available-for-sale securities	Proceeds from paydowns/maturities of available-for-sale securities	66,981		68,102		Proceeds from paydowns/maturities of available-for-sale securities	112,793		66,981

Loans originated and principal collected, net		193,265		(269,376)
Loan principal collected, net of originations						Loan principal collected, net of originations	97,935		193,265
Purchase of bank-owned life insurance policies	Purchase of bank-owned life insurance policies	(1,943)		(941)		Purchase of bank-owned life insurance policies	—		(1,943)
Cash receipts from bank-owned life insurance policies	Cash receipts from bank-owned life insurance policies	2,478		—		Cash receipts from bank-owned life insurance policies	350		2,478
Purchase of premises and equipment	Purchase of premises and equipment	(833)		(769)		Purchase of premises and equipment	(762)		(833)

Cash acquired from American River Bankshares	Cash acquired from American River Bankshares	140,577		—		Cash acquired from American River Bankshares	—		140,577

Cash paid for low income housing tax credit investment	Cash paid for low income housing tax credit investment	(396)		(1,289)		Cash paid for low income housing tax credit investment	(30)		(396)
Net cash used in investing activities	Net cash used in investing activities	(18,924)		(222,381)		Net cash used in investing activities	(283,031)		(18,924)
Cash Flows from Financing Activities:	Cash Flows from Financing Activities:					Cash Flows from Financing Activities:
Net increase in deposits	Net increase in deposits	433,425		232,800		Net increase in deposits	94,160		433,425
Proceeds from stock options exercised	Proceeds from stock options exercised	423		1,277		Proceeds from stock options exercised	821		423

Payment of tax withholdings for vesting of restricted stock		(156)		(73)
Restricted stock surrendered for tax withholdings upon vesting						Restricted stock surrendered for tax withholdings upon vesting	(40)		(156)
Proceeds from stock issued under employee and director stock purchase plans	Proceeds from stock issued under employee and director stock purchase plans	106		96		Proceeds from stock issued under employee and director stock purchase plans	62		106
Stock repurchased, net of commissions		(35,451)		(3,333)
Stock repurchased, including commissions						Stock repurchased, including commissions	(1,250)		(35,451)
Repayment of subordinated debenture including execution costs	Repayment of subordinated debenture including execution costs	(4,126)		—		Repayment of subordinated debenture including execution costs	—		(4,126)
Repayment of Federal Home Loan Bank borrowings	Repayment of Federal Home Loan Bank borrowings	(13,885)		—		Repayment of Federal Home Loan Bank borrowings	—		(13,885)
Repayment of finance lease obligations	Repayment of finance lease obligations	(55)		(131)		Repayment of finance lease obligations	(96)		(55)
Cash dividends paid on common stock	Cash dividends paid on common stock	(9,264)		(9,376)		Cash dividends paid on common stock	(11,666)		(9,264)

Net cash provided by financing activities	Net cash provided by financing activities	371,017		221,260		Net cash provided by financing activities	81,991		371,017
Net increase in cash, cash equivalents and restricted cash		384,419		30,196
Net (decrease) increase in cash, cash equivalents and restricted cash						Net (decrease) increase in cash, cash equivalents and restricted cash	(162,089)		384,419
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	200,320		183,388		Cash, cash equivalents and restricted cash at beginning of period	347,641		200,320
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	584,739	$	213,584	Cash, cash equivalents and restricted cash at end of period	$	185,552	$	584,739
Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid in interest	Cash paid in interest	$	1,492	$	2,450	Cash paid in interest	$	1,716	$	1,492
Cash paid in income taxes	Cash paid in income taxes	$	9,000	$	9,765	Cash paid in income taxes	$	11,075	$	9,000
Supplemental disclosure of noncash investing and financing activities:	Supplemental disclosure of noncash investing and financing activities:					Supplemental disclosure of noncash investing and financing activities:

Change in net unrealized gains on available-for-sale securities		$	(8,558)	$	11,605
Change in net unrealized gain or (loss) on available-for-sale securities						Change in net unrealized gain or (loss) on available-for-sale securities	$	(97,094)	$	(8,558)

Securities transferred from available-for-sale to held-to-maturity, at fair value						Securities transferred from available-for-sale to held-to-maturity, at fair value	$	357,482	$	—
Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	$	385	$	394	Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	$	1,126	$	385
Purchase of investment security not yet settled		$	19,972	$	—
Purchase of investment securities not yet settled						Purchase of investment securities not yet settled	$	—	$	19,972

Stock issued to employee stock ownership plan	Stock issued to employee stock ownership plan	$	999	$	967	Stock issued to employee stock ownership plan	$	1,233	$	999
Stock issued for director compensation expense		$	347	$	226
Stock issued in payment of director fees						Stock issued in payment of director fees	$	355	$	216
Repurchase of stock not yet settled	Repurchase of stock not yet settled	$	127	$	—	Repurchase of stock not yet settled	$	—	$	127
Acquisition: Fair value of assets acquired, excluding cash acquired	Acquisition: Fair value of assets acquired, excluding cash acquired	$	757,844	$	—	Acquisition: Fair value of assets acquired, excluding cash acquired	$	—	$	757,844
Fair value of liabilities assumed	Fair value of liabilities assumed	$	816,558	$	—	Fair value of liabilities assumed	$	—	$	816,558
Restricted cash1	Restricted cash1	$	—	$	—	Restricted cash1	$	2,996	$	15,805

1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San ~~Francisco.~~Francisco and other cash pledged. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020.

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

Page-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1: Basis of Presentation

The consolidated financial statements include the accounts of Bancorp, a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin, a California state-chartered commercial bank. Effective August 6, 2021 (the "merger date"), American River Bankshares ("AMRB") merged with and into Bank of Marin Bancorp ("Bancorp"), with Bank of Marin Bancorp surviving, followed thereafter at 12:05 AM on August 7, 2021, by the merger of American River Bank ("ARB") with and into Bank of Marin, with Bank of Marin (the "Bank") surviving, (collectively the "Merger"). The Merger was accounted for under ASC 805, ~~Business Combinations. See Note 10, Merger, for further detail.~~ References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes. The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations. Certain items in prior financial statements were reclassified to conform to the current presentation, including the reclassification of the provision for credit losses on unfunded commitments in the second quarter of 2021 from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income. This reclassification had no impact to net income or stockholders' equity.

Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our ~~2020~~2021 Annual Report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in stockholders’ equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period.

The NorCal Community Bancorp Trust II (the "Trust") was formed for the sole purpose of issuing trust preferred securities. Bancorp is not considered the primary beneficiary of the Trust (a variable interest entity), therefore the Trust is not consolidated in our consolidated financial statements, but rather the subordinated debenture is shown as a liability on our consolidated statements of condition. Bancorp's investment in the securities of the Trust is accounted for under the equity method and is included in interest receivable and other assets on the consolidated statements of condition. Refer to Note 6, Borrowings, for additional information on the subordinated debenture due to NorCal Community Bancorp Trust II and the early redemption that occurred on March 15, 2021.

The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in the quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period under the treasury stock method. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, ~~there is no~~the difference in EPS ~~when considering~~is nominal for these participating securities.

~~Page-7~~


		Three months ended				Nine months ended					Three months ended				Nine months ended
(in thousands, except per share data)	(in thousands, except per share data)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		(in thousands, except per share data)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Weighted average basic common shares outstanding	Weighted average basic common shares outstanding	14,922		13,539		13,798		13,526		Weighted average basic common shares outstanding	15,939		14,922		15,912		13,798
Potentially dilutive common shares related to:	Potentially dilutive common shares related to:									Potentially dilutive common shares related to:
Stock options	Stock options	51		53		62		71		Stock options	22		51		33		62
Unvested restricted stock awards	Unvested restricted stock awards	20		18		21		20		Unvested restricted stock awards	13		20		14		21
Weighted average diluted shares outstanding	Weighted average diluted shares outstanding	14,993		13,610		13,881		13,617		Weighted average diluted shares outstanding	15,974		14,993		15,959		13,881
Net income	Net income	$	5,282	$	7,491	$	23,514	$	22,125	Net income	$	12,174	$	5,282	$	33,705	$	23,514
Basic EPS	Basic EPS	$	0.35	$	0.55	$	1.70	$	1.64	Basic EPS	$	0.76	$	0.35	$	2.12	$	1.70
Diluted EPS	Diluted EPS	$	0.35	$	0.55	$	1.69	$	1.62	Diluted EPS	$	0.76	$	0.35	$	2.11	$	1.69
Weighted average anti-dilutive common shares not included in the calculation of diluted EPS	Weighted average anti-dilutive common shares not included in the calculation of diluted EPS	97		202		91		152		Weighted average anti-dilutive common shares not included in the calculation of diluted EPS	237		97		213		91

Note 2: Recently Adopted and Issued Accounting Standards

~~Accounting Standards Adopted in 2021~~

~~In December 2019, the FASB issued ASU No. 2019-12,~~ ~~Income Taxes (ASC Topic 740): Simplifying the Accounting for Income Taxes~~. This ASU is intended to reduce the cost and complexity related to accounting for income taxes by removing certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and simplifying aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. We adopted this ASU prospectively on January 1, 2021, which did not have a material impact on our financial condition or results of operations.

~~In January 2020, the FASB issued ASU No. 2020-01,~~ Investments - Equity Securities (ASC Topic 321), Investments - Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815) - Clarifying the Interactions between ASC 321, ASC 323, and ASC 815~~. Among other things, this ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under ASC 323,~~for the purposes of applying the measurement alternative in accordance with ASC 321. We adopted this ASU prospectively on January 1, 2021, which did not have a material impact on our financial condition or results of operations.

~~In October 2020, the FASB issued ASU No. 2020-08,~~ ~~Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs~~. This ASU was issued as part of the Board's ongoing project to improve codification or correct unintended application. This ASU adds clarification to ASU 2017-08, which the Bank early-adopted in 2017, and delineates whether an entity with callable debt securities that have multiple call dates should amortize the amount above that which is repayable, to the next call date. We adopted this ASU prospectively on January 1, 2021. Because this ASU was narrow in scope and for clarification purposes, it did not have a material impact on our financial condition and results of operations.

Accounting Standards Not Yet Effective

In March 2020, the FASB issued ~~ASU~~Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden of accounting for, or recognizing the effects of reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of

Page-7

reference rate reform. The amendments in this ASU may be elected as of March 12, 2020 through December 31, 2022. An entity may choose to elect the amendments in this update at an interim period subsequent to March 12, 2020 with adoption methods varying based on transaction type. We have elected not ~~elected~~ to apply amendments at this time and ~~will~~to assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU ~~are intended~~intend to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. As of September 30, 2022, we had four interest rate swap contracts with notional values totaling $12.3 million indexed to LIBOR that will either be subject to the fall-back index rate stipulated by the ISDA protocol or modified to other reference rates such as Prime or SOFR as mutually agreed by our counterparty and us. We have not elected to apply the amendments at this time and will continue to assess the applicability of this

~~Page-8~~

ASU to us as we ~~continue to~~ monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities From Contracts With Customers (Topic 805). The amendments address diversity in accounting practices and require acquiring companies to apply ASC 606, Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination, as opposed to other methods such as fair value. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination. The amendments are to be applied prospectively to business combinations occurring on or after December 15, 2022 and early adoption is permitted. In the event of a future business combination, we will assess the impact of the ASU on our financial condition and results of operations.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendment eliminates the recognition measurement guidance for troubled debt restructured ("TDR") loans, and instead requires an entity to evaluate whether a modification represents a new loan or a continuation of an existing loan in accordance with ASC Topic 310-20, Receivables - Nonrefundable Fees and Other Costs. In addition, the amendment requires that an entity include in its vintage disclosures the current period-gross loan charge-offs by year of origination. The amendments are effective for years beginning after December 15, 2022, and should be applied prospectively, except that an entity has the option to apply a modified retrospective method for TDR loans, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. An entity may elect to early adopt each of the amendments separately. As such, we early adopted the current period charge-off disclosures in the first quarter of 2022 and intend to adopt the loan modification amendments when effective in the first quarter of 2023. Neither the early adoption of the amendments related to gross charge-off disclosures nor the future adoption of the TDR amendments had or will have a material impact on our financial condition or results of operations.

In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. Among other things, the ASU renames the "last-of-layer" method to the "portfolio layer" method and makes fair value hedging more accessible for hedge accounting of interest rate risk for portfolios and financial assets. For example, the guidance permits an entity to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby providing for consistency between accounting for similar hedges. The amendments are effective for years beginning after December 15, 2022. The adoption of the amendments will not affect our existing hedge accounting, disclosures, financial condition or results of operations.

In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendment reduces diversity in practice by clarifying that a separate contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. In addition, this ASU provided amended examples to illustrate that a restriction that is a characteristic of the equity security, which market participants would take into account when pricing them, would be considered in measuring fair value. This ASU also introduces new disclosure requirements. The amendments are effective prospectively for years beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements. As discussed in Note 4, Investment Securities, we hold Visa Inc. Class B common stock that is legally restricted from resale to non-member banks of Visa U.S.A. until the covered litigation against Visa Inc. is settled. While the adoption of the amendments may require additional disclosures, we do not anticipate that it will impact our financial condition or results of operations.

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Note 3: Fair Value of Assets and Liabilities

Fair Value Hierarchy and Fair Value Measurement

We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant management judgment and estimation.

Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation process in the reporting period during which the event or circumstances that caused the transfer occurred. No such transfers occurred in the years presented.

The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.


(in thousands) Description of Financial Instruments	(in thousands) Description of Financial Instruments	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Measurement Categories: Changes in Fair Value Recorded In1	(in thousands) Description of Financial Instruments	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Measurement Categories: Changes in Fair Value Recorded In1
September 30, 2021
September 30, 2022											September 30, 2022
Securities available-for-sale:											Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies											Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	489,389	$	—	$	489,389	$	—	OCI
SBA-backed securities											SBA-backed securities	$	44,791	$	—	$	44,791	$	—	OCI
Debentures of government sponsored agencies											Debentures of government sponsored agencies	$	134,921	$	—	$	134,921	$	—	OCI
U.S. Treasury securities											U.S. Treasury securities	$	10,158	$	10,158	$	—	$	—	OCI

Obligations of state and political subdivisions											Obligations of state and political subdivisions	$	98,427	$	—	$	98,427	$	—	OCI
Corporate bonds											Corporate bonds	$	33,202	$	—	$	33,202	$	—	OCI
Asset-backed securities											Asset-backed securities	$	1,605	$	—	$	1,605	$	—	OCI
Derivative financial assets (interest rate contracts)											Derivative financial assets (interest rate contracts)	$	649	$	—	$	649	$	—	NI

December 31, 2021											December 31, 2021
Securities available-for-sale:	Securities available-for-sale:										Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	693,532	$	—	$	693,532	$	—	OCI	Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	759,576	$	—	$	759,576	$	—	OCI
SBA-backed securities	SBA-backed securities	$	34,609	$	—	$	34,609	$	—	OCI	SBA-backed securities	$	33,478	$	—	$	33,478	$	—	OCI
Debentures of government sponsored agencies	Debentures of government sponsored agencies	$	70,214	$	—	$	70,214	$	—	OCI	Debentures of government sponsored agencies	$	188,527	$	—	$	188,527	$	—	OCI
U.S. Treasury securities	U.S. Treasury securities	$	11,777	$	11,777	$	—	$	—	OCI	U.S. Treasury securities	$	11,630	$	11,630	$	—	$	—	OCI

Obligations of state and political subdivisions	Obligations of state and political subdivisions	$	137,215	$	—	$	137,215	$	—	OCI	Obligations of state and political subdivisions	$	134,000	$	—	$	134,000	$	—	OCI
Corporate bonds	Corporate bonds	$	13,777	$	—	$	13,777	$	—	OCI	Corporate bonds	$	38,495	$	—	$	38,495	$	—	OCI
Asset-backed securities	Asset-backed securities	$	1,909	$	—	$	1,909	$	—	OCI	Asset-backed securities	$	1,862	$	—	$	1,862	$	—	OCI

Derivative financial liabilities (interest rate contracts)	Derivative financial liabilities (interest rate contracts)	$	1,266	$	—	$	1,266	$	—	NI	Derivative financial liabilities (interest rate contracts)	$	1,085	$	—	$	1,085	$	—	NI
December 31, 2020
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies		$	228,651	$	—	$	228,651	$	—	OCI
SBA-backed securities		$	32,862	$	—	$	36,286	$	—	OCI
Debentures of government sponsored agencies		$	20,186	$	—	$	20,186	$	—	OCI

Obligations of state and political subdivisions		$	110,652	$	—	$	110,652	$	—	OCI

Derivative financial liabilities (interest rate contracts)		$	1,912	$	—	$	1,912	$	—	NI

1 Other comprehensive income ("OCI") or net income ("NI").

Page-9

Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2). Level 2 securities include

~~Page-9~~

asset-backed securities, obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, and corporate bonds. As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were no Level 3 securities.

Held-to-maturity securities may be written down to fair value as a result of an other-than-temporary impairment, ~~through a provision for credit losses in investments securities. We~~and we did not record any write-downs during the nine months ended September 30, ~~2021~~2022 or September 30, ~~2020.~~2021. Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities.

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. These unobservable inputs are not considered significant inputs to the fair value measurement overall. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as of the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties. We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities.

Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as ~~impaired~~individually analyzed loans that are collateral dependent and other real estate owned ("OREO").

OREO represents collateral acquired through foreclosure and is initially recorded at fair value as established by a current appraisal of the collateral. Subsequent to foreclosure, OREO is carried at the lower of cost or fair value, less estimated costs to sell. OREO values are reviewed on an ongoing basis and any subsequent decline in fair value is recorded as a foreclosed asset expense in the current period. The value of OREO is classified as Level 3. Our current OREO resulted from the ~~ARB Merger.~~American River Bankshares ("AMRB") merger in 2021.

The following table presents the carrying value of assets measured at fair value on a non-recurring basis and that were held in the consolidated statements of condition at each respective period end, by level within the fair value hierarchy as of September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.


(in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2022
Other real estate owned	$	455	$	—	$	—	$	455
December 31, 2021
Other real estate owned	$	800	$	—	$	—	$	800

(in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3)
September 30, 2021
Other real estate owned $ 800 $ — $ — $ 800
December 31, 2020
Other real estate owned $ — $ — $ — $ —

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Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI"), lease obligations and non-maturity deposit liabilities. Additionally, we held shares of Federal Home Loan Bank ("FHLB") of San Francisco

~~Page-10~~

stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of September 30, ~~2021~~2022 or December 31, ~~2020.~~2021. The values are discussed in Note 4, Investment Securities.


		September 30, 2021					December 31, 2020						September 30, 2022					December 31, 2021
(in thousands)	(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy	(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy
Financial assets (recorded at amortized cost):	Financial assets (recorded at amortized cost):											Financial assets (recorded at amortized cost):
Cash and cash equivalents	Cash and cash equivalents	$	584,739	$	584,739	Level 1	$	200,320	$	200,320	Level 1	Cash and cash equivalents	$	185,552	$	185,552	Level 1	$	347,641	$	347,641	Level 1
Investment securities held-to-maturity	Investment securities held-to-maturity	196,801		201,052		Level 2	109,036		115,185		Level 2	Investment securities held-to-maturity	959,867		829,048		Level 2	342,222		342,755		Level 2
Loans, net	Loans, net	2,294,605		2,305,003		Level 3	2,065,682		2,089,192		Level 3	Loans, net	2,135,373		2,123,520		Level 3	2,232,622		2,234,430		Level 3
Interest receivable	Interest receivable	10,898		10,898		Level 2	10,922		10,922		Level 2	Interest receivable	11,458		11,458		Level 2	11,889		11,889		Level 2
Financial liabilities (recorded at amortized cost):	Financial liabilities (recorded at amortized cost):											Financial liabilities (recorded at amortized cost):
Time deposits	Time deposits	140,173		140,385		Level 2	97,433		97,769		Level 2	Time deposits	139,815		139,553		Level 2	150,235		150,475		Level 2

Subordinated debenture		—		—		Level 3	2,777		3,115		Level 3

Interest payable	Interest payable	82		82		Level 2	97		97		Level 2	Interest payable	83		83		Level 2	81		81		Level 2

Fair value of loans is based on exit price techniques and obtained from an independent third-party that uses its proprietary valuation model and methodology and may ~~not reflect~~differ from actual orprice from a prospective ~~market valuations.~~buyer. The discounted cash flow valuation approach reflects key inputs and assumptions that are unobservable, such as loan probability of default, loss given default, prepayment speed, and market discount rates.

Fair value of fixed-rate time deposits is estimated by discounting future contractual cash flows using discount rates that reflect the current observable market rates offered for time deposits of similar remaining maturities.

~~Fair value of the subordinated debenture is estimated using a discounted cash flow approach based on current interest rates for similar financial instruments adjusted for credit and liquidity spreads.~~

The value of ~~unrecognized~~off-balance-sheet financial instruments is estimated based on the fee income associated with the commitments, which in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material as of September 30, ~~2021~~2022 or December 31, ~~2020.~~2021.

Note 4: Investment Securities

Our investment securities portfolio consists of U.S. Treasury securities, obligations of state and political subdivisions, ~~U.S. Corporations,~~ U.S. federal government agencies such as Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), U.S. government-sponsored enterprises ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and ~~FHLB.~~FHLB, U.S. Corporations and one asset-backed security collateralized by student loan pools. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, as reflected in the following table. ~~In addition, we hold an asset-backed security collateralized by student loan pools through the ARB acquisition.~~

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A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 is presented below.

