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 ~~June 30, 2022~~March 31, 2023

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

For the transition period from __________________ to __________________

Commission File Number 001-33572

Bank of Marin Bancorp

(Exact name of Registrant as specified in its charter)

California

20-8859754

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

504 Redwood Blvd.

Suite 100

Novato

94947

(Address of principal executive office)

(Zip Code)

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

Not Applicable

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


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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Yes ☐ No ☒

As of ~~July 31, 2022,~~April 30, 2023, there were ~~16,015,474~~16,115,082 shares of common stock outstanding.

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION	3

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

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk	4342

ITEM 4.	Controls and Procedures	4443

PART II	OTHER INFORMATION	4544

ITEM 1.	Legal Proceedings	4544

ITEM 1A.	Risk Factors	4544

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

ITEM 3.	Defaults Upon Senior Securities	45

ITEM 4.	Mine Safety Disclosures	45

ITEM 5.	Other Information	45

ITEM 6.	Exhibits	46

SIGNATURES

Page-2

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements


BANK OF MARIN BANCORP CONSOLIDATEDSTATEMENTS OFCONDITION


(in thousands, except share data; unaudited)	(in thousands, except share data; unaudited)	June 30, 2022		December 31, 2021		(in thousands, except share data; unaudited)	March 31, 2023		December 31, 2022
Assets	Assets					Assets
Cash, cash equivalents and restricted cash	Cash, cash equivalents and restricted cash	$	115,905	$	347,641	Cash, cash equivalents and restricted cash	$	37,993	$	45,424

Investment securities
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)		893,149		1,167,568
Investment securities:						Investment securities:
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at March 31, 2023 and December 31, 2022)						Held-to-maturity, at amortized cost (net of zero allowance for credit losses at March 31, 2023 and December 31, 2022)	958,560		972,207
Available-for-sale, at fair value (net of zero allowance for credit losses at March 31, 2023 and December 31, 2022)						Available-for-sale, at fair value (net of zero allowance for credit losses at March 31, 2023 and December 31, 2022)	797,533		802,096
Total investment securities	Total investment securities	1,824,736		1,509,790		Total investment securities	1,756,093		1,774,303
Loans, at amortized cost	Loans, at amortized cost	2,162,632		2,255,645		Loans, at amortized cost	2,112,328		2,092,546
Allowance for credit losses on loans	Allowance for credit losses on loans	(22,539)		(23,023)		Allowance for credit losses on loans	(23,330)		(22,983)
Loans, net of allowance for credit losses on loans	Loans, net of allowance for credit losses on loans	2,140,093		2,232,622		Loans, net of allowance for credit losses on loans	2,088,998		2,069,563
Goodwill	Goodwill	72,754		72,754		Goodwill	72,754		72,754
Bank-owned life insurance	Bank-owned life insurance	61,834		61,473		Bank-owned life insurance	67,006		67,066
Operating lease right-of-use assets	Operating lease right-of-use assets	22,353		23,604		Operating lease right-of-use assets	22,854		24,821
Bank premises and equipment, net	Bank premises and equipment, net	7,067		7,558		Bank premises and equipment, net	8,690		8,134
Core deposit intangible, net	Core deposit intangible, net	5,851		6,605		Core deposit intangible, net	4,771		5,116
Other real estate owned	Other real estate owned	800		800		Other real estate owned	455		455
Interest receivable and other assets	Interest receivable and other assets	75,511		51,362		Interest receivable and other assets	75,665		79,828
Total assets	Total assets	$	4,326,904	$	4,314,209	Total assets	$	4,135,279	$	4,147,464

Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity					Liabilities and Stockholders' Equity
Liabilities	Liabilities					Liabilities
Deposits
Deposits:						Deposits:
Non-interest bearing	Non-interest bearing	$	2,034,717	$	1,910,240	Non-interest bearing	$	1,636,651	$	1,839,114
Interest bearing	Interest bearing					Interest bearing
Transaction accounts	Transaction accounts	297,871		290,813		Transaction accounts	251,716		287,651
Savings accounts	Savings accounts	343,585		340,959		Savings accounts	306,951		338,163
Money market accounts	Money market accounts	1,012,823		1,116,303		Money market accounts	911,189		989,390
Time accounts	Time accounts	141,674		150,235		Time accounts	144,067		119,030
Total deposits	Total deposits	3,830,670		3,808,550		Total deposits	3,250,574		3,573,348
Borrowings and other obligations		356		419
Short-term borrowings and other obligations						Short-term borrowings and other obligations	405,802		112,439

