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 March 31,June 30, 2022
OR
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 100NovatoCA 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 classTrading symbolName of each exchange on which registered
Common stock, no par value and attached Share Purchase RightsBMRCThe 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 filerAccelerated filer
Non-accelerated filerSmaller 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 April 30,July 31, 2022, there were 15,997,18016,015,474 shares of common stock outstanding.



TABLE OF CONTENTS
 
PART I
   
ITEM 1.
 
 
 
 
 
   
ITEM 2.
   
ITEM 3.
   
ITEM 4.
   
PART II
   
ITEM 1.
   
ITEM 1A.
   
ITEM 2.
   
ITEM 3.
   
ITEM 4.
   
ITEM 5.
   
ITEM 6.
   



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)March 31, 2022December 31, 2021(in thousands, except share data; unaudited)June 30, 2022December 31, 2021
AssetsAssets  Assets  
Cash, cash equivalents and restricted cashCash, cash equivalents and restricted cash$170,901 $347,641 Cash, cash equivalents and restricted cash$115,905 $347,641 
Investment securitiesInvestment securities Investment securities 
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at March 31, 2022 and December 31, 2021)790,264 342,222 
Available-for-sale, at fair value (net of zero allowance for credit losses at March 31, 2022 and December 31, 2021)955,457 1,167,568 
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at June 30, 2022 and December 31, 2021)Held-to-maturity, at amortized cost (net of zero allowance for credit losses at June 30, 2022 and December 31, 2021)931,587 342,222 
Available-for-sale, at fair value (net of zero allowance for credit losses at June 30, 2022 and December 31, 2021)Available-for-sale, at fair value (net of zero allowance for credit losses at June 30, 2022 and December 31, 2021)893,149 1,167,568 
Total investment securitiesTotal investment securities1,745,721 1,509,790 Total investment securities1,824,736 1,509,790 
Loans, at amortized costLoans, at amortized cost2,201,854 2,255,645 Loans, at amortized cost2,162,632 2,255,645 
Allowance for credit losses on loansAllowance for credit losses on loans(22,547)(23,023)Allowance for credit losses on loans(22,539)(23,023)
Loans, net of allowance for credit losses on loans
Loans, net of allowance for credit losses on loans
2,179,307 2,232,622 
Loans, net of allowance for credit losses on loans
2,140,093 2,232,622 
GoodwillGoodwill72,754 72,754 Goodwill72,754 72,754 
Bank-owned life insuranceBank-owned life insurance61,536 61,473 Bank-owned life insurance61,834 61,473 
Operating lease right-of-use assetsOperating lease right-of-use assets23,544 23,604 Operating lease right-of-use assets22,353 23,604 
Bank premises and equipment, netBank premises and equipment, net7,236 7,558 Bank premises and equipment, net7,067 7,558 
Core deposit intangible, netCore deposit intangible, net6,225 6,605 Core deposit intangible, net5,851 6,605 
Other real estate ownedOther real estate owned800 800 Other real estate owned800 800 
Interest receivable and other assetsInterest receivable and other assets62,400 51,362 Interest receivable and other assets75,511 51,362 
Total assetsTotal assets$4,330,424 $4,314,209 Total assets$4,326,904 $4,314,209 
Liabilities and Stockholders' EquityLiabilities and Stockholders' Equity Liabilities and Stockholders' Equity 
LiabilitiesLiabilities Liabilities 
DepositsDeposits Deposits 
Non-interest bearingNon-interest bearing$1,960,684 $1,910,240 Non-interest bearing$2,034,717 $1,910,240 
Interest bearingInterest bearing Interest bearing 
Transaction accountsTransaction accounts299,336 290,813 Transaction accounts297,871 290,813 
Savings accountsSavings accounts347,335 340,959 Savings accounts343,585 340,959 
Money market accountsMoney market accounts1,108,852 1,116,303 Money market accounts1,012,823 1,116,303 
Time accountsTime accounts145,135 150,235 Time accounts141,674 150,235 
Total depositsTotal deposits3,861,342 3,808,550 Total deposits3,830,670 3,808,550 
Borrowings and other obligationsBorrowings and other obligations388 419 Borrowings and other obligations356 419 
Operating lease liabilitiesOperating lease liabilities25,351 25,429 Operating lease liabilities24,117 25,429 
Interest payable and other liabilitiesInterest payable and other liabilities22,935 29,443 Interest payable and other liabilities62,188 29,443 
Total liabilitiesTotal liabilities3,910,016 3,863,841 Total liabilities3,917,331 3,863,841 
Commitments and contingent liabilities (Note 8)Commitments and contingent liabilities (Note 8)0Commitments and contingent liabilities (Note 8)0
Stockholders' EquityStockholders' 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 - 16,003,847 and 15,929,243 at March 31, 2022 and December 31, 2021, respectively
213,204 212,524 
Common stock, no par value,
Authorized - 30,000,000 shares; issued and outstanding - 16,009,600 and 15,929,243 at June 30, 2022 and December 31, 2021, respectively
Common stock, no par value,
Authorized - 30,000,000 shares; issued and outstanding - 16,009,600 and 15,929,243 at June 30, 2022 and December 31, 2021, respectively
213,864 212,524 
Retained earningsRetained earnings246,511 239,868 Retained earnings253,737 239,868 
Accumulated other comprehensive loss, net of taxesAccumulated other comprehensive loss, net of taxes(39,307)(2,024)Accumulated other comprehensive loss, net of taxes(58,028)(2,024)
Total stockholders' equityTotal stockholders' equity420,408 450,368 Total stockholders' equity409,573 450,368 
Total liabilities and stockholders' equityTotal liabilities and stockholders' equity$4,330,424 $4,314,209 Total liabilities and stockholders' equity$4,326,904 $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 endedThree months endedSix months ended
(in thousands, except per share amounts; unaudited)(in thousands, except per share amounts; unaudited)March 31, 2022December 31, 2021March 31, 2021(in thousands, except per share amounts; unaudited)June 30, 2022March 31, 2022June 30, 2021June 30, 2022June 30, 2021
Interest incomeInterest income  Interest income   
Interest and fees on loansInterest and fees on loans$23,677 25,495 $20,661 Interest and fees on loans$23,334 $23,677 $21,429 $47,011 $42,090 
Interest on investment securitiesInterest on investment securities6,693 5,625 3,129 Interest on investment securities8,273 6,693 3,504 14,966 6,633 
Interest on federal funds sold and due from banksInterest on federal funds sold and due from banks106 125 42 Interest on federal funds sold and due from banks180 106 54 286 96 
Total interest incomeTotal interest income30,476 31,245 23,832 Total interest income31,787 30,476 24,987 62,263 48,819 
Interest expenseInterest expense Interest expense  
Interest on interest-bearing transaction accountsInterest on interest-bearing transaction accounts56 53 39 Interest on interest-bearing transaction accounts53 56 39 109 78 
Interest on savings accountsInterest on savings accounts29 28 19 Interest on savings accounts32 29 21 61 40 
Interest on money market accountsInterest on money market accounts478 505 286 Interest on money market accounts438 478 312 916 598 
Interest on time accountsInterest on time accounts14 25 96 Interest on time accounts67 14 81 81 177 
Interest on borrowings and other obligationsInterest on borrowings and other obligations— Interest on borrowings and other obligations— — — 
Interest on subordinated debentureInterest on subordinated debenture— — 1,361 Interest on subordinated debenture— — — — 1,361 
Total interest expenseTotal interest expense578 612 1,801 Total interest expense590 578 453 1,168 2,254 
Net interest incomeNet interest income29,898 30,633 22,031 Net interest income31,197 29,898 24,534 61,095 46,565 
(Reversal of) provision for credit losses on loans(485)600 (2,929)
(Reversal of) provision for credit losses on unfunded loan commitments(318)210 (590)
Net interest income after (reversal of) provision for credit losses30,701 29,823 25,550 
Reversal of credit losses on loansReversal of credit losses on loans— (485)(920)(485)(3,849)
Reversal of credit losses on unfunded loan commitmentsReversal of credit losses on unfunded loan commitments— (318)(612)(318)(1,202)
Net interest income after reversal of credit lossesNet interest income after reversal of credit losses31,197 30,701 26,066 61,898 51,616 
Non-interest incomeNon-interest income Non-interest income  
Wealth Management and Trust ServicesWealth Management and Trust Services600 607 488 Wealth Management and Trust Services630 600 530 1,230 1,018 
Debit card interchange fees, netDebit card interchange fees, net505 544 366 Debit card interchange fees, net531 505 419 1,036 785 
Service charges on deposit accountsService charges on deposit accounts488 531 281 Service charges on deposit accounts465 488 317 953 598 
Earnings on bank-owned life insurance, netEarnings on bank-owned life insurance, net413 302 257 Earnings on bank-owned life insurance, net298 413 233 711 490 
Dividends on Federal Home Loan Bank stockDividends on Federal Home Loan Bank stock259 255 149 Dividends on Federal Home Loan Bank stock249 259 177 508 326 
Merchant interchange fees, netMerchant interchange fees, net140 175 57 Merchant interchange fees, net149 140 61 289 118 
Losses on sale of investment securities, net— (17)— 
Other incomeOther income462 322 228 Other income406 462 285 868 513 
Total non-interest incomeTotal non-interest income2,867 2,719 1,826 Total non-interest income2,728 2,867 2,022 5,595 3,848 
Non-interest expenseNon-interest expense Non-interest expense  
Salaries and related benefitsSalaries and related benefits11,548 10,716 9,208 Salaries and related benefits10,341 11,548 8,888 21,889 18,096 
Occupancy and equipmentOccupancy and equipment1,909 1,929 1,751 Occupancy and equipment1,894 1,909 1,751 3,803 3,502 
Data processingData processing1,277 1,887 819 Data processing1,199 1,277 820 2,476 1,639 
Professional servicesProfessional services913 653 863 Professional services665 913 986 1,578 1,849 
Information technologyInformation technology478 445 313 Information technology468 478 296 946 609 
Depreciation and amortizationDepreciation and amortization452 461 459 Depreciation and amortization393 452 389 845 848 
Amortization of core deposit intangibleAmortization of core deposit intangible380 393 204 Amortization of core deposit intangible374 380 204 754 408 
Directors' expenseDirectors' expense311 297 175 Directors' expense294 311 230 605 405 
Federal Deposit Insurance Corporation insuranceFederal Deposit Insurance Corporation insurance290 292 179 Federal Deposit Insurance Corporation insurance296 290 182 586 361 
Charitable contributionsCharitable contributions45 90 31 Charitable contributions511 45 462 556 493 
Other expenseOther expense1,772 1,821 1,410 Other expense2,471 1,772 1,348 4,243 2,758 
Total non-interest expenseTotal non-interest expense19,375 18,984 15,412 Total non-interest expense18,906 19,375 15,556 38,281 30,968 
Income before provision for income taxesIncome before provision for income taxes14,193 13,558 11,964 Income before provision for income taxes15,019 14,193 12,532 29,212 24,496 
Provision for income taxesProvision for income taxes3,728 3,844 3,017 Provision for income taxes3,953 3,728 3,247 7,681 6,264 
Net incomeNet income$10,465 $9,714 $8,947 Net income$11,066 $10,465 $9,285 $21,531 $18,232 
Net income per common share:Net income per common share: Net income per common share:  
BasicBasic$0.66 $0.61 $0.67 Basic$0.70 $0.66 $0.71 $1.35 $1.38 
DilutedDiluted$0.66 $0.61 $0.66 Diluted$0.69 $0.66 $0.71 $1.35 $1.37 
Weighted average shares:Weighted average shares: Weighted average shares:  
BasicBasic15,876 15,948 13,363 Basic15,921 15,876 13,092 15,898 13,227 
DilutedDiluted15,946 16,027 13,469 Diluted15,955 15,946 13,164 15,950 13,316 
Comprehensive income (loss):
Comprehensive (loss) income:Comprehensive (loss) income:
Net incomeNet income$10,465 $9,714 $8,947 Net income$11,066 $10,465 $9,285 $21,531 $18,232 
Other comprehensive income (loss):
Other comprehensive (loss) income:Other comprehensive (loss) income:
Change in net unrealized (losses) gains on available-for-sale securitiesChange in net unrealized (losses) gains on available-for-sale securities(38,228)(12,723)(9,082)Change in net unrealized (losses) gains on available-for-sale securities(27,050)(38,228)2,798 (65,278)(6,284)
Reclassification adjustment for losses on available-for-sale securities included in net income— 17 — 
Net unrealized losses on securities transferred from available-for-sale to held-to-maturityNet unrealized losses on securities transferred from available-for-sale to held-to-maturity(14,847)— — Net unrealized losses on securities transferred from available-for-sale to held-to-maturity— (14,847)— (14,847)— 
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturityAmortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity144 108 143 Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity472 144 138 616 281 
Other comprehensive loss, before tax(52,931)(12,598)(8,939)
Deferred tax benefit(15,648)(3,726)(2,644)
Other comprehensive loss, net of tax(37,283)(8,872)(6,295)
Other comprehensive (loss) income, before taxOther comprehensive (loss) income, before tax(26,578)(52,931)2,936 (79,509)(6,003)
Deferred tax (benefit) expenseDeferred tax (benefit) expense(7,857)(15,648)864 (23,505)(1,780)
Other comprehensive (loss) income, net of taxOther comprehensive (loss) income, net of tax(18,721)(37,283)2,072 (56,004)(4,223)
Total comprehensive (loss) incomeTotal comprehensive (loss) income$(26,818)$842 $2,652 Total comprehensive (loss) income$(7,655)$(26,818)$11,357 $(34,473)$14,009 
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 March 31,June 30, 2022 and 2021
(in thousands, except share data; unaudited)(in thousands, except share data; unaudited)Common StockRetained
Earnings
Accumulated Other
Comprehensive (Loss) Income,
Net of Taxes
 Total(in thousands, except share data; unaudited)Common StockRetained
Earnings
Accumulated Other
Comprehensive (Loss) Income,
Net of Taxes
 Total
SharesAmountSharesAmount
Three months ended March 31, 2022Three months ended June 30, 2022
Balance at January 1, 202215,929,243 $212,524 $239,868 $(2,024)$450,368 
Balance at April 1, 2022Balance at April 1, 202216,003,847 $213,204 $246,511 $(39,307)$420,408 
Net incomeNet income— — 10,465 — 10,465 Net income— — 11,066 — 11,066 
Other comprehensive loss— — — (37,283)(37,283)
Other comprehensive loss, net of taxOther comprehensive loss, net of tax— — — (18,721)(18,721)
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdingsStock options exercised, net of shares surrendered for cashless exercises and tax withholdings35,543 739 — — 739 Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings4,768 81 — — 81 
Stock issued under employee stock purchase planStock issued under employee stock purchase plan936 30 — — 30 
Stock issued under employee stock ownership planStock issued under employee stock ownership plan13,000 412 — — 412 
Stock issued under employee stock ownership plan12,000 417 — — 417 
Restricted stock granted46,672 — — — — 
Restricted stock surrendered for tax withholdings upon vestingRestricted stock surrendered for tax withholdings upon vesting(836)(29)— — (29)Restricted stock surrendered for tax withholdings upon vesting(333)(11)— — (11)
Restricted stock forfeited / cancelledRestricted stock forfeited / cancelled(649)— — — — Restricted stock forfeited / cancelled(12,618)— — — — 
Stock-based compensation - stock optionsStock-based compensation - stock options— 86 — — 86 Stock-based compensation - stock options— 29 — — 29 
Stock-based compensation - restricted stockStock-based compensation - restricted stock— 151 — — 151 Stock-based compensation - restricted stock— 119 — — 119 
Cash dividends paid on common stock ($0.24 per share)Cash dividends paid on common stock ($0.24 per share)— — (3,822)— (3,822)Cash dividends paid on common stock ($0.24 per share)— — (3,840)— (3,840)
Stock issued in payment of director fees5,149 193 — — 193 
Stock repurchased, including commissions(23,275)(877)— — (877)
Balance at March 31, 202216,003,847 $213,204 $246,511 $(39,307)$420,408 
Three months ended March 31, 2021
Balance at January 1, 202113,500,453 $125,905 $219,747 $12,601 $358,253 
Balance at June 30, 2022Balance at June 30, 202216,009,600 $213,864 $253,737 $(58,028)$409,573 
Three months ended June 30, 2021
Balance at April 1, 2021Balance at April 1, 202113,326,509 $118,386 $225,600 $6,306 $350,292 
Net incomeNet income— — 8,947 — 8,947 Net income— — 9,285 — 9,285 
Other comprehensive loss— — — (6,295)(6,295)
Other comprehensive income, net of taxOther comprehensive income, net of tax— — — 2,072 2,072 
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdingsStock options exercised, net of shares surrendered for cashless exercises and tax withholdings17,180 38 — — 38 Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings14,000 314 — — 314 
Stock issued under employee stock purchase planStock issued under employee stock purchase plan778 28 — — 28 Stock issued under employee stock purchase plan831 25 — — 25 
Stock issued under employee stock ownership planStock issued under employee stock ownership plan9,000 332 — — 332 Stock issued under employee stock ownership plan9,300 336 — — 336 
Restricted stock grantedRestricted stock granted27,054 — — — — Restricted stock granted2,400 — — — — 
Restricted stock surrendered for tax withholdings upon vesting(3,961)(156)— — (156)
Restricted stock forfeited / cancelled(3,848)— — — — 
Stock-based compensation - stock optionsStock-based compensation - stock options— 172 — — 172 Stock-based compensation - stock options— 28 — — 28 
Stock-based compensation - restricted stockStock-based compensation - restricted stock— 443 — — 443 Stock-based compensation - restricted stock— 95 — — 95 
Cash dividends paid on common stock ($0.23 per share)Cash dividends paid on common stock ($0.23 per share)— — (3,094)— (3,094)Cash dividends paid on common stock ($0.23 per share)— — (3,044)— (3,044)
Stock purchased by directors under director stock plan519 18 — — 18 
Stock issued in payment of director fees3,347 117 — — 117 
Stock repurchased, including commissionsStock repurchased, including commissions(224,013)(8,511)— — (8,511)Stock repurchased, including commissions(297,935)(10,754)— — (10,754)
Balance at March 31, 202113,326,509 $118,386 $225,600 $6,306 $350,292 
Balance at June 30, 2021Balance at June 30, 202113,055,105 $108,430 $231,841 $8,378 $348,649 