Held-to-maturity:
Amortized Cost 1
Allowance for Credit Losses Net Carrying Amount Gross Unrealized Fair Value
(in thousands) Gains (Losses)
September 30, 2021
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA $ 70,085 $ — $ 70,085 $ 2,828 $ (38) $ 72,875
CMOs issued by FHLMC 42,275 — 42,275 1,114 (95) 43,294
CMOs issued by FNMA 5,598 — 5,598 163 — 5,761
SBA-backed securities 4,841 — 4,841 290 — 5,131
Debentures of government-sponsored agencies 51,470 — 51,470 — — 51,470
Obligations of state and political subdivisions 22,532 — 22,532 20 (31) 22,521
Total held-to-maturity $ 196,801 $ — $ 196,801 $ 4,415 $ (164) $ 201,052
December 31, 2020
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA $ 65,579 $ — $ 65,579 $ 3,924 $ — $ 69,503
CMOs issued by FHLMC 27,201 — 27,201 1,441 — 28,642
CMOs issued by FNMA 8,042 — 8,042 363 — 8,405
SBA-backed securities 6,547 — 6,547 400 — 6,947
Obligations of state and political subdivisions 1,667 — 1,667 21 — 1,688
Total held-to-maturity $ 109,036 $ — $ 109,036 $ 6,149 $ — $ 115,185
1 Amortized cost and fair values exclude accrued interest receivable of $451 thousand and $366 thousand at September 30, 2021 and December 31, 2020, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

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Held-to-maturity:	Amortized Cost 1		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized				Fair Value
(in thousands)							Gains		(Losses)
September 30, 2022
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	335,959	$	—	$	335,959	$	—	$	(53,659)	$	282,300
CMOs issued by FHLMC	236,061		—		236,061		—		(30,272)		205,789
CMOs issued by FNMA	115,043		—		115,043		—		(6,066)		108,977
CMOs issued by GNMA	32,070		—		32,070		—		(2,204)		29,866
SBA-backed securities	2,373		—		2,373		—		(143)		2,230
Debentures of government-sponsored agencies	145,747		—		145,747		—		(25,193)		120,554
Obligations of state and political subdivisions	62,614		—		62,614		—		(11,697)		50,917
Corporate bonds	30,000		—		30,000		—		(1,585)		28,415
Total held-to-maturity	$	959,867	$	—	$	959,867	$	—	$	(130,819)	$	829,048
December 31, 2021

Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	126,990	$	—	$	126,990	$	2,110	$	(712)	$	128,388
CMOs issued by FHLMC	106,851		—		106,851		668		(1,045)		106,474
CMOs issued by FNMA	4,866		—		4,866		128		—		4,994

SBA-backed securities	4,840		—		4,840		198		—		5,038
Debentures of government-sponsored agencies	51,472		—		51,472		—		(901)		50,571
Obligations of state and political subdivisions	47,203		—		47,203		296		(209)		47,290
Total held-to-maturity	$	342,222	$	—	$	342,222	$	3,400	$	(2,867)	$	342,755
1 Amortized cost and fair values exclude accrued interest receivable of $2.6 million and $1.1 million at September 30, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

Management measures expected credit losses on held-to-maturity securities ~~on a collective basis~~collectively by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued or guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions and corporate bonds, management ~~considers~~considers: (i) issuer and/or guarantor credit ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity,(iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. Based on the comprehensive analysis, no credit losses are expected.

The following table summarizes the amortized cost of our portfolio of held-to-maturity securities issued by states and political subdivisions and corporate bonds by Moody's and/or Standard & Poor's bond ratings as of September 30, ~~2021.~~2022.

Obligations of state and political subdivisions
(in thousands) September 30, 2021 December 31, 2020
AAA $ 7,455 $ —
AA 14,975 1,461
A 102 206
Total $ 22,532 $ 1,667


	Obligations of state and political subdivisions				Corporate bonds
(in thousands)	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
AAA / Aaa	$	43,087	$	34,229	$	—	$	—
AA / Aa	19,527		12,873		—		—
A2 / A	—		101		30,000		—
Total	$	62,614	$	47,203	$	30,000	$	—

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A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 is presented below.


Available-for-sale:	Available-for-sale:	Amortized Cost 1		Gross Unrealized				Allowance for Credit Losses		Fair Value		Available-for-sale:	Amortized Cost 1		Gross Unrealized				Allowance for Credit Losses		Fair Value
(in thousands)	(in thousands)			Gains		(Losses)						(in thousands)			Gains		(Losses)
September 30, 2021
September 30, 2022												September 30, 2022
Securities of U.S. government-sponsored enterprises:	Securities of U.S. government-sponsored enterprises:											Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	207,557	$	1,925	$	(243)	$	—	$	209,239	MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	113,941	$	3	$	(13,702)	$	—	$	100,242
CMOs issued by FHLMC	CMOs issued by FHLMC	363,708		5,045		(1,065)		—		367,688		CMOs issued by FHLMC	357,486		—		(35,575)		—		321,911
CMOs issued by FNMA	CMOs issued by FNMA	55,178		244		(211)		—		55,211		CMOs issued by FNMA	38,125		—		(4,177)		—		33,948
CMOs issued by GNMA	CMOs issued by GNMA	61,411		232		(249)		—		61,394		CMOs issued by GNMA	36,747		—		(3,459)		—		33,288
SBA-backed securities	SBA-backed securities	33,422		1,323		(136)		—		34,609		SBA-backed securities	48,372		4		(3,585)		—		44,791
Debentures of government- sponsored agencies	Debentures of government- sponsored agencies	71,328		63		(1,177)		—		70,214		Debentures of government- sponsored agencies	149,106		—		(14,185)		—		134,921

U.S. Treasury securities	U.S. Treasury securities	11,881		—		(104)		—		11,777		U.S. Treasury securities	11,899		—		(1,741)		—		10,158
Obligations of state and political subdivisions	Obligations of state and political subdivisions	131,865		5,519		(169)		—		137,215		Obligations of state and political subdivisions	117,161		—		(18,734)		—		98,427
Corporate bonds	Corporate bonds	14,014		—		(237)		—		13,777		Corporate bonds	36,989		—		(3,787)		—		33,202
Asset-backed securities	Asset-backed securities	1,914		—		(5)		—		1,909		Asset-backed securities	1,650		—		(45)		—		1,605
Total available-for-sale	Total available-for-sale	$	952,278	$	14,351	$	(3,596)	$	—	$	963,033	Total available-for-sale	$	911,476	$	7	$	(98,990)	$	—	$	812,493
December 31, 2020
December 31, 2021												December 31, 2021
Securities of U.S. government-sponsored enterprises:	Securities of U.S. government-sponsored enterprises:											Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA		$	50,686	$	2,530	$	—	$	—	$	53,216
MBS pass-through securities issued by FHLMC, FNMA and GNMA												MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	316,090	$	1,224	$	(2,784)	$	—	$	314,530
CMOs issued by FHLMC	CMOs issued by FHLMC	143,267		7,925		(1)		—		151,191		CMOs issued by FHLMC	343,047		3,209		(4,829)		—		341,427
CMOs issued by FNMA	CMOs issued by FNMA	16,450		580		—		—		17,030		CMOs issued by FNMA	48,187		152		(611)		—		47,728
CMOs issued by GNMA	CMOs issued by GNMA	6,863		351		—		—		7,214		CMOs issued by GNMA	56,345		99		(553)		—		55,891
SBA-backed securities	SBA-backed securities	30,941		1,976		(55)		—		32,862		SBA-backed securities	32,640		993		(155)		—		33,478
Debentures of government- sponsored agencies	Debentures of government- sponsored agencies	19,944		266		(24)		—		20,186		Debentures of government- sponsored agencies	191,449		25		(2,947)		—		188,527

U.S. Treasury securities												U.S. Treasury securities	11,886		—		(256)				11,630
Obligations of state and political subdivisions	Obligations of state and political subdivisions	104,887		5,765		—		—		110,652		Obligations of state and political subdivisions	129,009		5,372		(381)		—		134,000

Corporate bonds												Corporate bonds	39,001		—		(506)		—		38,495
Asset-backed securities												Asset-backed securities	1,866		—		(4)		—		1,862
Total available-for-sale	Total available-for-sale	$	373,038	$	19,393	$	(80)	$	—	$	392,351	Total available-for-sale	$	1,169,520	$	11,074	$	(13,026)	$	—	$	1,167,568
1 Amortized cost and fair value exclude accrued interest receivable of $2.9 million and $1.9 million September 30, 2021 and December 31, 2020, which is included in interest receivable and other assets in the consolidated statements of condition.
1 Amortized cost and fair value exclude accrued interest receivable of $3.1 million and $3.7 million at September 30, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.												1 Amortized cost and fair value exclude accrued interest receivable of $3.1 million and $3.7 million at September 30, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies. In March 2022, we transferred $357.5 million of these securities from available-for-sale to held-to-maturity at fair value. We intend and have the ability to hold these securities to maturity. The net unrealized pre-tax loss of $14.8 million that remained and the related accumulated other comprehensive loss are accreted to interest income over the remaining lives of the securities. Because these entries offset each other, there is no impact to net income.

The amortized cost and fair value of investment debt securities by contractual maturity at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.


		September 30, 2021								December 31, 2020									September 30, 2022								December 31, 2021
		Held-to-Maturity				Available-for-Sale				Held-to-Maturity				Available-for-Sale					Held-to-Maturity				Available-for-Sale				Held-to-Maturity				Available-for-Sale
(in thousands)	(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	Within one year	$	102	$	104	$	11,700	$	11,818	$	246	$	250	$	11,530	$	11,687	Within one year	$	453	$	450	$	1,831	$	1,813	$	101	$	103	$	10,785	$	10,841
After one but within five years	After one but within five years	23,536		24,725		75,784		77,755		7,550		7,961		59,028		62,397		After one but within five years	90,541		86,684		273,040		251,164		25,666		26,559		219,474		219,957
After five years through ten years	After five years through ten years	51,125		53,105		314,110		318,801		52,113		55,872		144,908		154,089		After five years through ten years	260,148		220,313		256,608		228,766		182,604		182,303		299,937		300,187
After ten years	After ten years	122,038		123,118		550,684		554,659		49,127		51,102		157,572		164,178		After ten years	608,725		521,601		379,997		330,750		133,851		133,790		639,324		636,583
Total	Total	$	196,801	$	201,052	$	952,278	$	963,033	$	109,036	$	115,185	$	373,038	$	392,351	Total	$	959,867	$	829,048	$	911,476	$	812,493	$	342,222	$	342,755	$	1,169,520	$	1,167,568

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Sales of investment securities and gross gains and losses are shown in the following ~~table:~~table.


		Three months ended				Nine months ended					Three months ended				Nine months ended
(in thousands)	(in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		(in thousands)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Available-for-sale:	Available-for-sale:									Available-for-sale:
Sales proceeds	Sales proceeds	$	4,099	$	—	$	4,099	$	33,756	Sales proceeds	$	10,664	$	4,099	$	10,664	$	4,099
Gross realized gains	Gross realized gains	1		—		1		916		Gross realized gains	17		1		17		1
Gross realized losses	Gross realized losses	—		—		—		(1)		Gross realized losses	(80)		—		(80)		—

~~Page-13~~

Pledged investment securities are shown in the following table:


(in thousands)	(in thousands)	September 30, 2021		December 31, 2020		(in thousands)	September 30, 2022		December 31, 2021
Pledged to the State of California:	Pledged to the State of California:					Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	Secure public deposits in compliance with the Local Agency Security Program	$	234,390	$	131,051	Secure public deposits in compliance with the Local Agency Security Program	$	193,479	$	213,861
Collateral for trust deposits	Collateral for trust deposits	738		751		Collateral for trust deposits	656		729
Collateral for Wealth Management and Trust Services checking account	Collateral for Wealth Management and Trust Services checking account	622		629		Collateral for Wealth Management and Trust Services checking account	554		614
Total investment securities pledged to the State of California	Total investment securities pledged to the State of California	235,750		132,431		Total investment securities pledged to the State of California	194,689		215,204
Bankruptcy trustee deposits pledged with Federal Reserve Bank	Bankruptcy trustee deposits pledged with Federal Reserve Bank	2,845		—		Bankruptcy trustee deposits pledged with Federal Reserve Bank	1,844		2,645
Total pledged investment securities	Total pledged investment securities	$	238,595	$	132,431	Total pledged investment securities	$	196,533	$	217,849

There were ~~165~~409 and 10217 securities in unrealized loss positions at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:


September 30, 2021		< 12 continuous months				≥ 12 continuous months				Total securities in a loss position
September 30, 2022														September 30, 2022	< 12 continuous months				≥ 12 continuous months				Total securities in a loss position
(in thousands)	(in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss		(in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Held-to-maturity:	Held-to-maturity:													Held-to-maturity:
MBS pass-through securities issued by FHLMC and FNMA		$	17,074	$	(38)	$	—	$	—	$	17,074	$	(38)

MBS pass-through securities issued by FHLMC, FNMA and GNMA														MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	203,739	$	(36,140)	$	78,562	$	(17,519)	$	282,301	$	(53,659)
CMOs issued by FHLMC	CMOs issued by FHLMC	9,320		(95)		—		—		9,320		(95)		CMOs issued by FHLMC	144,517		(18,126)		51,272		(12,146)		195,789		(30,272)

CMOs issued by FNMA														CMOs issued by FNMA	108,978		(6,066)		—		—		108,978		(6,066)
CMOs issued by GNMA														CMOs issued by GNMA	19,059		(735)		10,807		(1,469)		29,866		(2,204)
SBA-backed securities														SBA-backed securities	2,230		(143)		—		—		2,230		(143)
Debentures of government-sponsored agencies														Debentures of government-sponsored agencies	54,445		(6,704)		66,109		(18,489)		120,554		(25,193)
Obligations of state and political subdivisions	Obligations of state and political subdivisions	10,194		(31)		—		—		10,194		(31)		Obligations of state and political subdivisions	35,899		(7,399)		15,018		(4,298)		50,917		(11,697)
Corporate bonds														Corporate bonds	28,415		(1,585)		—		—		28,415		(1,585)
Total held-to-maturity	Total held-to-maturity	36,588		(164)		—		—		36,588		(164)		Total held-to-maturity	597,282		(76,898)		221,768		(53,921)		819,050		(130,819)
Available-for-sale:	Available-for-sale:													Available-for-sale:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	MBS pass-through securities issued by FHLMC, FNMA and GNMA	63,171		(243)		—		—		63,171		(243)		MBS pass-through securities issued by FHLMC, FNMA and GNMA	54,639		(6,702)		44,711		(7,000)		99,350		(13,702)
CMOs issued by FHLMC	CMOs issued by FHLMC	142,557		(1,065)		—		—		142,557		(1,065)		CMOs issued by FHLMC	192,988		(17,898)		128,923		(17,677)		321,911		(35,575)
CMOs issued by FNMA	CMOs issued by FNMA	25,256		(211)		—		—		25,256		(211)		CMOs issued by FNMA	7,310		(514)		26,638		(3,663)		33,948		(4,177)
CMOs issued by GNMA	CMOs issued by GNMA	25,879		(249)		—		—		25,879		(249)		CMOs issued by GNMA	11,248		(399)		22,039		(3,060)		33,287		(3,459)
SBA-backed securities	SBA-backed securities	8,115		(93)		1,307		(43)		9,422		(136)		SBA-backed securities	37,629		(3,443)		6,649		(142)		44,278		(3,585)
Debentures of government- sponsored agencies	Debentures of government- sponsored agencies	50,344		(1,021)		3,812		(156)		54,156		(1,177)		Debentures of government- sponsored agencies	128,077		(12,060)		6,844		(2,125)		134,921		(14,185)
U.S. Treasury securities	U.S. Treasury securities	11,777		(104)		—		—		11,777		(104)		U.S. Treasury securities	—		—		10,159		(1,741)		10,159		(1,741)

Obligations of state and political subdivisions	Obligations of state and political subdivisions	16,494		(169)		—		—		16,494		(169)		Obligations of state and political subdivisions	84,021		(15,366)		14,406		(3,368)		98,427		(18,734)
Corporate bonds	Corporate bonds	13,778		(237)		—		—		13,778		(237)		Corporate bonds	23,221		(1,779)		9,981		(2,008)		33,202		(3,787)
Asset-backed securities	Asset-backed securities	1,909		(5)		—		—		1,909		(5)		Asset-backed securities	1,606		(45)		—		—		1,606		(45)
Total available-for-sale	Total available-for-sale	359,280		(3,397)		5,119		(199)		364,399		(3,596)		Total available-for-sale	540,739		(58,206)		270,350		(40,784)		811,089		(98,990)
Total securities at loss position	Total securities at loss position	$	395,868	$	(3,561)	$	5,119	$	(199)	$	400,987	$	(3,760)	Total securities at loss position	$	1,138,021	$	(135,104)	$	492,118	$	(94,705)	$	1,630,139	$	(229,809)

December 31, 2020 < 12 continuous months ≥ 12 continuous months Total securities
in a loss position
(in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss
Available-for-sale:
CMOs issued by FHLMC $ 5,975 $ (1) $ — $ — $ 5,975 $ (1)
SBA-backed securities — — 1,790 (55) 1,790 (55)
Debentures of government- sponsored agencies 3,943 (24) — — 3,943 (24)
Total securities at loss position $ 9,918 $ (25) $ 1,790 $ (55) $ 11,708 $ (80)

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December 31, 2021	< 12 continuous months				≥ 12 continuous months				Total securities in a loss position
(in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Held-to-maturity:
MBS pass-through securities issued by FHLMC and FNMA	$	76,619	$	(712)	$	—	$	—	$	76,619	$	(712)

CMOs issued by FHLMC	54,811		(1,045)		—		—		54,811		(1,045)
Obligations of state and political subdivisions	19,203		(209)		—		—		19,203		(209)
Debentures of government-sponsored agencies	50,571		(901)		—		—		50,571		(901)
Total held-to-maturity	201,204		(2,867)		—		—		201,204		(2,867)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	263,474		(2,784)		—		—		263,474		(2,784)
SBA-backed securities	7,478		(112)		1,209		(43)		8,687		(155)
CMOs issued by FHLMC	226,175		(4,677)		4,415		(152)		230,590		(4,829)
CMOs issued by GNMA	44,790		(553)		—		—		44,790		(553)
CMOs issued by FNMA	37,348		(611)		—		—		37,348		(611)
Debentures of government- sponsored agencies	148,979		(2,527)		8,549		(420)		157,528		(2,947)
U.S. Treasury securities	11,629		(256)		—		—		11,629		(256)
Obligations of state and political subdivisions	17,552		(381)		—		—		17,552		(381)
Corporate Bonds	38,495		(506)		—		—		38,495		(506)

Asset-backed securities	1,861		(4)		—		—		1,861		(4)
Total available-for-sale	797,781		(12,411)		14,173		(615)		811,954		(13,026)
Total securities at loss position	$	998,985	$	(15,278)	$	14,173	$	(615)	$	1,013,158	$	(15,893)

As of September 30, ~~2021,~~2022, the investment portfolio included 6173 investment securities that had been in a continuous loss position for twelve months or more and ~~159~~236 investment securities that had been in a loss position for less than twelve months.

~~Page-14~~

Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities.

Our investment in obligations of state and political subdivisions bonds are deemed credit worthy after our comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or credit enhancements.

At September 30, ~~2021,~~2022, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost. No allowances for credit losses have been recognized on available-for-sale securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality at September 30, ~~2021.~~2022.

Non-Marketable Securities Included in Other Assets

FHLB Capital Stock

As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $100 per share par value. We held $16.7 million ~~and $11.9 million~~ of FHLB stock included in other assets on the consolidated statements of condition at both September 30, ~~2021~~2022 and December 31, ~~2020, respectively.~~2021. The carrying

Page-15

amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and they do not have a readily determinable market value. Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021. On October ~~28, 2021,~~27, 2022, FHLB announced a cash dividend for the third quarter of ~~2021~~2022 at an annualized dividend rate of ~~6.00%~~7.00% to be distributed in mid-November ~~2021.~~2022. Cash dividends paid on FHLB capital stock are recorded as non-interest income.

VISA Inc. Class B Common Stock

As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021. These shares have a carrying value of zero and are restricted from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction and the uncertainty on the conversion rate to Class A shares, these shares lack a readily determinable fair value. When converting this Class B common stock to Class A common stock based on the estimated conversion rate of ~~1.6228 both~~1.6059 and 1.6181 at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been ~~$3.8~~$3.0 million and $3.7 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The conversion rate is subject to further adjustment upon the final settlement of the covered litigation against Visa Inc. and its member banks. As such, the fair value of these Class B shares can differ significantly from their converted values. For further information, refer to Note 8, Commitments and Contingencies.

Low Income Housing Tax Credits

We invest in low-income housing tax credit funds as a limited partner, which totaled ~~$3.2~~$2.6 million and ~~$3.5~~$3.0 million recorded in other assets as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. In the first nine months of ~~2021,~~2022, we recognized ~~$484~~$475 thousand of low-income housing tax credits and other tax benefits, offset by ~~$406~~$400 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of September 30, ~~2021,~~2022, our unfunded commitments for these low-income housing tax credit funds totaled ~~$425~~$392 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first nine months of ~~2021~~2022 or ~~2020,~~2021, as the value of the future tax benefits exceeds the carrying value of the investments.

~~Page-15~~

Note 5: Loans and Allowance for Credit Losses on Loans

Under the accounting relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act passed in March 2020, we postponed the adoption of the CECL standard from January 1, 2020 to December 31, 2020. Upon adoption we used a modified retrospective method effective October 1, 2020 (the beginning of the first reporting period in which the standard was effective due to the postponement of CECL) through a cumulative adjustment to retained earnings. The cumulative adjustment to retained earnings was recorded, net of taxes, based on economic forecasts and other assumptions as of December 31, 2019. Results for reporting periods beginning after September 30, 2020 have been presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the CECL accounting standards and have not been included below. Refer to Notes 1 and 3 under Part II, Item 8, of our 2020 Form 10-K for additional information regarding the adoption of CECL. In addition, refer to Note 5 under Part I, Item 1, of our September 30, 2020 Form 10-Q for prior period information.

The following table presents the amortized cost of loans by class as of September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

(in thousands) September 30, 2021 December 31, 2020
Commercial and industrial $ 377,965 $ 498,408
Real estate:
  Commercial owner-occupied 398,543 304,963
  Commercial investor-owned 1,157,344 961,208
  Construction 125,060 73,046
  Home equity 92,396 104,813
  Other residential 117,778 123,395
Installment and other consumer loans 47,933 22,723
Total loans, at amortized cost 1
2,317,019 2,088,556
Allowance for credit losses on loans (22,414) (22,874)
Total loans, net $ 2,294,605 $ 2,065,682


(in thousands)	September 30, 2022		December 31, 2021
Commercial and industrial	$	207,488	$	301,602
Real estate:
Commercial owner-occupied	368,415		392,345
Commercial investor-owned	1,211,651		1,189,021
Construction	112,154		119,840
Home equity	89,244		88,746
Other residential	114,247		114,558
Installment and other consumer loans	55,137		49,533
Total loans, at amortized cost 1	2,158,336		2,255,645
Allowance for credit losses on loans	(22,963)		(23,023)
Total loans, net of allowance for credit losses on loans	$	2,135,373	$	2,232,622

1 Amortized cost includes net deferred loan origination ~~fees~~costs (fees) of ~~$(2.9)~~$1.6 million and ~~$(4.9) million~~$(901) thousand at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Amounts are also net of unrecognized purchase discounts of ~~$2,834 thousand~~$2.6 million and ~~$815 thousand~~$2.5 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Amortized cost excludes accrued interest, which totaled ~~$7.7~~$5.8 million and ~~$8.8~~$7.1 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.

Lending Risks

Commercial and Industrial Loans - Commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and

Page-16

acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable and inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress. A weakened economy, and resultant decreased consumer and/or business spending, may have an effect on the credit quality of commercial loans.

~~In April~~Pursuant to the 2020 ~~the~~CARES Act, Bank ~~began participating~~of Marin originated 2,876 guaranteed loans totaling $444.1 million in two rounds of the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). Additionally in 2021, Bank of Marin assumed 113 PPP loans totaling $18.6 million from AMRB as of the merger date. As of September 30, ~~2021,~~2022, there were ~~871~~42 PPP loans outstanding ~~including 31 loans~~ totaling ~~$9.6 million that ARB financed prior to the merger date. PPP loans totaling $164.8~~$7.6 million (net of ~~$4.2~~$161 thousand in unrecognized fees and costs), compared to 368 loans outstanding at December 31, 2021 totaling $111.2 million (net of $2.5 million in unrecognized fees and costs) ~~and $291.6 million (net of $5.4 million in unrecognized fees and costs) as of September 30, 2021 and December 31, 2020, respectively, were~~ included in commercial and industrial loan balances. Of the 871 PPP loans outstanding as of September 30, 2021, 790 loans totaling $123.9 million were funded by Bank of Marin and ARB during the first half of 2021 under the second round of the PPP stimulus plan. PPP loans have terms of two to five years and earn interest at 1%. In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was netted with loan origination costs and accreted/amortized into interest income using the effective yield method over the contractual life of each loan. The recognition of fees and

~~Page-16~~

costs is accelerated when the SBA forgives the loan and/or the loan is paid off prior to maturity. PPP loans are fully guaranteed by the SBA ~~and have virtually no risk~~if they meet the requirements of ~~loss. We expect~~the program. As expected, the vast majority of the PPP loans ~~to be~~have been fully forgiven by the ~~SBA.~~SBA and we expect the majority of remaining loans to be forgiven as well.

Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow from either the business or investment property and supported by real property collateral. Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios. Furthermore, a large majority of our loans are guaranteed by the owners of the properties. Conditions in the real estate markets or downturn in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio.

Construction Loans - Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loans include interest reserves that are used for the payment of interest during the development and marketing periods and are capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project.

Consumer Loans - Consumer loans primarily consist of home equity lines of credit, other residential loans, floating homes, and indirect luxury auto loans, along with a small number of installment loans. Our other residential loans include tenancy-in-common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores or collateral with high loan-to-value ratios.

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Credit Quality Indicators

We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of “Special Mention” risk graded loans, or worse, are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows:

Pass and Watch - Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt-service-coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period.

Special Mention - Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification.

~~Page-17~~

Substandard - Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies.

Doubtful - Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent.

We regularly review our credits for accuracy of risk grades whenever we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.

The following tables present the loan portfolio by loan class, origination year and internal risk rating as of September 30, ~~2021~~2022 and December 31, ~~2020.~~ 2021. We early adopted the vintage disclosure requirements of ASU 2022-02 prospectively as described in Note 2 beginning with the first quarter of 2022. Accordingly, the 2022 vintage table reflects gross charge-offs by loan class and year of origination. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination.

(in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost
September 30, 2021 2021 2020 2019 2018 2017 Prior Total
Commercial and industrial:
Pass $ 130,037 $ 54,621 $ 28,941 $ 18,245 $ 3,044 $ 33,707 $ 101,044 $ 369,639
Special Mention — 1,787 613 346 — 2 4,037 6,785
Substandard — — — — — — 1,541 1,541
Total commercial and industrial $ 130,037 $ 56,408 $ 29,554 $ 18,591 $ 3,044 $ 33,709 $ 106,622 $ 377,965
Commercial real estate, owner-occupied:
Pass $ 40,399 $ 43,782 $ 50,976 $ 53,139 $ 42,410 $ 109,020 $ — $ 339,726
Special Mention — — — 7,889 16,418 20,110 — 44,417
Substandard — 7,155 289 — — 6,838 — 14,282
Doubtful — 118 — — — — — 118
Total commercial real estate, owner-occupied $ 40,399 $ 51,055 $ 51,265 $ 61,028 $ 58,828 $ 135,968 $ — $ 398,543
Commercial real estate, investor-owned:
Pass $ 153,943 $ 188,064 $ 188,508 $ 135,653 $ 83,895 $ 352,715 $ 90 $ 1,102,868
Special Mention — 1,210 2,715 19,345 1,796 27,167 — 52,233
Substandard — — — 709 — 1,534 — 2,243
Total commercial real estate, investor-owned $ 153,943 $ 189,274 $ 191,223 $ 155,707 $ 85,691 $ 381,416 $ 90 $ 1,157,344
Construction:
Pass $ 26,902 $ 63,355 $ 25,696 $ 9,107 $ — $ — $ — $ 125,060
Total construction $ 26,902 $ 63,355 $ 25,696 $ 9,107 $ — $ — $ — $ 125,060
Home equity:
Pass $ — $ — $ — $ — $ — $ 259 $ 91,333 $ 91,592
Substandard — — — — — 384 420 804
Total home equity $ — $ — $ — $ — $ — $ 643 $ 91,753 $ 92,396
Other residential:
Pass $ 14,229 $ 32,700 $ 26,347 $ 17,476 $ 8,374 $ 18,652 $ — $ 117,778
Total other residential $ 14,229 $ 32,700 $ 26,347 $ 17,476 $ 8,374 $ 18,652 $ — $ 117,778
Installment and other consumer:
Pass $ 12,311 $ 8,514 $ 11,620 $ 5,777 $ 1,129 $ 6,833 $ 1,749 $ 47,933
Total installment and other consumer $ 12,311 $ 8,514 $ 11,620 $ 5,777 $ 1,129 $ 6,833 $ 1,749 $ 47,933
Total loans:
Pass $ 377,821 $ 391,036 $ 332,088 $ 239,397 $ 138,852 $ 521,186 $ 194,216 $ 2,194,596
Total Special Mention $ — $ 2,997 $ 3,328 $ 27,580 $ 18,214 $ 47,279 $ 4,037 $ 103,435
Total Substandard $ — $ 7,155 $ 289 $ 709 $ — $ 8,756 $ 1,961 $ 18,870
Total Doubtful $ — $ 118 $ — $ — $ — $ — $ — $ 118
Totals $ 377,821 $ 401,306 $ 335,705 $ 267,686 $ 157,066 $ 577,221 $ 200,214 $ 2,317,019


(in thousands)	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost
September 30, 2022	2022		2021		2020		2019		2018		Prior				Total
Commercial and industrial:
Pass and Watch	$	10,791	$	11,634	$	8,266	$	22,979	$	6,007	$	25,989	$	114,750	$	200,416
Special Mention	—		—		—		477		4,166		—		403		5,046
Substandard	—		—		1,361		—		—		665		—		2,026
Total commercial and industrial	$	10,791	$	11,634	$	9,627	$	23,456	$	10,173	$	26,654	$	115,153	$	207,488
Gross current period charge-offs	$	—	$	—	$	(9)	$	—	$	—	$	—	$	—	$	(9)

Commercial real estate, owner-occupied:
Pass and Watch	$	52,024	$	52,909	$	41,096	$	45,607	$	30,178	$	108,888	$	—	$	330,702
Special Mention	—		16,336		—		309		5,284		4,532		—		26,461
Substandard	—		—		7,127		1,758		—		2,266		—		11,151
Doubtful	—		—		101		—		—		—		—		101
Total commercial real estate, owner-occupied	$	52,024	$	69,245	$	48,324	$	47,674	$	35,462	$	115,686	$	—	$	368,415

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(in thousands)	(in thousands)	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost				(in thousands)	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost
December 31, 2020		2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost		Total
Commercial and industrial:
Pass		$	308,237	$	22,589	$	12,596	$	4,508	$	5,915	$	34,282	$	85,889	$	474,016
September 30, 2022																		September 30, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost		Revolving Loans Amortized Cost		Total
Commercial real estate, investor-owned:																		Commercial real estate, investor-owned:															Revolving Loans Amortized Cost
Pass and Watch																		Pass and Watch	$	157,021	$	219,857	$	156,190	$	165,464	$	128,149	$	332,987	$	65	$	1,159,733
Special Mention	Special Mention	—		2,034		1,318		141		11		49		19,092		22,645		Special Mention	—		1,178		12,157		3,961		6,002		9,384		—		32,682
Substandard	Substandard	1,747		—		—		—		—		—		—		1,747		Substandard	—		—		—		—		—		19,236		—		19,236
Total commercial and industrial		$	309,984	$	24,623	$	13,914	$	4,649	$	5,926	$	34,331	$	104,981	$	498,408
Commercial real estate, owner-occupied:
Pass		$	31,029	$	27,581	$	32,603	$	43,843	$	12,768	$	101,014	$	—	$	248,838
Special Mention		—		—		11,764		17,062		7,343		6,601		—		42,770
Substandard		7,147		—		—		—		6,208		—		—		13,355
Total commercial real estate, owner-occupied		$	38,176	$	27,581	$	44,367	$	60,905	$	26,319	$	107,615	$	—	$	304,963
Commercial real estate, investor-owned:
Pass		$	162,300	$	144,751	$	173,955	$	100,842	$	94,862	$	253,611	$	117	$	930,438
Special Mention		—		10,695		—		1,819		—		8,124		—		20,638
Substandard		—		2,716		4,435		—		1,553		1,428		—		10,132

Total commercial real estate, investor-owned	Total commercial real estate, investor-owned	$	162,300	$	158,162	$	178,390	$	102,661	$	96,415	$	263,163	$	117	$	961,208	Total commercial real estate, investor-owned	$	157,021	$	221,035	$	168,347	$	169,425	$	134,151	$	361,607	$	65	$	1,211,651

Construction:	Construction:																	Construction:
Pass		$	31,654	$	30,150	$	11,242	$	—	$	—	$	—	$	—	$	73,046
Pass and Watch																		Pass and Watch	$	42,163	$	16,897	$	36,239	$	7,744	$	9,111	$	—	$	—	$	112,154

Total construction	Total construction	$	31,654	$	30,150	$	11,242	$	—	$	—	$	—	$	—	$	73,046	Total construction	$	42,163	$	16,897	$	36,239	$	7,744	$	9,111	$	—	$	—	$	112,154

Home equity:	Home equity:																	Home equity:
Pass		$	—	$	—	$	—	$	—	$	128	$	694	$	102,614	$	103,436
Special Mention		—		—		—		—		—		—		799		799
Pass and Watch																		Pass and Watch	$	—	$	—	$	—	$	—	$	—	$	742	$	87,685	$	88,427

Substandard	Substandard	—		—		—		—		—		391		187		578		Substandard	—		—		—		—		—		499		318		817
Total home equity	Total home equity	$	—	$	—	$	—	$	—	$	128	$	1,085	$	103,600	$	104,813	Total home equity	$	—	$	—	$	—	$	—	$	—	$	1,241	$	88,003	$	89,244

Other residential:	Other residential:																	Other residential:
Pass		$	34,447	$	31,079	$	23,673	$	10,574	$	6,035	$	17,587	$	—	$	123,395
Pass and Watch																		Pass and Watch	$	16,623	$	15,383	$	29,942	$	22,385	$	11,438	$	18,476	$	—	$	114,247

Total other residential	Total other residential	$	34,447	$	31,079	$	23,673	$	10,574	$	6,035	$	17,587	$	—	$	123,395	Total other residential	$	16,623	$	15,383	$	29,942	$	22,385	$	11,438	$	18,476	$	—	$	114,247

Installment and other consumer:	Installment and other consumer:																	Installment and other consumer:
Pass		$	2,361	$	4,382	$	3,483	$	1,543	$	3,423	$	4,921	$	2,593	$	22,706
Pass and Watch																		Pass and Watch	15,579		$	14,591	$	6,168	$	6,837	$	4,428	$	6,656	$	786	$	55,045

Substandard	Substandard	—		—		—		17		—		—		—		17		Substandard	—		—		—		—		—		92		—		92
Total installment and other consumer	Total installment and other consumer	$	2,361	$	4,382	$	3,483	$	1,560	$	3,423	$	4,921	$	2,593	$	22,723	Total installment and other consumer	$	15,579	$	14,591	$	6,168	$	6,837	$	4,428	$	6,748	$	786	$	55,137
Gross current period charge-offs																		Gross current period charge-offs	$	—	$	—	$	—	$	—	$	—	$	(18)	$	(5)	$	(23)
Total loans:	Total loans:																	Total loans:
Pass		$	570,028	$	260,532	$	257,552	$	161,310	$	123,131	$	412,109	$	191,213	$	1,975,875
Pass and Watch																		Pass and Watch	$	294,201	$	331,271	$	277,901	$	271,016	$	189,311	$	493,738	$	203,286	$	2,060,724
Total Special Mention	Total Special Mention	$	—	$	12,729	$	13,082	$	19,022	$	7,354	$	14,774	$	19,891	$	86,852	Total Special Mention	$	—	$	17,514	$	12,157	$	4,747	$	15,452	$	13,916	$	403	$	64,189
Total Substandard	Total Substandard	$	8,894	$	2,716	$	4,435	$	17	$	7,761	$	1,819	$	187	$	25,829	Total Substandard	$	—	$	—	$	8,488	$	1,758	$	—	$	22,758	$	318	$	33,322
Total Doubtful																		Total Doubtful	$	—	$	—	$	101	$	—	$	—	$	—	$	—	$	101
Totals	Totals	$	578,922	$	275,977	$	275,069	$	180,349	$	138,246	$	428,702	$	211,291	$	2,088,556	Totals	$	294,201	$	348,785	$	298,647	$	277,521	$	204,763	$	530,412	$	204,007	$	2,158,336
Total gross current period charge-offs																		Total gross current period charge-offs	$	—	$	—	$	(9)	$	—	$	—	$	(18)	$	(5)	$	(32)


(in thousands)	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost
December 31, 2021	2021		2020		2019		2018		2017		Prior				Total
Commercial and industrial:
Pass and Watch	$	96,643	$	35,967	$	25,754	$	12,763	$	2,729	$	31,280	$	90,744	$	295,880
Special Mention	—		1,700		584		273		—		—		2,088		4,645
Substandard	—		—		—		—		—		—		1,077		1,077
Total commercial and industrial	$	96,643	$	37,667	$	26,338	$	13,036	$	2,729	$	31,280	$	93,909	$	301,602
Commercial real estate, owner-occupied:
Pass and Watch	$	58,395	$	43,216	$	49,485	$	36,174	$	42,430	$	104,898	$	—	$	334,598
Special Mention	16,748		—		—		7,846		—		16,996		—		41,590
Substandard	—		7,155		285		—		—		8,603		—		16,043
Doubtful	—		114		—		—		—		—		—		114
Total commercial real estate, owner-occupied	$	75,143	$	50,485	$	49,770	$	44,020	$	42,430	$	130,497	$	—	$	392,345
Commercial real estate, investor-owned:
Pass and Watch	$	225,722	$	186,214	$	187,418	$	143,028	$	75,419	$	325,882	$	84	$	1,143,767
Special Mention	—		1,214		2,714		11,773		1,787		9,540		—		27,028
Substandard	—		—		—		695		—		17,531		—		18,226
Total commercial real estate, investor-owned	$	225,722	$	187,428	$	190,132	$	155,496	$	77,206	$	352,953	$	84	$	1,189,021
Construction:
Pass and Watch	$	31,269	$	70,528	$	8,935	$	9,108	$	—	$	—	$	—	$	119,840


Total construction	$	31,269	$	70,528	$	8,935	$	9,108	$	—	$	—	$	—	$	119,840
Home equity:
Pass and Watch	$	—	$	—	$	—	$	—	$	10	$	268	$	87,693	$	87,971

Substandard	—		—		—		—		—		377		398		775
Total home equity	$	—	$	—	$	—	$	—	$	10	$	645	$	88,091	$	88,746
Other residential:
Pass and Watch	$	15,800	$	31,981	$	25,529	$	15,411	$	7,964	$	17,873	$	—	$	114,558


Total other residential	$	15,800	$	31,981	$	25,529	$	15,411	$	7,964	$	17,873	$	—	$	114,558
Installment and other consumer:
Pass and Watch	$	17,207	$	7,748	$	9,436	$	5,633	$	1,123	$	6,620	$	1,766	$	49,533


Total installment and other consumer	$	17,207	$	7,748	$	9,436	$	5,633	$	1,123	$	6,620	$	1,766	$	49,533
Total loans:
Pass and Watch	$	445,036	$	375,654	$	306,557	$	222,117	$	129,675	$	486,821	$	180,287	$	2,146,147
Total Special Mention	$	16,748	$	2,914	$	3,298	$	19,892	$	1,787	$	26,536	$	2,088	$	73,263
Total Substandard	$	—	$	7,155	$	285	$	695	$	—	$	26,511	$	1,475	$	36,121
Doubtful	$	—	$	114	$	—	$	—	$	—	$	—	$	—	$	114
Totals	$	461,784	$	385,837	$	310,140	$	242,704	$	131,462	$	539,868	$	183,850	$	2,255,645

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The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.


Loan Aging Analysis by Class	Loan Aging Analysis by Class																	Loan Aging Analysis by Class
(in thousands)	(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Total		(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Total
September 30, 2021
September 30, 2022																		September 30, 2022
30-59 days past due	30-59 days past due	$	181	$	—	$	—	$	—	$	143	$	—	$	73	$	397	30-59 days past due	$	1,007	$	—	$	—	$	—	$	520	$	—	$	—	$	1,527
60-89 days past due	60-89 days past due	924		—		—		—		121		—		1		1,046		60-89 days past due	1,474		—		—		—		360		—		—		1,834
90 days or more past due	90 days or more past due	—		—		0		—		—		—		—		—		90 days or more past due	255		—		—		—		54		—		—		309
Total past due	Total past due	1,105		—		—		—		264		—		74		1,443		Total past due	2,736		—		—		—		934		—		—		3,670
Current	Current	376,860		398,543		1,157,344		125,060		92,132		117,778		47,859		2,315,576		Current	204,752		368,415		1,211,651		112,154		88,310		114,247		55,137		2,154,666
Total loans 1	Total loans 1	$	377,965	$	398,543	$	1,157,344	$	125,060	$	92,396	$	117,778	$	47,933	$	2,317,019	Total loans 1	$	207,488	$	368,415	$	1,211,651	$	112,154	$	89,244	$	114,247	$	55,137	$	2,158,336
Non-accrual loans 2	Non-accrual loans 2	$	—	$	7,273	$	709	$	—	$	441	$	—	$	—	$	8,423	Non-accrual loans 2	$	—	$	9,846	$	—	$	—	$	699	$	—	$	92	$	10,637
Non-accrual loans with no allowance	Non-accrual loans with no allowance	$	—	$	7,273	$	709	$	—	$	441	$	—	$	—	$	8,423	Non-accrual loans with no allowance	$	—	$	9,846	$	—	$	—	$	699	$	—	$	92	$	10,637
December 31, 2020
December 31, 2021																		December 31, 2021
30-59 days past due	30-59 days past due	$	—	$	—	$	1,673	$	—	$	274	$	—	$	136	$	2,083	30-59 days past due	$	2	$	—	$	—	$	—	$	498	$	—	$	1,036	$	1,536
60-89 days past due	60-89 days past due	—		—		—		—		—		—		622		622		60-89 days past due	394		—		—		—		67		—		—		461
90 days or more past due	90 days or more past due	—		—		—		—		—		—		—		—		90 days or more past due	229		—		—		—		88		—		—		317
Total past due	Total past due	—		—		1,673		—		274		—		758		2,705		Total past due	625		—		—		—		653		—		1,036		2,314
Current	Current	498,408		304,963		959,535		73,046		104,539		123,395		21,965		2,085,851		Current	300,977		392,345		1,189,021		119,840		88,093		114,558		48,497		2,253,331
Total loans 1	Total loans 1	$	498,408	$	304,963	$	961,208	$	73,046	$	104,813	$	123,395	$	22,723	$	2,088,556	Total loans 1	$	301,602	$	392,345	$	1,189,021	$	119,840	$	88,746	$	114,558	$	49,533	$	2,255,645
Non-accrual loans 2	Non-accrual loans 2	$	—	$	7,147	$	1,610	$	—	$	459	$	—	$	17	$	9,233	Non-accrual loans 2	$	—	$	7,269	$	694	$	—	$	413	$	—	$	—	$	8,376
Non-accrual loans with no allowance	Non-accrual loans with no allowance	$	—	$	7,147	$	1,610	$	—	$	459	$	—	$	17	$	9,233	Non-accrual loans with no allowance	$	—	$	7,269	$	694	$	—	$	413	$	—	$	—	$	8,376

1 There were no non-performing loans past due more than ninety days and accruing interest atas of September 30, ~~2021 or~~2022 and December 31, ~~2020.~~2021.

2 None of the non-accrual loans as of September 30, ~~2021~~2022 or December 31, ~~2020~~2021 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the three and nine months ended September 30, ~~2021~~2022 and 2020. Other than a $118 thousand owner-occupied commercial real estate loan assumed in the ARB acquisition, there were no new loans placed on non-accrual status during the nine months ended September 30, 2021. Accrued interest of ~~$20~~$47 thousand was reversed from interest income for loans that were placed on non-accrual ~~status~~ during the nine months ended September 30, ~~2020.~~2022. No interest income was reversed for the single loan that was placed on non-accrual during the nine months ended September 30, 2021.

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Collateral Dependent Loans

The following table presents the amortized cost basis of individually analyzed collateral-dependent loans, which are all on non-accrual ~~loans~~status, by class at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.