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 six months ended June 30, 2022 and 2021
(in thousands, except share data; unaudited)Common StockRetained
Earnings
Accumulated Other
Comprehensive (Loss) Income,
Net of Taxes
 Total
SharesAmount
Six months ended June 30, 2022
Balance at January 1, 202215,929,243 $212,524 $239,868 $(2,024)$450,368 
Net income— — 21,531 — 21,531 
Other comprehensive loss, net of tax— — — (56,004)(56,004)
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings40,311 820 — — 820 
Stock issued under employee stock purchase plan936 30 — — 30 
Stock issued under employee stock ownership plan25,000 829 — — 829 
Restricted stock granted46,672 — — — — 
Restricted stock surrendered for tax withholdings upon vesting(1,169)(40)— — (40)
Restricted stock forfeited / cancelled(13,267)— — — — 
Stock-based compensation - stock options— 115 — — 115 
Stock-based compensation - restricted stock— 270 — — 270 
Cash dividends paid on common stock ($0.48 per share)— — (7,662)— (7,662)
Stock issued in payment of director fees5,149 193 — — 193 
Stock repurchased, net of commissions(23,275)(877)— — (877)
Balance at June 30, 202216,009,600 $213,864 $253,737 $(58,028)$409,573 
Six months ended June 30, 2021
Balance at January 1, 202113,500,453 $125,905 $219,747 $12,601 $358,253 
Net income— — 18,232 — 18,232 
Other comprehensive loss, net of tax— — — (4,223)(4,223)
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings31,180 351 — — 351 
Stock issued under employee stock purchase plan1,609 53 — — 53 
Stock issued under employee stock ownership plan18,300 668 — — 668 
Restricted stock granted29,454 — — — — 
Restricted stock surrendered for tax withholdings upon vesting(3,961)(156)— — (156)
Restricted stock forfeited / cancelled(3,848)— — — — 
Stock-based compensation - stock options— 200 — — 200 
Stock-based compensation - restricted stock— 538 — — 538 
Cash dividends paid on common stock ($0.46 per share)— — (6,138)— (6,138)
Stock purchased by directors under director stock plan519 18 — — 18 
Stock issued in payment of director fees3,347 117 — — 117 
Stock repurchased, net of commissions(521,948)(19,264)— — (19,264)
Balance at June 30, 202113,055,105 $108,430 $231,841 $8,378 $348,649 
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 threesix months ended March 31,June 30, 2022 and 2021
(in thousands; unaudited)(in thousands; unaudited)March 31, 2022March 31, 2021(in thousands; unaudited)June 30, 2022June 30, 2021
Cash Flows from Operating Activities:Cash Flows from Operating Activities: Cash Flows from Operating Activities: 
Net incomeNet income$10,465 $8,947 Net income$21,531 $18,232 
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(485)(2,929)
(Reversal of) provision for credit losses on unfunded loan commitments(318)(590)
Reversal of credit losses on loansReversal of credit losses on loans(485)(3,849)
Reversal of credit losses on unfunded loan commitmentsReversal of credit losses on unfunded loan commitments(318)(1,202)
Noncash contribution expense to employee stock ownership planNoncash contribution expense to employee stock ownership plan417 332 Noncash contribution expense to employee stock ownership plan829 668 
Noncash director compensation expenseNoncash director compensation expense244 162 Noncash director compensation expense193 117 
Stock-based compensation expenseStock-based compensation expense237 615 Stock-based compensation expense385 738 
Amortization of core deposit intangibleAmortization of core deposit intangible380 204 Amortization of core deposit intangible754 408 
Amortization of investment security premiums, net of accretion of discountsAmortization of investment security premiums, net of accretion of discounts2,497 685 Amortization of investment security premiums, net of accretion of discounts4,963 1,753 
Accretion of premiums (discounts) on acquired loansAccretion of premiums (discounts) on acquired loans115 (33)Accretion of premiums (discounts) on acquired loans281 (78)
Accretion of discount on subordinated debentureAccretion of discount on subordinated debenture— 1,347 Accretion of discount on subordinated debenture— 1,347 
Net change in deferred loan origination costs/feesNet change in deferred loan origination costs/fees(1,591)2,658 Net change in deferred loan origination costs/fees(2,322)1,146 
Depreciation and amortizationDepreciation and amortization452 459 Depreciation and amortization845 848 
Earnings on bank-owned life insurance policiesEarnings on bank-owned life insurance policies(413)(257)Earnings on bank-owned life insurance policies(711)(490)
Net changes in interest receivable and other assetsNet changes in interest receivable and other assets4,648 2,901 Net changes in interest receivable and other assets(443)952 
Net changes in interest payable and other liabilitiesNet changes in interest payable and other liabilities(5,169)(2,065)Net changes in interest payable and other liabilities(5,894)(821)
Total adjustmentsTotal adjustments1,014 3,489 Total adjustments(1,923)1,537 
Net cash provided by operating activitiesNet cash provided by operating activities11,479 12,436 Net cash provided by operating activities19,608 19,769 
Cash Flows from Investing Activities:Cash Flows from Investing Activities: Cash Flows from Investing Activities: 
Purchase of held-to-maturity securitiesPurchase of held-to-maturity securities(95,932)(41,607)Purchase of held-to-maturity securities(208,784)(74,521)
Purchase of available-for-sale securitiesPurchase of available-for-sale securities(243,459)(151,828)Purchase of available-for-sale securities(243,459)(170,161)
Proceeds from paydowns/maturities of held-to-maturity securitiesProceeds from paydowns/maturities of held-to-maturity securities5,067 8,600 Proceeds from paydowns/maturities of held-to-maturity securities16,827 14,376 
Proceeds from paydowns/maturities of available-for-sale securitiesProceeds from paydowns/maturities of available-for-sale securities42,966 16,060 Proceeds from paydowns/maturities of available-for-sale securities76,276 36,936 
Loan principal collected, net of originationsLoan principal collected, net of originations54,524 (36,543)Loan principal collected, net of originations93,875 84,259 
Purchase of bank-owned life insurance policiesPurchase of bank-owned life insurance policies— (1,943)
Cash receipts from bank-owned life insurance policiesCash receipts from bank-owned life insurance policies350 — Cash receipts from bank-owned life insurance policies350 — 
Purchase of premises and equipmentPurchase of premises and equipment(130)(144)Purchase of premises and equipment(354)(765)
Cash paid for low income housing tax credit investmentCash paid for low income housing tax credit investment(4)(313)Cash paid for low income housing tax credit investment(30)(346)
Net cash used in investing activitiesNet cash used in investing activities(236,618)(205,775)Net cash used in investing activities(265,299)(112,165)
Cash Flows from Financing Activities:Cash Flows from Financing Activities: Cash Flows from Financing Activities: 
Net increase in depositsNet increase in deposits52,792 151,950 Net increase in deposits22,120 179,326 
Proceeds from stock options exercisedProceeds from stock options exercised739 38 Proceeds from stock options exercised820 351 
Restricted stock surrendered for tax withholdings upon vestingRestricted stock surrendered for tax withholdings upon vesting(29)(156)Restricted stock surrendered for tax withholdings upon vesting(40)(156)
Proceeds from stock issued under employee and director stock purchase plansProceeds from stock issued under employee and director stock purchase plans— 46 Proceeds from stock issued under employee and director stock purchase plans30 71 
Stock repurchased, including commissionsStock repurchased, including commissions(1,250)(8,792)Stock repurchased, including commissions(1,250)(19,677)
Repayment of subordinated debenture including execution costsRepayment of subordinated debenture including execution costs— (4,126)Repayment of subordinated debenture including execution costs— (4,126)
Repayment of finance lease obligationsRepayment of finance lease obligations(31)(28)Repayment of finance lease obligations(63)(32)
Cash dividends paid on common stockCash dividends paid on common stock(3,822)(3,094)Cash dividends paid on common stock(7,662)(6,138)
Net cash provided by financing activitiesNet cash provided by financing activities48,399 135,838 Net cash provided by financing activities13,955 149,619 
Net decrease in cash, cash equivalents and restricted cash(176,740)(57,501)
Net (decrease) increase in cash, cash equivalents and restricted cashNet (decrease) increase in cash, cash equivalents and restricted cash(231,736)57,223 
Cash, cash equivalents and restricted cash at beginning of periodCash, cash equivalents and restricted cash at beginning of period347,641 200,320 Cash, cash equivalents and restricted cash at beginning of period347,641 200,320 
Cash, cash equivalents and restricted cash at end of periodCash, cash equivalents and restricted cash at end of period$170,901 $142,819 Cash, cash equivalents and restricted cash at end of period$115,905 $257,543 
Supplemental disclosure of cash flow information:Supplemental disclosure of cash flow information:Supplemental disclosure of cash flow information:
Cash paid in interestCash paid in interest$588 $492 Cash paid in interest$1,175 $951 
Cash paid in income taxesCash paid in income taxes$— $— Cash paid in income taxes$8,450 $6,000 
Supplemental disclosure of noncash investing and financing activities:Supplemental disclosure of noncash investing and financing activities: Supplemental disclosure of noncash investing and financing activities: 
Change in net unrealized gain or loss on available-for-sale securities$(38,228)$(9,092)
Change in net unrealized gain or (loss) on available-for-sale securitiesChange in net unrealized gain or (loss) on available-for-sale securities$(65,278)$(6,284)
Securities transferred from available-for-sale to held-to-maturity, at fair valueSecurities transferred from available-for-sale to held-to-maturity, at fair value$357,482 $— 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-maturityAmortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity$144 $143 Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity$616 $281 
Purchase of investment security not yet settled$— $10,000 
Purchase of investment securities not yet settledPurchase of investment securities not yet settled$40,278 $— 
Stock issued to employee stock ownership planStock issued to employee stock ownership plan$417 $332 Stock issued to employee stock ownership plan$829 $668 
Stock issued in payment of director feesStock issued in payment of director fees$193 $117 Stock issued in payment of director fees$193 $117 
Repurchase of stock not yet settled$— $132 
Restricted cash1
Restricted cash1
$930 $1,930 
Restricted cash1
$930 $1,930 
1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San 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).
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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 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 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, the difference in EPS is nominal for these participating securities.
Three months ended
(in thousands, except per share data)March 31, 2022March 31, 2021
Weighted average basic common shares outstanding15,876 13,363 
Potentially dilutive common shares related to:
Stock options52 81 
Unvested restricted stock awards18 25 
Weighted average diluted shares outstanding15,946 13,469 
Net income$10,465 $8,947 
Basic EPS$0.66 $0.67 
Diluted EPS$0.66 $0.66 
Weighted average anti-dilutive common shares not included in the calculation of diluted EPS125 80 

Three months endedSix months ended
(in thousands, except per share data)June 30, 2022June 30, 2021June 30, 2022June 30, 2021
Weighted average basic common shares outstanding15,921 13,092 15,898 13,227 
Potentially dilutive common shares related to:
Stock options24 54 38 67 
Unvested restricted stock awards10 18 14 22 
Weighted average diluted shares outstanding15,955 13,164 15,950 13,316 
Net income$11,066 $9,285 $21,531 $18,232 
Basic EPS$0.70 $0.71 $1.35 $1.38 
Diluted EPS$0.69 $0.71 $1.35 $1.37 
Weighted average anti-dilutive common shares not included in the calculation of diluted EPS230 111 167 88 


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Note 2: Recently Adopted and Issued Accounting Standards

Accounting Standards Not Yet Effective
In March 2020, the FASB issued ASUAccounting 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 willto 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 intendedintend 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 March 31,June 30, 2022, we had 4 interest rate swap contracts with notional values totaling $12.8$12.5 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 us and our counterparty an us. We have not elected to apply the amendments at this time and will continue to assess the applicability of this ASU to us as we 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 requiresrequire 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 impactaffect 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.
Page-8


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 ValueQuoted 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 ValueQuoted 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
March 31, 2022   
June 30, 2022June 30, 2022   
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 agenciesMortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies$585,224 $— $585,224 $— OCIMortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies$539,991 $— $539,991 $— OCI
SBA-backed securitiesSBA-backed securities$54,652 $— $54,652 $— OCISBA-backed securities$53,168 $— $53,168 $— OCI
Debentures of government sponsored agenciesDebentures of government sponsored agencies$143,297 $— $143,297 $— OCIDebentures of government sponsored agencies$139,340 $— $139,340 $— OCI
U.S. Treasury securitiesU.S. Treasury securities$10,973 $10,973 $— $— OCIU.S. Treasury securities$10,644 $10,644 $— $— OCI
Obligations of state and political subdivisionsObligations of state and political subdivisions$124,690 $— $124,690 $— OCIObligations of state and political subdivisions$114,263 $— $114,263 $— OCI
Corporate bondsCorporate bonds$34,860 $— $34,860 $— OCICorporate bonds$34,092 $— $34,092 $— OCI
Asset-backed securities Asset-backed securities$1,761 $— $1,761 $— OCI Asset-backed securities$1,651 $— $1,651 $— OCI
Derivative financial assets (interest rate contracts)Derivative financial assets (interest rate contracts)$42 $— $42 $— NIDerivative financial assets (interest rate contracts)$206 $— $206 $— NI
Derivative financial liabilities (interest rate contracts)Derivative financial liabilities (interest rate contracts)$370 $— $370 $— NIDerivative financial liabilities (interest rate contracts)$104 $— $104 $— NI
December 31, 2021December 31, 2021December 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 agenciesMortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies$759,576 $— $759,576 $— OCIMortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies$759,576 $— $759,576 $— OCI
SBA-backed securitiesSBA-backed securities$33,478 $— $33,478 $— OCISBA-backed securities$33,478 $— $33,478 $— OCI
Debentures of government sponsored agenciesDebentures of government sponsored agencies$188,527 $— $188,527 $— OCIDebentures of government sponsored agencies$188,527 $— $188,527 $— OCI
U.S. Treasury securitiesU.S. Treasury securities$11,630 $11,630 $— $— OCIU.S. Treasury securities$11,630 $11,630 $— $— OCI
Obligations of state and political subdivisionsObligations of state and political subdivisions$134,000 $— $134,000 $— OCIObligations of state and political subdivisions$134,000 $— $134,000 $— OCI
Corporate bondsCorporate bonds$38,495 $— $38,495 $— OCICorporate bonds$38,495 $— $38,495 $— OCI
Asset-backed securitiesAsset-backed securities$1,862 $— $1,862 $— OCIAsset-backed securities$1,862 $— $1,862 $— OCI
Derivative financial liabilities (interest rate contracts)Derivative financial liabilities (interest rate contracts)$1,085 $— $1,085 $— NIDerivative financial liabilities (interest rate contracts)$1,085 $— $1,085 $— 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 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 March 31,June 30, 2022 and December 31, 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, and we did not record any write-downs during the threesix months ended March 31,June 30, 2022 or March 31,June 30, 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. 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 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 ("ARB") 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 March 31,June 30, 2022 and December 31, 2021.
(in thousands)(in thousands)Carrying ValueQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs 
(Level 3)
(in thousands)Carrying ValueQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs 
(Level 3)
March 31, 2022
June 30, 2022June 30, 2022
Other real estate ownedOther real estate owned$800 $— $— $800 Other real estate owned$800 $— $— $800 
December 31, 2021December 31, 2021December 31, 2021
Other real estate ownedOther real estate owned$800 $— $— $800 Other real estate owned$800 $— $— $800 


Page-10

Disclosures about Fair Value of Financial Instruments
 
The table below is a summary of fair value estimates for financial instruments as of March 31,June 30, 2022 and December 31, 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 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 March 31,June 30, 2022 or December 31, 2021. The values are discussed in Note 4, Investment Securities.
March 31, 2022December 31, 2021 June 30, 2022December 31, 2021
(in thousands)(in thousands)Carrying AmountsFair ValueFair Value HierarchyCarrying AmountsFair ValueFair Value Hierarchy(in thousands)Carrying AmountsFair ValueFair Value HierarchyCarrying AmountsFair ValueFair Value Hierarchy
Financial assets (recorded at amortized cost):Financial assets (recorded at amortized cost):  Financial assets (recorded at amortized cost):  
Cash and cash equivalentsCash and cash equivalents$170,901 $170,901 Level 1$347,641 $347,641 Level 1Cash and cash equivalents$115,905 $115,905 Level 1$347,641 $347,641 Level 1
Investment securities held-to-maturityInvestment securities held-to-maturity790,264 744,512 Level 2342,222 342,755 Level 2Investment securities held-to-maturity931,587 847,386 Level 2342,222 342,755 Level 2
Loans, netLoans, net2,179,307 2,173,298 Level 32,232,622 2,234,430 Level 3Loans, net2,140,093 2,123,254 Level 32,232,622 2,234,430 Level 3
Interest receivableInterest receivable11,298 11,298 Level 211,889 11,889 Level 2Interest receivable12,248 12,248 Level 211,889 11,889 Level 2
Financial liabilities (recorded at amortized cost):Financial liabilities (recorded at amortized cost):  Financial liabilities (recorded at amortized cost):  
Time depositsTime deposits145,135 145,553 Level 2150,235 150,475 Level 2Time deposits141,674 141,857 Level 2150,235 150,475 Level 2
Interest payableInterest payable71 71 Level 281 81 Level 2Interest payable74 74 Level 281 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 differ from actual price from a prospective 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.
The value of 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 March 31,June 30, 2022 or December 31, 2021.

Note 4:  Investment Securities
 
Our investment securities portfolio consists of U.S. Treasury securities, obligations of state and political subdivisions, 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, 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.


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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 March 31,June 30, 2022 and December 31, 2021 is presented below.
Held-to-maturity:
Amortized Cost 1
Allowance for Credit LossesNet Carrying AmountGross UnrealizedFair Value
(in thousands)Gains(Losses)
March 31, 2022
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA$339,149 $— $339,149 $148 $(18,528)$320,769 
CMOs issued by FHLMC187,459 — 187,459 42 (11,811)175,690 
CMOs issued by FNMA51,732 — 51,732 — (1,000)50,732 
CMOs issued by GNMA12,375 — 12,375 — (431)11,944 
SBA-backed securities3,245 — 3,245 — (29)3,216 
Debentures of government-sponsored agencies115,603 — 115,603 — (9,477)106,126 
Obligations of state and political subdivisions50,701 — 50,701 (4,667)46,035 
Corporate bonds30,000 030,000 — — 30,000 
Total held-to-maturity$790,264 $— $790,264 $191 $(45,943)$744,512 
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 FHLMC106,851 — 106,851 668 (1,045)106,474 
  CMOs issued by FNMA4,866 — 4,866 128 — 4,994 
  SBA-backed securities4,840 — 4,840 198 — 5,038 
Debentures of government-sponsored agencies51,472 — 51,472 — (901)50,571 
Obligations of state and political subdivisions47,203 — 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 $1.8 million and $1.1 million at March 31, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.
Page-11

Held-to-maturity:
Amortized Cost 1
Allowance for Credit LossesNet Carrying AmountGross UnrealizedFair Value
(in thousands)Gains(Losses)
June 30, 2022
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA$337,998 $— $337,998 $$(34,731)$303,271 
CMOs issued by FHLMC230,553 — 230,553 172 (20,766)209,959 
CMOs issued by FNMA118,956 — 118,956 853 (2,574)117,235 
CMOs issued by GNMA12,329 — 12,329 — (982)11,347 
SBA-backed securities3,244 — 3,244 — (66)3,178 
Debentures of government-sponsored agencies135,678 — 135,678 — (17,457)118,221 
Obligations of state and political subdivisions62,829 — 62,829 19 (8,304)54,544 
Corporate bonds30,000 — 30,000 — (369)29,631 
Total held-to-maturity$931,587 $— $931,587 $1,048 $(85,249)$847,386 
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 FHLMC106,851 — 106,851 668 (1,045)106,474 
  CMOs issued by FNMA4,866 — 4,866 128 — 4,994 
  SBA-backed securities4,840 — 4,840 198 — 5,038 
Debentures of government-sponsored agencies51,472 — 51,472 — (901)50,571 
Obligations of state and political subdivisions47,203 — 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 $3.1 million and $1.1 million at June 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 basiscollectively 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 considersconsiders: (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 March 31,June 30, 2022.
Obligations of state and political subdivisionsCorporate bondsObligations of state and political subdivisionsCorporate bonds
(in thousands)(in thousands)March 31, 2022December 31, 2021March 31, 2022December 31, 2021(in thousands)June 30, 2022December 31, 2021June 30, 2022December 31, 2021
AAA / AaaAAA / Aaa$37,735 $34,229 $— $— AAA / Aaa$43,188 $34,229 $— $— 
AA / AaAA / Aa12,866 12,873 — — AA / Aa19,541 12,873 — — 
A2 / AA2 / A100 101 30,000 — A2 / A100 101 30,000 — 
TotalTotal$50,701 $47,203 $30,000 $— Total$62,829 $47,203 $30,000 $— 


Page-12

A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of March 31,June 30, 2022 and December 31, 2021 is presented below.
Available-for-sale:Available-for-sale:
Amortized Cost 1
Gross UnrealizedAllowance for Credit LossesFair ValueAvailable-for-sale:
Amortized Cost 1
Gross UnrealizedAllowance for Credit LossesFair Value
(in thousands)(in thousands)Gains(Losses)(in thousands)Gains(Losses)
March 31, 2022
June 30, 2022June 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 GNMAMBS pass-through securities issued by FHLMC, FNMA and GNMA$133,883 $252 $(5,486)$— $128,649 MBS pass-through securities issued by FHLMC, FNMA and GNMA$127,526 $23 $(8,784)$— $118,765 
CMOs issued by FHLMCCMOs issued by FHLMC390,501 103 (14,756)— 375,848 CMOs issued by FHLMC370,610 (23,017)— 347,594 
CMOs issued by FNMACMOs issued by FNMA43,750 (2,258)— 41,501 CMOs issued by FNMA40,375 (2,960)— 37,416 
CMOs issued by GNMACMOs issued by GNMA40,948 (1,725)— 39,226 CMOs issued by GNMA38,629 (2,414)— 36,216 
SBA-backed securitiesSBA-backed securities56,085 11 (1,444)— 54,652 SBA-backed securities55,297 (2,133)— 53,168 
Debentures of government- sponsored agenciesDebentures of government- sponsored agencies150,091 (6,797)— 143,297 Debentures of government- sponsored agencies149,099 — (9,759)— 139,340 
U.S. Treasury securitiesU.S. Treasury securities11,890 — (917)— 10,973 U.S. Treasury securities11,895 — (1,251)— 10,644 
Obligations of state and political subdivisionsObligations of state and political subdivisions129,706 498 (5,514)— 124,690 Obligations of state and political subdivisions128,238 50 (14,025)— 114,263 
Corporate bondsCorporate bonds36,988 — (2,128)— 34,860 Corporate bonds36,989 — (2,897)— 34,092 
Asset-backed securitiesAsset-backed securities1,795 — (34)— 1,761 Asset-backed securities1,721 — (70)— 1,651 
Total available-for-saleTotal available-for-sale$995,637 $879 $(41,059)$— $955,457 Total available-for-sale$960,379 $80 $(67,310)$— $893,149 
December 31, 2021December 31, 2021December 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, FNMA and GNMAMBS pass-through securities issued by FHLMC, FNMA and GNMA$316,090 $1,224 $(2,784)$— $314,530 MBS pass-through securities issued by FHLMC, FNMA and GNMA$316,090 $1,224 $(2,784)$— $314,530 
CMOs issued by FHLMCCMOs issued by FHLMC343,047 3,209 (4,829)— 341,427 CMOs issued by FHLMC343,047 3,209 (4,829)— 341,427 
CMOs issued by FNMACMOs issued by FNMA48,187 152 (611)— 47,728 CMOs issued by FNMA48,187 152 (611)— 47,728 
CMOs issued by GNMACMOs issued by GNMA56,345 99 (553)— 55,891 CMOs issued by GNMA56,345 99 (553)— 55,891 
SBA-backed securitiesSBA-backed securities32,640 993 (155)— 33,478 SBA-backed securities32,640 993 (155)— 33,478 
Debentures of government- sponsored agenciesDebentures of government- sponsored agencies191,449 25 (2,947)— 188,527 Debentures of government- sponsored agencies191,449 25 (2,947)— 188,527 
U.S. Treasury securitiesU.S. Treasury securities11,886 — (256)011,630 U.S. Treasury securities11,886 — (256)011,630 
Obligations of state and political subdivisionsObligations of state and political subdivisions129,009 5,372 (381)— 134,000 Obligations of state and political subdivisions129,009 5,372 (381)— 134,000 
Corporate bondsCorporate bonds39,001 — (506)— 38,495 Corporate bonds39,001 — (506)— 38,495 
Asset-backed securitiesAsset-backed securities1,866 — (4)— 1,862 Asset-backed securities1,866 — (4)— 1,862 
Total available-for-saleTotal available-for-sale$1,169,520 $11,074 $(13,026)$— $1,167,568 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 $3.3 million and $3.7 million at March 31, 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 $3.4 million and $3.7 million at June 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 $3.4 million and $3.7 million at June 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 in accumulated other comprehensive loss and is accreted over the remaining lives of the securities.

The amortized cost and fair value of investment debt securities by contractual maturity at March 31,June 30, 2022 and December 31, 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.
March 31, 2022December 31, 2021 June 30, 2022December 31, 2021
Held-to-MaturityAvailable-for-SaleHeld-to-MaturityAvailable-for-Sale Held-to-MaturityAvailable-for-SaleHeld-to-MaturityAvailable-for-Sale
(in thousands)(in thousands)Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value(in thousands)Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
Within one yearWithin one year$101 $102 $5,605 $5,618 $101 $103 $10,785 $10,841 Within one year$100 $100 $3,369 $3,366 $101 $103 $10,785 $10,841 
After one but within five yearsAfter one but within five years43,041 42,969 260,143 251,904 25,666 26,559 219,474 219,957 After one but within five years83,024 81,968 260,444 247,749 25,666 26,559 219,474 219,957 
After five years through ten yearsAfter five years through ten years244,649 227,772 312,767 298,180 182,604 182,303 299,937 300,187 After five years through ten years255,978 228,380 300,994 280,179 182,604 182,303 299,937 300,187 
After ten yearsAfter ten years502,473 473,669 417,122 399,755 133,851 133,790 639,324 636,583 After ten years592,485 536,938 395,572 361,855 133,851 133,790 639,324 636,583 
TotalTotal$790,264 $744,512 $995,637 $955,457 $342,222 $342,755 $1,169,520 $1,167,568 Total$931,587 $847,386 $960,379 $893,149 $342,222 $342,755 $1,169,520 $1,167,568 

There were no sales of investment securities in the first quarterhalf of 2022 or 2021.
Page-13

 Three months ended
Pledged investment securities are shown in the following table:
(in thousands)(in thousands)March 31, 2022December 31, 2021(in thousands)June 30, 2022December 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 ProgramSecure public deposits in compliance with the Local Agency Security Program$208,406 $213,861 Secure public deposits in compliance with the Local Agency Security Program$217,143 $213,861 
Collateral for trust depositsCollateral for trust deposits691 729 Collateral for trust deposits676 729 
Collateral for Wealth Management and Trust Services checking account Collateral for Wealth Management and Trust Services checking account583 614  Collateral for Wealth Management and Trust Services checking account568 614 
Total investment securities pledged to the State of CaliforniaTotal investment securities pledged to the State of California209,680 215,204 Total investment securities pledged to the State of California218,387 215,204 
Bankruptcy trustee deposits pledged with Federal Reserve BankBankruptcy trustee deposits pledged with Federal Reserve Bank2,194 2,645 Bankruptcy trustee deposits pledged with Federal Reserve Bank1,905 2,645 
Total pledged investment securitiesTotal pledged investment securities$211,874 $217,849 Total pledged investment securities$220,292 $217,849 

There were 354409 and 217 securities in unrealized loss positions at March 31,June 30, 2022 and December 31, 2021, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:
March 31, 2022< 12 continuous months≥ 12 continuous monthsTotal securities
 in a loss position
June 30, 2022June 30, 2022< 12 continuous months≥ 12 continuous monthsTotal securities
 in a loss position
(in thousands)(in thousands)Fair valueUnrealized lossFair valueUnrealized lossFair valueUnrealized loss(in thousands)Fair valueUnrealized lossFair valueUnrealized lossFair valueUnrealized loss
Held-to-maturity:Held-to-maturity:Held-to-maturity:
MBS pass-through securities issued by FHLMC, FNMA and GNMAMBS pass-through securities issued by FHLMC, FNMA and GNMA$299,200 $(18,528)$— $— $299,200 $(18,528)MBS pass-through securities issued by FHLMC, FNMA and GNMA$302,998 $(34,731)$— $— $302,998 $(34,731)
CMOs issued by FHLMCCMOs issued by FHLMC165,101 (11,498)4,328 (313)169,429 (11,811)CMOs issued by FHLMC194,163 (20,136)4,018 (630)198,181 (20,766)
CMOs issued by FNMACMOs issued by FNMA25,350 (1,000)— — 25,350 (1,000)CMOs issued by FNMA67,069 (2,574)— — 67,069 (2,574)
CMOs issued by GNMACMOs issued by GNMA11,944 (431)— — 11,944 (431)CMOs issued by GNMA11,347 (982)— — 11,347 (982)
SBA-backed securitiesSBA-backed securities3,216 (29)— — 3,216 $(29)SBA-backed securities3,178 (66)— — 3,178 (66)
Debentures of government-sponsored agenciesDebentures of government-sponsored agencies65,826 (6,510)40,300 (2,967)106,126 $(9,477)Debentures of government-sponsored agencies61,339 (11,007)36,881 (6,450)98,220 (17,457)
Obligations of state and political subdivisionsObligations of state and political subdivisions42,348 (4,667)— — 42,348 (4,667)Obligations of state and political subdivisions51,313 (8,304)— — 51,313 (8,304)
Corporate bondsCorporate bonds29,631 (369)— — 29,631 (369)
Total held-to-maturityTotal held-to-maturity612,985 (42,663)44,628 (3,280)657,613 (45,943)Total held-to-maturity721,038 (78,169)40,899 (7,080)761,937 (85,249)
Available-for-sale:Available-for-sale:Available-for-sale:
MBS pass-through securities issued by FHLMC, FNMA and GNMAMBS pass-through securities issued by FHLMC, FNMA and GNMA108,982 (5,486)— — 108,982 (5,486)MBS pass-through securities issued by FHLMC, FNMA and GNMA113,127 (8,784)— — 113,127 (8,784)
CMOs issued by FHLMCCMOs issued by FHLMC359,856 (14,357)4,107 (399)363,963 (14,756)CMOs issued by FHLMC343,897 (22,540)3,538 (477)347,435 (23,017)
CMOs issued by FNMACMOs issued by FNMA40,170 (2,258)— — 40,170 (2,258)CMOs issued by FNMA33,201 (2,674)4,156 (286)37,357 (2,960)
CMOs issued by GNMACMOs issued by GNMA37,732 (1,725)— — 37,732 (1,725)CMOs issued by GNMA34,696 (2,414)— — 34,696 (2,414)
SBA-backed securitiesSBA-backed securities43,665 (1,400)1,124 (44)44,789 (1,444)SBA-backed securities51,556 (2,091)1,059 (42)52,615 (2,133)
Debentures of government- sponsored agenciesDebentures of government- sponsored agencies114,450 (5,673)7,845 (1,124)122,295 (6,797)Debentures of government- sponsored agencies132,004 (8,126)7,336 (1,633)139,340 (9,759)
U.S. Treasury securitiesU.S. Treasury securities10,973 (917)— — 10,973 (917)U.S. Treasury securities10,644 (1,251)— — 10,644 (1,251)
Obligations of state and political subdivisionsObligations of state and political subdivisions102,115 (5,153)2,243 (361)104,358 (5,514)Obligations of state and political subdivisions101,078 (13,425)2,001 (600)103,079 (14,025)
Corporate bondsCorporate bonds29,421 (1,579)5,440 (549)34,861 (2,128)Corporate bonds28,833 (2,167)5,259 (730)34,092 (2,897)
Asset-backed securitiesAsset-backed securities1,761 (34)— — 1,761 (34)Asset-backed securities1,651 (70)— — 1,651 (70)
Total available-for-saleTotal available-for-sale849,125 (38,582)20,759 (2,477)869,884 (41,059)Total available-for-sale850,687 (63,542)23,349 (3,768)874,036 (67,310)
Total securities at loss positionTotal securities at loss position$1,462,110 $(81,245)$65,387 $(5,757)$1,527,497 $(87,002)Total securities at loss position$1,571,725 $(141,711)$64,248 $(10,848)$1,635,973 $(152,559)
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December 31, 2021December 31, 2021< 12 continuous months≥ 12 continuous monthsTotal securities
 in a loss position
December 31, 2021< 12 continuous months≥ 12 continuous monthsTotal securities
 in a loss position
(in thousands)(in thousands)Fair valueUnrealized lossFair valueUnrealized lossFair valueUnrealized loss(in thousands)Fair valueUnrealized lossFair valueUnrealized lossFair valueUnrealized loss
Held-to-maturity:Held-to-maturity:Held-to-maturity:
MBS pass-through securities issued by FHLMC and FNMAMBS pass-through securities issued by FHLMC and FNMA$76,619 $(712)$— $— 76,619 $(712)MBS pass-through securities issued by FHLMC and FNMA$76,619 $(712)$— $— $76,619 $(712)
CMOs issued by FHLMCCMOs issued by FHLMC54,811 (1,045)— — 54,811 (1,045)CMOs issued by FHLMC54,811 (1,045)— — 54,811 (1,045)
Obligations of state and political subdivisionsObligations of state and political subdivisions19,203 (209)— — 19,203 (209)Obligations of state and political subdivisions19,203 (209)— — 19,203 (209)
Debentures of government-sponsored agenciesDebentures of government-sponsored agencies50,571 (901)— — 50,571 (901)Debentures of government-sponsored agencies50,571 (901)— — 50,571 (901)
Total held-to-maturityTotal held-to-maturity201,204 (2,867)— — 201,204 (2,867)Total held-to-maturity201,204 (2,867)— — 201,204 (2,867)
Available-for-sale:Available-for-sale:Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMAMBS pass-through securities issued by FHLMC and FNMA263,474 (2,784)— — 263,474 (2,784)MBS pass-through securities issued by FHLMC and FNMA263,474 (2,784)— — 263,474 (2,784)
SBA-backed securitiesSBA-backed securities7,478 (112)1,209 (43)8,687 (155)SBA-backed securities7,478 (112)1,209 (43)8,687 (155)
CMOs issued by FHLMCCMOs issued by FHLMC226,175 (4,677)4,415 (152)230,590 (4,829)CMOs issued by FHLMC226,175 (4,677)4,415 (152)230,590 (4,829)
CMOs issued by GNMACMOs issued by GNMA$44,790 $(553)$— $— $44,790 $(553)CMOs issued by GNMA44,790 (553)— — 44,790 (553)
CMOs issued by FNMACMOs issued by FNMA37,348 (611)— — 37,348 (611)CMOs issued by FNMA37,348 (611)— — 37,348 (611)
Debentures of government- sponsored agenciesDebentures of government- sponsored agencies148,979 (2,527)8,549 (420)157,528 (2,947)Debentures of government- sponsored agencies148,979 (2,527)8,549 (420)157,528 (2,947)
U.S. Treasury securitiesU.S. Treasury securities11,629 (256)— — 11,629 (256)U.S. Treasury securities11,629 (256)— — 11,629 (256)
Obligations of state and political subdivisionsObligations of state and political subdivisions17,552 (381)— — 17,552 (381)Obligations of state and political subdivisions17,552 (381)— — 17,552 (381)
Corporate BondsCorporate Bonds38,495 (506)— — 38,495 (506)Corporate Bonds38,495 (506)— — 38,495 (506)
Asset-backed securitiesAsset-backed securities1,861 (4)— — 1,861 (4)Asset-backed securities1,861 (4)— — 1,861 (4)
Total available-for-saleTotal available-for-sale797,781 (12,411)14,173 (615)811,954 (13,026)Total available-for-sale797,781 (12,411)14,173 (615)811,954 (13,026)
Total securities at loss positionTotal securities at loss position$998,985 $(15,278)$14,173 $(615)$1,013,158 $(15,893)Total securities at loss position$998,985 $(15,278)$14,173 $(615)$1,013,158 $(15,893)

As of March 31,June 30, 2022, the investment portfolio included 1718 investment securities that had been in a continuous loss position for twelve months or more and 337391 investment securities that had been in a loss position for less than twelve months.

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 March 31,June 30, 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 March 31,June 30, 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 of FHLB stock included in other assets on the consolidated statements of condition at both March 31,June 30, 2022 and December 31, 2021. The carrying amounts of
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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 March 31,June 30, 2022 and December 31, 2021. On AprilJuly 28, 2022, FHLB announced a cash dividend for the first quarter of 2022 at an annualized dividend rate of 6.00% to be distributed in mid-Maymid-August 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 March 31,June 30, 2022 and December 31, 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 1.6059 and 1.6181 both at March 31,June 30, 2022 and December 31, 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 $3.3 million and $3.7 million at both March 31,June 30, 2022 and December 31, 2021.2021, 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 $2.9$2.7 million and $3.0 million recorded in other assets as of March 31,June 30, 2022 and December 31, 2021, respectively. In the first threesix months of 2022, we recognized $159$317 thousand of low-income housing tax credits and other tax benefits, offset by $134$267 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of March 31,June 30, 2022, our unfunded commitments for these low-income housing tax credit funds totaled $419$392 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first threesix months of 2022 or 2021, as the value of the future tax benefits exceeds the carrying value of the investments.

Note 5:  Loans and Allowance for Credit Losses on Loans

The following table presents the amortized cost of loans by class as of March 31,June 30, 2022 and December 31, 2021.
(in thousands)March 31, 2022December 31, 2021
Commercial and industrial$248,625 $301,602 
Real estate:
  Commercial owner-occupied391,924 392,345 
  Commercial investor-owned1,176,918 1,189,021 
  Construction131,015 119,840 
  Home equity88,092 88,746 
  Other residential114,277 114,558 
Installment and other consumer loans51,003 49,533 
Total loans, at amortized cost 1
2,201,854 2,255,645 
Allowance for credit losses on loans(22,547)(23,023)
Total loans, net of allowance for credit losses on loans$2,179,307 $2,232,622 

(in thousands)June 30, 2022December 31, 2021
Commercial and industrial$213,122 $301,602 
Real estate:
  Commercial owner-occupied382,897 392,345 
  Commercial investor-owned1,190,419 1,189,021 
  Construction118,147 119,840 
  Home equity90,629 88,746 
  Other residential113,361 114,558 
Installment and other consumer loans54,057 49,533 
Total loans, at amortized cost 1
2,162,632 2,255,645 
Allowance for credit losses on loans(22,539)(23,023)
Total loans, net of allowance for credit losses on loans$2,140,093 $2,232,622 
1 Amortized cost includes net deferred loan origination costs (fees) of $690 thousand$1.4 million and $(901) thousand at March 31,June 30, 2022 and December 31, 2021, respectively. Amounts are also net of unrecognized purchase discounts of $2.6$2.7 million and $2.5 million at March 31,June 30, 2022 and December 31, 2021, respectively. Amortized cost excludes accrued interest, which totaled $6.2$5.8 million and $7.1 million at March 31,June 30, 2022 and December 31, 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 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
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of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers,
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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.
 
Pursuant to the 2020 CARES Act, Bank of Marin originated 2,876 guaranteed loans totaling $444.1 million in 2 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 ARB as of the merger date. As of March 31,June 30, 2022, there were 191112 PPP loans outstanding totaling $40.6$17.0 million (net of $993$420 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) included in commercial and industrial loan balances. 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 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 if they meet the requirements of the program. As expected, the vast majority of the PPP loans have been fully forgiven by the 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:
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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.
 