		Amortized Cost by Collateral Type										Amortized Cost by Collateral Type
(in thousands)	(in thousands)	Commercial Real Estate		Residential Real Estate		Other		Total		Allowance for Credit Losses			(in thousands)	Commercial Real Estate		Residential Real Estate		Other		Total 1		Allowance for Credit Losses

September 30, 2021
September 30, 2022													September 30, 2022
Commercial real estate, owner-occupied													Commercial real estate, owner-occupied	$	9,846	$	—	$	—	$	9,846	$	—

Home equity													Home equity	—		699		—		699		—

Installment and other consumer													Installment and other consumer	—		—		92		92		—
Total													Total	$	9,846	$	699	$	92	$	10,637	$	—
December 31, 2021													December 31, 2021
Commercial real estate, owner-occupied	Commercial real estate, owner-occupied	$	7,273	$	—	$	—	$	7,273	$	—		Commercial real estate, owner-occupied	$	7,269	$	—	$	—	$	7,269	$	—
Commercial real estate, investor-owned	Commercial real estate, investor-owned	709		—		—		709		—			Commercial real estate, investor-owned	694		—		—		694		—

Home equity	Home equity	—		441		—		441		—			Home equity	—		413		—		413		—

Total	Total	$	7,982	$	441	$	—	$	8,423	$	—		Total	$	7,963	$	413	$	—	$	8,376	$	—
December 31, 2020
Commercial real estate, owner-occupied		$	7,147	$	—	$	—	$	7,147	$	—
Commercial real estate, investor-owned		1,610		—		—		1,610		—

Home equity		—		459		—		459		—

Installment and other consumer		—		—		17		17		—
Total		$	8,757	$	459	$	17	$	9,233	$	—

NoThere were no collateral-dependent residential real estate mortgage loans ~~were~~ in process of foreclosure or in substance repossessed at September 30, ~~2021~~2022 or December 31, ~~2020. In addition, the~~2021. The weighted average loan-to-value of collateral dependent loans was approximately ~~61.7%~~66% at September 30, ~~2021~~2022 and ~~59.2%~~67% at December 31, ~~2020.~~2021.

Troubled Debt Restructuring

Our loan portfolio includes certain loans modified in a troubled debt restructuring (“TDR”), where we have granted economic concessions to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to accruing status after management considers the borrower’s sustained repayment performance for a reasonable period, generally nine months, and obtains reasonable assurance of repayment and performance.

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We may remove a loan from TDR designation if it meets all of the following conditions:

•The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards;

•The borrower is no longer considered to be in financial difficulty;

•Performance on the loan is reasonably assured; and

•Existing loan did not have any forgiveness of principal or interest.

There were no loans removed from TDR designation during the nine months ended September 30, 2022. We removed 1one commercial loan with a remaining amortized cost of $2 thousand and an unfunded commitment of $600 thousand from TDR designation during the nine months ended September 30, 2021 after meeting all of the conditions above. ~~There were no loans removed from TDR designation during the nine months ended September 30, 2020.~~

In accordance with section 4013 of the CARES Act, subsequently amended by section 541 of the 2020 Economic Aid Act, we elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated as TDRs under existing G~~AAP.~~GAAP. As of September 30, ~~2021, 2~~2022, one borrowing ~~relationships~~relationship with 5two loans totaling ~~$23.6~~$7.1 million ~~were~~was continuing to benefit from payment relief. ~~The~~ ~~weighted average loan-to-value ratio~~Shortly after quarter end, both of the ~~remaining payment relief~~ loans, ~~was approximately 33%. We accrue~~which were classified substandard and ~~recognize interest income~~ on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued interest is fully paid.non-accrual, were paid off.

~~Page-20~~

The following table summarizes the ~~carrying amount~~amortized cost of TDR loans by loan class as of September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.


(in thousands)	(in thousands)					(in thousands)	September 30, 2022		December 31, 2021
Recorded Investment in Troubled Debt Restructurings 1		September 30, 2021		December 31, 2020
Commercial and industrial	Commercial and industrial	$	1,394	$	1,021	Commercial and industrial	$	941	$	1,183
Commercial real estate, owner-occupied	Commercial real estate, owner-occupied	7,155		7,147		Commercial real estate, owner-occupied	9,436		7,155
Commercial real estate, investor-owned	Commercial real estate, investor-owned	1,718		3,305		Commercial real estate, investor-owned	165		179

Home equity	Home equity	273		281		Home equity	629		386

Installment and other consumer	Installment and other consumer	706		752		Installment and other consumer	561		607
Total		$	11,246	$	12,506
Total 1						Total 1	$	11,732	$	9,510

1TDR loans on non-accrual status totaled $9.9 million and $7.4 million at ~~both~~ September 30, ~~2021~~2022 and December 31, ~~2020.~~2021, respectively. Unfunded commitments for TDR loans totaled ~~$242~~$218 thousand and $441 thousand as of September 30, ~~2021.~~2022 and December 31, 2021, respectively.

The following table presents information for loans modified in a TDR during the presented periods, including the number of modified contracts, the ~~recorded investment in~~amortized cost of the loans prior to modification, and the ~~recorded investment in~~amortized cost of the loans at period end after being restructured. The table excludes fully charged-off TDR loans and loans modified in a TDR and subsequently paid-off during the years presented, if applicable.


(dollars in thousands)	(dollars in thousands)	Number of Contracts Modified	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment at Period End		(dollars in thousands)	Number of Contracts Modified	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment at Period End
TDRs during the three months ended September 30, 2022:									TDRs during the three months ended September 30, 2022:
Commercial real estate, owner occupied									Commercial real estate, owner occupied	2	$	2,308	$	2,308	$	2,308
Home equity									Home equity	2	147		147		147
Total									Total	4	$	2,455	$	2,455	$	2,455
TDRs during the three months ended September 30, 2021:	TDRs during the three months ended September 30, 2021:								TDRs during the three months ended September 30, 2021:
Commercial and industrial	Commercial and industrial	1	$	1,101	$	1,101	$	1,101	Commercial and industrial	1	$	1,101	$	1,101	$	1,101
TDRs during the three months ended September 30, 2020:
Commercial real estate, investor-owned		1	$	1,553	$	1,553	$	1,553


(dollars in thousands)									(dollars in thousands)	Number of Contracts Modified	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment at Period End
TDRs during the nine months ended September 30, 2022:									TDRs during the nine months ended September 30, 2022:
Commercial real estate, owner occupied									Commercial real estate, owner occupied	2	$	2,308	$	2,308	$	2,308
Home equity									Home equity	3	247		247		247
Total									Total	5	$	2,555	$	2,555	$	2,555
TDRs during the nine months ended September 30, 2021:	TDRs during the nine months ended September 30, 2021:								TDRs during the nine months ended September 30, 2021:
Commercial and industrial	Commercial and industrial	1	$	1,101	$	1,101	$	1,101	Commercial and industrial	1	$	1,101	$	1,101	$	1,101
TDRs during the nine months ended September 30, 2020:
Commercial and industrial		1	$	170	$	162	$	144
Commercial real estate, investor-owned		1	1,553		1,553		1,553
Home equity		1	276		276		276
Installment and other consumer		3	211		211		210
Total		6	$	2,210	$	2,202	$	2,183

The loan modifications in 2022 included one or more of the following: payment deferment, maturity date extension, interest rate concession, and/or other payment modifications. Three of the modifications in 2022 (or 93%) were for

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one borrowing relationship. The loan modified in 2021 reflected a maturity date extension and other loan term and payment modifications. ~~The loans modified in 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications.~~ During the three and nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition of more than ninety days past due.

~~Purchased Loans with Credit Deterioration~~

For purchased loans with a more-than-insignificant amount of credit deterioration since origination ("PCD loans") the initial allowance for credit losses at the date of acquisition was added to the purchase price (or fair value) to determine the initial amortized cost basis. Subsequent changes in expected credit losses (favorable or unfavorable) are recognized through net income as adjustments to the allowance for credit losses on loans. Refer to Notes 1 and 3 under Part II, Item 8, of our 2020 Form 10-K for additional information regarding the accounting for PCD and non-PCD loans.

~~Page-21~~

~~A reconciliation of the unpaid principal balance (or par value) to the purchase price (or fair value) for PCD loans as of the August 6, 2021 merger date is presented below.~~


~~(in thousands)~~
~~Unpaid principal balance (par value)~~	$	~~92,029~~
~~Non-credit discount~~	~~(1,662)~~
~~Amortized cost basis~~	~~90,367~~
~~Initial allowance for credit losses on PCD loans~~	~~(1,505)~~
~~Purchase price (PCD loans at fair value)~~	$	~~88,862~~

Allowance for Credit Losses on Loans Rollforward

The following table discloses activity in the allowance for credit losses on loans for the periods presented.


Allowance for Credit Losses on Loans Rollforward	Allowance for Credit Losses on Loans Rollforward																			Allowance for Credit Losses on Loans Rollforward
(in thousands)	(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Unallocated		Total		(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Unallocated		Total
Three months ended September 30, 2022																				Three months ended September 30, 2022
Beginning balance																				Beginning balance	$	1,699	$	2,617	$	12,439	$	1,737	$	530	$	585	$	733	$	2,199	$	22,539
Provision (reversal)																				Provision (reversal)	265		(81)		299		38		12		5		83		(199)		422
Charge-offs																				Charge-offs	(9)		—		—		—		—		—		(1)		—		(10)
Recoveries																				Recoveries	3		—		—		9		—		—		—		—		12
Ending balance																				Ending balance	$	1,958	$	2,536	$	12,738	$	1,784	$	542	$	590	$	815	$	2,000	$	22,963
Three months ended September 30, 2021	Three months ended September 30, 2021																			Three months ended September 30, 2021
Beginning balance	Beginning balance	$	1,590	$	2,037	$	10,761	$	1,142	$	412	$	613	$	238	$	2,307	$	19,100	Beginning balance	$	1,590	$	2,037	$	10,761	$	1,142	$	412	$	613	$	238	$	2,307	$	19,100
Provision (reversal) - CECL		126		(30)		1,011		77		247		4		384		(19)		1,800
Provision (reversal)																				Provision (reversal)	126		(30)		1,011		77		247		4		384		(19)		1,800
Initial allowance for PCD loans	Initial allowance for PCD loans	405		559		533		—		—		6		2		—		1,505		Initial allowance for PCD loans	405		559		533		—		—		6		2		—		1,505
Charge-offs	Charge-offs	—		—		—		—		—		—		(2)		—		(2)		Charge-offs	—		—		—		—		—		—		(2)		—		(2)
Recoveries	Recoveries	3		—		—		8		—		—		—		—		11		Recoveries	3		—		—		8		—		—		—		—		11
Ending balance	Ending balance	$	2,124	$	2,566	$	12,305	$	1,227	$	659	$	623	$	622	$	2,288	$	22,414	Ending balance	$	2,124	$	2,566	$	12,305	$	1,227	$	659	$	623	$	622	$	2,288	$	22,414
Three months ended September 30, 2020
Beginning balance		$	2,609	$	2,910	$	10,403	$	836	$	1,044	$	1,266	$	426	$	1,374	$	20,868
Provision - incurred loss		(79)		225		1,221		24		(6)		(6)		(20)		(109)		1,250
Charge-offs		(10)		—		—		—		—		—		—		—		(10)
Recoveries		5		—		—		—		—		—		—		—		5
Ending balance		$	2,525	$	3,135	$	11,624	$	860	$	1,038	$	1,260	$	406	$	1,265	$	22,113

Allowance for Credit Losses on Loans Rollforward
(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor Construction Home equity Other residential Installment and other consumer Unallocated Total
Nine months ended September 30, 2021
Beginning balance $ 2,530 $ 2,778 $ 12,682 $ 1,557 $ 738 $ 998 $ 291 $ 1,300 $ 22,874
Provision (reversal) - CECL (821) (771) (910) (356) (129) (381) 331 988 (2,049)
Initial allowance for PCD loans 405 559 533 — — 6 2 — 1,505
Charge-offs — — — — — — (2) — (2)
Recoveries 10 — — 26 50 — — — 86
Ending balance $ 2,124 $ 2,566 $ 12,305 $ 1,227 $ 659 $ 623 $ 622 $ 2,288 $ 22,414
Nine months ended September 30, 2020
Beginning balance $ 2,334 $ 2,462 $ 8,483 $ 638 $ 850 $ 973 $ 284 $ 653 $ 16,677
Provision - incurred loss 208 673 3,141 219 188 287 122 612 5,450
Charge-offs (30) — — — — — — — (30)
Recoveries 13 — — 3 — — — — 16
Ending balance $ 2,525 $ 3,135 $ 11,624 $ 860 $ 1,038 $ 1,260 $ 406 $ 1,265 $ 22,113

We adopted the CECL accounting standard on December 31, 2020, which we had previously postponed under the optional accounting relief provisions of the CARES Act passed in March 2020 to the earlier of the end of the national emergency or December 31, 2020. During the first nine months of 2020, we applied the incurred loss method under previous GAAP in determining the allowance for credit losses on loans.



Allowance for Credit Losses on Loans Rollforward
(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Unallocated		Total
Nine months ended September 30, 2022
Beginning balance	$	1,709	$	2,776	$	12,739	$	1,653	$	595	$	644	$	621	$	2,286	$	23,023
Provision (reversal)	248		(240)		(1)		106		(53)		(54)		217		(286)		(63)

Charge-offs	(9)		—		—		—		—		—		(23)		—		(32)
Recoveries	10		—		—		25		—		—		—		—		35
Ending balance	$	1,958	$	2,536	$	12,738	$	1,784	$	542	$	590	$	815	$	2,000	$	22,963
Nine months ended September 30, 2021
Beginning balance	$	2,530	$	2,778	$	12,682	$	1,557	$	738	$	998	$	291	$	1,300	$	22,874
Provision (reversal)	(821)		(771)		(910)		(356)		(129)		(381)		331		988		(2,049)
Initial allowance for PCD loans	405		559		533		—		—		6		2		—		1,505
Charge-offs	—		—		—		—		—		—		(2)		—		(2)
Recoveries	10		—		—		26		50		—		—		—		86
Ending balance	$	2,124	$	2,566	$	12,305	$	1,227	$	659	$	623	$	622	$	2,288	$	22,414

Pledged Loans

Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of ~~$1.091~~$1.300 billion and ~~$1.165~~$1.330 billion at September 30, ~~2021~~2022 and December 31,

~~Page-22~~

~~2020,~~ 2021, respectively. In addition, we pledge eligible TIC loans, which totaled ~~$109.2~~$105.7 million and ~~$113.6~~$106.2 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). ~~Also,~~For additional information, see Note 6, Borrowings.

Related Party Loans

The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These transactions, including loans, are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Related party loans totaled ~~$8.6~~

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$6.5 million at September 30, ~~2021~~2022 and ~~$6.4~~$7.9 million at December 31, ~~2020.~~2021. In addition, undisbursed commitments to related parties totaled ~~$8.6 million~~$562 thousand at September 30, ~~2021~~2022 and ~~$9.1~~$8.6 million at December 31, ~~2020.~~2021. The decreases in both the outstanding amount and undisbursed commitment as of September 30, 2022 were primarily due to a Director retirement in the first quarter.

Note 6: Borrowings and Other Obligations

Federal Funds Purchased – The Bank had unsecured available lines of credit with correspondent banks for overnight borrowings totaling ~~$115.0~~$150.0 million at September 30, ~~2021~~2022 and ~~$135.0 million at~~ December 31, ~~2020.~~2021. In general, interest rates on these lines approximate the federal funds target rate. We had no overnight borrowings under these credit facilities at September 30, ~~2021~~2022 or December 31, ~~2020~~2021.

Federal Home Loan Bank Borrowings – As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Bank had available lines of credit with the FHLB totaling ~~$651.4~~$739.6 million and ~~$642.5~~$820.5 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at September 30, ~~2021~~2022 or December 31, ~~2020. As part of our acquisition of ARB, we assumed FHLB advances in the amount of $13.8 million that we paid off on August 25,~~ 2021.

Federal Reserve Line of Credit – The Bank has an available line of credit with the ~~FRBSF~~Federal Reserve Bank of San Francisco ("FRBSF") secured by certain residential loans. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Bank had borrowing capacity under this line totaling ~~$72.7~~$54.2 million and ~~$78.7~~$70.8 million, respectively, and had no outstanding borrowings with the FRBSF.

Subordinated Debenture – As part of an acquisition in 2013, Bancorp assumed a subordinated debenture with a contractual balance of $4.1 million due to NorCal Community Bancorp Trust II (the "Trust"), established for the sole purpose of issuing trust preferred securities. On March 15, 2021, Bancorp redeemed in full the $2.8 million (book value) subordinated debenture due to the Trust, which had ~~an effective interest rate of 6.0% for the first nine months of 2020. The~~a 251.5% effective rate for the first nine months of 2021, and included accelerated accretion of the $1.3 million remaining purchase discount due to the early redemption. ~~Accretion was $17 thousand and $52 thousand for the three and nine months ended September 30, 2020, respectively.~~

Other Obligations – Finance lease liabilities totaling ~~$451~~$365 thousand and ~~$58~~$419 thousand at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, are included in borrowings and other obligations in the consolidated statements of condition. See Note 8, Commitments and Contingencies, for additional information.

Note 7: Stockholders' Equity

Dividends

On ~~October~~July 22, ~~2021,~~2022, Bancorp declared a ~~$0.24~~$0.25 per share cash dividend, payable on August 12, 2022 to shareholders of record at the close of business on August 5, 2022. Subsequent to quarter end on October 21, 2022, Bancorp declared a $0.25 per share cash dividend, payable on November ~~12, 2021~~14, 2022 to shareholders of record at the close of business on November ~~5, 2021.~~7, 2022.

Share-Based Payments

The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period, which is generally the vesting period, with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards, which equals the grant date price, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the

~~Page-23~~

retirement eligibility date. For those awards, we accelerate the recording of stock-based compensation when the award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the exercisability of the stock options, which are based on the scheduled vesting period.

Performance-based stock awards (restricted stock) are issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0% to 200% of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the

Page-23

probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.

We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable.

The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense.

Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements. During the nine months ended September 30, 2022, we withheld 11,505 shares totaling $393 thousand at a weighted-average price of $34.13 for cashless exercises. During the nine months ended September 30, 2021, we withheld 27,679 shares totaling $1.1 million at a weighted-average price of $38.86 ~~for cashless exercises. During the nine months ended September 30, 2020, we withheld 9,214 shares totaling $369 thousand at a weighted-average price of $40.01~~ for cashless exercises. Shares withheld under net settlement arrangements are available for future grants.

Share Repurchase Program

~~On April 23, 2018,~~ Bancorp ~~announced that its Board of Directors~~has an approved a share repurchase program with $34.7 million outstanding. The last activity under ~~which Bancorp may repurchase up to $25.0 million of its outstanding common stock through May 1, 2019. Bancorp's Board of Directors subsequently extended~~ the ~~share repurchase program through February 28, 2020. After expiration of this share repurchase program, a new share repurchase program began on March 5, 2020. This new~~ program was ~~approved on January 24, 2020 by Bancorp Board~~in the first quarter of ~~Directors, allowing Bancorp to repurchase up to $25.0 million of its outstanding common stock through February 28,~~ 2022. The share repurchase program, which began on March 5, 2020, was suspended by the Board of Directors on March 20, 2020 in response to the COVID-19 pandemic. The program was reactivated by the Board of Directors on October 23, 2020 and completed in May 2021 upon depletion of repurchase funds. A new share repurchase program was approved by Bancorp Board of Directors on July 16, 2021 under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through July 31, 2023. On October 22, 2021, Bancorp's Board of Directors approved an amendment to the current share repurchase program, which increased the total authorization from $25.0 million to $57.0 million and left the expiration date unchanged.

Under the share repurchase program, Bancorp may purchase shares of its common stock through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at Bancorp's discretion. Factors include, but are not limited to, stock price, trading volume and general market conditions, along with Bancorp’s general business conditions. The program may be suspended or discontinued at any time and does not obligate Bancorp to acquire any specific number of shares of its common stock.

As part of the share repurchase program, Bancorp entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common stock to be repurchased at times that might otherwise be prohibited under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions.

~~Page-24~~

Bancorp repurchased ~~445,735~~23,275 shares totaling ~~$15.9 million in the third quarter of 2021 for a cumulative total of 967,683 shares and $35.2 million~~$877 thousand in the first nine months of ~~2021.~~2022. Cumulative shares repurchased under the current program totaled 618,991 shares as of September 30, 2022 at an average price of $36.04 per share.

Note 8: Commitments and ~~Contingencies~~Contingent Liabilities

Financial Instruments with Off-Balance Sheet Risk

We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements.

Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property.

The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:


(in thousands)	(in thousands)	September 30, 2021		December 31, 2020		(in thousands)	September 30, 2022		December 31, 2021
Commercial lines of credit	Commercial lines of credit	$	300,308	$	297,898	Commercial lines of credit	$	283,731	$	330,234
Revolving home equity lines	Revolving home equity lines	204,846		191,969		Revolving home equity lines	216,632		210,938
Undisbursed construction loans	Undisbursed construction loans	82,782		101,307		Undisbursed construction loans	47,795		78,381
Personal and other lines of credit	Personal and other lines of credit	10,981		10,611		Personal and other lines of credit	11,556		11,001
Standby letters of credit	Standby letters of credit	3,658		2,657		Standby letters of credit	1,978		3,657
Total commitments and standby letters of credit	Total commitments and standby letters of credit	$	602,575	$	604,442	Total commitments and standby letters of credit	$	561,692	$	634,211

We record an allowance for credit losses on unfunded loan commitments at the balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and expected loss rates determined for pooled funded loans. The allowance

Page-24

for credit losses on unfunded commitments totaled ~~$1.6~~$1.5 million and ~~$2.8~~$1.8 million as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition. We adopted the CECL accounting standard on December 31, 2020. We applied the incurred loss method under previous GAAP in determining the allowance for credit losses on unfunded commitments for the three and nine month periods ended September 30, 2020. We recorded 0no provision for credit losses on unfunded commitments for the ~~three months ended September 30, 2021~~third quarters of 2022 and ~~a reversal~~2021. This compares to reversals of ~~the allowance for credit losses on unfunded commitments totaling~~$318 thousand and $1.2 million for the nine ~~month period~~months ended September 30, ~~2021. This compares~~2022 and 2021, respectively, due to ~~provisions for credit losses on unfunded commitments for~~improved economic forecasts at the three and nine month periods ended September 30, 2020 totaling $248 thousand and $610 thousand, respectively. In the second quarter of 2021, we reclassified the provision for credit losses on unfunded commitments from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income.time.

Leases

We lease premises under long-term non-cancelable operating leases with remaining terms of ~~1 year~~3 months to 1120 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised.

We lease certain equipment under finance leases with initial terms of 3 years to 45 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees.

~~Page-25~~

The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities.