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 March 31,June 30, 2022 and December 31, 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)(in thousands)Term Loans - Amortized Cost by Origination YearRevolving Loans Amortized Cost(in thousands)Term Loans - Amortized Cost by Origination YearRevolving Loans Amortized Cost
March 31, 202220222021202020192018PriorTotal
June 30, 2022June 30, 202220222021202020192018PriorRevolving Loans Amortized CostTotal
Commercial and industrial:Commercial and industrial:Commercial and industrial:
Pass and WatchPass and Watch$2,563 $44,716 $12,583 $24,654 $7,862 $30,950 $112,839 $236,167 Pass and Watch$9,586 $21,160 $9,230 $24,730 $6,988 $28,168 $102,567 $202,429 
Special MentionSpecial Mention— — — 530 4,330 — 4,863 Special Mention— — — 503 4,248 — 123 4,874 
SubstandardSubstandard— — 1,576 — — — 6,019 7,595 Substandard— — 1,469 — — — 4,350 5,819 
Total commercial and industrialTotal commercial and industrial$2,563 $44,716 $14,159 $25,184 $12,192 $30,950 $118,861 $248,625 Total commercial and industrial$9,586 $21,160 $10,699 $25,233 $11,236 $28,168 $107,040 $213,122 
Commercial real estate, owner-occupied:Commercial real estate, owner-occupied:Commercial real estate, owner-occupied:
Pass and WatchPass and Watch$14,542 $53,334 $43,851 $47,384 $35,681 $151,304 $— $346,096 Pass and Watch$55,263 $53,245 $41,565 $45,948 $30,419 $116,659 $— $343,099 
Special MentionSpecial Mention6,215 16,471 — 1,763 5,419 5,152 — 35,020 Special Mention— 16,471 — 317 5,386 4,567 — 26,741 
SubstandardSubstandard— — 7,162 — — 3,536 — 10,698 Substandard— — 7,142 1,754 — 4,055 — 12,951 
DoubtfulDoubtful— — 110 — — — — 110 Doubtful— — 106 — — — — 106 
Total commercial real estate, owner-occupiedTotal commercial real estate, owner-occupied$20,757 $69,805 $51,123 $49,147 $41,100 $159,992 $— $391,924 Total commercial real estate, owner-occupied$55,263 $69,716 $48,813 $48,019 $35,805 $125,281 $— $382,897 
Commercial real estate, investor-owned:Commercial real estate, investor-owned:
Pass and WatchPass and Watch$118,868 $221,908 $164,765 $171,674 $125,646 $343,000 $73 $1,145,934 
Special MentionSpecial Mention— — 4,531 2,714 9,729 9,980 — 26,954 
SubstandardSubstandard— — — — — 17,531 — 17,531 
Total commercial real estate, investor-ownedTotal commercial real estate, investor-owned$118,868 $221,908 $169,296 $174,388 $135,375 $370,511 $73 $1,190,419 
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(in thousands)(in thousands)Term Loans - Amortized Cost by Origination YearRevolving Loans Amortized Cost(in thousands)Term Loans - Amortized Cost by Origination YearRevolving Loans Amortized Cost
March 31, 202220222021202020192018PriorTotal
Commercial real estate, investor-owned:
Pass and Watch$42,615 $222,832 $177,077 $177,477 $141,444 $374,554 $78 $1,136,077 
Special Mention— — 1,213 2,714 9,761 9,621 — 23,309 
Substandard— — — — — 17,532 — 17,532 
Total commercial real estate, investor-owned$42,615 $222,832 $178,290 $180,191 $151,205 $401,707 $78 $1,176,918 
June 30, 2022June 30, 202220222021202020192018PriorRevolving Loans Amortized CostTotal
Construction:Construction:Construction:
Pass and WatchPass and Watch$2,708 $30,721 $79,544 $8,933 $9,109 $— $— $131,015 Pass and Watch$33,184 $24,274 $42,658 $8,921 $9,110 $— $— $118,147 
Total constructionTotal construction$2,708 $30,721 $79,544 $8,933 $9,109 $— $— $131,015 Total construction$33,184 $24,274 $42,658 $8,921 $9,110 $— $— $118,147 
Home equity:Home equity:Home equity:
Pass and WatchPass and Watch$— $24 $— $— $— $320 $87,173 $87,517 Pass and Watch$— $24 $— $— $— $600 $89,369 $89,993 
Special Mention— — — — — — 66 66 
SubstandardSubstandard— — — — — 370 139 509 Substandard— — — — — 433 203 636 
Total home equityTotal home equity$— $24 $— $— $— $690 $87,378 $88,092 Total home equity$— $24 $— $— $— $1,033 $89,572 $90,629 
Other residential:Other residential:Other residential:
Pass and WatchPass and Watch$5,249 $15,690 $31,776 $24,342 $14,848 $22,372 $— $114,277 Pass and Watch$11,504 $15,575 $30,158 $22,869 $13,186 $20,069 $— $113,361 
Total other residentialTotal other residential$5,249 $15,690 $31,776 $24,342 $14,848 $22,372 $— $114,277 Total other residential$11,504 $15,575 $30,158 $22,869 $13,186 $20,069 $— $113,361 
Installment and other consumer:Installment and other consumer:Installment and other consumer:
Pass and WatchPass and Watch$6,038 $15,852 $7,074 $8,219 $4,873 $7,103 $1,828 $50,987 Pass and Watch$10,938 $15,523 $6,850 $7,441 $4,696 $6,888 $1,721 $54,057 
Substandard— — — — — 16 — 16 
Total installment and other consumerTotal installment and other consumer$6,038 $15,852 $7,074 $8,219 $4,873 $7,119 $1,828 $51,003 Total installment and other consumer$10,938 $15,523 $6,850 $7,441 $4,696 $6,888 $1,721 $54,057 
Gross current period charge-offsGross current period charge-offs$— $— $— $— $— $— $$Gross current period charge-offs$— $— $— $— $— $(18)$(4)$(22)
Total loans:Total loans:Total loans:
Pass and WatchPass and Watch$73,715 $383,169 $351,905 $291,009 $213,817 $586,603 $201,918 $2,102,136 Pass and Watch$239,343 $351,709 $295,226 $281,583 $190,045 $515,384 $193,730 $2,067,020 
Total Special MentionTotal Special Mention$6,215 $16,471 $1,213 $5,007 $19,510 $14,773 $69 $63,258 Total Special Mention$— $16,471 $4,531 $3,534 $19,363 $14,547 $123 $58,569 
Total SubstandardTotal Substandard$— $— $8,738 $— $— $21,454 $6,158 $36,350 Total Substandard$— $— $8,611 $1,754 $— $22,019 $4,553 $36,937 
Total DoubtfulTotal Doubtful$— $— $110 $— $— $— $— $110 Total Doubtful$— $— $106 $— $— $— $— $106 
TotalsTotals$79,930 $399,640 $361,966 $296,016 $233,327 $622,830 $208,145 $2,201,854 Totals$239,343 $368,180 $308,474 $286,871 $209,408 $551,950 $198,406 $2,162,632 
Total gross current period charge-offsTotal gross current period charge-offs$— $— $— $— $— $— $$Total gross current period charge-offs$— $— $— $— $— $(18)$(4)$(22)

(in thousands)Term Loans - Amortized Cost by Origination YearRevolving Loans Amortized Cost
December 31, 202120212020201920182017PriorTotal
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 Mention16,748 — — 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 March 31,June 30, 2022 and December 31, 2021.
Loan Aging Analysis by ClassLoan Aging Analysis by ClassLoan Aging Analysis by Class
(in thousands)(in thousands)Commercial and industrialCommercial real estate, owner-occupiedCommercial real estate, investor-ownedConstructionHome equityOther residentialInstallment and other consumerTotal(in thousands)Commercial and industrialCommercial real estate, owner-occupiedCommercial real estate, investor-ownedConstructionHome equityOther residentialInstallment and other consumerTotal
March 31, 2022 
June 30, 2022June 30, 2022 
30-59 days past due 30-59 days past due$435 $324 $— $— $399 $635 $337 $2,130  30-59 days past due$1,065 $660 $— $— $100 $— $166 $1,991 
60-89 days past due 60-89 days past due341 — — — 100 — 443  60-89 days past due589 545 — — — — 28 1,162 
90 days or more past due 90 days or more past due— — 0— 54 — 16 70  90 days or more past due202 — — — 54 — — 256 
Total past dueTotal past due776 324 — — 553 635 355 2,643 Total past due1,856 1,205 — — 154 — 194 3,409 
CurrentCurrent247,849 391,600 1,176,918 131,015 87,539 113,642 50,648 2,199,211 Current211,266 381,692 1,190,419 118,147 90,475 113,361 53,863 2,159,223 
Total loans 1
Total loans 1
$248,625 $391,924 $1,176,918 $131,015 $88,092 $114,277 $51,003 $2,201,854 
Total loans 1
$213,122 $382,897 $1,190,419 $118,147 $90,629 $113,361 $54,057 $2,162,632 
Non-accrual loans 2
Non-accrual loans 2
$— $7,272 $— $— $390 $— $16 $7,678 
Non-accrual loans 2
$— $7,564 $— $— $454 $— $— $8,018 
Non-accrual loans with no allowanceNon-accrual loans with no allowance$— $7,272 $— $— $390 $— $16 $7,678 Non-accrual loans with no allowance$— $7,564 $— $— $454 $— $— $8,018 
December 31, 2021December 31, 2021 December 31, 2021 
30-59 days past due 30-59 days past due$$— $— $— $498 $— $1,036 $1,536  30-59 days past due$$— $— $— $498 $— $1,036 $1,536 
60-89 days past due 60-89 days past due394 — — — 67 — — 461  60-89 days past due394 — — — 67 — — 461 
90 days or more past due 90 days or more past due229 — — — 88 — — 317  90 days or more past due229 — — — 88 — — 317 
Total past dueTotal past due625 — — — 653 — 1,036 2,314 Total past due625 — — — 653 — 1,036 2,314 
CurrentCurrent300,977 392,345 1,189,021 119,840 88,093 114,558 48,497 2,253,331 Current300,977 392,345 1,189,021 119,840 88,093 114,558 48,497 2,253,331 
Total loans 1
Total loans 1
$301,602 $392,345 $1,189,021 $119,840 $88,746 $114,558 $49,533 $2,255,645 
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
$— $7,269 $694 $— $413 $— $— $8,376 
Non-accrual loans 2
$— $7,269 $694 $— $413 $— $— $8,376 
Non-accrual loans with no allowanceNon-accrual loans with no allowance$— $7,269 $694 $— $413 $— $— $8,376 Non-accrual loans with no allowance$— $7,269 $694 $— $413 $— $— $8,376 
1 There were no0 non-performing loans past due more than ninety days accruing interest at March 31, 2022. There were 2 SBA PPP loans past due more than ninety days totaling $229 thousandand accruing interest as of June 30, 2022 and December 31, 2021 for which we requested "guarantee" payment from the SBA. The SBA subsequently purchased both loans in January 2022.2021.
2 None of the non-accrual loans as of March 31,June 30, 2022 or December 31, 2021 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the three and six months ended March 31,June 30, 2022 and 2021. There was 1 loan with amortized cost of $16were 3 loans totaling $397 thousand placed on non-accrual status during the threesix months ended March 31,June 30, 2022 for which we reversed less than 1000$8 thousand in interest income at the time of change in status. There were no loans placed on non-accrual status, during1 of which for $16 thousand was subsequently charged off in the three months ended March 31, 2021.second quarter.

Collateral Dependent Loans

The following table presents the amortized cost basis of individually analyzed collateral-dependent loans, which are all on non-accrual loansstatus, by class at March 31,June 30, 2022 and December 31, 2021.
Amortized Cost by Collateral TypeAmortized Cost by Collateral Type
(in thousands)(in thousands)Commercial Real EstateResidential Real EstateOtherTotalAllowance for Credit Losses(in thousands)Commercial Real EstateResidential Real EstateOther
Total 1
Allowance for Credit Losses
March 31, 2022
June 30, 2022June 30, 2022
Commercial real estate, owner-occupiedCommercial real estate, owner-occupied$7,272 $— $— $7,272 $— Commercial real estate, owner-occupied$7,564 $— $— $7,564 $— 
Home equityHome equity— 390 — 390 — Home equity— 454 — 454 — 
Installment and other consumer— — 16 16 $— 
TotalTotal$7,272 $390 $16 $7,678 $— Total$7,564 $454 $— $8,018 $— 
December 31, 2021December 31, 2021December 31, 2021
Commercial real estate, owner-occupiedCommercial real estate, owner-occupied$7,269 $— $— $7,269 $— Commercial real estate, owner-occupied$7,269 $— $— $7,269 $— 
Commercial real estate, investor-ownedCommercial real estate, investor-owned694 — — 694 — Commercial real estate, investor-owned694 — — 694 — 
Home equityHome equity— 413 — 413 — Home equity— 413 — 413 — 
TotalTotal$7,963 $413 $— $8,376 $— Total$7,963 $413 $— $8,376 $— 

1
NoThere were no collateral-dependent residential real estate mortgage loans were in process of foreclosure or in substance repossessed at March 31,June 30, 2022 or December 31, 2021. In addition, theThe weighted average loan-to-value of collateral dependent loans was approximately 69%67% at March 31,both June 30, 2022 and 67% at December 31, 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
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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.
 
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;
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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 threesix months ended March 31,June 30, 2022 and 2021.

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 GAAP. As of March 31,June 30, 2022, 2 borrowing relationships with 3 loans totaling $23.6 million were continuing to benefit from payment relief. The weighted average loan-to-value ratio of the remaining payment relief loans was approximately 44%. We accrue 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. We monitor the financial situationwill continue to work closely with both of these clients closely and expect them to resume payments as the economy continues to recover.monitor their performance.

The following table summarizes the amortized cost of TDR loans by loan class as of March 31,June 30, 2022 and December 31, 2021.
(in thousands)(in thousands)March 31, 2022December 31, 2021(in thousands)June 30, 2022December 31, 2021
Commercial and industrialCommercial and industrial$1,180 $1,183 Commercial and industrial$1,178 $1,183 
Commercial real estate, owner-occupiedCommercial real estate, owner-occupied7,162 7,155 Commercial real estate, owner-occupied7,141 7,155 
Commercial real estate, investor-ownedCommercial real estate, investor-owned175 179 Commercial real estate, investor-owned170 179 
Home equityHome equity379 386 Home equity479 386 
Installment and other consumerInstallment and other consumer596 607 Installment and other consumer571 607 
Total 1
Total 1
$9,492 $9,510 
Total 1
$9,539 $9,510 
1TDR loans on non-accrual status totaled $7.4 million at both March 31,June 30, 2022 and December 31, 2021. Unfunded commitments for TDR loans totaled $241 thousand and $441 thousand as of March 31,June 30, 2022 and December 31, 2021, respectively.
There werewas 1 loan modified in a TDR during the three and six months ended June 30, 2022 with a pre- and post-modification and end of period amortized cost of $100 thousand, and no loans modified in a TDR during the three and six months ended March 31,June 30, 2021. The modification in the second quarter of 2022 included a maturity date extension and 2021.interest rate concession. During the three and six months ended March 31,June 30, 2022 and March 31, 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.

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 RollforwardAllowance for Credit Losses on Loans RollforwardAllowance for Credit Losses on Loans Rollforward
(in thousands)(in thousands)Commercial and industrialCommercial real estate, owner-occupiedCommercial real estate, investor-ownedConstructionHome equityOther residentialInstallment and other consumerUnallocatedTotal(in thousands)Commercial and industrialCommercial real estate, owner-occupiedCommercial real estate, investor-ownedConstructionHome equityOther residentialInstallment and other consumerUnallocatedTotal
Three months ended March 31, 2022
Three months ended June 30, 2022Three months ended June 30, 2022
Beginning balanceBeginning balance$1,709 $2,776 $12,739 $1,653 $595 $644 $621 $2,286 $23,023 Beginning balance$1,784 $2,622 $12,301 $1,717 $549 $628 $641 $2,305 $22,547 
Provision (reversal)72 (154)(438)56 (46)(16)22 19 (485)
(Reversal) Provision(Reversal) Provision(89)(5)138 12 (19)(43)112 (106)— 
Charge-offsCharge-offs— — — — — — (2)— (2)Charge-offs— — — — — — (20)— (20)
RecoveriesRecoveries— — — — — — 11 Recoveries— — — — — — 12 
Ending balanceEnding balance$1,784 $2,622 $12,301 $1,717 $549 $628 $641 $2,305 $22,547 Ending balance$1,699 $2,617 $12,439 $1,737 $530 $585 $733 $2,199 $22,539 
Three months ended March 31, 2021
Three months ended June 30, 2021Three months ended June 30, 2021
Beginning balanceBeginning balance$2,530 $2,778 $12,682 $1,557 $738 $998 $291 $1,300 $22,874 Beginning balance$1,654 $2,304 $10,856 $1,312 $520 $757 $255 $2,300 $19,958 
Provision (reversal)(880)(474)(1,826)(254)(218)(241)(36)1,000 (2,929)
(Reversal) Provision(Reversal) Provision(68)(267)(95)(178)(158)(144)(17)(920)
Charge-offsCharge-offs— — — — — — — — — Charge-offs— — — — — — — — — 
RecoveriesRecoveries— — — — — — 13 Recoveries— — 50 — — — 62 
Ending balanceEnding balance$1,654 $2,304 $10,856 $1,312 $520 $757 $255 $2,300 $19,958 Ending balance$1,590 $2,037 $10,761 $1,142 $412 $613 $238 $2,307 $19,100 
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Allowance for Credit Losses on Loans Rollforward
(in thousands)Commercial and industrialCommercial real estate, owner-occupiedCommercial real estate, investorConstructionHome equityOther residentialInstallment and other consumerUnallocatedTotal
Six months ended June 30, 2022
Beginning balance$1,709 $2,776 $12,739 $1,653 $595 $644 $621 $2,286 $23,023 
(Reversal) Provision(17)(159)(300)68 (65)(59)134 (87)(485)
Charge-offs— — — — — — (22)— (22)
Recoveries— — 16 — — — — 23 
Ending balance$1,699 $2,617 $12,439 $1,737 $530 $585 $733 $2,199 $22,539 
Six months ended June 30, 2021
Beginning balance$2,530 $2,778 $12,682 $1,557 $738 $998 $291 $1,300 $22,874 
(Reversal) Provision(947)(741)(1,921)(433)(376)(385)(53)1,007 (3,849)
Charge-offs— — — — — — — — — 
Recoveries— — 18 50 — — — 75 
Ending balance$1,590 $2,037 $10,761 $1,142 $412 $613 $238 $2,307 $19,100 

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 $1.295$1.293 billion and $1.330 billion at March 31,June 30, 2022 and December 31, 2021, respectively. In addition, we pledge eligible TIC loans, which totaled $102.2$102.6 million and $106.2 million at March 31,June 30, 2022 and December 31, 2021, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). 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 $5.1$6.6 million at March 31,June 30, 2022 and $7.9 million at December 31, 2021. In addition, undisbursed commitments to related parties totaled $562 thousand at March 31,June 30, 2022 and $8.6 million at December 31, 2021. The decreases in both the outstanding amount and undisbursed commitment as of March 31,June 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 $150.0 million at March 31,June 30, 2022 and December 31, 2021.  In general, interest rates on these lines approximate the federal funds target rate. We had no overnight borrowings under these credit facilities at March 31,June 30, 2022 or December 31, 2021.
 
Federal Home Loan Bank Borrowings – As of March 31,June 30, 2022 and December 31, 2021, the Bank had available lines of credit with the FHLB totaling $799.5$762.6 million and $820.5 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at March 31,June 30, 2022 or December 31, 2021. 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 Federal Reserve Bank of San Francisco ("FRBSF") secured by certain residential loans.  At March 31,June 30, 2022 and December 31, 2021, the Bank had borrowing capacity under this line totaling $57.3 million and $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 a 251.5% effective rate for the first threesix months of 2021, and included accelerated accretion of the $1.3 million remaining purchase discount due to the early redemption.
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Other Obligations – Finance lease liabilities totaling $388$356 thousand and $419 thousand at March 31,June 30, 2022 and December 31, 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 AprilJuly 22, 2022, Bancorp declared a $0.24$0.25 per share cash dividend, payable on May 13,August 12, 2022 to shareholders of record at the close of business on May 6,August 5, 2022.


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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 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 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 threesix months ended March 31,June 30, 2022, we withheld 8,00310,208 shares totaling $278$351 thousand at a weighted-average price of $34.76$34.38 for cashless exercises. During the threesix months ended March 31,June 30, 2021, we withheld 27,547 shares totaling $1.1 million at a weighted-average price of $38.87 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 Directorshas 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. A new share repurchase program was approved byin the Boardfirst quarter of Directors on January 24, 2020, which began on March 1, 2020 and allowed Bancorp to repurchase up to $25.0 million of its outstanding common stock and ended May 2021. 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. 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.

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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.

2022. Bancorp repurchased 23,275 shares totaling $877 thousand in the first quarterhalf of 2022. Cumulative shares repurchased under the current program totaled 618,991 shares as of March 31,June 30, 2022 at an average price of $36.04 per share. Bancorp continues to evaluate the resumption of share repurchases in the context of other capital and strategic initiatives.
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Note 8:  Commitments and ContingenciesContingent 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)March 31, 2022December 31, 2021(in thousands)June 30, 2022December 31, 2021
Commercial lines of creditCommercial lines of credit$294,162 $330,234 Commercial lines of credit$318,400 $330,234 
Revolving home equity linesRevolving home equity lines212,595 210,938 Revolving home equity lines212,208 210,938 
Undisbursed construction loansUndisbursed construction loans61,554 78,381 Undisbursed construction loans48,671 78,381 
Personal and other lines of creditPersonal and other lines of credit10,973 11,001 Personal and other lines of credit11,044 11,001 
Standby letters of creditStandby letters of credit2,141 3,657 Standby letters of credit2,150 3,657 
Total commitments and standby letters of credit Total commitments and standby letters of credit$581,425 $634,211  Total commitments and standby letters of credit$592,473 $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 for credit losses on unfunded commitments totaled $1.5 million and 1.8$1.8 million as of March 31,June 30, 2022 and December 31, 2021, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition. We recorded a reversals ofThere was no adjustment to the allowance for credit losses on unfunded commitments for the second quarter of 2022, compared to a reversal of $612 thousand for the second quarter of 2021. This compares to year-to-date reversals of $318 thousand and $590 thousand for$1.2 million in the threesix months ended March 31,June 30, 2022 and 2021 respectively, due to improved economic forecasts.forecasts at the time.

Leases

We lease premises under long-term non-cancelable operating leases with remaining terms of 75 months to 1110 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 5 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees.


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The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities.
(in thousands)(in thousands)March 31, 2022December 31, 2021(in thousands)June 30, 2022December 31, 2021
Operating leases:Operating leases:Operating leases:
Operating lease right-of-use assetsOperating lease right-of-use assets$23,544 $23,604 Operating lease right-of-use assets$22,353 $23,604 
Operating lease liabilitiesOperating lease liabilities$25,351 $25,429 Operating lease liabilities$24,117 $25,429 
Finance leases:Finance leases:Finance leases:
Finance lease right-of-use assetsFinance lease right-of-use assets$499 $499 Finance lease right-of-use assets$499 $499 
Accumulated amortizationAccumulated amortization(124)(93)Accumulated amortization(155)(93)
Finance lease right-of-use assets, net1
Finance lease right-of-use assets, net1
$375 $406 
Finance lease right-of-use assets, net1
$344 $406 
Finance lease liabilities2
Finance lease liabilities2
$388 $419 
Finance lease liabilities2
$356 $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 periodperiods presented.
ThreeSix months ended
(in thousands)March 31,June 30, 2022March 31,June 30, 2021
Right-of-use assets obtained in exchange for operating lease liabilities$1,1201,124 $— 
Right-of-use assets obtained in exchange for finance lease liabilities$— $412 

The following table shows components of operating and finance lease cost.
Three months endedThree months endedSix months ended
(in thousands)(in thousands)March 31, 2022March 31, 2021(in thousands)June 30, 2022June 30, 2021June 30, 2022June 30, 2021
Operating lease costOperating lease cost$1,284 $1,164 Operating lease cost$1,295 $1,164 $2,579 $2,328 
Variable lease costVariable lease cost— — Variable lease cost— — — — 
Total operating lease cost1
Total operating lease cost1
$1,284 $1,164 
Total operating lease cost1
$1,295 $1,164 $2,579 $2,328 
Finance lease cost:Finance lease cost:Finance lease cost:
Amortization of right-of-use assets2
Amortization of right-of-use assets2
$31 $27 
Amortization of right-of-use assets2
$31 $$62 $34 
Interest on finance lease liabilities3
Interest on finance lease liabilities3
— 
Interest on finance lease liabilities3
— — — 
Total finance lease costTotal finance lease cost32 27 Total finance lease cost$31 $$63 $34 
Total lease costTotal lease cost$1,316 $1,191 Total lease cost$1,326 $1,171 $2,642 $2,362 
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 March 31,June 30, 2022. Total minimum lease payments do not include obligations of approximately $1.7 million for an operating lease agreement related to a retail branch location that is expected to commence in the third quarter of 2022. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB 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.
(in thousands)March 31, 2022
YearOperating LeasesFinance Leases
2022$4,035 $95 
20234,745 117 
20243,837 113 
20253,328 66 
20262,535 — 
Thereafter8,468 — 
Total minimum lease payments26,948 391 
Amounts representing interest (present value discount)(1,597)(3)
Present value of net minimum lease payments (lease liability)$25,351 $388 
Weighted average remaining term (in years)6.83.3
Weighted average discount rate1.67 %0.62 %

(in thousands)June 30, 2022
YearOperating LeasesFinance Leases
2022$2,701 $62 
20234,745 117 
20243,837 113 
20253,327 67 
20262,535 — 
Thereafter8,467 — 
Total minimum lease payments25,612 359 
Amounts representing interest (present value discount)(1,495)(3)
Present value of net minimum lease payments (lease liability)$24,117 $356 
Weighted average remaining term (in years)6.73.0
Weighted average discount rate1.68 %0.59 %
Page-25

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. TheDuring the three months ended June 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 $882 million as of March 31, 2022, 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.

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 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 March 31,June 30, 2022, we had 4 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$5 thousand at March 31,June 30, 2022 and $11 thousand at December 31, 2021. Information on our derivatives follows:
Asset DerivativesLiability Derivatives
(in thousands)March 31,
2022
December 31, 2021March 31,
2022
December 31, 2021
Fair value hedges:
Interest rate contracts notional amount$3,082 $— $9,709 $13,037 
Interest rate contracts fair value1
$42 $— $370 $1,085 
Page-26

Asset DerivativesLiability Derivatives
(in thousands)June 30,
2022
December 31, 2021June 30,
2022
December 31, 2021
Fair value hedges:
Interest rate contracts notional amount$5,616 $— $6,929 $13,037 
Interest rate contracts fair value1
$206 $— $104 $1,085 
1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology.
Page-26


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 March 31,June 30, 2022 and December 31, 2021.
Carrying Amounts of Hedged AssetsCumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged LoansCarrying Amounts of Hedged AssetsCumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands)(in thousands)March 31, 2022December 31, 2021March 31, 2022December 31, 2021(in thousands)June 30, 2022December 31, 2021June 30, 2022December 31, 2021
LoansLoans$12,979 $13,976 $187 $939 Loans$12,305 $13,976 $(241)$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 endedThree months endedSix months ended
(in thousands)(in thousands)March 31, 2022March 31, 2021(in thousands)June 30, 2022June 30, 2021June 30, 2022June 30, 2021
Interest and fees on loans 1
Interest and fees on loans 1
$23,677 $20,661 
Interest and fees on loans 1
$23,334 $21,429 $47,011 $42,090 
Increase in fair value of designated interest rate swaps due to LIBOR interest rate movements$757 $719 
Increase (decrease) in fair value of designated interest rate swaps due to LIBOR interest rate movementsIncrease (decrease) in fair value of designated interest rate swaps due to LIBOR interest rate movements$430 $(170)$1,187 $549 
Payment on interest rate swapsPayment on interest rate swaps(85)(93)Payment on interest rate swaps(65)(93)(150)(185)
Decrease in fair value hedging adjustment of hedged loans(752)(714)
Decrease (increase) in fair value hedging adjustment of hedged loansDecrease (increase) in fair value hedging adjustment of hedged loans(428)177 (1,180)(537)
Decrease in value of yield maintenance agreementDecrease in value of yield maintenance agreement(3)(3)Decrease in value of yield maintenance agreement(2)(2)(5)(6)
Net losses on fair value hedging relationships recognized in interest incomeNet losses on fair value hedging relationships recognized in interest income$(83)$(91)Net losses on fair value hedging relationships recognized in interest income$(65)$(88)$(148)$(179)
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:
Offsetting of Financial Assets and Derivative AssetsOffsetting of Financial Assets and Derivative AssetsOffsetting of Financial Assets and Derivative Assets
Gross AmountsNet Amounts ofGross Amounts Not Offset inGross AmountsNet Amounts ofGross Amounts Not Offset in
Gross AmountsOffset in theAssets Presentedthe Statements of ConditionGross AmountsOffset in theAssets Presentedthe Statements of Condition
of RecognizedStatements ofin the StatementsFinancialCash Collateralof RecognizedStatements ofin the StatementsFinancialCash Collateral
(in thousands)
(in thousands)
AssetsConditionof ConditionInstrumentsReceivedNet Amount
(in thousands)
AssetsConditionof ConditionInstrumentsReceivedNet Amount
March 31, 2022
June 30, 2022June 30, 2022
Derivatives by Counterparty:Derivatives by Counterparty:Derivatives by Counterparty:
Counterparty ACounterparty A$42 $— $42 $(42)$— $— Counterparty A$206 $— $206 $(206)$— $— 
December 31, 2021December 31, 2021December 31, 2021
Derivatives by Counterparty:Derivatives by Counterparty:Derivatives by Counterparty:
Counterparty ACounterparty A$— $— $— $— $— $— Counterparty A$— $— $— $— $— $— 
Offsetting of Financial Liabilities and Derivative Liabilities
Gross AmountsNet Amounts ofGross Amounts Not Offset in
Gross AmountsOffset in theLiabilities Presentedthe Statements of Condition
of RecognizedStatements ofin the StatementsFinancialCash Collateral
(in thousands)
Liabilities1
Condition
of Condition1
InstrumentsPledgedNet Amount
March 31, 2022
Derivatives by Counterparty:
Counterparty A$370 $— $370 $(42)$(328)$— 
December 31, 2021
Derivatives by Counterparty:
Counterparty A$1,085 $— $1,085 $— $(1,085)$— 
Page-27

Offsetting of Financial Liabilities and Derivative Liabilities
Gross AmountsNet Amounts ofGross Amounts Not Offset in
Gross AmountsOffset in theLiabilities Presentedthe Statements of Condition
of RecognizedStatements ofin the StatementsFinancialCash Collateral
(in thousands)
Liabilities1
Condition
of Condition1
InstrumentsPledgedNet Amount
June 30, 2022
Derivatives by Counterparty:
Counterparty A$104 $— $104 $(206)$102 $— 
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 2021 Form 10-K filed with the SEC on March 15, 2022.


Page-27

Note 10: Merger

As described in Note 1, Basis of Presentation, Bancorp completed its merger with and acquired all assets and assumed all liabilities of American River Bankshares inon August 6, 2021. The Merger expanded Bank of Marin's presence throughout the Greater Sacramento, Amador and Sonoma County Regions where ARB 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 as of the 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 ASC 805, Business Combinations.

AMRB shareholders received 0.575 shares of Bancorp's common stock for each share of AMRB common stock outstanding immediately prior to the Merger 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 options63
Cash paid in lieu of fractional shares13
Total merger consideration$124,477 

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 and is evaluated for impairment annually.

The core deposit intangible ("CDI") represents the estimated future benefits of acquired deposits and is recorded separately from the related deposits. We recorded a core deposit intangible asset of $3.9 million related to the ARB merger, of which $184$179 thousand wasand $363 thousand, respectively, were amortized in the first quarter of 2022three and nosix month periods ended June 30, 2022. No amortization was recognized in the comparable quarterperiods of 2021. The CDI is amortized on an accelerated basis over an estimated ten-year life and is evaluated periodically for impairment. No impairment loss was recognized as of March 31,June 30, 2022.

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
(in thousands, unaudited)March 31, 2022March 31, 2021
Personnel and severance$335 $— 
Professional services67 — 
Data processing48 — 
Other expense97 — 
Total merger-related one-time and conversion costs$547 $— 
Three months endedSix months ended
(in thousands, unaudited)June 30, 2022June 30, 2021June 30, 2022June 30, 2021
Personnel and severance$58 $— $393 $— 
Professional services— 201 67 201 
Data processing29 — 77 — 
Other expense224 16 321 16 
Total merger-related one-time and conversion costs$311 $217 $858 $217 
Page-28

ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management's discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our 2021 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

In November 2020, the SEC issued Final Rule 33-10890, Management’s Discussion and Analysis, Selected Financial Data and Supplementary Financial Information, which modernized and simplified certain disclosure requirements of Regulation S-K. The update to Item 303 of Regulation S-K related to interim period disclosures beginning with the first quarter of 2022 allows registrants to compare the results of the most recently completed quarter to the results of either the immediately preceding quarter or the corresponding quarter of the preceding year. Management believes that comparing current quarter results to those of the immediately preceding quarter is more useful in identifying current business trends and provides a more meaningful comparison. Accordingly, we have compared the results for the three months ended June 30, 2022 and March 31, 2022 and December 31, 2021 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 ourimpact 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 factorsexpectations include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including economic or other disruptions to financial markets caused by acts of terrorism, war or other conflicts such as Russia's military action in Ukraine, impacts from inflation, supply change disruptions, changes in interest rates (including the actions taken by the Federal Reserve to control inflation), California's unemployment rate, deposit flows, real estate values, and expected future cash flows on loans and securities; costs or effects of acquisitions; competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; our borrowers’ actual payment performance as loan deferrals related to the COVID-19 pandemic expire, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance; natural disasters (such as wildfires and earthquakes in our area); adverse weather conditions; interruptions of utility service in our markets for sustained periods; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting our operations, pricing, products and services; and successful integration of acquisitions.

Important factors that could cause results or performance to materially differ from those expressed in our prior forward-looking statements are detailed in ITEM 1A, Risk Factors section of our 2021 Form 10-K as filed with the SEC, copies of which are available from us at no charge. Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.


Page-29

Critical Accounting Estimates

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation and uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. We consider accounting estimates to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. Our critical estimates include: Allowance for Credit Losses on Loans and Unfunded Commitments, Income Taxes, and Fair Value Measurements. For a detailed discussion, refer to the Critical Accounting Estimates section of our 2021 Form 10-K filed with the SEC on March 15, 2022.

Executive Summary
NetWe generated record net income for the firstsecond quarter of 2022 totaled $10.5$11.1 million, compared to $9.7 million in the fourth quarter of 2021 and $8.9$10.5 million in the first quarter of 2021.2022. Diluted earnings per share were $0.69 in the second quarter of 2022, compared to $0.66 in the immediately preceding quarter. Earnings for the first quartersix months of 2022 $0.61 in the prior quarter and $0.66totaled $21.5 million, compared to $18.2 million in the same quarter a year ago. First quarterperiod last year. Diluted earnings per share were $1.35 and $1.37 in the first six months of 2022 and fourth quarter 2021, respectively. All periods of earnings presented were impacted by the costs associated with our most recent acquisition.acquisition, the details of which are discussed throughout this report. In particular, diluted earnings per share for the first half of 2022 would have increased by one cent per share over 2021 without those costs.

The following are highlights of our operating and financial performance for the periods presented:
Conversion of our core systems occurred in March of 2022, bringing acquired ARB accounts and key systems under the umbrella of Bank of Marin. For a smooth end-user experience in line with standards of legendary service, extra resources were deployed to assist our customers with the transition.
Merger-related one-timeReturn on assets of 1.03% and return on equity of 10.74% for the three months ended June 30, 2022, would have been 1.05% and 10.95%, respectively, without one-time and conversion costs reduced net income by $385 thousand, net of taxes, or $0.02 per share inrelated to the quarter.2021 merger with American River Bankshares ("ARB"). That compares to 0.98% and 9.61% (GAAP) and 1.01% and 9.96% (non-GAAP), respectively, for the three months ended March 31, 2022. As shown in the reconciliation of GAAP to non-GAAP financial measures on page 35, merger-related costs reduced net income by $219 thousand, net of taxes, or $0.02 per share in the second quarter.

31, The second quarter tax-equivalent net interest margin improved 9 basis points over the preceding quarter despite the 7 basis point drag of declining PPP loan fee recognition. Rising interest rates had a positive impact on the Bank's asset sensitive portfolio, as did the deployment of excess cash into securities and flat deposit costs.

without those acquisition related components, return on average assets ("ROA") of 0.98% and return on average equity ("ROE") of 9.61% would have been 1.01% and 9.96%, respectively,Deposits increased by $22.1 million to $3.831 billion at June 30, 2022, compared to 0.97% and 9.19% for the quarter ended$3.809 billion at December 31, 2021. ROA and ROE were 1.21% and 10.22% for the first three monthsNon-interest bearing deposits made up 53% of 2021.
A good indicatortotal deposits as of the merger's positive impact on operating earnings is the efficiency ratio,June 30, 2022 versus 50% as it neither includes provisions for losses on loans and unfunded commitments, nor is it impacted by changes in share counts. As shown in the reconciliation of GAAP to non-GAAP financial measures on page 31, the efficiency ratios excluding merger-related one-time and conversion costs were 57.46% and 53.63% for the quarters ended March 31, 2022 and December 31, 2021, respectively, as compared to 59.13% and 56.92%.representing one of the strongest deposit franchises among peers. The change over the prior quarter was primarily due to typical first quarter increases in salaries, related benefits and professional services expenses as discussedcost of average deposits in the Non-Interest Expense section below.second quarter of 2022 was 0.06%, unchanged from the preceding quarter. The significant improvement in operating leverage generated by the acquisition is evidentcost of average deposits in the declinefirst half of 2022 was 0.06%, a decrease from 0.07% in efficiency ratio from 64.60% inthe first quarterhalf of 2021, which was not impacted by merger costs.prior year.

Loan balances of $2.202$2.163 billion at March 31,June 30, 2022 included an increasereflected record second quarter originations of $16.6$102.2 million in traditional commercialand first half of the year originations of $152.0 million. While our production was strong and more than double the first half of 2021, total loans and a decrease of $70.6 million in PPP loans forgiven and paid off, resulting in a net decrease in loans of $53.8 milliondecreased modestly from December 31, 2021. First quarter2021 balances driven by payoffs including expected construction project completions, borrowers' sales of underlying real estate and business assets, PPP loan originationspayoffs, and third-party refinancing of $49.8 million represented a six year peak for first quarter originations, and commercial line utilization increased to 38% of total commitments as of March 31, 2022, from 34% at December 31, 2021.acquired loans outside the Bank's credit risk appetite.