(in thousands)	(in thousands)	September 30, 2021		December 31, 2020		(in thousands)	September 30, 2022		December 31, 2021
Operating leases:	Operating leases:					Operating leases:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	24,776	$	3,831	Operating lease right-of-use assets	$	25,006	$	23,604
Operating lease liabilities	Operating lease liabilities	$	26,637	$	27,062	Operating lease liabilities	$	26,744	$	25,429
Finance leases:	Finance leases:					Finance leases:
Finance lease right-of-use assets	Finance lease right-of-use assets	$	499	$	365	Finance lease right-of-use assets	$	512	$	499
Accumulated amortization	Accumulated amortization	(62)		(307)		Accumulated amortization	(158)		(93)
Finance lease right-of-use assets, net1	Finance lease right-of-use assets, net1	$	437	$	58	Finance lease right-of-use assets, net1	$	354	$	406
Finance lease liabilities2	Finance lease liabilities2	$	451	$	58	Finance lease liabilities2	$	365	$	419
1 Included in premises and equipment in the consolidated statements of condition.	1 Included in premises and equipment in the consolidated statements of condition.					1 Included in premises and equipment in the consolidated statements of condition.
2 Included in borrowings and other obligations in the consolidated statements of condition.	2 Included in borrowings and other obligations in the consolidated statements of condition.					2 Included in borrowings and other obligations in the consolidated statements of condition.

The following table shows supplemental disclosures of noncash investing and financing activities for the ~~period~~periods presented.


		Nine months ended					Nine months ended
(in thousands)	(in thousands)	September 30, 2021		September 30, 2020		(in thousands)	September 30, 2022		September 30, 2021
Right-of-use assets obtained in exchange for operating lease liabilities	Right-of-use assets obtained in exchange for operating lease liabilities	$	2,376	$	18,021	Right-of-use assets obtained in exchange for operating lease liabilities	$	4,989	$	2,376
Right-of-use assets obtained in exchange for finance lease liabilities	Right-of-use assets obtained in exchange for finance lease liabilities	$	444	$	18	Right-of-use assets obtained in exchange for finance lease liabilities	$	41	$	444

The following table shows components of operating and finance lease cost.


		Three months ended				Nine months ended					Three months ended				Nine months ended
(in thousands)	(in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		(in thousands)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Operating lease cost	Operating lease cost	$	1,216	$	1,165	$	3,543	$	3,334	Operating lease cost	$	1,328	$	1,216	$	3,907	$	3,543
Variable lease cost	Variable lease cost	—		1		—		4		Variable lease cost	—		—		—		—
Total operating lease cost1	Total operating lease cost1	$	1,216	$	1,166	$	3,543	$	3,338	Total operating lease cost1	$	1,328	$	1,216	$	3,907	$	3,543
Finance lease cost:	Finance lease cost:									Finance lease cost:
Amortization of right-of-use assets2	Amortization of right-of-use assets2	$	31	$	41	$	65	$	129	Amortization of right-of-use assets2	$	31	$	31	$	93	$	65
Interest on finance lease liabilities3	Interest on finance lease liabilities3	1		1		1		$	3	Interest on finance lease liabilities3	1		1		2		1
Total finance lease cost	Total finance lease cost	32		42		$	66	$	132	Total finance lease cost	$	32	$	32	$	95	$	66
Total lease cost	Total lease cost	$	1,248	$	1,208	$	3,609	$	3,470	Total lease cost	$	1,360	$	1,248	$	4,002	$	3,609
1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income.	1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income.									1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income.
2 Included in depreciation and amortization in the consolidated statements of comprehensive income.	2 Included in depreciation and amortization in the consolidated statements of comprehensive income.									2 Included in depreciation and amortization in the consolidated statements of comprehensive income.
3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.	3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.									3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.

The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of September 30, ~~2021.~~2022. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB

Page-25

borrowing rates that were commensurate with lease terms and minimum payments on the ~~later of the date we adopted the new lease accounting standards or~~ lease commencement date.

~~Page-26~~


(in thousands)	(in thousands)	September 30, 2021						(in thousands)	September 30, 2022
Year	Year	Operating Leases			Finance Leases			Year	Operating Leases			Finance Leases
2021		$	1,315		$	32
2022	2022	5,203			127			2022	$	1,369		$	32
2023	2023	4,377			117			2023	5,236			125
2024	2024	3,667			114			2024	4,412			123
2025	2025	3,152			66			2025	3,676			76
2026								2026	2,888			10
Thereafter	Thereafter	10,684			—			Thereafter	11,938			5
Total minimum lease payments	Total minimum lease payments	28,398			456			Total minimum lease payments	29,519			371
Amounts representing interest (present value discount)	Amounts representing interest (present value discount)	(1,761)			(5)			Amounts representing interest (present value discount)	(2,775)			(6)
Present value of net minimum lease payments (lease liability)	Present value of net minimum lease payments (lease liability)	$	26,637		$	451		Present value of net minimum lease payments (lease liability)	$	26,744		$	365
Weighted average remaining term (in years)	Weighted average remaining term (in years)	7.1			3.7			Weighted average remaining term (in years)	7.8			3.1
Weighted average discount rate	Weighted average discount rate	1.68		%	0.64		%	Weighted average discount rate	2.13		%	0.94		%

Litigation Matters

Bancorp may be party to legal actions that arise from time to time in the normal course of business. Bancorp's management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has recently been a party that will have a material adverse effect on the financial condition or results of operations of Bancorp or the Bank.

The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us.

In 2012, Visa ~~had~~ reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. ~~The~~For the fiscal year ended September 30, 2022, Visa deposited an additional $600 million into the litigation escrow account to address claims of certain merchants who opted out of the Amended Settlement Agreement for a balance of ~~$894 million as of June 30, 2021 (latest information available), combined~~$1.5 billion. Combined with funds previously deposited with the court, these funds are expected to cover the settlement payment obligations.

The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities. The final conversion rate is subject to change depending on the final settlement payments, and the full effect on member banks is still uncertain. Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims as contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote.

Note 9: Derivative Financial Instruments and Hedging Activities

We entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates.

Page-26

Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is

~~Page-27~~

in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.

As of September 30, ~~2021,~~2022, we had 4four interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, and October 2037. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled ~~$10 thousand~~$519 at September 30, ~~2021~~2022 and $11 thousand at December 31, ~~2020.~~2021. Information on our derivatives follows:


		Asset Derivatives				Liability Derivatives					Asset Derivatives				Liability Derivatives
(in thousands)	(in thousands)	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020		(in thousands)	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Fair value hedges:	Fair value hedges:									Fair value hedges:
Interest rate contracts notional amount	Interest rate contracts notional amount	$	—	$	—	$	13,280	$	13,991	Interest rate contracts notional amount	$	12,298	$	—	$	—	$	13,037
Interest rate contracts fair value1	Interest rate contracts fair value1	$	—	$	—	$	1,266	$	1,912	Interest rate contracts fair value1	$	649	$	—	$	—	$	1,085

1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology.

The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.


		Carrying Amounts of Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans					Carrying Amounts of Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands)	(in thousands)	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020		(in thousands)	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Loans	Loans	$	14,401	$	15,745	$	1,122	$	1,753	Loans	$	11,519	$	13,976	$	(779)	$	939

The following table presents the net losses recognized in interest income on loans on the consolidated statements of comprehensive income related to our derivatives designated as fair value hedges.


		Three months ended				Nine months ended					Three months ended				Nine months ended
(in thousands)	(in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		(in thousands)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Interest and fees on loans 1	Interest and fees on loans 1	$	24,027	$	21,776	$	66,117	$	63,880	Interest and fees on loans 1	$	23,357	$	24,027	$	70,368	$	66,117
Increase (decrease) in fair value of designated interest rate swaps due to LIBOR interest rate movements		$	97	$	152	$	646	$	(1,351)
Increase in fair value of designated interest rate swaps due to LIBOR interest rate movements										Increase in fair value of designated interest rate swaps due to LIBOR interest rate movements	$	547	$	97	$	1,734	$	646
Payment on interest rate swaps	Payment on interest rate swaps	(93)		(108)		(278)		(255)		Payment on interest rate swaps	(19)		(93)		(169)		(278)
Decrease (increase) in fair value hedging adjustment of hedged loans		(94)		(155)		(631)		1,374
Decrease in fair value hedging adjustment of hedged loans										Decrease in fair value hedging adjustment of hedged loans	(538)		(94)		(1,718)		(631)
Decrease in value of yield maintenance agreement	Decrease in value of yield maintenance agreement	(3)		(3)		(9)		(9)		Decrease in value of yield maintenance agreement	(3)		(3)		(8)		(9)
Net losses on fair value hedging relationships recognized in interest income	Net losses on fair value hedging relationships recognized in interest income	$	(93)	$	(114)	$	(272)	$	(241)	Net losses on fair value hedging relationships recognized in interest income	$	(13)	$	(93)	$	(161)	$	(272)

1 Represents the income line item in the statement of comprehensive income in which the effects of fair value hedges are recorded.

Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes. Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:

~~Page-28~~Page-27


Offsetting of Financial Liabilities and Derivative Liabilities

Offsetting of Financial Assets and Derivative Assets														Offsetting of Financial Assets and Derivative Assets
				Gross Amounts		Net Amounts of		Gross Amounts Not Offset in									Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
		Gross Amounts		Offset in the		Liabilities Presented		the Statements of Condition							Gross Amounts		Offset in the		Assets Presented		the Statements of Condition
		of Recognized		Statements of		in the Statements		Financial		Cash Collateral					of Recognized		Statements of		in the Statements		Financial		Cash Collateral
(in thousands)		Liabilities1		Condition		of Condition1		Instruments		Pledged		Net Amount
September 30, 2021
(in thousands)														(in thousands)	Assets		Condition		of Condition		Instruments		Received		Net Amount
September 30, 2022														September 30, 2022
Derivatives by Counterparty:	Derivatives by Counterparty:													Derivatives by Counterparty:
Counterparty A	Counterparty A	$	1,266	$	—	$	1,266	$	—	$	(1,266)	$	—	Counterparty A	$	649	$	—	$	649	$	(649)	$	—	$	—

December 31, 2020
December 31, 2021														December 31, 2021
Derivatives by Counterparty:	Derivatives by Counterparty:													Derivatives by Counterparty:
Counterparty A	Counterparty A	$	1,912	$	—	$	1,912	$	—	$	(1,912)	$	—	Counterparty A	$	—	$	—	$	—	$	—	$	—	$	—


Offsetting of Financial Liabilities and Derivative Liabilities
			Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
	Gross Amounts		Offset in the		Liabilities Presented		the Statements of Condition
	of Recognized		Statements of		in the Statements		Financial		Cash Collateral
(in thousands)	Liabilities1		Condition		of Condition1		Instruments		Pledged		Net Amount
September 30, 2022
Derivatives by Counterparty:
Counterparty A	$	—	$	—	$	—	$	—	$	—	$	—


December 31, 2021
Derivatives by Counterparty:
Counterparty A	$	1,085	$	—	$	1,085	$	—	$	(1,085)	$	—

1 Amounts exclude accrued interest on swaps.

For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our ~~2020~~2021 Form 10-K filed with the SEC on March 15, ~~2021.~~2022.

Note 10: Merger

Bancorp completed its merger ~~with American River Bankshares ("AMRB")~~and acquired all assets and assumed all liabilities of AMRB on August 6, ~~2021 (the "merger date"), with Bancorp continuing as~~2021. The Merger expanded Bank of Marin's presence throughout the ~~surviving entity, followed thereafter at 12:05 a.m. on August 7, 2021 by the merger of American River Bank ("ARB") with~~Greater Sacramento, Amador and ~~into~~Sonoma County Regions where AMRB had ten branches. The Merger added $297.8 million in investment securities, $419.4 million in loans and $790.0 million in deposits to Bank of Marin ~~(collectively,~~as of the ~~"Merger"),~~merger date. Bancorp accounted for the Merger as a business combination under the acquisition method of accounting. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the merger date in accordance with ~~Bank of Marin surviving.~~ASC 805, Business Combinations.

~~On August 6, 2021,~~AMRB shareholders received 0.575 shares of Bancorp's common stock for each share of ~~AMRB's~~AMRB common stock ~~issued and~~ outstanding immediately prior to the Merger ~~was converted into 0.575 shares of Bancorp's common stock~~ resulting in the issuance of 3,441,235 shares of Bancorp common stock. In addition, merger consideration included cash paid for outstanding stock options and cash paid in lieu of fractional shares, as summarized in the following table.


(in thousands)	Merger Consideration
Value of common stock consideration paid to shareholders (0.575 fixed exchange ratio, stock price $36.15)	$	124,401
Cash consideration for stock options	63
Cash paid in lieu of fractional shares	13
Total merger consideration	$	124,477

~~Bancorp accounted for the Merger using the acquisition method of accounting in accordance with ASC 805,~~ ~~Business Combinations~~. We recorded the estimated fair values of acquired assets and liabilities based on initial valuations as of August 6, 2021. Under ASC 805, during the measurement period of up to one year, the acquirer is allowed to adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the merger date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are recognized in the reporting period in which they are determined. As such, the estimated fair values are considered preliminary as of September 30, 2021 and subject to adjustment for up to one year after August 6, 2021. Fair value amounts subject to change include, but are not limited to, loans, certain deposits, deferred tax assets and liabilities and certain other assets and other liabilities.

~~Page-29~~

~~The following table presents the preliminary fair values of the assets acquired and liabilities assumed, and the resulting goodwill as of August 6, 2021.~~


~~(in thousands)~~
~~Total merger consideration~~	$	~~124,477~~
~~Assets acquired:~~
~~Cash and cash equivalents~~	~~140,577~~
~~Investment securities~~	~~297,797~~
~~Loans~~	~~419,435~~
~~Bank-owned life insurance~~	~~16,259~~
~~Operating lease right-of-use assets~~	~~2,376~~
~~Bank premises and equipment, net~~	~~2,891~~
~~Core deposit intangible~~	~~3,909~~
~~Other real estate owned~~	~~800~~
~~Interest receivable and other assets~~	~~14,377~~
~~Total assets acquired~~	~~898,421~~
~~Liabilities assumed:~~
~~Deposits:~~
~~Non-interest bearing~~	~~331,459~~
~~Interest bearing~~	~~458,563~~
~~Total deposits~~	~~790,022~~
~~FHLB borrowings~~	~~13,885~~
~~Operating lease liabilities~~	~~2,798~~
~~Interest payable and other liabilities~~	~~9,853~~
~~Total liabilities assumed~~	~~816,558~~
~~Fair value of net assets acquired~~	~~81,863~~
~~Goodwill~~	$	~~42,614~~

We recorded $42.6 million in goodwill, which represents the excess of the total merger consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. Goodwill mainly reflects expected value created through the combined operations of AMRB and ~~Bancorp. It~~Bancorp and is evaluated for impairment annually.

~~The following are descriptions of the methods used to determine the fair values of significant assets and liabilities presented above.~~

~~Cash and cash equivalents~~ ~~- The carrying amount of cash and cash equivalents is a reasonable estimate of fair value based on the short-term nature of these assets.~~

~~Investment securities~~ - Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies.

~~Loans~~ - The loan valuation methodology was based on a discounted cash flow approach that considered factors including the type of loan, risk classification status, fixed or variable interest rates, term, amortization status and current discount rates. Loans were grouped according to similar credit risk characteristics when applying various valuation techniques. The discount rates applied were based on current market rates for new originations of comparable loans and included adjustments for interest rate risk, equity return, servicing, credit and liquidity risk. ARB's allowance for credit losses and any existing deferred fees or costs and premiums and discounts were not carried over at the merger date.

~~Bank-owned life insurance~~ ~~- The cash surrender values of bank-owned life insurance policies approximated fair value.~~

~~Operating lease right-of-use assets and lease liabilities~~ ~~- Operating lease right-of-use assets were measured at the present value of the remaining lease payments, as if the acquired leases commenced on the merger date, and~~

~~Page-30~~

~~adjusted to reflect favorable and unfavorable terms of the leases when compared to current market terms. Lease liabilities were measured at the present value of the remaining lease payments.~~

~~Bank premises and equipment~~ - The value of the land and buildings acquired were based on independent third-party appraisals. The fair values of other premises and equipment, such as tenant improvements, furniture and fixtures and equipment, approximated their carrying values.

~~Core deposit Intangible~~ - The core deposit intangible ("CDI") represents the estimated future benefits of acquired deposits and is recorded separately from the related deposits. ~~The value of the~~We recorded a core deposit intangible asset ~~was calculated using a discounted cash flow approach~~of $3.9 million related to ~~arrive at~~ the ~~cost differential between~~AMRB merger, of which $174 thousand and $537 thousand, respectively, were amortized in the ~~core deposits (non-maturity deposits such as transaction, savings~~three and ~~money market accounts)~~nine month periods ended September 30, 2022. Amortization for both the three and alternative funding sources. It was calculated as the present value of the difference in cash flows between maintaining the core deposits (interest and net maintenance costs) and the cost of an equal amount of funds with a similar term from an alternative source.nine month periods ended September 30, 2021 totaled $129 thousand. The ~~core deposit intangible~~CDI is amortized on an accelerated basis over an estimated ten-year life and is evaluated periodically for impairment.

~~We recorded a core deposit intangible asset~~ No impairment losses were recognized as of ~~$3.9 million at acquisition, of which $129 thousand was~~ ~~amortized from the merger date to~~ September 30, ~~2021. The future amortization expense for the CDI arising from the Merger is as follows:~~

(in thousands) 2021 2022 2023 2024 2025 Thereafter Total
Core deposit intangible amortization $ 189 $ 707 $ 630 $ 552 $ 475 $ 1,227 $ 3,780

~~Other real estate owned~~ ~~- The value of other real estate owned was based on an independent third-party appraisal.~~

~~Deposits~~ ~~- The fair values for the demand~~2022 and savings deposits equaled the amount payable on demand at the merger date. The fair values for time deposits were estimated using a discounted cash flow calculation that applied interest rates currently being offered to the contractual interest rates on such time deposits.

~~FHLB borrowings~~ ~~- The carrying value of Federal Home Loan Bank borrowings was adjusted to reflect prepayment fees, which approximated fair value.~~

~~Pro Forma Results of Operations~~

~~AMRB's unaudited contributions to net interest income and net income from the August 6, 2021 merger date to~~ September 30, ~~2021 included in the consolidated statements of comprehensive income are presented in the following table.~~


~~(in thousands)~~2021.
~~Net interest income~~ 1	$	~~3,427~~
~~Net loss~~ 1	$	~~(2,993)~~
1 AMRB's net interest income and net loss include merger-related costs incurred from the merger date to September 30, 2021, accretion of the net purchase discount on acquired loans, premises fair value adjustment depreciation, CDI amortization and time deposit premium amortization, as applicable. The pro forma net loss does not include allowance for credit losses adjustments related to acquired loans.

The following table presents certain unaudited pro forma net interest income and net income for illustrative purposes only for the three and nine months ended September 30, 2021 and 2020 as if AMRB was acquired on January 1, 2020. This unaudited pro forma information combines Bancorp's and AMRB's historical results and includes adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition consummated as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loans at fair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented, and the differences could be significant.

~~Page-31~~Page-28

Three months ended Nine months ended
(in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Net interest income - Pro forma $ 30,488 $ 31,386 $ 91,240 $ 92,791
Net interest income - Actual $ 27,753 $ 24,566 $ 74,318 $ 73,060
Net income - Pro forma 1
$ 9,953 $ 9,182 $ 33,422 $ 19,638
Net income - Actual $ 5,282 $ 7,491 $ 23,514 $ 22,125
1 The 2021 pro forma combined net income was adjusted to exclude merger-related costs of $5.4 million incurred by Bancorp and $3.6 million incurred by AMRB. These merger-related costs were included in the combined net income for the nine months ended September 30, 2020 as if the merger occurred on January 1, 2020.

Merger-related one time and conversion costs are recognized as incurred and continue until all systems have been converted and operational functions are fully integrated. Bancorp's merger-related costs reflected in the consolidated statements of comprehensive income are summarized in the following table.


		Three months ended				Nine months ended					Three months ended				Nine months ended
(in thousand, unaudited)		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
(in thousands, unaudited)										(in thousands, unaudited)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Personnel and severance	Personnel and severance	$	2,668	$	—	$	2,668	$	—	Personnel and severance	$	—	$	2,668	$	393	$	2,668
Professional services	Professional services	1,778		—		1,979		—		Professional services	—		1,778		67		1,979
Data processing	Data processing	433		—		433		—		Data processing	—		433		77		433
Other expense	Other expense	263		—		279		—		Other expense	—		263		321		279
Total merger-related one-time and conversion costs	Total merger-related one-time and conversion costs	$	5,142	$	—	$	5,359	$	—	Total merger-related one-time and conversion costs	$	—	$	5,142	$	858	$	5,359

~~Page-32~~Page-29

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our ~~2020~~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 ~~affect our~~impact Bancorp's earnings in future periods. ~~A number of factors, many of which are beyond management’s control,~~Factors that could cause future results to vary materially from current management ~~expectations. Such factors~~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 ~~California~~(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 (including the Coronavirus Aid, Relief and Economic Security Act of 2020, as amended, and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act of 2020); our borrowers’ actual payment performance as loan deferrals related to the COVID-19 pandemic expire, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance;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.~~

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

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

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

•~~revenues following the Merger may be lower than expected;~~

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

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

Important factors that could cause results or performance to materially differ from those expressed in our prior forward-looking statements are detailed in ~~the~~ITEM 1A, Risk Factors section of our ~~2020~~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-33~~Page-30

Critical Accounting ~~Policies and~~ Estimates

~~The SEC requires us~~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 ~~disclose "critical accounting policies" defined as those that are both most important to the presentation of~~have a material impact on our financial condition and results of operations and require management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and imprecise.operations. We consider accounting estimates to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. ~~There have been no material changes to our~~Our critical ~~accounting policies previously reported, which~~ estimates include: Allowance for Credit Losses on Loans and Unfunded Commitments, ~~Allowance for Credit Losses on Investments Securities, Accounting for~~ Income Taxes, and Fair Value Measurements. For a detailed discussion, ~~of these accounting policies,~~ refer to ~~Note 1, Summary~~the Critical Accounting Estimates section of ~~Significant Accounting Policies, in the Consolidated Financial Statements included in~~ our ~~2020~~2021 Form 10-K filed with the SEC on March 15, 2021. In addition, as a result of the acquisition of American River Bankshares in the third quarter of 2021, we consider the accounting policies and estimates for the following to be critical for this reporting period.