Credit quality remains strong, with non-accrual loans representing 0.35%0.37% of total loans as of March 31,June 30, 2022, compared to 0.37% atand December 31, 2021. WhileThere was not a significant change in classified loans did not change significantly from the prior quarter end, special mention loans decreased by $10.0 million, the majority of whichloans. There was due to payoffs and upgrades to pass risk ratings.
Reversals of $485 thousandno provision made to the allowance for credit losses on loans and $318 thousandor to the allowance for credit losses on unfunded loan commitments this quarter as an improvement in the first quarterCalifornia unemployment rate forecast decreased the quantitative portion of 2022 resulted fromestimated credit losses while ongoing supply chain issues, inflation and recession risks increased qualitative factors. The preceding quarter's provision reversals were due primarily to the improved economic forecasts.forecast at the time.
Deposits grew by $52.8 million to $3.861 billion at March 31, 2022 compared to $3.809 billion at December 31, 2021, with most of the growth coming from non-interest bearing balances. Non-interest bearing deposits made up 51% of total deposits as of March 31, 2022 versus 50% as of December 31, 2021. The cost of average deposits was 0.06% in the first quarter, consistent with the fourth quarter of 2021 at 0.06%, compared to 0.07% in the first quarter of 2021. Additionally, as part of our liquidity management, the Bank maintained $180.0 million in deposits off-balance sheet with deposit networks at March 31, 2022.
Page-30

Our declining efficiency ratios quarter-over-quarter and year-over-year are a testament to the improved operating leverage attained through the ARB acquisition. The efficiency ratios of 55.73% for the second quarter and 57.40% year-to-date compare to 59.13% and 61.43% for the first quarter of 2022 and year to date 2021, respectively. Changes from the prior quarter were primarily visible in salaries, benefits and professional services expenses.

All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 14.4%14.7% at March 31,June 30, 2022, compared to 14.6% at December 31, 2021. Bancorp's tangible common equity to tangible assets was 8.0%7.8% at March 31,June 30, 2022, compared to 8.8% at December 31, 2021 (see Results of Operations(refer to footnote 4 on page 36 for a definitiondiscussion of this non-GAAP financial measure). The decline in tangible equity from December 31, 2021 was primarily due to the $37.3 million other comprehensive loss, net of taxes, related to significant increases in interest rates during the quarter. The Bank's total risk-based capital ratio for the Bank was 14.3%14.2% at March 31,June 30, 2022, compared to 14.4% at December 31, 2021. The Bank's tangible common equity to tangible assets was 7.5% at June 30, 2022, compared to 8.6% at December 31, 2021. Declines in the Bank's and Bancorp's tangible common equity and book value per share were primarily related to an increase in after-tax unrealized losses on available-for-sale securities associated with interest rate increases during 2022.

TheGiven the strength and durability of the Bank's financial performance, the Board of Directors declared a cash dividend of $0.25 per share, an increase from $0.24 per share in the prior quarter, on AprilJuly 22, 2022, which represents the 6869th consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on May 13,August 12, 2022, to shareholders of record at the close of business on May 6,August 5, 2022.


Page-31

Statement Regarding use of Non-GAAP Financial Measures
In this Form 10-Q, Bancorp's financial results are presented in accordance with GAAP and referwith 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
Three months endedThree months endedSix months ended
(in thousands, unaudited) (in thousands, unaudited)March 31, 2022December 31, 2021March 31, 2021 (in thousands, unaudited)June 30, 2022March 31, 2022June 30, 2022June 30, 2021
Net incomeNet incomeNet income
Net income (GAAP)Net income (GAAP)$10,465 $9,714 $8,947 Net income (GAAP)$11,066 $10,465 $21,531 $18,232 
Merger-related one-time and conversion costs:Merger-related one-time and conversion costs:Merger-related one-time and conversion costs:
Personnel and severancePersonnel and severance335 336 — Personnel and severance58 335 393 — 
Professional servicesProfessional services67 — — Professional services— 67 67 201 
Data processingData processing48 695 — Data processing29 48 77 — 
OtherOther97 67 — Other224 97 321 16 
Total merger costs before tax benefitsTotal merger costs before tax benefits547 1,098 — Total merger costs before tax benefits311 547 858 217 
Income tax benefit of merger-related expensesIncome tax benefit of merger-related expenses(162)(307)— Income tax benefit of merger-related expenses(92)(162)(254)(17)
Total merger-related one-time and conversion costs, net of tax benefitsTotal merger-related one-time and conversion costs, net of tax benefits385 791 — Total merger-related one-time and conversion costs, net of tax benefits219 385 604 200 
Comparable net income (non-GAAP)Comparable net income (non-GAAP)$10,850 $10,505 $8,947 Comparable net income (non-GAAP)$11,285 $10,850 $22,135 $18,432 
Diluted earnings per shareDiluted earnings per shareDiluted earnings per share
Weighted average diluted sharesWeighted average diluted shares15,946 16,027 13,469 Weighted average diluted shares15,955 15,946 15,950 13,316 
Diluted earnings per share (GAAP)Diluted earnings per share (GAAP)$0.66 $0.61 $0.66 Diluted earnings per share (GAAP)$0.69 $0.66 $1.35 $1.37 
Merger-related one-time and conversion costs, net of tax benefitsMerger-related one-time and conversion costs, net of tax benefits0.02 0.05 — Merger-related one-time and conversion costs, net of tax benefits0.02 0.02 0.04 0.01 
Comparable diluted earnings per share (non-GAAP)Comparable diluted earnings per share (non-GAAP)$0.68 $0.66 $0.66 Comparable diluted earnings per share (non-GAAP)$0.71 $0.68 $1.39 $1.38 
Return on average assetsReturn on average assetsReturn on average assets
Average assetsAverage assets$4,345,258 $4,298,766 $2,966,006 Average assets$4,312,919 $4,345,258 $4,328,999 $3,044,933 
Return on average assets (GAAP)Return on average assets (GAAP)0.98 %0.90 %1.21 %Return on average assets (GAAP)1.03 %0.98 %1.00 %1.21 %
Comparable return on average assets (non-GAAP)Comparable return on average assets (non-GAAP)1.01 %0.97 %1.21 %Comparable return on average assets (non-GAAP)1.05 %1.01 %1.03 %1.22 %
Return on average equityReturn on average equityReturn on average equity
Average stockholders' equityAverage stockholders' equity$441,626 $453,468 $355,022 Average stockholders' equity$413,271 $441,626 $427,370 $351,227 
Return on average equity (GAAP)Return on average equity (GAAP)9.61 %8.50 %10.22 %Return on average equity (GAAP)10.74 %9.61 %10.16 %10.47 %
Comparable return on average equity (non-GAAP)Comparable return on average equity (non-GAAP)9.96 %9.19 %10.22 %Comparable return on average equity (non-GAAP)10.95 %9.96 %10.44 %10.58 %
Efficiency ratioEfficiency ratioEfficiency ratio
Non-interest expense (GAAP)Non-interest expense (GAAP)$19,375 $18,984 $15,412 Non-interest expense (GAAP)$18,906 $19,375 $38,281 $30,968 
Merger-related expensesMerger-related expenses(547)(1,098)— Merger-related expenses(311)(547)(858)(217)
Non-interest expense (non-GAAP)Non-interest expense (non-GAAP)$18,828 $17,886 $15,412 Non-interest expense (non-GAAP)$18,595 $18,828 $37,423 $30,751 
Net interest incomeNet interest income$29,898 $30,633 $22,031 Net interest income$31,197 $29,898 $61,095 $46,565 
Non-interest incomeNon-interest income$2,867 $2,719 $1,826 Non-interest income$2,728 $2,867 $5,595 $3,848 
Efficiency ratio (GAAP)Efficiency ratio (GAAP)59.13 %56.92 %64.60 %Efficiency ratio (GAAP)55.73 %59.13 %57.40 %61.43 %
Comparable efficiency ratio (non-GAAP)Comparable efficiency ratio (non-GAAP)57.46 %53.63 %64.60 %Comparable efficiency ratio (non-GAAP)54.81 %57.46 %56.11 %61.00 %
Page-31Page-32

RESULTS OF OPERATIONS
 
Highlights of the financial results are presented in the following tables:
Three months endedThree months endedSix months ended
(dollars in thousands, except per share data)(dollars in thousands, except per share data)March 31, 2022December 31, 2021March 31, 2021(dollars in thousands, except per share data)June 30, 2022March 31, 2022June 30, 2022June 30, 2021
Selected operating data:Selected operating data:Selected operating data:
Net interest incomeNet interest income$29,898 $30,633 $22,031 Net interest income$31,197 $29,898 $61,095 $46,565 
(Reversal of) provision for credit losses on loans(485)600 (2,929)
(Reversal of) provision for credit losses on unfunded loan commitments(318)210 (590)
Reversal of credit losses on loansReversal of credit losses on loans— (485)(485)(3,849)
Reversal of credit losses on unfunded loan commitmentsReversal of credit losses on unfunded loan commitments— (318)(318)(1,202)
Non-interest incomeNon-interest income2,867 2,719 1,826 Non-interest income2,728 2,867 5,595 3,848 
Non-interest expenseNon-interest expense19,375 18,984 15,412 Non-interest expense18,906 19,375 38,281 30,968 
Net incomeNet income10,465 9,714 8,947 Net income11,066 10,465 21,531 18,232 
Net income per common share:Net income per common share:Net income per common share:
BasicBasic$0.66 $0.61 $0.67 Basic$0.70 $0.66 $1.35 $1.38 
DilutedDiluted$0.66 $0.61 $0.66 Diluted$0.69 $0.66 $1.35 $1.37 
Performance and other financial ratios:Performance and other financial ratios:Performance and other financial ratios:
Return on average assetsReturn on average assets0.98 %0.90 %1.21 %Return on average assets1.03 %0.98 %1.00 %1.21 %
Return on average equityReturn on average equity9.61 %8.50 %10.22 %Return on average equity10.74 %9.61 %10.16 %10.47 %
Tax-equivalent net interest margin 1
Tax-equivalent net interest margin 1
2.96 %3.03 %3.19 %
Tax-equivalent net interest margin 1
3.05 %2.96 %3.01 %3.28 %
Cost of depositsCost of deposits0.06 %0.06 %0.07 %Cost of deposits0.06 %0.06 %0.06 %0.07 %
Efficiency ratioEfficiency ratio59.13 %56.92 %64.60 %Efficiency ratio55.73 %59.13 %57.40 %61.43 %
Net charge-offs (recoveries)Net charge-offs (recoveries)$$(9)$(1)$(75)
Cash dividend payout ratio on common stock 2
Cash dividend payout ratio on common stock 2
36.36 %39.34 %34.33 %
Cash dividend payout ratio on common stock 2
34.29 %36.36 %35.56 %33.33 %
(dollars in thousands, except per share data)(dollars in thousands, except per share data)March 31, 2022December 31, 2021(dollars in thousands, except per share data)June 30, 2022December 31, 2021
Selected financial condition data:Selected financial condition data:Selected financial condition data:
Total assetsTotal assets$4,330,424 $4,314,209 Total assets$4,326,904 $4,314,209 
Loans, netLoans, net2,179,307 2,232,622 Loans, net2,140,093 2,232,622 
DepositsDeposits3,861,342 3,808,550 Deposits3,830,670 3,808,550 
Borrowings and other obligationsBorrowings and other obligations388 419 Borrowings and other obligations356 419 
Stockholders' equityStockholders' equity420,408 450,368 Stockholders' equity409,573 450,368 
Book value per shareBook value per share26.27 28.27 Book value per share25.58 28.27 
Asset quality ratios:Asset quality ratios:Asset quality ratios:
Allowance for credit losses on loans to total loansAllowance for credit losses on loans to total loans1.02 %1.02 %Allowance for credit losses on loans to total loans1.04 %1.02 %
Allowance for credit losses on loans to total loans, excluding SBA PPP loans 3
Allowance for credit losses on loans to total loans, excluding SBA PPP loans 3
1.04 %1.07 %
Allowance for credit losses on loans to total loans, excluding SBA PPP loans 3
1.05 %1.07 %
Allowance for credit losses on loans to non-accrual loans2.94x2.75x
Allowance for credit losses on loans to non-performing loansAllowance for credit losses on loans to non-performing loans2.81x2.75x
Non-accrual loans to total loansNon-accrual loans to total loans0.35 %0.37 %Non-accrual loans to total loans0.37 %0.37 %
Capital ratios:Capital ratios:Capital ratios:
Equity to total assets ratioEquity to total assets ratio9.71 %10.44 %Equity to total assets ratio9.47 %10.44 %
Tangible common equity to tangible assets 4
Tangible common equity to tangible assets 4
8.03 %8.76 %
Tangible common equity to tangible assets 4
7.79 %8.76 %
Total capital (to risk-weighted assets)Total capital (to risk-weighted assets)14.35 %14.58 %Total capital (to risk-weighted assets)14.67 %14.58 %
Tier 1 capital (to risk-weighted assets)Tier 1 capital (to risk-weighted assets)13.52 %13.70 %Tier 1 capital (to risk-weighted assets)13.84 %13.70 %
Tier 1 capital (to average assets)Tier 1 capital (to average assets)8.90 %8.85 %Tier 1 capital (to average assets)9.07 %8.85 %
Common equity Tier 1 capital (to risk weighted assets)Common equity Tier 1 capital (to risk weighted assets)13.52 %13.70 %Common equity Tier 1 capital (to risk weighted assets)13.84 %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.
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.
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.
2 Calculated as dividends on common shares divided by basic net income per common share.
2 Calculated as dividends on common shares divided by basic net income per common share.

3 The allowance for credit losses on loans to total loans, excluding SBA-guaranteed PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for credit losses on loans. SBA PPP loans at March 31, 2022 and December 31, 2021 totaled $40.6 million and $111.2 million, respectively.
4 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses. Tangible common equity of $341 million and $371 million at March 31, 2022 and December 31, 2021, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets. Tangible assets exclude goodwill and intangible assets of $79.0 million and $79.4 million at March 31, 2022 and December 31, 2021, respectively.

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 June 30, 2022 and December 31, 2021 totaled $17.0 million and $111.2 million, respectively.

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 June 30, 2022 and December 31, 2021 totaled $17.0 million and $111.2 million, respectively.
4 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses. Tangible common equity of $331 million and $371 million at June 30, 2022 and December 31, 2021, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets. Tangible assets exclude goodwill and intangible assets of $78.6 million and $79.4 million at June 30, 2022 and December 31, 2021, respectively.
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 $331 million and $371 million at June 30, 2022 and December 31, 2021, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets. Tangible assets exclude goodwill and intangible assets of $78.6 million and $79.4 million at June 30, 2022 and December 31, 2021, respectively.

Page-32Page-33

Net Interest Income
 
Net interest income is the interest earned on loans, investment 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 endedThree months endedThree months ended
March 31, 2022December 31, 2021March 31, 2021
InterestInterestInterest
AverageIncome/Yield/AverageIncome/Yield/AverageIncome/Yield/
(dollars in thousands)BalanceExpenseRateBalanceExpenseRateBalanceExpenseRate
Assets
Interest-earning deposits with banks 1
$231,555 $106 0.18 %$330,894 $125 0.15 %$165,788 $42 0.10 %
Investment securities 2, 3
1,626,537 6,871 1.69 %1,410,383 5,801 1.65 %540,970 3,282 2.43 %
Loans 1, 3, 4
2,227,495 23,881 4.29 %2,269,785 25,711 4.43 %2,099,847 20,836 3.97 %
   Total interest-earning assets 1
4,085,587 30,858 3.02 %4,011,062 31,637 3.09 %2,806,605 24,160 3.44 %
Cash and non-interest-bearing due from banks69,019 85,869 50,931 
Bank premises and equipment, net7,430 7,777 4,777 
Interest receivable and other assets, net183,222 194,058 133,693 
Total assets$4,345,258 $4,298,766 $2,996,006 
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts$295,183 $56 0.08 %$290,394 $53 0.07 %$174,135 $39 0.09 %
Savings accounts343,327 29 0.03 %336,715 28 0.03 %214,049 19 0.04 %
Money market accounts1,122,215 478 0.17 %1,102,943 505 0.18 %703,577 286 0.16 %
Time accounts including CDARS147,707 14 0.04 %144,993 25 0.07 %96,349 96 0.40 %
Borrowings and other obligations 1
399 0.62 %430 0.62 %36 — 1.99 %
Subordinated debenture 1, 5
— — — %— — — %2,164 1,361 251.54 %
   Total interest-bearing liabilities1,908,831 578 0.12 %1,875,475 612 0.13 %1,190,310 1,801 0.61 %
Demand accounts1,942,804 1,915,309 1,406,123 
Interest payable and other liabilities51,997 54,514 44,551 
Stockholders' equity441,626 453,468 355,022 
Total liabilities & stockholders' equity$4,345,258 $4,298,766 $2,996,006 
Tax-equivalent net interest income/margin 1
$30,280 2.96 %$31,025 3.03 %$22,359 3.19 %
Reported net interest income/margin 1
$29,898 2.93 %$30,633 2.99 %$22,031 3.14 %
Tax-equivalent net interest rate spread2.90 %2.96 %2.83 %
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.


Three months endedThree months ended
June 30, 2022March 31, 2022
InterestInterest
AverageIncome/Yield/AverageIncome/Yield/
(dollars in thousands)BalanceExpenseRateBalanceExpenseRate
Assets
Interest-earning deposits with banks 1
$95,326 $180 0.75 %$231,555 $106 0.18 %
Investment securities 2, 3
1,807,710 8,469 1.87 %1,626,537 6,871 1.69 %
Loans 1, 3, 4
2,194,810 23,522 4.24 %2,227,495 23,881 4.29 %
   Total interest-earning assets 1
4,097,846 32,171 3.11 %4,085,587 30,858 3.09 %
Cash and non-interest-bearing due from banks56,408 69,019 
Bank premises and equipment, net7,182 7,430 
Interest receivable and other assets, net151,483 183,222 
Total assets$4,312,919 $4,345,258 
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts$300,258 $53 0.07 %$295,183 $56 0.08 %
Savings accounts343,338 32 0.04 %343,327 29 0.03 %
Money market accounts1,076,912 438 0.16 %1,122,215 478 0.17 %
Time accounts including CDARS144,432 67 0.19 %147,707 14 0.04 %
Borrowings and other obligations 1
370 — 0.61 %399 0.62 %
Subordinated debenture 1, 5
— — — %— — — %
   Total interest-bearing liabilities1,865,310 590 0.13 %1,908,831 578 0.12 %
Demand accounts1,984,629 1,942,804 
Interest payable and other liabilities49,709 51,997 
Stockholders' equity413,271 441,626 
Total liabilities & stockholders' equity$4,312,919 $4,345,258 
Tax-equivalent net interest income/margin 1
$31,581 3.05 %$30,280 2.96 %
Reported net interest income/margin 1
$31,197 3.01 %$29,898 2.93 %
Tax-equivalent net interest rate spread2.98 %2.90 %
Page-33Page-34

Six months endedSix months ended
June 30, 2022June 30, 2021
InterestInterest
AverageIncome/Yield/AverageIncome/Yield/
(in thousands)BalanceExpenseRateBalanceExpenseRate
Assets
Interest-earning deposits with banks 1
$163,064 $286 0.35 %$179,846 $96 0.11 %
Investment securities 2, 3
1,717,624 15,340 1.79 %601,498 6,948 2.31 %
Loans 1, 3, 4
2,211,062 47,403 4.26 %2,081,069 42,437 4.06 %
   Total interest-earning assets 1
4,091,750 63,029 3.06 %2,862,413 49,481 3.44 %
Cash and non-interest-bearing due from banks62,679 45,059 
Bank premises and equipment, net7,305 4,786 
Interest receivable and other assets, net167,265 132,675 
Total assets$4,328,999 $3,044,933 
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts$297,734 $109 0.07 %$170,943 $78 0.09 %
Savings accounts343,333 61 0.04 %220,946 40 0.04 %
Money market accounts1,099,439 916 0.17 %719,769 598 0.17 %
Time accounts including CDARS146,061 81 0.11 %95,849 177 0.37 %
Borrowings and other obligations 1
384 0.62 %50 — 1.46 %
Subordinated debenture 1, 5
— — — %1,076 1,361 251.54 %
   Total interest-bearing liabilities1,886,951 1,168 0.12 %1,208,633 2,254 0.38 %
Demand accounts1,963,832 1,442,320 
Interest payable and other liabilities50,846 42,753 
Stockholders' equity427,370 351,227 
Total liabilities & stockholders' equity$4,328,999 $3,044,933 
Tax-equivalent net interest income/margin 1
$61,861 3.01 %$47,227 3.28 %
Reported net interest income/margin 1
$61,095 2.97 %$46,565 3.24 %
Tax-equivalent net interest rate spread2.94 %3.06 %
1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.
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.

Analysis of Changes in Net Interest Income

The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the 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 twoone more daysday in the three months ended March 31,June 30, 2022 compared to DecemberMarch 31, 2021.2022.
Three Months Ended March 31, 2022 Compared to Three Months Ended
December 31, 2021
Three Months Ended March 31, 2022 Compared to Three Months Ended
March 31, 2021
(in thousands)VolumeYield/RateMixTotalVolumeYield/RateMixTotal
Interest-earning deposits with banks$(38)$30 $(11)$(19)$17 $35 $12 $64 
Investment securities 1
888 158 24 1,070 6,586 (997)(2,000)3,589 
Loans 1
(479)(835)(516)(1,830)1,267 1,676 102 3,045 
Total interest-earning assets371 (647)(503)(779)7,870 714 (1,886)6,698 
Interest-bearing transaction accounts(1)27 (6)(4)17 
Savings accounts— — 11 (1)— 10 
Money market accounts(24)(12)(27)170 14 192 
Time accounts, including CDARS— (10)(1)(11)51 (87)(46)(82)
Borrowings and other obligations— — — — — — 
Subordinated debenture 2
— — — — (1,361)(1,361)1,361 (1,361)
Total interest-bearing liabilities11 (31)(14)(34)(1,102)(1,441)1,320 (1,223)
Changes in tax-equivalent net interest income$360 $(616)$(489)$(745)$8,972 $2,155 $(3,206)$7,921 
1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.
2 Three months ended March 31, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.
Page-35

Three Months Ended June 30, 2022 Compared to Three Months Ended
March 31, 2022
Six Months Ended June 30, 2022 Compared to Six Months Ended
June 30, 2021
(in thousands)VolumeYield/RateMixTotalVolumeYield/RateMixTotal
Interest-earning deposits with banks$(63)$325 $(188)$74 $(9)$221 $(22)$190 
Investment securities 1
765 749 84 1,598 12,893 (1,576)(2,925)8,392 
Loans 1
(350)(271)262 (359)2,651 2,179 136 4,966 
Total interest-earning assets352 803 158 1,313 15,535 824 (2,811)13,548 
Interest-bearing transaction accounts(4)— (3)58 (15)(12)31 
Savings accounts— — 22 (1)— 21 
Money market accounts(19)(27)(40)315 318 
Time accounts, including CDARS— 54 (1)53 93 (124)(65)(96)
Borrowings and other obligations— — (1)(1)— — 
Subordinated debenture 2
— — — — — (1,361)— (1,361)
Total interest-bearing liabilities(18)26 12 488 (1,499)(75)(1,086)
Changes in tax-equivalent net interest income$370 $777 $154 $1,301 $15,047 $2,323 $(2,736)$14,634 
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 Six months ended June 30, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.
FirstSecond Quarter of 2022 Compared to the FourthFirst Quarter of 20212022

Net interest income totaled $31.2 million in the second quarter of 2022, compared to $29.9 million in the first quarter of 2022, compared to $30.62022. The $1.3 million in the prior quarter. The $735 thousand decreaseincrease from the prior quarter was primarily attributable to changes in amortization and accretion on acquired loans, lower loan prepayment fees, lower PPP fee recognition and fewer days in the quarter, partially offset by higher average balances and yields on investment securities.securities driving an increase of $1.6 million, quarter-over-quarter in investment interest income.
The tax-equivalent net interest margin was 3.05% in the second quarter of 2022, compared to 2.96% in the first quarter of 2022, compared to 3.03% in the fourth quarter of 2021.2022. The decreaseincrease from the prior quarter was primarily due to changes in amortization and accretion on acquired loans, lower loan prepayment fees, lower PPP fee recognition, and acontinued deployment of cash into higher proportion ofyielding investment securities from balance sheet growth.and higher interest rates on non-PPP loans, partially offset by lower interest and fee income on PPP loans. Average yields on the non-PPP portion of the loan portfolio and the investment portfolio are beginningincreased from 1.69% in the first quarter of 2022 to reflect1.87% in the second quarter reflecting recent increases in market interest rates, particularly commercial loans.and the average rate on gross loans increased 10 basis points, which excludes the impact of loan origination fees/costs and purchase discounts/premiums.

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

Net interest income totaled $29.9$61.1 million infor the first quarter ofsix months ended June 30, 2022, compared to $22.0$46.6 million for the same period in the first quarter of 2021.prior year. The $7.9$14.5 million increase from the comparative quarter aprior year ago was reflective ofprimarily due to the ARB merger, a larger allocation ofinvestment portfolio generating an incremental $8.3 million, and $4.9 million related to higher balances and yields on the loan portfolio to higher rate loans, deployment(net of cash into investment securities,a $3.7 million decrease in interest and costs associated withfees on PPP loans). Additionally, 2021 included a $1.3 million accelerated discount from the early redemption of a subordinated debt in the first quarter of 2021. Increases were partially offset by a lower average yield on the investment portfolio.debenture.

The tax-equivalent net interest margin was 2.96%3.01% in the first quarter ofsix months ended June 30, 2022, compared to 3.19%3.28% in the same quarter lastperiod in the prior year. The decrease in tax-equivalent net interest margin from the same period a year ago was primarily attributed to a higher proportion of investment securities in the larger balance sheet associated with ARB's lower loan-to-deposit ratio and other deposit growth with average yields 74 basis points lower.over the period. The decrease was partially offset by a shift to a higher percentage of non-PPP loans within the loan portfolio and the absence of trust preferred securities redemption that occurred in 2021.

Market Interest Rates

Market interest rates are, in part, based on the target federal funds interest rate (the interest rate banks charge each
other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC").

In response to the evolvingeconomic 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
Page-34

range resided between 0.0% and 0.25% after March 15, 2020 through the beginning of 2022, putting downward pressure on our asset yields and net interest margin. In 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 shortages of oil, other supply
Page-36

chain disruptions, and elevated inflation. In response, the FOMC increased the federal funds rate by 75 basis points twice effective June 16, 2022 and July 28, 2022 to a range of 75%2.25% - 1.00% and anticipates2.50%. It is widely anticipated that ongoingadditional increases in the target range will be appropriateoccur in 2022. Our net interest margin should benefit from a rising interest rate environment. See ITEM 3. Quantitative and Qualitative Disclosure about Market Risk for further information.

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

The following table shows the provision for credit losses activity for the periods presented.
Three months endedThree months endedSix months ended
(dollars in thousands)(dollars in thousands)March 31, 2022December 31, 2021March 31, 2021(dollars in thousands)June 30, 2022March 31, 2022June 30, 2022June 30, 2021
(Reversal of) provision for credit losses on loans$(485)$600 $(2,929)
Reversal of credit losses on loansReversal of credit losses on loans$— $(485)$(485)$(3,849)

There was no provision made to the allowance for credit losses on loans in the second quarter. An improvement in the California unemployment rate forecast decreased the quantitative portion of estimated credit losses while ongoing supply chain issues, inflation and recession risks increased qualitative factors. The reversalsreversal of the allowance for credit losses on loans in the quarters ended March 31, 2022 and 2021prior quarter primarily resulted from improved forecasted economic conditions.conditions at the time. The $600 thousand provision for credit losses on loansreversals in the fourth quarter ofsix months ended June 30, 2021 resulted from increases to qualitative risk factorswere primarily impacted by changes in executive leadership, senior lending positions, and integration of the ARB lending staff and loan portfolio as well as further refinements to the discounted cash flow assumptions applied to acquired loans within the allowance model. These increases were partially offset by reductions in qualitative risk factors due to a declineimprovements in the volume of loans downgraded to substandard classification, fewer delinquencies,forecasted California unemployment rates at the time and the elimination of an allowance related to a commercial real estatedecrease in non-PPP loan that had been individually analyzed for potential credit losses in the previous periods and paid off in the fourth quarter. Additionally, there was an overall improvement in the underlying economic forecasts.balances.

Loans designated special mention, which are not considered adversely classified, decreased year-to-date by $10.0$14.7 million to $63.3$58.6 million at March 31,June 30, 2022 from $73.3 million at December 31, 2021. The decrease was largely due to $15.0$22.3 million in upgrades to pass risk ratings because of the borrowers' improved financial condition, which was offset by $11.5 million in downgrades from pass to special mention. Additionally, there were $3.6 million in downgrades from special mention to substandard, and $706$908 thousand in paydowns and payoffs. These decreases were partially offset by $8.7 million in downgrades from pass to special mention.

Classified assets (loans with risk ratings of substandard or doubtful) totaled $36.6$36.9 million at March 31,June 30, 2022, compared to $36.2 million at December 31, 2021. The $224$815 thousand increase was primarily related to $6.8$5.1 million in commercial loans to one borrowing relationship that were downgraded from special mention to substandard (comprised of $3.6 million as of December 31, 2021 and $3.2$1.5 million in additional advances in 2022). The increase was largely offset by and the downgrade of two well-secured owner occupied commercial real estate loans totaling $2.3 million and two home equity loans totaling $128 thousand. Additionally, there were $5.2 million in upgrades to pass and $684$832 thousand in paydowns and payoffs. Classified loans also included one $110$106 thousand loan acquired from ARB with a doubtful risk rating as of March 31,June 30, 2022 and December 31, 2021, which is well-secured by real estate collateral.

The ratio of allowance for credit losses on loans to total loans was 1.04% and 1.02% at March 31,June 30, 2022 and December 31, 2021.2021, respectively. Non-accrual loans decreased $698$358 thousand to $7.7$8.0 million, or 0.35%0.37% of total loans at March 31,June 30, 2022 from $8.4 million, or 0.37% of total loans at December 31, 2021.

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


Page-35Page-37

Non-interest Income
 
The following table details the components of non-interest income.
Three months endedQuarter over quarterYear over year Three months endedAmount ChangePercent Change
(dollars in thousands)(dollars in thousands)March 31, 2022December 31, 2021March 31, 2021Amount ChangePercent ChangeAmount ChangePercent Change(dollars in thousands)June 30, 2022March 31, 2022
Wealth Management and Trust ServicesWealth Management and Trust Services$600 $607 $488 $(7)(1.2)%$112 23.0 %Wealth Management and Trust Services$630 $600 $30 5.0 %
Debit card interchange fees, netDebit card interchange fees, net505 544 366 (39)(7.2)%139 38.0 %Debit card interchange fees, net531 505 26 5.1 %
Service charges on deposit accountsService charges on deposit accounts488 531 281 (43)(8.1)%207 73.7 %Service charges on deposit accounts465 488 (23)(4.7)%
Earnings on bank-owned life insurance, netEarnings on bank-owned life insurance, net413 302 257 111 36.8 %156 60.7 %Earnings on bank-owned life insurance, net298 413 (115)(27.8)%
Dividends on Federal Home Loan Bank stockDividends on Federal Home Loan Bank stock259 255 149 1.6 %110 73.8 %Dividends on Federal Home Loan Bank stock249 259 (10)(3.9)%
Merchant interchange fees, netMerchant interchange fees, net140 175 57 (35)(20.0)%83 145.6 %Merchant interchange fees, net149 140 6.4 %
Losses on sale of investment securities, net— (17)— 17 NM— NM
Other incomeOther income462 322 228 140 43.5 %234 102.6 %Other income406 462 (56)(12.1)%
Total non-interest incomeTotal non-interest income$2,867 $2,719 $1,826 $148 5.4 %$1,041 57.0 %Total non-interest income$2,728 $2,867 $(139)(4.8)%
NM - not meaningful
 Six months endedAmount ChangePercent Change
(dollars in thousands)June 30, 2022June 30, 2021
Wealth Management and Trust Services$1,230 $1,018 $212 20.8 %
Debit card interchange fees, net1,036 785 251 32.0 %
Service charges on deposit accounts953 598 355 59.4 %
Earnings on bank-owned life insurance, net711 490 221 45.1 %
Dividends on Federal Home Loan Bank stock508 326 182 55.8 %
Merchant interchange fees, net289 118 171 144.9 %
Other income868 513 355 69.2 %
Total non-interest income$5,595 $3,848 $1,747 45.4 %
First
Second Quarter of 2022 Compared to FourthFirst Quarter of 2022

Non-interest income totaled $2.7 million in the second quarter of 2022, compared to $2.9 million in the preceding quarter. The $139.0 thousand decrease was primarily related to payments on bank-owned life insurance in the prior quarter.

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

Non-interest income increased by $148 thousand in the first quarter of 2022 to $2.9 million, compared to $2.7totaled $5.6 million in the prior quarter. The increase from the prior quarter was primarily due to a payment on bank-owned life insurance.

First Quarter ofsix months ended June 30, 2022, Compared to the First Quarter of 2021

Non-interest income increased by $1.0 million in the first quarter of 2022 to $2.9 million, compared to $1.8$3.8 million in the same quarter a year ago.period of the prior year. The increase$1.7 million improvement from the first quarter of 2021prior year period was evident in all categories and mostly attributable to increased activity associated with the ARB acquisition in the first quarter of 2022.and higher Wealth Management and Trust Services income.

Non-interest Expense
 
The following table details the components of non-interest expense.
Three months endedQuarter over quarterYear over year Three months endedAmount ChangePercent Change
(dollars in thousands)(dollars in thousands)March 31, 2022December 31, 2021March 31, 2021Amount ChangePercent ChangeAmount ChangePercent Change(dollars in thousands)June 30, 2022March 31, 2022
Salaries and related benefitsSalaries and related benefits$11,548 $10,716 $9,208 $832 7.8 %$2,340 25.4 %Salaries and related benefits$10,341 $11,548 $(1,207)(10.5)%
Occupancy and equipmentOccupancy and equipment1,909 1,929 1,751 (20)(1.0)%158 9.0 %Occupancy and equipment1,894 1,909 (15)(0.8)%
Data processingData processing1,277 1,887 819 (610)(32.3)%458 55.9 %Data processing1,199 1,277 (78)(6.1)%
Professional servicesProfessional services913 653 863 260 39.8 %50 5.8 %Professional services665 913 (248)(27.2)%
Information technologyInformation technology478 445 313 33 7.4 %165 52.7 %Information technology468 478 (10)(2.1)%
Depreciation and amortizationDepreciation and amortization452 461 459 (9)(2.0)%(7)(1.5)%Depreciation and amortization393 452 (59)(13.1)%
Amortization of core deposit intangibleAmortization of core deposit intangible380 393 204 (13)(3.3)%176 86.3 %Amortization of core deposit intangible374 380 (6)(1.6)%
Directors' expenseDirectors' expense311 297 175 14 4.7 %136 77.7 %Directors' expense294 311 (17)(5.5)%
Federal Deposit Insurance Corporation insuranceFederal Deposit Insurance Corporation insurance290 292 179 (2)(0.7)%111 62.0 %Federal Deposit Insurance Corporation insurance296 290 2.1 %
Charitable contributionsCharitable contributions45 90 31 (45)(50.0)%14 45.2 %Charitable contributions511 45 466 1,035.6 %
Other non-interest expenseOther non-interest expenseOther non-interest expense
AdvertisingAdvertising347 305 239 42 13.8 %108 45.2 %Advertising221 347 (126)(36.3)%
Other expenseOther expense1,425 1,516 1,171 (91)(6.0)%254 21.7 %Other expense2,250 1,425 825 57.9 %
Total other non-interest expenseTotal other non-interest expense1,772 1,821 1,410 (49)(2.7)%362 25.7 %Total other non-interest expense2,471 1,772 699 39.4 %
Total non-interest expenseTotal non-interest expense$19,375 $18,984 $15,412 $391 2.1 %$3,963 25.7 %Total non-interest expense$18,906 $19,375 $(469)(2.4)%
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First
Six months endedAmount ChangePercent Change
(dollars in thousands)June 30, 2022June 30, 2021
Salaries and related benefits$21,889 $18,096 $3,793 21.0 %
Occupancy and equipment3,803 3,502 301 8.6 %
Data processing2,476 1,639 837 51.1 %
Professional services1,578 1,849 (271)(14.7)%
Information technology946 609 337 55.3 %
Depreciation and amortization845 848 (3)(0.4)%
Amortization of core deposit intangible754 408 346 84.8 %
Directors' expense605 405 200 49.4 %
Federal Deposit Insurance Corporation insurance586 361 225 62.3 %
Charitable contributions556 493 63 12.8 %
Other non-interest expense 
Advertising568414154 37.2 %
Other expense3,675 2,344 1,331 56.8 %
Total other non-interest expense4,243 2,758 1,485 53.8 %
Total non-interest expense$38,281 $30,968 $7,313 23.6 %

Second Quarter of 2022 Compared to FourthFirst Quarter of 2022

Non-interest expense totaled $18.9 million in the second quarter of 2022, compared to $19.4 million in the prior quarter. The decrease from the prior quarter was primarily due to a $1.2 million reduction in salaries and benefits after the completion of the acquisition-related conversion in March 2022 and 22 fewer full-time equivalent employees. Decreases were partially offset by a $466 thousand increase in charitable contributions in the quarter due to the annual distribution of grant funding related to the Bank's corporate giving program.

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

Non-interest expense increased by $391 thousand to $19.4totaled $38.3 million in the first quarter ofsix months ended June 30, 2022, compared to $19.0 million in the prior quarter. The increase from the prior quarter is primarily due to seasonal increases related to annual incentives, share-based compensation and 401(k) contributions included in salaries and related benefits.
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Additionally, the cost of professional services increased due to audit work performed in the first quarter related to both the year-end financial statement audit and the ARB acquisition. Increases were partially offset by a decrease in acquisition-related one-time data processing expenses.

First Quarter of 2022 Compared to the First Quarter of 2021

Non-interest expense increased by $4.0 million to $19.4 million in the first quarter of 2022, compared to $15.4$31.0 million in the same period a year ago.of prior year. The largest increases over prior year first quarter expenseexpenses came from salaries and related benefits, which rose $2.3$3.8 million due to increased numbers of employees in acquired branch and loan offices, regularly scheduled annual merit and related increases, and lower deferred loan origination costs.costs (the first six months of 2021 included PPP round two origination activity). Higher expenses across most other categories reflect the ARB acquisition, including one-time and conversion costs of $547$858 thousand, an increase in other data processing of $762 thousand, and an additional $346 thousand in amortization associated with the ARB core deposit intangible asset in the first quarterhalf of 2022.