~~Business Combinations~~

~~Bancorp accounts for business combinations under the acquisition method of accounting in accordance with ASC 805,~~ ~~Business Combinations~~. ASC 805 requires assets and liabilities in a business combination to be recorded at their fair values as of the date of acquisition. This method often involves estimates based on third party or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. Business acquisition-related costs, including conversion and restructuring charges, are expensed as incurred. For further information, refer to Note 10, Merger, herein, and Note 1, Summary of Significant Accounting Policies; and Item 1A, Risk Factors, in the Consolidated Financial Statements included in our 2020 Form 10-K filed with the SEC on March 15, 2021.2022.

Executive Summary

~~Bancorp completed its merger~~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") on August 6, 2021 (the "merger date"), with Bancorp continuing as the surviving entity, followed thereafter at 12:05 a.m. on August 7, 2021 by the Merger of American River Bank ("ARB") with and into Bank of Marin (collectively, the "Merger"), with Bank of Marin surviving. AMRB shareholders received a fixed exchange ratio of 0.575 shares of Bancorp common stock for each share of AMRB common stock outstanding. Based on Bancorp's closing stock price of $36.15 on August 6, 2021 (merger date), the ~~transaction was valued at $124.5 million (with 3.4 million~~details of ~~additional shares of Bancorp common stock issued), or $20.80~~which are discussed in this report. In particular, non-GAAP diluted earnings per share for the first nine months of AMRB common stock, which includes the value of AMRB options paid in cash. For other important factors regarding the AMRB acquisition, please see Note 10, Merger, and the Forward-Looking Statements section2022 would have increased by 16 cents per share over 2021 without those costs (refer to page 34 for a discussion of this ~~Form 10-Q.~~non-GAAP financial measure).

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

•~~Net income~~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, ~~totaled $5.3 million, compared~~respectively. The improvement in both periods was primarily due to ~~$7.5 million~~a significant increase in ~~the~~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 ~~2020. Diluted earnings per share were $0.35 in the third quarter of 2021, compared to $0.55 in the same quarter a year ago. Net income~~deposits remained flat. The tax-equivalent net interest margin for the first nine months of ~~2021 totaled $23.5 million, compared to $22.1 million in~~2022 of 3.06% decreased 17 basis points from 3.23% for the same period ~~a year ago. Diluted earnings per share were $1.69,~~in 2021. The decrease was largely due to higher average investment securities in proportion to the larger balance sheet in 2022, as compared to ~~$1.62~~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 ~~2020. Merger-related one-time and conversion costs reduced net income by $3.9 million, net of taxes, or 26 cents per share~~2022 was 0.06%, a decrease from 0.07% in the ~~quarter and by $4.1 million, net~~same period of ~~taxes, or 30 cents per share year-to-date. See reconciliation of GAAP to non-GAAP financial measures on page 36.~~the prior year.

•Loan balances of ~~$2.317~~$2.158 billion at September 30, ~~2021 increased by $228.5 million compared to $2.089~~2022 decreased modestly from $2.256 billion at December 31, ~~2020. The increase was largely due to $419.4~~2021, but increased $6.3 million excluding PPP loans. Year-to-date originations of $204.1 million in ~~loans from~~ the ~~acquisition~~first nine months of ~~ARB on August 6,~~2022 were double when compared to the first nine months of 2021 and ~~new non-PPP related loan originations totaling $101.7 million. These increases~~included $52.2 million in the third quarter. Year-to-date payoffs were ~~partially offset by non-PPP loan payoffs totaling $145.3 million,~~concentrated in expected construction project completions, borrowers’ sales of underlying commercial real estate, and ~~a $126.8 million decrease in Small Business Administration ("SBA") Paycheck Protection Program ("PPP")~~third-party refinancing of acquired loans ~~outstanding.~~outside the Bank’s credit risk appetite.

~~Page-34~~Page-31

•Credit quality remains strong, with non-accrual loans representing ~~0.36%~~0.49% of total loans ~~as of~~at September 30, ~~2021,~~2022, compared to ~~0.44%~~0.37% at December 31, ~~2020. The ratio~~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 ~~allowance~~third quarter of 2022, there was a provision for credit losses on loans ~~to total loans was 0.97% at September 30, 2021, compared to 1.10% at December 31, 2020. Excluding SBA PPP loans, the ratio~~ of ~~allowance to loans would have been 1.04%~~$422 thousand and ~~1.27% at September 30, 2021 and December 31, 2020, respectively (see Results of Operations for a definition of this non-GAAP financial measure).~~

•The allowance for credit losses increased by $3.3 million in the third quarter and was comprised of a $1.8 million provision, mainly related to purchased ARB loans without credit deterioration, and a $1.5 million merger-date allowance established for purchased credit deteriorated loans. There was no provision for credit losses on unfunded ~~loan commitments in the third quarter of 2021.~~

•Total deposits of $3.728 billion at September 30, 2021 increased by $1.224 billion from $2.504 billion at December 31, 2020, mainly due to the ARB acquisition. Non-interest bearing deposits were 49% of total deposits as of September 30, 2021, versus 54% as of December 31, 2020.commitments. The ~~decrease in this ratio~~provision for credit losses on loans was primarily due to an increase in ~~interest bearing deposits from existing customers and a lower ratio of non-interest-bearing deposits acquired from ARB. The cost of average deposits~~qualitative factors to account for the ~~quarter and nine months ended September 30, 2021 was 0.06% and 0.07%, respectively, compared to 0.09% and 0.13% for~~ongoing deterioration in the ~~comparable periods~~economic outlook not captured in ~~2020.~~the quantitative portion of the allowance.

•ROA and ROE ratios were significantly impacted by provisions for credit losses on acquired loans and shares issued in conjunction with the Merger. A good indicator of the Merger's positive impact on operating earnings is the efficiency ratio, as it neither includes provisions for losses on loans and unfunded commitments, nor is it impacted by changes in share counts. As shown in the reconciliation of GAAP to non-GAAP financial measures on page 36 the efficiency ratio excluding merger-related one-time and conversion costs of 56.02% for the quarter ended September 30, 2021, improved from 56.88% for the quarter a year ago. The comparable year-to-date non-GAAP efficiency ratio for the first nine months of 2021 was 59.09%, compared to 55.45% in 2020, and was not as good an indicator of the positive effects of the acquisition because it was impacted by a significant decline in interest rates.

•All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was ~~15.0%~~15.1% at September 30, ~~2021,~~2022, compared to ~~16.0%~~14.6% at December 31, ~~2020.~~2021. Bancorp's tangible common equity to tangible assets was ~~9.1%~~7.5% at September 30, ~~2021,~~2022, compared to ~~11.3%~~8.8% at December 31, ~~2020 (see Results of Operations for~~2021 (refer to footnote 4 on page 35 for a ~~definition~~discussion of this non-GAAP financial measure). The ~~Bank's~~ total risk-based capital ratio for the Bank was ~~14.4%~~14.7% at September 30, ~~2021,~~2022, compared to ~~15.8%~~14.4% at December 31, ~~2020.~~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.

•~~The~~Given the strength and durability of the Bank's financial performance, the Board of Directors declared a cash dividend of ~~$0.24~~$0.25 per share on October ~~22, 2021,~~21, 2022, which represents the ~~66th~~70th consecutive quarterly dividend paid by ~~Bank of Marin~~ Bancorp. The dividend is payable on November ~~12, 2021,~~14, 2022, to shareholders of record at the close of business on November ~~5, 2021.~~7, 2022.

•On October 22, 2021, the Board of Directors approved an amendment to the current share repurchase program which increased the total authorization from $25.0 million to $57.0 million. The July 31, 2023 expiration date of the program remained unchanged.

•Effective October 31, 2021, Russell A. Colombo retired as Chief Executive Officer of Bank of Marin and Bank of Marin Bancorp and the Board of Directors named Tim Myers, previously President and Chief Operating Officer, as his successor. Mr. Colombo will remain on the Boards of Bancorp and the Bank, and Mr. Myers will join both Boards.

Bank of Marin's strong balance sheet is built from our core values - relationship banking, disciplined fundamentals and commitment to the communities that we serve. We believe that our robust liquidity and capital positions, high credit quality loan portfolio, excellent credit metrics, and low-cost deposit base, as well as our acquisition of AMRB will reinforce the long-term success of the bank and position us well for the remainder of 2021.

~~Page-35~~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 ~~refer~~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 ~~core~~ operating results and comparison of operating results across reporting periods. Management also uses non-GAAP financial measures to establish budgets and manage Bancorp's business. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below.

Reconciliation of GAAP and Non-GAAP Financial Measures

(in thousand, unaudited) Three months ended Nine months ended
Net income September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Net income (GAAP) $ 5,282 $ 7,491 $ 23,514 $ 22,125
Merger-related one-time and conversion costs:
Personnel and severance 2,668 — 2,668 —
Professional services 1,778 — 1,979 —
Data processing 433 — 433 —
Other 263 — 279 —
Income tax benefit of merger-related expenses (1,222) — (1,239) —
Total merger-related one-time and conversion costs, net of taxes 3,920 — 4,120 —
Comparable net income (non-GAAP) $ 9,202 $ 7,491 $ 27,634 $ 22,125
Diluted earnings per share
Weighted average diluted shares 14,993 13,610 13,881 13,617
Diluted earnings per share (GAAP) $ 0.35 $ 0.55 $ 1.69 $ 1.62
Comparable diluted earnings per share (non-GAAP) $ 0.61 $ 0.55 $ 1.99 $ 1.62
Return on average assets
Average assets $ 3,743,968 $ 3,029,342 $ 3,280,505 $ 2,876,618
Return on average assets (GAAP) 0.56 % 0.98 % 0.96 % 1.03 %
Comparable return on average assets (non-GAAP) 0.98 % 0.98 % 1.13 % 1.03 %
Return on average equity
Average stockholders' equity $ 420,124 $ 356,230 $ 374,445 $ 348,812
Return on average equity (GAAP) 4.99 % 8.37 % 8.40 % 8.47 %
Comparable return on average equity (non-GAAP) 8.69 % 8.37 % 9.87 % 8.47 %
Efficiency ratio
Non-interest expense (GAAP) $ 22,686 $ 14,990 $ 53,654 $ 44,238
Merger-related expenses (5,142) — (5,359) —
Non-interest expense (non-GAAP) $ 17,544 $ 14,990 $ 48,295 $ 44,238
Net interest income $ 27,753 $ 24,566 $ 74,318 $ 73,060
Non-interest income $ 3,565 $ 1,790 $ 7,413 $ 6,723
Efficiency ratio (GAAP) 72.44 % 56.88 % 65.65 % 55.45 %
Comparable efficiency ratio (non-GAAP) 56.02 % 56.88 % 59.09 % 55.45 %


	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-36~~Page-33

RESULTS OF OPERATIONS

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

(dollars in thousands) September 30, 2021 December 31, 2020
Selected financial condition data:
Total assets $ 4,261,062 $ 2,911,926
Loans, net 2,294,605 2,065,682
Deposits 3,727,696 2,504,249
Borrowings and other obligations 451 58
Subordinated debenture — 2,777
Stockholders' equity 458,525 358,253
Asset quality ratios:
Allowance for credit losses on loans to total loans 0.97 % 1.10 %
Allowance for credit losses on loans to total loans, excluding SBA PPP loans 1
1.04 % 1.27 %
Allowance for credit losses on loans to non-accrual loans 2.66x 2.48x
Non-accrual loans to total loans 0.36 % 0.44 %
Capital ratios:
Equity to total assets ratio 10.76 % 12.30 %
Tangible common equity to tangible assets 2
9.06 % 11.27 %
Total capital (to risk-weighted assets) 14.97 % 16.03 %
Tier 1 capital (to risk-weighted assets) 14.10 % 14.82 %
Tier 1 capital (to average assets) 10.20 % 10.80 %
Common equity Tier 1 capital (to risk weighted assets) 14.10 % 14.69 %


	Three months ended						Nine months ended
(dollars in thousands, except per share data)	September 30, 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		%

Three months ended Nine months ended
(dollars in thousands, except per share data) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Selected operating data:
Net interest income $ 27,753 $ 24,566 $ 74,318 $ 73,060
Provision for (reversal of) credit losses on loans 1,800 1,250 (2,049) 5,450
Provision for (reversal of) credit losses on unfunded loan commitments — 248 (1,202) 610
Non-interest income 3,565 1,790 7,413 6,723
Non-interest expense 22,686 14,990 53,654 44,238
Net income 5,282 7,491 23,514 22,125
Net income per common share:
Basic $ 0.35 $ 0.55 $ 1.70 $ 1.64
Diluted $ 0.35 $ 0.55 $ 1.69 $ 1.62
Performance and other financial ratios:
Return on average assets 0.56 % 0.98 % 0.96 % 1.03 %
Return on average equity 4.99 % 8.37 % 8.40 % 8.47 %
Tax-equivalent net interest margin 3
3.15 % 3.44 % 3.23 % 3.61 %
Cost of deposits 0.06 % 0.09 % 0.07 % 0.13 %
Efficiency ratio 72.44 % 56.88 % 65.65 % 55.45 %
Cash dividend payout ratio on common stock 4
68.57 % 41.82 % 41.18 % 42.07 %


(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.

1 The allowance for credit losses on loans to total loans, excluding SBA-guaranteed PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for credit losses on loans. SBA PPP loans at September 30, 2021 and December 31, 2020 totaled $164.8 million and $291.6 million, respectively.

2 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses. Tangible common equity of $379 million and $324 million at September 30, 2021 and December 31, 2020, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets. Tangible assets exclude goodwill and intangible assets of $79.8 million and $34.0 million at September 30, 2021 and December 31, 2020, respectively.

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

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

~~Page-37~~Page-34

Net Interest Income

Net interest income is the interest earned on loans, ~~investment~~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								Three months ended						Three months ended
			September 30, 2021						September 30, 2020								September 30, 2022						June 30, 2022
					Interest						Interest								Interest						Interest
			Average		Income/		Yield/		Average		Income/		Yield/				Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	(dollars in thousands)		Balance		Expense		Rate		Balance		Expense		Rate		(dollars in thousands)		Balance		Expense		Rate		Balance		Expense		Rate
Assets	Assets														Assets
		Interest-earning deposits with banks 1	$	456,405	$	178	0.15	%	$	184,883	$	50	0.11	%		Interest-earning deposits with banks 1	$	94,963	$	546	2.24	%	$	95,326	$	180	0.75	%
		Investment securities 2, 3	845,127		4,249		2.01	%	527,077		3,481		2.64	%		Investment securities 2, 3	1,875,660		9,875		2.11	%	1,807,710		8,469		1.87	%
		Loans 1, 3, 4	2,189,563		24,229		4.33	%	2,117,679		21,957		4.06	%		Loans 1, 3, 4	2,166,879		23,540		4.25	%	2,194,810		23,522		4.24	%
		Total interest-earning assets 1	3,491,095		28,656		3.21	%	2,829,639		25,488		3.52	%		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	68,680						55,353							Cash and non-interest-bearing due from banks	44,597						56,408
		Bank premises and equipment, net	6,468						5,412							Bank premises and equipment, net	7,052						7,182
		Interest receivable and other assets, net	177,725						138,938							Interest receivable and other assets, net	145,691						151,483
Total assets	Total assets		$	3,743,968					$	3,029,342					Total assets		$	4,334,842					$	4,312,919
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity														Liabilities and Stockholders' Equity
		Interest-bearing transaction accounts	$	237,883	$	41	0.07	%	$	153,089	$	41	0.11	%		Interest-bearing transaction accounts	$	293,296	$	121	0.16	%	$	300,258	$	53	0.07	%
		Savings accounts	293,434		26		0.03	%	191,915		17		0.04	%		Savings accounts	341,468		32		0.04	%	343,338		32		0.04	%
		Money market accounts	911,294		417		0.18	%	802,585		377		0.19	%		Money market accounts	1,025,722		268		0.10	%	1,076,912		438		0.16	%
		Time accounts including CDARS	124,247		44		0.14	%	97,465		133		0.54	%		Time accounts including CDARS	142,341		128		0.36	%	144,432		67		0.19	%
		Borrowings and other obligations 1, 6	3,010		8		1.09	%	113		—		2.51	%		Borrowings and other obligations 1	337		1		0.93	%	370		—		0.61	%
		Subordinated debenture 1, 5	—		—		—	%	2,751		35		4.97	%
		Total interest-bearing liabilities	1,569,868		536		0.14	%	1,247,918		603		0.19	%		Total interest-bearing liabilities	1,803,164		550		0.12	%	1,865,310		590		0.13	%
		Demand accounts	1,707,142						1,380,708							Demand accounts	2,069,476						1,984,629
		Interest payable and other liabilities	46,834						44,486							Interest payable and other liabilities	47,583						49,709
		Stockholders' equity	420,124						356,230							Stockholders' equity	414,619						413,271
Total liabilities & stockholders' equity	Total liabilities & stockholders' equity		$	3,743,968					$	3,029,342					Total liabilities & stockholders' equity		$	4,334,842					$	4,312,919
Tax-equivalent net interest income/margin 1	Tax-equivalent net interest income/margin 1				$	28,120	3.15	%			$	24,885	3.44	%	Tax-equivalent net interest income/margin 1				$	33,411	3.16	%			$	31,581	3.05	%
Reported net interest income/margin 1	Reported net interest income/margin 1				$	27,753	3.11	%			$	24,566	3.40	%	Reported net interest income/margin 1				$	33,027	3.12	%			$	31,197	3.01	%
Tax-equivalent net interest rate spread	Tax-equivalent net interest rate spread						3.07	%					3.33	%	Tax-equivalent net interest rate spread						3.09	%					2.98	%

~~Page-38~~Page-35

Nine months ended Nine months ended
September 30, 2021 September 30, 2020
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(in thousands) Balance Expense Rate Balance Expense Rate
Assets
Interest-earning deposits with banks 1
$ 273,045 $ 274 0.13 % $ 152,587 $ 421 0.36 %
Investment securities 2, 3
683,600 11,196 2.18 % 544,754 11,632 2.85 %
Loans 1, 3, 4
2,117,631 66,665 4.15 % 1,998,456 64,423 4.24 %
Total interest-earning assets 1
3,074,276 78,135 3.35 % 2,695,797 76,476 3.73 %
Cash and non-interest-bearing due from banks 53,020 44,665
Bank premises and equipment, net 5,353 5,631
Interest receivable and other assets, net 147,856 130,525
Total assets $ 3,280,505 $ 2,876,618
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts $ 193,502 $ 119 0.08 % $ 144,784 $ 146 0.13 %
Savings accounts 245,374 66 0.04 % 179,288 50 0.04 %
Money market accounts 784,313 1,015 0.17 % 786,012 1,731 0.29 %
Time accounts including CDARS 105,419 221 0.28 % 96,237 436 0.61 %
Borrowings and other obligations 1, 6
1,047 8 1.10 % 208 3 2.14 %
Subordinated debenture 1, 5
713 1,361 251.54 % 2,733 124 5.96 %
Total interest-bearing liabilities 1,330,368 2,790 0.28 % 1,209,262 2,490 0.27 %
Demand accounts 1,531,564 1,278,265
Interest payable and other liabilities 44,128 40,279
Stockholders' equity 374,445 348,812
Total liabilities & stockholders' equity $ 3,280,505 $ 2,876,618
Tax-equivalent net interest income/margin 1
$ 75,345 3.23 % $ 73,986 3.61 %
Reported net interest income/margin 1
$ 74,318 3.19 % $ 73,060 3.56 %
Tax-equivalent net interest rate spread 3.07 % 3.45 %
1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.
2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly.
3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21 percent in 2021 and 2020.
4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.
5 2021 interest on subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.
6 Average balances and rate consider $13.9 million in FHLB borrowings acquired from American River Bank that were redeemed on August 25, 2021.

~~Analysis of Changes in Net Interest Income~~


		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 ~~nine~~three months ended September ~~30,2020.~~30, 2022 compared to June 30, 2022.

~~Page-39~~Page-36


		Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020								Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020									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)	(in thousands)	Volume		Yield/Rate		Mix		Total		Volume		Yield/Rate		Mix		Total		(in thousands)	Volume		Yield/Rate		Mix		Total		Volume		Yield/Rate		Mix		Total
Interest-earning deposits with banks	Interest-earning deposits with banks	$	73	$	22	$	33	$	128	$	332	$	(267)	$	(212)	$	(147)	Interest-earning deposits with banks	$	(1)	$	361	$	6	$	366	$	(133)	$	1,345	$	(654)	$	558
Investment securities 1	Investment securities 1	2,101		(831)		(502)		768		2,965		(2,710)		(691)		(436)		Investment securities 1	318		1,048		40		1,406		17,808		(1,462)		(2,328)		14,018
Loans 1	Loans 1	745		1,477		50		2,272		3,842		(1,279)		(321)		2,242		Loans 1	(299)		63		254		18		2,473		1,742		64		4,279
Total interest-earning assets	Total interest-earning assets	2,919		668		(419)		3,168		7,139		(4,256)		(1,224)		1,659		Total interest-earning assets	18		1,472		300		1,790		20,148		1,625		(2,918)		18,855
Interest-bearing transaction accounts	Interest-bearing transaction accounts	24		(16)		(8)		—		49		(57)		(19)		(27)		Interest-bearing transaction accounts	(1)		70		(1)		68		63		31		17		111
Savings accounts	Savings accounts	10		(1)		—		9		18		—		(2)		16		Savings accounts	—		—		—		—		26		1		—		27
Money market accounts	Money market accounts	51		(11)		—		40		(4)		(710)		(2)		(716)		Money market accounts	(21)		(160)		11		(170)		376		(151)		(56)		169
Time accounts, including CDARS	Time accounts, including CDARS	37		(98)		(28)		(89)		42		(238)		(19)		(215)		Time accounts, including CDARS	(1)		61		1		61		83		(69)		(26)		(12)
Borrowings and other obligations	Borrowings and other obligations	19		—		(11)		8		14		(2)		(7)		5		Borrowings and other obligations	—		—		1		1		(6)		(3)		3		(6)
Subordinated debenture 2	Subordinated debenture 2	(35)		—		—		(35)		(92)		5,108		(3,779)		1,237		Subordinated debenture 2	—		—		—		—		—		(1,361)		—		(1,361)
Total interest-bearing liabilities	Total interest-bearing liabilities	106		(126)		(47)		(67)		27		4,101		(3,828)		300		Total interest-bearing liabilities	(23)		(29)		12		(40)		542		(1,552)		(62)		(1,072)
Changes in tax-equivalent net interest income	Changes in tax-equivalent net interest income	$	2,813	$	794	$	(372)	$	3,235	$	7,112	$	(8,357)	$	2,604	$	1,359	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%.	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%.																	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.	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.																	2 Nine months ended September 30, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.