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 firstsecond quarter of 2022 totaled $3.7$4.0 million at an effective tax rate of 26.3%, compared to $3.8$3.7 million at an effective tax rate of 28.4%26.3% in the prior quarter and $3.0quarter. The provision for income taxes for the first half of 2022 totaled $7.7 million at an effective tax rate of 25.2% in the same quarter last year. Although pretax income was higher in26.3%, compared to $6.3 million at an effective tax rate of 25.6% for the first quarterhalf of 2022 compared to the prior quarter, the higher provision in the prior quarter reflects non-deductible merger expenses and executive compensation, which also accounted for the higher effective tax rate.2021. The increase in the provision in the firstsecond quarter of 2022 reflected higher pre-tax income as compared to the same quarter a year ago.prior quarter. The 11070 basis point increase in the effective tax rate in the first quarterhalf of 2022 as compared to the same quarter a year agofirst half of 2021 was primarily due to a higher level of tax benefits in 2021 from the disqualifying dispositions of incentive stock options.

We file a consolidated return in the U.S. 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 March 31,June 30, 2022, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.


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FINANCIAL CONDITION SUMMARY

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

Total cash, cash equivalents and restricted cash were $170.9$115.9 million at March 31,June 30, 2022, compared to $347.6 million at December 31, 2021. The $176.7$231.7 million decrease was primarily due to the deployment of funds into investment securities, as noted below. Cash and cash equivalents do not include $180.0$152.4 million and $173.1 million in temporary one-way sale transfers of deposits to third-party deposit networks as part of our liquidity management at March 31,June 30, 2022 and December 31, 2021, respectively.

Investment Securities

The investment securities portfolio totaled $1.746$1.825 billion at March 31,June 30, 2022, an increase of $235.9$314.9 million from December 31, 2021. The increase was primarily due to purchases of $339.4$492.5 million to deploy excess cash into interest earning assets in a more favorable interest rate environment in 2022, partially offset by paydowns, maturities and calls and maturities of $48.0$93.1 million. Additionally, the fair value ofunrealized losses on available-for-sale securities decreased $53.0increased $80.1 million as a result of higher interest rates in the first threesix months of 2022. As part of our ongoing review of the investment securities portfolio and because of our strong liquidity position, we reassessed the classification of certain securities issued by government sponsored agencies in the context of recent changes in market expectations for future interest rates. In March 2022, we transferred $357.5 million securities at fair value from available-for-sale to held-to-
Page-37

maturityheld-to-maturity to reduce the effect of future rate increases on the available-for-sale portfolio mark-to-market, other comprehensive income and equity. See Note 4, Investment Securities, for additional information.

The following table summarizes our investment in obligations of state and political subdivisions at March 31,June 30, 2022 and December 31, 2021.
March 31, 2022December 31, 2021June 30, 2022December 31, 2021
(dollars in thousands)(dollars in thousands)Amortized CostFair Value% of Total State and Political SubdivisionsAmortized CostFair Value% of Total State and Political Subdivisions(dollars in thousands)Amortized CostFair Value% of Total State and Political SubdivisionsAmortized CostFair Value% of Total State and Political Subdivisions
Within California:Within California:Within California:
General obligation bonds$26,023 $23,757 14.4 %$25,036 $25,020 14.2 %General obligation bonds$25,997 $22,042 13.6 %$25,036 $25,020 14.2 %
Revenue bonds5,245 4,911 2.9 5,249 5,185 3.0 Revenue bonds5,055 4,496 2.6 5,249 5,185 3.0 
Tax allocation bonds502 505 0.3 503 510 0.3 Tax allocation bonds501 501 0.3 503 510 0.3 
Total within CaliforniaTotal within California31,770 29,173 17.6 30,788 30,715 17.5 Total within California31,553 27,039 16.5 30,788 30,715 17.5 
Outside California:Outside California:Outside California:
General obligation bonds120,546 114,862 66.8 117,278 121,303 66.5 General obligation bonds131,479 118,110 68.8 117,278 121,303 66.5 
Revenue bonds28,091 26,689 15.6 28,146 29,272 16.0 Revenue bonds28,035 23,659 14.7 28,146 29,272 16.0 
Total outside CaliforniaTotal outside California148,637 141,551 82.4 145,424 150,575 82.5 Total outside California159,514 141,769 83.5 145,424 150,575 82.5 
Total obligations of state and political subdivisionsTotal obligations of state and political subdivisions$180,407 $170,724 100.0 %$176,212 $181,290 100.0 %Total obligations of state and political subdivisions$191,067 $168,808 100.0 %$176,212 $181,290 100.0 %
Percent of investment portfolioPercent of investment portfolio10.1 %10.0 %11.7 %12.0 %Percent of investment portfolio10.2 %9.8 %11.7 %12.0 %

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (37.4%(38.2%), Washington (16.0%(15.0%) and Wisconsin (6.6%(9.7%). Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). We have $6.0 million in obligations of Texas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from 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

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Loans

During the first threesix months of 2022, loans decreased by $53.8$93.0 million and totaled $2.202$2.163 billion at March 31,June 30, 2022, primarily due to $70.6$94.2 million in PPP loans being forgiven and paid off. New non-PPP related loan originations totaled $49.8$152.0 million in the first threesix months of 2022, representing a six year peak for first quarter originations.2022. Non-PPP loan payoffs were $49.3$159.1 million in the first quartersix months of 2022, which were largely driven by borrowerincluding construction project completions of $34.6 million. These payoffs also reflected borrowers' sales of underlying real estate and business assets and cash payoffs due to excess liquidity, as well as investor commercial real estatethird-party refinancing of acquired loans with structures outside the Bank’sBank's credit risk appetite or in locations beyond our market area. Offsetting the decreases are increases in credit line utilization, net of normal loan amortization, of $16.3 million.appetite.

As of March 31,June 30, 2022, there were 191112 PPP loans outstanding totaling $40.6$17.0 million (net of $993$420 thousand in unrecognized fees and costs) compared to 368 loans outstanding December 31, 2021 for a total of $111.2 million (net of $2.5 million in unrecognized fees and costs). In the first quarterhalf of 2022, Bank of Marin recognized $1.5$2.1 million in PPP fees, net of costs, compared to $1.8 million in the prior quarter and $1.7$4.3 million in the same quarterperiod of 2021.
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As of March 31,June 30, 2022, two borrowing relationships withwith three loans totaling $23.6 million werewere continuing to benefit from payment relief under the provisions of the 2020 CARES Act. We will continue to work closely with both of these clients and monitor their performance.

Liabilities

During the first threesix months of 2022, total liabilities increased by $46.2$53.5 million to $3.910$3.917 billion. Deposits increased $52.8$22.1 million in the first threesix months of 2022 which is consistent with activity experienced throughout 2021 from larger business clients.to $3.831 billion. Non-interest bearing deposits increased $50.4$124.5 million while money market deposits decreased $103.5 million in the first threesix months of 2022, and was partially related to $1.961 billion, anda large transfer to non-interest bearing deposits by a significant customer in preparation for withdrawals in early July consistent with that customer's normal business activity. Non-interest bearing deposits represented 50.8%53.1% of total deposits at March 31,June 30, 2022, compared to 50.2% at December 31, 2021. The average cost of deposits remained consistentwas 0.06% in the first quarterhalf of 2022 compared to 0.07% in the same period of 2021. Additionally, as part of our liquidity management, the Bank maintained $152.4 million in deposits off-balance sheet with deposit networks at 0.06%.June 30, 2022, compared to $173.1 million at December 31, 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 March 31,June 30, 2022. There are no conditions or events since that notification that management believes have changed the Bank’s categories and we expect the Bank to remain well capitalized for prompt corrective action purposes.


Page-41

The Bancorp’s and Bank’s capital adequacy ratios as of March 31,June 30, 2022 and December 31, 2021 are presented in the following tables.
Capital Ratios for Bancorp

(dollars in thousands)
Capital Ratios for Bancorp

(dollars in thousands)
Actual RatioAdequately Capitalized ThresholdRatio to be a Well Capitalized Bank Holding Company
Capital Ratios for Bancorp

(dollars in thousands)
Actual RatioAdequately Capitalized ThresholdRatio to be a Well Capitalized Bank Holding Company
March 31, 2022AmountRatioAmountRatioAmountRatio
June 30, 2022June 30, 2022AmountRatioAmountRatioAmountRatio
Total Capital (to risk-weighted assets)Total Capital (to risk-weighted assets)$404,039 14.35 %≥ $295,720 ≥ 10.50 %≥ $281,638 ≥ 10.00 %Total Capital (to risk-weighted assets)$412,325 14.67 %$295,112 ≥ 10.50 %$281,059 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets)Tier 1 Capital (to risk-weighted assets)$380,876 13.52 %≥ $239,392 ≥   8.50 %≥ $225,310 ≥   8.00 %Tier 1 Capital (to risk-weighted assets)$389,091 13.84 %$238,900 ≥   8.50 %$224,847 ≥   8.00 %
Tier 1 Capital (to average assets)Tier 1 Capital (to average assets)$380,876 8.90 %≥ $171,200 ≥   4.00 %≥ $214,000 ≥   5.00 %Tier 1 Capital (to average assets)$389,091 9.07 %$171,628 ≥   4.00 %$214,535 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets)Common Equity Tier 1 (to risk-weighted assets)$380,876 13.52 %≥ $197,147 ≥   7.00 %≥ $183,065 ≥   6.50 %Common Equity Tier 1 (to risk-weighted assets)$389,091 13.84 %$196,741 ≥   7.00 %$182,689 ≥   6.50 %
December 31, 2021December 31, 2021  December 31, 2021  
Total Capital (to risk-weighted assets)Total Capital (to risk-weighted assets)$397,101 14.58 %≥ $286,035 ≥ 10.50 %≥ $272,414 ≥ 10.00 %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)Tier 1 Capital (to risk-weighted assets)$373,286 13.70 %≥ $231,552 ≥   8.50 %≥ $217,931 ≥   8.00 %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)Tier 1 Capital (to average assets)$373,286 8.85 %≥ $168,750 ≥   4.00 %≥ $210,937 ≥   5.00 %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)Common Equity Tier 1 (to risk-weighted assets)$373,286 13.70 %≥ $190,690 ≥   7.00 %≥ $177,069 ≥   6.50 %Common Equity Tier 1 (to risk-weighted assets)$373,286 13.70 %≥ $190,690 ≥   7.00 %≥ $177,069 ≥   6.50 %
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Capital Ratios for the Bank


(dollars in thousands)
Capital Ratios for the Bank


(dollars in thousands)
Actual RatioAdequately Capitalized ThresholdRatio to be Well Capitalized under Prompt Corrective Action Provisions
Capital Ratios for the Bank


(dollars in thousands)
Actual RatioAdequately Capitalized ThresholdRatio to be Well Capitalized under Prompt Corrective Action Provisions
March 31, 2022AmountRatioAmountRatioAmountRatio
June 30, 2022June 30, 2022AmountRatioAmountRatioAmountRatio
Total Capital (to risk-weighted assets)Total Capital (to risk-weighted assets)$402,918 14.31 %≥ $295,688 ≥ 10.50 %≥ $281,607 ≥ 10.00 %Total Capital (to risk-weighted assets)$399,228 14.21 %$295,078 ≥ 10.50 %$281,027 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets)Tier 1 Capital (to risk-weighted assets)$379,755 13.49 %≥ $239,366 ≥   8.50 %≥ $225,286 ≥   8.00 %Tier 1 Capital (to risk-weighted assets)$375,994 13.38 %$238,873 ≥   8.50 %$224,822 ≥   8.00 %
Tier 1 Capital (to average assets)Tier 1 Capital (to average assets)$379,755 8.87 %≥ $171,192 ≥   4.00 %≥ $213,989 ≥   5.00 %Tier 1 Capital (to average assets)$375,994 8.76 %$171,618 ≥   4.00 %$214,523 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets)Common Equity Tier 1 (to risk-weighted assets)$379,755 13.49 %≥ $197,125 ≥   7.00 %≥ $183,045 ≥   6.50 %Common Equity Tier 1 (to risk-weighted assets)$375,994 13.38 %$196,719 ≥   7.00 %$182,667 ≥   6.50 %
December 31, 2021December 31, 2021 December 31, 2021 
Total Capital (to risk-weighted assets)Total Capital (to risk-weighted assets)$390,924 14.35 %≥ $286,009 ≥ 10.50 %≥ $272,390 ≥ 10.00 %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)Tier 1 Capital (to risk-weighted assets)$367,109 13.48 %≥ $231,531 ≥   8.50 %≥ $217,912 ≥   8.00 %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)Tier 1 Capital (to average assets)$367,109 8.70 %≥ $168,724 ≥   4.00 %≥ $210,905 ≥   5.00 %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)Common Equity Tier 1 (to risk-weighted assets)$367,109 13.48 %≥ $190,673 ≥   7.00 %≥ $177,053 ≥   6.50 %Common Equity Tier 1 (to risk-weighted assets)$367,109 13.48 %≥ $190,673 ≥   7.00 %≥ $177,053 ≥   6.50 %

Liquidity and Capital Resources

The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report. Our Asset Liability Management Committee ("ALCO"), which is comprised of independent Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies, which are subject to projection and stress testing over a two-year horizon. ALCO has adopted a contingency funding plan that provides early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis. Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs. We also have relationships with third-party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash management strategy. We maintained $180.0$152.4 million in one-way-sale deposits off-balance sheet with deposit networks at MarchJune 30, 2022, compared to $173.1 million at December 31, 2022.2021.

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
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convenience, rates paid to customers, and our financial strength. The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us. Since 2020, the banking industry experienced abundant liquidity driven by pandemic-related government programs such as PPP and stimulus checks as well as an elevated savings rate system-wide.

Our cash and cash equivalents decreased $176.7$231.7 million in the first threesix months of 2022. Significant uses of liquidity during 2022 were $339.4$452.2 million in investment securities purchased, $3.8$7.7 million in cash dividends paid on common stock to our shareholders, and $1.2 million in common stock repurchases. Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position and core deposit base are adequate to fund our operations.

The most significant source of liquidity during the first six months of 2022 was proceeds from loans collected net(net of loan originationsoriginations) of $54.5$93.9 million, principal paydowns, maturities and calls of investment securities of $93.1 million, a net increase in deposits totaling $52.8 million. Proceeds from principal paydownsof $22.1 million (primarily related to $25 million of one-way sell deposits that was previously placed in third-party deposit networks being brought back on balance sheet), and maturities of securities totaled $48.0 million, and $11.5$19.6 million in net cash was provided by operating activities.

Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $581.4$592.5 million at March 31,June 30, 2022. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth and liquid assets. Over the next twelve months, $106.5
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$107.5 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 June 30, 2022 or December 31, 2021, as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report, the available credit lines with FHLB and FRB SF have declined by $71.4 million from December 30, 2021 to June 30, 2022, primarily because the rising market interest rates in the first half of 2022 have unfavorably affected the market value of the loans collateralizing these lines.
 
Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. 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 $1.1$13.0 million ofin cash at March 31,June 30, 2022, andwhich is in the process of obtaining regulatory approvalexpected to distribute a dividend from the Bank to the Bancorpbe 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, investments, borrowings and deposits as inputs. If potential changes to net equity value and net interest income
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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 March 31,June 30, 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. 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.
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 IncomeEstimated Change in Net Interest Income in Year 2, as percent of Net Interest IncomeImmediate and Parallel Shift in Interest Rates (in basis points)Estimated Change in Net Interest Income in Year 1, as percent of Net Interest IncomeEstimated Change in Net Interest Income in Year 2, as percent of Net Interest Income
up 400up 400(6.7)%4.9 %up 4006.9 %16.3 %
up 300up 300(4.8)%4.2 %up 3002.5 %9.8 %
up 200up 200(3.0)%3.1 %up 2001.8 %6.8 %
up 100up 100(1.4)%1.8 %up 1001.2 %4.0 %
down 100down 100(2.2)%(5.2)%down 100(4.6)%(8.1)%

Asset sensitivity increased over the quarter primarily due to a reduction in our deposit betas, floating rate loans repricing above their respective floors and fully-indexed rates on adjustable loans in position to move above floors at next repricing. 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. AssetsAdditionally, assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate
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movements. Important deposit modeling assumptions areinclude the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates change, otherwise known as the deposit beta. We applied anlowered the average interest-bearing deposit beta ofto 26% from last quarter's 58% to rates paid on interest-bearing deposits in rising rate scenarios, reflected in the table above. However, ourwhich is much closer to historical beta in the prior rising rate cycle was less than halflevels for Bank of the modeled beta and will be reflected in the next quarterly simulation model. Further, theMarin. 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 in different tenors that result in a change inchanges to the shape of the yield curve such as what happened in the first quarter of 2022, 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 March 31,June 30, 2022, we completed the conversion of core systems in relation to the merger with American River Bankshares in the third quarter of 2021 and we have integrated their business processes and systems into our internal control over financial reporting. Other than the interim effects of the Merger, 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
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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

Refer to Note 12 to the Consolidated Financial Statements in Item 8 of our 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 fromin the risk factors previously disclosed in our 2021 Form 10-K. Refer to "Risk Factors" in Item 1A of our 2021 Form 10-K, pages 12 through 20.

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.
 

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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. 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.

During the threesix months ended March 31,June 30, 2022, Bancorp repurchased 23,275 shares at an average price of $37.64 per share for a total cost of $877 thousand. FromThe last activity under the startprogram was in the first quarter of this2022. Cumulative shares repurchased under the current program the Bancorp has repurchasedtotaled 618,991 shares at an average price of $36.04 per share, totaling $22.3with $34.7 million outstanding as of March 31,June 30, 2022. The remaining $34.7 million inBancorp continues to evaluate the program will be executedresumption of share repurchases in the context of our overallother capital planning and stress testing, as well as other potential capital investments. The following table reflects repurchases under this share repurchase program for the periods presented.strategic initiatives.
(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 ProgramsApproximate Dollar Value That May yet Be Purchased Under the Program
Period
January 1-31, 202223,275 $37.64 23,275 $34,664 
February 1-28, 2022— — — $34,664 
March 1-31, 2022— — — $34,664 
Total23,275 $37.64 23,275 
1 Average price paid per share excludes commission.

ITEM 3       Defaults upon Senior Securities
None.
 
ITEM 4      Mine Safety Disclosures
Not applicable.

ITEM 5      Other Information
None.
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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 NumberExhibit DescriptionFormFile No.ExhibitFiling DateHerewith
2.018-K001-335722.1April 19, 2021
3.01S-4333-2570253.01June 11, 2021 
3.02S-4333-2570253.02June 11, 2021
4.018-A12B001-335724.1July 7, 2017
4.0210-K001-335724.02March 13, 2020
10.01S-8333-2182744.1May 26, 2017 
10.02S-8333-2212194.1October 30, 2017
10.03S-8333-2278404.1October 15, 2018 
10.04S-8333-2395554.1June 30, 2020 
10.0510-Q001-3357210.06November 7, 2007 
10.0610-K001-3357210.07March 15, 2021 
10.078-K001-3357210.2November 4, 2014
10.088-K001-3357210.3November 4, 2014 
10.098-K001-3357210.1October 31, 2007 
10.1010-Q001-3357210.12November 6, 2020
10.1110-K001-3357210.13March 15, 2021
10.128-K001-3357210.1September 24, 2021
31.01    Filed
31.02    Filed
32.01    Filed
101.INSInline XBRL Instance DocumentFiled
101.SCHInline XBRL Taxonomy Extension Schema DocumentFiled
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentFiled
101.LABInline XBRL Taxonomy Extension Label Linkbase Document    Filed
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentFiled
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentFiled
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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)
May 9,August 8, 2022 /s/ Timothy D. Myers
Date Timothy D. Myers
  President and Chief Executive Officer
  (Principal Executive Officer)
  
May 9,August 8, 2022 /s/ Tani Girton
Date Tani Girton
  Executive Vice President &
  Chief Financial Officer
(Principal Financial Officer)
May 9,August 8, 2022 /s/ David A. Merck
 Date David A. Merck
First Vice President & Controller
   (Principal Accounting Officer)

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