Third Quarter of ~~2021~~2022 Compared to ~~Third~~the Second Quarter of ~~2020~~2022

Net interest income totaled ~~$27.8~~$33.0 million in the third quarter of ~~2021,~~2022, compared to ~~$24.6~~$31.2 million in the ~~same~~second quarter ~~a year ago.~~of 2022. The ~~$3.2~~$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 ~~addition~~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 ~~ARB interest earning balances, higher yield on acquired ARB loans, and higher income from SBA PPP loans. Increases were partially offset by lower yields on acquired ARB investment securities balances.~~a subordinated debenture.

The tax-equivalent net interest margin was ~~3.15%~~3.06% in the third quarter of 2021 compared to 3.44% in the same quarter of last year. The decrease in tax-equivalent net interest margin was primarily attributed to both $271.5 million increase in low yielding due from banks interest-earning balances and the lower interest rate environment. SBA PPP loans added 13 basis points to the third quarter 2021 net interest margin as compared to a 4 basis points reduction to the net interest margin in the third quarter of 2020 due to higher fee income accretion in the third quarter of 2021 as more PPP loans were forgiven and paid off by the SBA.

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

~~Net interest income totaled $74.3 million in the first~~ nine months ended September 30, ~~2021,~~2022, compared to ~~$73.1 million~~3.23% in the same period in the prior year. The decrease resulted from a ~~year ago. The $1.3 million increase was primarily attributed~~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 ~~addition of ARB interest-earning assets and higher income from SBA PPP loans. Increases~~larger investment portfolio. Reductions were partially offset by ~~$1.3 million in accelerated discount accretion on~~ the ~~early redemption~~shift to a higher percentage of non-PPP loans within the loan portfolio and the absence of a subordinated debenture that was redeemed in the first quarter of 2021 and lower yielding interest-earning assets. We recognized $6.6 million in SBA PPP fees, net of cost in the first nine months of 2021, compared to $2.8 million in the first nine months a year ago. As of September 30, 2021 $4.2 million PPP fees, net of deferred costs remain outstanding and will be recognized into income in future periods.

The tax-equivalent net interest margin was 3.23% in the first nine months ended June 30, 2021, compared to 3.61% in the same period a year ago. The decrease was primarily attributed to $1.3 million in accelerated discount accretion from the early redemption of a subordinated debenture in the first quarter of 2021, the lower interest rate environment and higher cash balances, partially offset by higher income from PPP loans. SBA PPP loans added 9 basis points to the first nine months' net interest margin as compared to a 3 basis points reduction to net interest margin in the comparable period in 2020.2021.

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").

~~Page-40~~

In response to ~~the evolving~~economic risks ~~to economic activity~~ posed by the COVID-19 pandemic, the FOMC made two emergency cuts totaling 150 basis points to the federal funds rate in March 2020. The federal funds target rate range ~~has~~ resided between 0.0% and 0.25% ~~since~~after March 15, 2020 through the beginning of 2022, putting downward pressure on our asset yields and net interest ~~margin. A low~~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 will continue to put downward pressure on our asset yields and net interest margin.~~environment. See ITEM 3. Quantitative and Qualitative Disclosure about MarketRisk for further information.

Provision for Credit Losses on Loans

Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors including growth of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans. The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off.

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


		Three months ended				Nine months ended					Three months ended				Nine months ended
(dollars in thousands)	(dollars in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		(dollars in thousands)	September 30, 2022		June 30, 2022			September 30, 2022		September 30, 2021
Provision for (reversal of) credit losses on loans	Provision for (reversal of) credit losses on loans	$	1,800	$	1,250	$	(2,049)	$	5,450	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 ~~$1.8 million~~net provision reversal for the ~~three~~first nine months ~~ended September 30, 2021 was mainly related~~in 2022 resulted from a provision reversal in the first quarter due to ~~purchased ARB loans without credit deterioration.~~improvements in the economic forecasts, partially offset by the provision in the third quarter as discussed above. The ~~net~~ provision reversal for the first nine months in 2021 was primarily due to continued improvements in the forecasted California unemployment rates ~~over~~at the ~~next four quarters,~~time, partially offset by ~~the~~a provision in the third quarter. Our allowance model is particularly sensitive to current and forecasted California unemployment rates, which decreased to 6.4% at September 30, 2021 from 9.1% at December 31, 2020. The provision for credit losses in 2020 calculated under the incurred loss method (priorquarter related to the ~~adoption of the excepted~~purchased AMRB loans without credit ~~loss method on December 31, 2020) was largely due to the uncertainty about the impact of the COVID-19 pandemic on the local and regional economies and our customers at that time.~~deterioration.

Loans designated special mention, which are not considered adversely classified, ~~increased~~decreased year-to-date by ~~$16.6~~$9.1 million to ~~$103.4~~$64.2 million at September 30, ~~2021~~2022 from ~~$86.9~~$73.3 million at December 31, ~~2020.~~2021. The ~~increase~~decrease was largely due to the downgrading from pass to special mention several well-secured commercial real estate loans totaling $41.2 million and one borrowing relationship with three commercial loans totaling $5.4 million, also well collateralized. In addition, we upgraded several borrowing relationships from substandard to special mention totaling $13.2 million because of their improved financial condition and assumed $13.7 million in special mention loans in the Merger. These increases were partially offset by $32.7$30.1 million in upgrades to pass ~~due to~~risk ratings because of the borrowers' improved financial condition, ~~$18.8~~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 and $5.4 million in downgrades to substandard comprised primarily of one well secured commercial real estate loan.~~payoffs.

Classified assets (loans with risk ratings of substandard or doubtful) totaled ~~$19.0~~$33.3 million at September 30, ~~2021,~~2022, compared to ~~$25.8~~$36.1 million at December 31, ~~2020.~~2021. The ~~$6.8~~$2.8 million decrease was primarily due to ~~the upgrading of $13.2~~$5.2 million in ~~loans mentioned above~~upgrades to pass risk rating and $3.2 million in paydowns and ~~payoffs totaling $1.9 million.~~payoffs. These decreases were ~~primarily~~partially offset by ~~the $5.4~~$1.4 million in ~~downgrades mentioned above and~~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 ~~substandard~~paydowns 2022) and the downgrade of two well-secured owner occupied commercial real estate loans ~~assumed in the Merger.~~totaling $2.3 million. Classified loans also included one ~~$118~~$101 thousand loan acquired from ~~ARB~~AMRB with a doubtful risk rating as of September 30, 2022 and December 31, 2021, which is well-secured by real estate collateral. ~~There were no loans considered doubtful at December 31, 2020.~~

The ratio of allowance for credit losses on loans to total loans was ~~0.97%~~1.06% and 1.02% at September 30, ~~2021, compared to 1.10% at~~2022 and December 31, ~~2020.~~2021, respectively. Non-accrual loans ~~totaled $8.4~~increased $2.2 million to $10.6 million, or ~~0.36%~~0.49% of total loans at September 30, ~~2021, and remained largely unchanged~~2022 from ~~$9.2~~$8.4 million, or ~~0.44%~~0.37% of total loans at December 31, ~~2020.~~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, subsequent 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

~~Page-41~~

Non-interest Income

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


		Three months ended				Amount Increase (Decrease		Percent Increase (Decrease)			Three months ended				Amount Change	Percent Change
(dollars in thousands)	(dollars in thousands)	September 30, 2021		September 30, 2020						(dollars in thousands)	September 30, 2022		June 30, 2022
Wealth Management and Trust Services										Wealth Management and Trust Services	$	507	$	630		$	(123)	(19.5)	%
Debit card interchange fees, net										Debit card interchange fees, net	502		531			(29)		(5.5)	%
Service charges on deposit accounts										Service charges on deposit accounts	535		465			70		15.1	%
Earnings on bank-owned life insurance, net	Earnings on bank-owned life insurance, net	1,402		232		1,170		504.3	%	Earnings on bank-owned life insurance, net	222		298			(76)		(25.5)	%
Wealth Management and Trust Services		$	597	$	450	$	147	32.7	%
Debit card interchange fees		483		383		100		26.1	%
Service charges on deposit accounts		464		284		180		63.4	%
Dividends on Federal Home Loan Bank stock	Dividends on Federal Home Loan Bank stock	179		149		30		20.1	%	Dividends on Federal Home Loan Bank stock	251		249			2		0.8	%
Merchant interchange fees		129		63		66		104.8	%
Gains on sale of investment securities, net		1		—		1		NM
Merchant interchange fees, net										Merchant interchange fees, net	141		149			(8)		(5.4)	%
Losses on sale of investment securities, net										Losses on sale of investment securities, net	(63)		—			(63)		NM
Other income	Other income	310		229		81		35.4	%	Other income	628		406			222		54.7	%
Total non-interest income	Total non-interest income	$	3,565	$	1,790	$	1,775	99.2	%	Total non-interest income	$	2,723	$	2,728		$	(5)	(0.2)	%
NM - not meaningful	NM - not meaningful									NM - not meaningful
		Nine months ended				Amount Increase (Decrease		Percent Increase (Decrease)
(dollars in thousands)		September 30, 2021		September 30, 2020
Earnings on bank-owned life insurance, net		1,892		741		1,151		155.3	%
Wealth Management and Trust Services		$	1,615	$	1,375	$	240	17.5	%
Debit card interchange fees		1,268		1,051		217		20.6	%
Service charges on deposit accounts		1,062		1,028		34		3.3	%
Dividends on Federal Home Loan Bank stock		505		503		2		0.4	%
Merchant interchange fees		247		183		64		35.0	%
Gains on sale of investment securities, net		1		915		(914)		(99.9)	%
Other income		823		927		(104)		(11.2)	%
Total non-interest income		$	7,413	$	6,723	$	690	10.3	%



	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 ~~2021~~2022 Compared to ~~Third~~the Second Quarter of ~~2020~~2022

Non-interest income ~~increased by $1.8~~totaled $2.7 million in the third quarter of ~~2021~~2022, substantially unchanged from the preceding quarter. The reduction in Wealth Management and Trust Services income related to ~~$3.6 million, compared to $1.8 million in the same quarter a year ago.~~stock market volatility and losses on investment securities sold were generally offset by increased fees for off-balance sheet deposits within other income. The ~~increase~~$63 thousand loss on sale of investment securities was ~~mostly attributed~~related to the ~~collection~~sale of ~~$1.1 million in death benefits on bank-owned life insurance ("BOLI") policies and increases in fee income from deposit accounts and debit card interchange activity.~~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 ~~2021~~2022 Compared to the First Nine Months of ~~2020~~2021

Non-interest income ~~increased by $0.7~~totaled $8.3 million in the ~~first~~ nine months ~~of 2021~~ended September 30, 2022, compared to $7.4 million ~~from $6.7 million~~ in the ~~first nine months~~same period of ~~2020.~~the prior year. The ~~increase~~$905 thousand improvement from the prior year period was ~~primarily due~~mostly attributable to ~~BOLI payments noted above, increases in Wealth Management~~higher activity associated with the AMRB acquisition and ~~Trust Services income generated from new accounts and favorable market performance, and~~higher fees ~~from~~on deposit accounts and debit card interchange activity. In March 2020, we implemented temporary waivers for all ATM fees, overdraft fees and early withdrawal penalties for time deposits to help ease the financial burden customers began experiencing due to the pandemic. We reinstituted the fees in May 2021. The increase wasbalances held off balance sheet with deposit networks, partially offset by ~~the absence of gains on investment securities, as $915 thousand~~a decrease in ~~gains were recognized in the comparative period a year ago.~~

benefits year-over-year associated with bank-owned life insurance payments.

~~Page-42~~Page-39

Non-interest Expense

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


		Three months ended				Amount Increase (Decrease)		Percent Increase (Decrease)			Three months ended				Amount Change	Percent Change
(dollars in thousands)	(dollars in thousands)	September 30, 2021		September 30, 2020						(dollars in thousands)	September 30, 2022		June 30, 2022
Salaries and related benefits	Salaries and related benefits	$	13,127	$	8,638	$	4,489	52.0	%	Salaries and related benefits	$	10,557	$	10,341		$	216	2.1	%
Occupancy and equipment	Occupancy and equipment	1,871		1,776		95		5.3	%	Occupancy and equipment	1,941		1,891			50		2.6	%
Data processing										Data processing	1,093		1,199			(106)		(8.8)	%
Professional services	Professional services	2,472		655		1,817		277.4	%	Professional services	736		665			71		10.7	%
Data processing		1,613		822		791		96.2	%
Information technology										Information technology	573		468			105		22.4	%
Depreciation and amortization	Depreciation and amortization	431		539		(108)		(20.0)	%	Depreciation and amortization	414		393			21		5.3	%
Information technology		496		256		240		93.8	%
Amortization of core deposit intangible	Amortization of core deposit intangible	334		213		121		56.8	%	Amortization of core deposit intangible	370		374			(4)		(1.1)	%
Federal Deposit Insurance Corporation insurance										Federal Deposit Insurance Corporation insurance	300		296			4		1.4	%
Directors' expense	Directors' expense	255		184		71		38.6	%	Directors' expense	233		294			(61)		(20.7)	%
Federal Deposit Insurance Corporation insurance		236		181		55		30.4	%
Charitable contributions	Charitable contributions	4		481		(477)		(99.2)	%	Charitable contributions	49		511			(462)		(90.4)	%
Other real estate owned										Other real estate owned	350		3			347		NM
Other non-interest expense	Other non-interest expense									Other non-interest expense
Advertising	Advertising	189		163		26		16.0	%	Advertising	221		221			—		—	%
Other expense	Other expense	1,658		1,082		576		53.2	%	Other expense	1,841		2,250			(409)		(18.2)	%
Total other non-interest expense	Total other non-interest expense	1,847		1,245		602		48.4	%	Total other non-interest expense	2,062		2,471			(409)		(16.6)	%
Total non-interest expense	Total non-interest expense	$	22,686	$	14,990	$	7,696	51.3	%	Total non-interest expense	$	18,678	$	18,906		$	(228)	(1.2)	%

		Nine months ended				Amount Increase (Decrease)		Percent Increase (Decrease)
(dollars in thousands)		September 30, 2021		September 30, 2020
Salaries and related benefits		$	31,223	$	25,979	$	5,244	20.2	%
Occupancy and equipment		5,373		5,100		273		5.4	%
Professional services		4,321		1,749		2,572		147.1	%
Data processing		3,252		2,437		815		33.4	%
Depreciation and amortization		1,279		1,591		(312)		(19.6)	%
Information technology		1,105		758		347		45.8	%
Amortization of core deposit intangible		742		639		103		16.1	%
Directors' expense		660		533		127		23.8	%
Federal Deposit Insurance Corporation insurance		597		299		298		99.7	%
Charitable contributions		497		921		(424)		(46.0)	%
Other non-interest expense
Advertising		603		572		31		5.4	%
Other expense		4,002		3,660		342		9.3	%
Total other non-interest expense		4,605		4,232		373		8.8	%
Total non-interest expense		$	53,654	$	44,238	$	9,416	21.3	%

NM - Not Meaningful										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 ~~2021~~2022 Compared to ~~Third~~the Second Quarter of ~~2020~~2022

Non-interest expense ~~increased by $7.7 million to $22.7~~totaled $18.7 million in the third quarter of ~~2021,~~2022, compared to ~~$15.0~~$18.9 million in the ~~same period a year ago.~~prior quarter. The ~~increase~~decrease from the prior quarter was primarily from $462 thousand less in charitable contributions due to ~~a $5.1 million increase in merger-related one-time and conversion costs (mostly~~the annual distribution of grant funding related to ~~professional services, data processing~~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 ~~and personnel costs), salaries and benefits~~fee accrual originally recorded in the second quarter, for ~~retained ARB employees and other ARB-related operating expenses incurred since the merger date. The increase was~~a net quarter-over-quarter effect of $200 thousand. These decreases were partially offset by a ~~$477~~$345 thousand ~~decrease in charitable contributions as the bank has transitioned~~valuation adjustment to ~~a more defined contributions disbursement schedule with funding occurring in the second and fourth quarters, and large pandemic-related contributions in 2020.~~other real estate owned.

First Nine Months of ~~2021~~2022 Compared to the First Nine Months of ~~2020~~2021

~~Non-interest~~Almost all expense categories increased ~~by $9.4 million~~over 2021 due primarily to ~~$53.7 million in the first~~a full nine months of ~~2021, compared to $44.2 million in the first nine months of 2020. Higher salaries and related benefits of $5.2 million included $2.7 million in personnel costs related~~operating expenses attributable to the ~~Merger. The increase in~~2021 AMRB acquisition. In addition, salaries and benefits ~~was also attributed~~reflected annual merit and other incentive increases, data processing and information technology expenses were elevated due to ~~fewer deferred~~the systems conversions associated with the merger and systems upgrades in 2022, and other expense reflected higher

~~Page-43~~Page-40

~~SBA PPP loan origination costs. Professional~~recruiting fees. These increases were partially offset by a $2.0 million decrease in professional services ~~increased by $2.6 million~~expense, as 2021 included merger-related legal and data processing expenses increased by $815 thousand, mainly due to merger-related expenses. In addition, FDIC deposit insurance expenses were $298 thousand higher. Charitable contributions were lower than 2020 for the reasons mentioned above.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 ~~2021~~2022 totaled ~~$1.6~~$4.5 million at an effective tax rate of ~~22.7%~~26.9%, compared to ~~$2.4~~$4.0 million at an effective tax rate of ~~24.1%~~26.3% in the ~~same quarter last year.~~prior quarter. The provision for income taxes for the first nine months of ~~2021~~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%~~, compared to $7.4 million at an effective tax rate of 25.0%~~ for the first nine months of ~~2020.~~2021. The ~~decrease~~increase in the provision ~~reflected lower pre-tax income for~~in the third quarter of ~~2021~~2022 reflected higher pre-tax income as compared to the ~~same quarter a year ago.~~prior quarter. The ~~140~~160 basis point ~~decrease~~increase in the effective tax rate in the ~~third quarter~~first nine months of ~~2021~~2022 as compared to the same ~~quarter a year ago~~period in 2021 was primarily due to lower BOLI income in 2022 and a higher ~~BOLI and~~level of tax ~~exempt loan and investment securities interest income~~benefits in 2021 from the ~~ARB acquisition,~~disqualifying dispositions of incentive stock options, partially offset by the non-deductible merger expenses incurred in ~~the third quarter of~~ 2021.

We file a consolidated return in the U.S. Federal tax jurisdiction and a combined return in the State of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the issuance of this report. At September 30, ~~2021,~~2022, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

FINANCIAL CONDITION SUMMARY

At September 30, 2021, assets totaled $4.261 billion, an increase of $1.349 billion, from $2.912 billion at December 31, 2020, mainly due to the acquisition of ARB in August 2021, which added approximately $898.4 million in assets, as well as increases in deposit inflows as discussed below. For additional information on the merger, refer to Note 10, Merger, in this Form 10-Q.

Cash, Cash Equivalents and Restricted Cash

Total cash, cash equivalents and restricted cash were ~~$584.7~~$185.6 million at September 30, ~~2021,~~2022, compared to ~~$200.3~~$347.6 million at December 31, ~~2020.~~2021. The ~~increase~~$162.0 million decrease was ~~mainly~~primarily due to the ~~acquisition~~deployment of ~~ARB, SBA PPP loan forgiveness and an increase in deposits.~~funds into investment securities, as noted below. Cash and cash equivalents do not include ~~$179.9~~$11.3 million and ~~$173.4~~$173.1 million in ~~temporary~~ one-way sale transfers of deposits to third-party deposit networks as part of our liquidity management at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Investment Securities

The investment securities portfolio totaled ~~$1.160~~$1.772 billion at September 30, ~~2021,~~2022, an increase of ~~$658.4~~$262.6 million from December 31, ~~2020.~~2021. The increase was primarily due to purchases of ~~$508.6~~$537.2 million to deploy excess cash into interest earning assets in a more favorable interest rate environment in ~~2021, and securities of $297.8 million acquired from ARB,~~2022, partially offset by paydowns, sales, maturities and calls ~~and maturities~~ of ~~$132.5~~$156.7 million. Additionally, the ~~fair value of~~unrealized losses on available-for-sale securities ~~decreased $8.6~~increased $97.0 million as a result of ~~the~~ higher interest ~~rate environment~~rates in the first nine months of ~~2021. Security sales in~~2022. In March 2022, we transferred $357.5 million securities at fair value from available-for-sale to held-to-maturity to reduce the ~~first nine months~~effect of ~~2021 totaled $4.1 million.~~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, ~~2021~~2022 and December 31, ~~2020.~~2021.

~~Page-44~~


			September 30, 2021						December 31, 2020								September 30, 2022								December 31, 2021
(dollars in thousands)	(dollars in thousands)		Amortized Cost		Fair Value		% of Total State and Political Subdivisions		Amortized Cost		Fair Value		% of Total State and Political Subdivisions		(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:	Within California:														Within California:
		General obligation bonds	$	14,975	$	15,180	9.7	%	$	3,327	$	3,565	3.1	%		General obligation bonds	$	25,831		$	20,560		14.3	%	$	25,036		$	25,020		14.2	%
		Revenue bonds	5,478		5,526		3.6		2,352		2,448		2.2			Revenue bonds	3,722			2,961			2.1		5,249			5,185			3.0
		Tax allocation bonds	1,614		1,624		1.0		2,832		2,876		2.7			Tax allocation bonds	—			—			—		503			510			0.3
Total within California	Total within California		22,067		22,330		14.3		8,511		8,889		8.0		Total within California		29,553			23,521			16.4		30,788			30,715			17.5
Outside California:	Outside California:														Outside California:
		General obligation bonds	109,463		113,444		70.9		78,299		82,100		73.5			General obligation bonds	122,244			103,209			68.0		117,278			121,303			66.5
		Revenue bonds	22,867		23,962		14.8		19,744		21,351		18.5			Revenue bonds	27,978			22,614			15.6		28,146			29,272			16.0
Total outside California	Total outside California		132,330		137,406		85.7		98,043		103,451		92.0		Total outside California		150,222			125,823			83.6		145,424			150,575			82.5
Total obligations of state and political subdivisions	Total obligations of state and political subdivisions		$	154,397	$	159,736	100.0	%	$	106,554	$	112,340	100.0	%	Total obligations of state and political subdivisions		$	179,775		$	149,344		100.0	%	$	176,212		$	181,290		100.0	%
Percent of investment portfolio															Percent of investment portfolio		9.6		%	9.1		%			11.7		%	12.0		%

~~The portion of the portfolio outside the state of California is distributed among fourteen states.~~ Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (39.7%), Washington ~~(18.8%~~(14.4%) and ~~Maryland (4.4%~~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. ~~We have little or no exposure to municipal sectors such as health care that are most vulnerable to credit risks posed by the COVID-19 pandemic.~~

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

•The soundness of a municipality’s budgetary position and stability of its tax revenues

•Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer

•Local demographics/economics including unemployment data, largest taxpayers and local employers, income indices and home values

•For revenue bonds, the source and strength of revenue for municipal authorities including the obligor’s financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer’s strength and collateral in escrow accounts)

•Credit ratings by major credit rating agencies

Loans

During the first nine months of ~~2021,~~2022, loans ~~increased~~decreased by ~~$228.5~~$97.3 million and totaled ~~$2.317~~$2.158 billion at September 30, ~~2021,~~2022, primarily due to ~~$419.4~~$103.6 million in PPP loans ~~from the acquisition of ARB on August 6,2021.~~forgiven and paid off. New non-PPP related loan originations totaled ~~$101.7~~$204.1 million in the first nine months of ~~2021.~~2022. Non-PPP loan payoffs ~~totaled $145.3~~were $204.2 million ~~during~~in the first nine months of ~~2021. Loan~~2022. These payoffs ~~in the third quarter~~reflected construction project completions, borrowers' sales of ~~2021 consisted largely of commercial borrower cash paydowns as part of ongoing deleveraging,~~underlying real estate ~~asset sales~~and business assets and third-party ~~refinancing. A significant portion~~refinancing of ~~the commercial third-party refinancing was attributable to price or structural elements~~acquired loans outside the ~~bank's desired~~Bank's credit ~~profile.~~risk appetite.

As of September 30, ~~2021,~~2022, there were ~~871~~42 PPP loans outstanding totaling ~~$164.8~~$7.6 million (net of ~~$4.2~~$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)~~, including 31 loans totaling $9.6 million acquired from ARB. Of~~. In the ~~2,876 PPP loans totaling $444.1 million funded by~~first nine months of 2022, Bank of Marin ~~2,036 loans for $284.7~~recognized $2.3 million ~~have been forgiven and paid off. Of~~in PPP fees, net of costs, compared to $6.6 million in the ~~remaining PPP loans, 580 loans or $25.5 million are less than or equal to $150 thousand and have access to streamlined forgiveness.~~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, ~~2021, 2 borrowing relationships with 5 loans totaling $23.6 million were continuing to benefit from payment relief. We monitor~~2022, and the ~~financial situation of these clients closely and expect the majority to resume payments as the economy continues to recover.~~others paid off in early October.

~~Page-45~~Page-42

Liabilities

During the first nine months of ~~2021,~~2022, total liabilities increased by ~~$1.248 billion~~$88.2 million to ~~$3.803~~$3.952 billion. Deposits increased $1.223 billion in the first nine months of 2021, primarily driven by the acquisition of ARB and normal fluctuations in some of our larger commercial accounts. Non-interest bearing deposits increased $482.9$94.2 million in the first nine months of ~~2021~~2022 to ~~$1.838 billion, and~~$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 money 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 deposit networks at September 30, 2022, compared to $173.1 million at December 31, 2021. Non-interest bearing deposits represented ~~49.3%~~52.6% of total deposits at September 30, ~~2021,~~2022, compared to ~~54.1%~~50.2% at December 31, ~~2020.~~2021. The ~~decrease in this ratio was primarily due to an increase in interest-bearing deposits for a large existing customer and a lower ratio of non-interest bearing deposits from the ARB acquisition. The~~average cost of ~~average~~ deposits was 0.06% ~~in the third quarter and 0.07%~~ in the first nine months of ~~2021, respectively, a decrease~~2022 compared to 0.07% in the same period of ~~2 basis points and 6 basis points from the equivalent periods a year ago.~~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, ~~2021.~~2022. There are no conditions or events since that notification that management believes have changed the Bank’s categories and we expect the Bank to remain well capitalized for prompt corrective action purposes.

~~In August 2018, the Board of Governors of the Federal Reserve System changed the definition of a "Small Bank Holding Company" by increasing the asset threshold from $1.0 billion~~Tangible common equity to ~~$3.0 billion. As a result, Bancorp~~tangible assets was ~~not subject~~7.5% at September 30, 2022, compared to ~~separate minimum capital requirements as of~~ 8.8% at December 31, ~~2020. However, we disclosed comparative capital ratios~~2021 for Bancorp ~~which would have exceeded well-capitalized levels had Bancorp been subject~~and 7.3% at September 30, 2022, compared to 8.6% at December 31, 2021 for the ~~same minimum capital requirements~~Bank (refer to footnote 4 on page 35 for a discussion of this non-GAAP financial measure). Declines in ~~2020.~~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, ~~2021~~2022 and December 31, ~~2020~~2021 are presented in the following tables. The decrease in capital ratios as of September 30, 2021 from December 31, 2020 was largely attributable to shares repurchased totaling $35.2 million during the first nine months of 2021. Tier 1 Capital to average assets was also reduced by an increase in cash driven by deposit growth over and above that attributable to the Merger. In addition, as of December 31, 2020, Bancorp's Tier 1 capital included a subordinated debenture, which was not included at the Bank level. On March 15, 2021, Bancorp redeemed in full our last subordinated debenture due to NorCal Community Bancorp Trust II. Partially offsetting those factors, the Merger served to increase capital ratios as the proportion of risk-weighted assets to total assets was lower for ARB, and the full effect of the Merger will not reflect in average assets until the fourth quarter.

~~Page-46~~


Capital Ratios for Bancorp (dollars in thousands)	Actual Ratio				Adequately Capitalized Threshold				Ratio to be a Well Capitalized Bank Holding Company
September 30, 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 Bancorp

(dollars in thousands)
Actual Ratio Adequately Capitalized Threshold Ratio to be a Well Capitalized Bank Holding Company
September 30, 2021 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 395,223 14.97 % ≥ $ 277,278 ≥ 10.50 % ≥ $ 264,074 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 372,293 14.10 % ≥ $ 224,463 ≥   8.50 % ≥ $ 211,259 ≥   8.00 %
Tier 1 Capital (to average assets) $ 372,293 10.20 % ≥ $ 145,976 ≥   4.00 % ≥ $ 182,470 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 372,293 14.10 % ≥ $ 184,852 ≥   7.00 % ≥ $ 171,648 ≥   6.50 %
December 31, 2020
Total Capital (to risk-weighted assets) $ 339,544 16.03 % ≥ $ 222,393 ≥ 10.50 % ≥ $ 211,802 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 313,891 14.82 % ≥ $ 180,032 ≥   8.50 % ≥ $ 169,442 ≥   8.00 %
Tier 1 Capital (to average assets) $ 313,891 10.80 % ≥ $ 116,224 ≥   4.00 % ≥ $ 145,280 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 311,114 14.69 % ≥ $ 148,262 ≥   7.00 % ≥ $ 137,672 ≥   6.50 %

Capital Ratios for the Bank

(dollars in thousands)
Actual Ratio Adequately Capitalized Threshold Ratio to be Well Capitalized under Prompt Corrective Action Provisions
September 30, 2021 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 378,753 14.35 % ≥ $ 277,156 ≥ 10.50 % ≥ $ 263,958 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 355,823 13.48 % ≥ $ 224,364 ≥   8.50 % ≥ $ 211,166 ≥   8.00 %
Tier 1 Capital (to average assets) $ 355,823 9.75 % ≥ $ 145,959 ≥   4.00 % ≥ $ 182,449 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 355,823 13.48 % ≥ $ 184,770 ≥   7.00 % ≥ $ 171,572 ≥   6.50 %
December 31, 2020
Total Capital (to risk-weighted assets) $ 334,686 15.80 % ≥ $ 222,391 ≥ 10.50 % ≥ $ 211,801 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 309,033 14.59 % ≥ $ 180,031 ≥   8.50 % ≥ $ 169,441 ≥   8.00 %
Tier 1 Capital (to average assets) $ 309,033 10.64 % ≥ $ 116,224 ≥   4.00 % ≥ $ 145,280 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 309,033 14.59 % ≥ $ 148,261 ≥   7.00 % ≥ $ 137,671 ≥   6.50 %


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.~~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.

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

~~Page-47~~

~~The most significant source of liquidity during 2021 was an increase in deposits of $433.4 million. The increase was primarily due to SBA PPP loan forgiveness~~Our cash and other increases in customer deposits. Proceeds from loans collected net of loan originations was $193.3 million. Proceeds from principal paydowns and maturities of securities totaled $136.6 million, and $32.3cash equivalents decreased $162.0 million in ~~net cash was provided by operating activities.~~

the first nine months of 2022.

Significant uses of liquidity during ~~2021~~2022 were ~~$488.6~~$537.2 million in investment securities purchased, ~~$35.5 million in common stock repurchases, $9.2~~$11.7 million in cash dividends paid on common stock to our shareholders, and ~~$4.1~~$1.2 million in ~~repayment of a subordinated debenture.~~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 ~~$602.6~~$561.7 million at September 30, ~~2021.~~2022. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth and liquid assets. Over the next twelve months, ~~$99.0~~$106.2 million of time deposits will mature. We expect to replace these funds with new ~~deposits.~~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 ~~$16.2~~$8.8 million ofin cash at September 30, ~~2021,~~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.

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

Market risk is defined as the risk of loss arising from an adverse change in the market value (or prices) of financial instruments. A significant component of market risk is interest rate risk, which is inherent in our lending, investment, borrowing and deposit gathering activities. The Bank manages interest rate sensitivity to minimize the exposure of our net interest margin, earnings, and capital to changes in interest rates. Interest rate changes can create fluctuations in the net interest margin due to an imbalance in the timing of repricing or maturity of assets or liabilities. Interest rate changes can also affect the market value of our financial instruments, such as available-for-sale securities and the related unrealized gains or losses, which affects our equity value.

To mitigate interest rate risk, the structure of our assets and liabilities is managed with the objective of correlating the effects of interest rate changes on loans and investments with those of deposits and borrowings. The asset liability management policy sets limits on the acceptable amount of change to net interest income and economic value of equity in different interest rate environments.

From time to time, we enter into interest rate swap contracts to mitigate the changes in the fair value of specified long-term fixed-rate loans and firm commitments to enter into long-term fixed-rate loans caused by changes in interest rates. See Note 9 to the Consolidated Financial Statements in this Form 10-Q.

ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly. We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability. A simplified ~~static~~ statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans,

Page-45

investments, borrowings and deposits as inputs. If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions. At September 30, ~~2021,~~2022, interest rate risk was within policy guidelines established by ALCO and the Board. One set of interest rates modeled and evaluated against flat interest rates and a static balance sheet is a series of immediate parallel shifts in the yield curve. ~~These are~~Our most recent analysis of our interest rate sensitivity is provided in the following table as an example rather than an expectation of likely interest rate movements.

~~Page-48~~


Immediate Changes in Interest Rates (in basis points)		Estimated Change in Net Interest Income in Year 1, as percent of Net Interest Income		Estimated Change in Net Interest Income in Year 2, as percent of Net Interest Income
Immediate and Parallel Shift in Interest Rates (in basis points)						Immediate and Parallel Shift in Interest Rates (in basis points)	Estimated Change in Net Interest Income in Year 1, as percent of Net Interest Income		Estimated Change in Net Interest Income in Year 2, as percent of Net Interest Income
up 400	up 400	11.7	%	28.1	%	up 400	0.6	%	9.0	%
up 300	up 300	8.9	%	21.4	%	up 300	0.6	%	7.2	%
up 200	up 200	6.0	%	14.4	%	up 200	0.6	%	5.2	%
up 100	up 100	2.8	%	6.9	%	up 100	0.6	%	3.2	%
down 100	down 100	(2.6)	%	(4.2)	%	down 100	(4.1)	%	(5.7)	%

down 200						down 200	(8.5)	%	(11.6)	%

Asset sensitivity decreased over the prior quarter due to loan growth, higher yielding bond purchases and an increase in the average interest-bearing deposit beta from 26% to 28%. Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. The Bank runs a combination of scenarios and sensitivities ~~in its attempt~~ to capture the range of interest rate risk including the simulations mentioned above. As with any simulation model or other method of measuring interest rate risk, limitations are inherent in the process and dependent on assumptions. For example, if we choose to pay interest on certain business deposits that are currently non-interest bearing, causing those deposits to become rate sensitive in the future, we would become less asset sensitive than the model currently indicates. ~~Assets~~Additionally, assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements. Important deposit modeling assumptions ~~are~~include the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates ~~change. Further,~~change, otherwise known as the deposit beta. The actual rates and timing of prepayments on loans and investment securities could vary significantly from the assumptions applied in the various scenarios. Lastly, uneven changes in different tenors of U.S. Treasury rates ~~accompanied by a change~~that result in changes to the shape of the yield curve could produce different results from those presented in the table. Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Bank of Marin Bancorp and its subsidiary (the "Company") conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the “Act”)) as of the end of the period covered by this report. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2021, we completed the merger with American River Bankshares and we continue to integrate and incorporate their business processes and systems into our internal control over financial reporting. Other than the interim effects of the Merger,2022, there were no significant changes that materially affected, or are reasonably likely to affect, our internal control over financial reporting. The term internal control over financial

Page-46

reporting, as defined by Rule 15d-15(f) of the Act, is a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

PART II OTHER INFORMATION

ITEM 1 Legal Proceedings

~~Page-49~~

Refer to Note 12 to the Consolidated Financial Statements in Item 8 of our ~~2020~~2021 Form 10-K and Note 8 to the Consolidated Financial Statements in this Form 10-Q.

ITEM 1A Risk Factors

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. In evaluating an investment in Bancorp's common stock, investors should consider, among other things, the risks previously disclosed in Part I, Item 1A, "Risk Factors" of our 2021 Form 10-K, and the information contained in this quarterly report on Form 10-Q and other reports and registration statements filed with the SEC, which are incorporated herein by reference. There have been no material changes ~~from~~in the risk factors ~~previously~~ disclosed in our ~~2020~~2021 Form 10-K. ~~Refer to "Risk Factors" in Item 1A of our 2020 Form 10-K, pages 12 through 21.~~

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities during the period covered by this report.

Issuer Purchases of Equity Securities

On July 16, 2021, Bancorp Board of Directors approved a share repurchase program under which Bancorp could repurchase up to $25.0 million of its outstanding common stock through July 31, 2023. During the three months ended September 30, 2021, Bancorp repurchased 445,735 shares at an average price of $35.64 per share for a total cost of $15.9 million. Approximately $9.1 million remained available for repurchases as of September 30, 2021. On October 22, 2021, Bancorp's Board of Directors approved an amendment to the current share repurchase program, which increased the total authorization from $25.0 million to $57.0 million and left the expiration date unchanged. ~~The following table reflects repurchases under this share repurchase program for the periods presented.~~

(in thousands, except per share data) Total Number of Shares Purchased
Average Price Paid per Share 1
Total Number of Shares Purchased as Part of Publicly Announced Programs Approximate Dollar Value That May yet Be Purchased Under the Program
Period
July 1-31, 2021 37,182 $ 32.99 37,182 $ 23,772
August 1-31, 2021 159,360 35.98 159,360 $ 18,031
September 1-30, 2021 249,193 35.81 249,193 $ 9,098
Total 445,735 $ 35.64 445,735
1 Average price paid per share excludes commission.
During the nine months ended September 30, 2022, Bancorp repurchased 23,275 shares at an average price of $37.64 per share for a total cost of $877 thousand. The last activity under the program was in the first quarter of 2022. Cumulative shares repurchased under the current program totaled 618,991 shares at an average price of $36.04 per share, with $34.7 million outstanding as of September 30, 2022.

ITEM 3 Defaults upon Senior Securities

None.

ITEM 4 Mine Safety Disclosures

Not applicable.

ITEM 5 Other Information

None.

~~Page-50~~Page-47

ITEM 6 Exhibits

The following exhibits are filed as part of this report or hereby incorporated by references to filings previously made with the SEC.

Incorporated by Reference
Exhibit Number Exhibit Description Form File No. Exhibit Filing Date Herewith
2.01
Agreement to Merge and Plan of Reorganization, dated April 16, 2021 by and among Bank of Marin Bancorp and American River Bankshares
8-K 001-33572 2.1 April 19, 2021
3.01
Articles of Incorporation, as amended
S-4 333-257025 3.01 June 11, 2021
3.02
Bylaws, as amended
S-4 333-257025 3.02 June 11, 2021
4.01
Rights Agreement, dated July 6, 2017
8-A12B 001-33572 4.1 July 7, 2017
4.02
Description of Capital Stock
10-K 001-33572 4.02 March 13, 2020
10.01
Employee Stock Ownership Plan
S-8 333-218274 4.1 May 26, 2017
10.02
2017 Employee Stock Purchase Plan
S-8 333-221219 4.1 October 30, 2017
10.03
2017 Equity Plan, as amended
S-8 333-227840 4.1 October 15, 2018
10.04
2020 Director Stock Plan
S-8 333-239555 4.1 June 30, 2020
10.05
Form of Indemnification Agreement for Directors and Executive Officers, dated August 9, 2007
10-Q 001-33572 10.06 November 7, 2007
10.06
Form of Employment Agreement, dated January 23, 2009
8-K 001-33572 10.1 January 26, 2009
10.07
2010 Annual Individual Incentive Compensation Plan, revised 2019
10-K 001-33572 10.07 March 15, 2021
10.08
Salary Continuation Agreement for executive officer Russell Colombo, Chief Executive Officer, dated January 1, 2011
8-K 001-33572 10.1 January 6, 2011
10.09
Salary Continuation Agreement for executive officer Tani Girton, Chief Financial Officer, dated October 18, 2013
8-K 001-33572 10.2 November 4, 2014
10.10
Salary Continuation Agreement for executive officer Elizabeth Reizman, Chief Credit Officer, dated July 20, 2014
8-K 001-33572 10.3 November 4, 2014
10.11
2007 Form of Change in Control Agreement
8-K 001-33572 10.1 October 31, 2007
10.12
Salary Continuation Agreement for executive officer Timothy Myers, President and Chief Operating Officer, dated January 1, 2016
10-Q 001-33572 10.12 November 6, 2020
10.13
Director Deferred Fee Plan, dated December 17, 2020
10-K 001-33572 10.13 March 15, 2021
10.14
Employment Agreement with Timothy Myers, dated September 23, 2021
8-K 001-33572 10.1 September 24, 2021
31.01
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed
31.02
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed
32.01
Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002
Filed
101.INS Inline XBRL Instance Document Filed
101.SCH Inline XBRL Taxonomy Extension Schema Document Filed
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document Filed
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document Filed
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Filed

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Herewith

2.01

Agreement to Merge and Plan of Reorganization, dated April 16, 2021 by and among Bank of Marin Bancorp and American River Bankshares

8-K

001-33572

2.1

April 19, 2021

3.01

Articles of Incorporation, as amended

S-4

333-257025

3.01

June 11, 2021

3.02

Bylaws, as amended

S-4

333-257025

3.02

June 11, 2021

4.01

Rights Agreement, dated July 6, 2017

8-A12B

001-33572

4.1

July 7, 2017

4.02

Description of Capital Stock

10-K

001-33572

4.02

March 13, 2020

10.01

Employee Stock Ownership Plan

S-8

333-218274

4.1

May 26, 2017

10.02

2017 Employee Stock Purchase Plan

S-8

333-221219

4.1

October 30, 2017

10.03

2017 Equity Plan, as amended

S-8

333-227840

4.1

October 15, 2018

10.04

2020 Director Stock Plan

S-8

333-239555

4.1

June 30, 2020

10.05

Form of Indemnification Agreement for Directors and Executive Officers, dated August 9, 2007

10-Q

001-33572

10.06

November 7, 2007

10.06

2010 Annual Individual Incentive Compensation Plan, revised 2019

10-K

001-33572

10.07

March 15, 2021

10.07

Salary Continuation Agreement for executive officer Tani Girton, Chief Financial Officer, dated October 18, 2013

8-K

001-33572

10.2

November 4, 2014

10.08

Salary Continuation Agreement for executive officer Elizabeth Reizman, Chief Credit Officer, dated July 20, 2014

8-K

001-33572

10.3

November 4, 2014

10.09

2007 Form of Change in Control Agreement

8-K

001-33572

10.1

October 31, 2007

10.10

Salary Continuation Agreement for executive officer Timothy Myers, President and Chief Operating Officer, dated January 1, 2016

10-Q

001-33572

10.12

November 6, 2020

10.11

Director Deferred Fee Plan, dated December 17, 2020

10-K

001-33572

10.13

March 15, 2021

10.12

Employment Agreement with Timothy Myers, dated September 23, 2021

8-K

001-33572

10.1

September 24, 2021

31.01

Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed

31.02

Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed

32.01

Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002

Filed

101.INS

Inline XBRL Instance Document

Filed

101.SCH

Inline XBRL Taxonomy Extension Schema Document

Filed

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Filed

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

Filed

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

Filed

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

Filed

~~Page-51~~Page-48

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



									Bank of Marin Bancorp
									(registrant)


			November ~~9, 2021~~8, 2022						/s/ Timothy D. Myers
			Date						Timothy D. Myers
									President and Chief Executive Officer
									(Principal Executive Officer)



			November ~~9, 2021~~8, 2022						/s/ Tani Girton
			Date						Tani Girton
									Executive Vice President &
									Chief Financial Officer
									(Principal Financial Officer)


			November ~~9, 2021~~8, 2022						/s/ David A. Merck
			Date						David A. Merck
									First Vice President &
									~~Financial Reporting Manager~~ Controller
									(Principal Accounting Officer)

~~Page-52~~Page-49


(in thousands, except per share data)	Total Number of Shares Purchased	Average Price Paid per Share 1		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value That May yet Be Purchased Under the Program


Period



July 1-31, 2021	37,182	$	32.99	37,182	$	23,772
August 1-31, 2021	159,360	35.98		159,360	$	18,031
September 1-30, 2021	249,193	35.81		249,193	$	9,098






Total	445,735	$	35.64	445,735
1 Average price paid per share excludes commission.