Operating lease liabilities	Operating lease liabilities	24,117		25,429		Operating lease liabilities	25,433		26,639
Interest payable and other liabilities	Interest payable and other liabilities	62,188		29,443		Interest payable and other liabilities	23,296		22,946
Total liabilities	Total liabilities	3,917,331		3,863,841		Total liabilities	3,705,105		3,735,372
Commitments and contingent liabilities (Note 8)	Commitments and contingent liabilities (Note 8)	0				Commitments and contingent liabilities (Note 8)
Stockholders' Equity	Stockholders' Equity					Stockholders' Equity
Preferred stock, no par value, Authorized - 5,000,000 shares, none issued	Preferred stock, no par value, Authorized - 5,000,000 shares, none issued	—		—		Preferred stock, no par value, Authorized - 5,000,000 shares, none issued	—		—
Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,009,600 and 15,929,243 at June 30, 2022 and December 31, 2021, respectively		213,864		212,524
Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,107,210 and 16,029,138 at March 31, 2023 and December 31, 2022, respectively						Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,107,210 and 16,029,138 at March 31, 2023 and December 31, 2022, respectively	215,965		215,057
Retained earnings	Retained earnings	253,737		239,868		Retained earnings	276,209		270,781
Accumulated other comprehensive loss, net of taxes	Accumulated other comprehensive loss, net of taxes	(58,028)		(2,024)		Accumulated other comprehensive loss, net of taxes	(62,000)		(73,746)
Total stockholders' equity	Total stockholders' equity	409,573		450,368		Total stockholders' equity	430,174		412,092
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	4,326,904	$	4,314,209	Total liabilities and stockholders' equity	$	4,135,279	$	4,147,464

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


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
	Three months ended
(in thousands, except per share amounts; unaudited)	March 31, 2023		December 31, 2022		March 31, 2022
Interest income
Interest and fees on loans	$	24,258	$	23,500	$	23,677
Interest on investment securities	10,033		10,126		6,693
Interest on federal funds sold and due from banks	56		575		106
Total interest income	34,347		34,201		30,476
Interest expense
Interest on interest-bearing transaction accounts	254		191		56
Interest on savings accounts	170		32		29
Interest on money market accounts	1,085		405		478
Interest on time accounts	223		114		14
Interest on borrowings and other obligations	2,716		89		1

Total interest expense	4,448		831		578
Net interest income	29,899		33,370		29,898
Provision for (reversal of) credit losses on loans	350		—		(485)
Reversal of credit losses on unfunded loan commitments	(174)		—		(318)
Net interest income after provision for (reversal of) credit losses	29,723		33,370		30,701
Non-interest income
Earnings on bank-owned life insurance, net	705		296		413
Service charges on deposit accounts	533		519		488
Wealth Management and Trust Services	511		490		600
Debit card interchange fees, net	447		513		505
Dividends on Federal Home Loan Bank stock	302		297		259
Merchant interchange fees, net	133		119		140

Other income	304		353		462
Total non-interest income	2,935		2,587		2,867
Non-interest expense
Salaries and related benefits	10,930		9,600		11,548
Occupancy and equipment	2,414		2,084		1,907
Professional services	1,123		985		913
Data processing	1,045		1,080		1,277
Depreciation and amortization	882		581		452
Information technology	370		678		478
Amortization of core deposit intangible	345		365		380
Directors' expense	321		269		311
Federal Deposit Insurance Corporation insurance	289		293		290
Charitable contributions	49		104		45
Other real estate owned	4		4		2
Other expense	2,008		2,267		1,772
Total non-interest expense	19,780		18,310		19,375
Income before provision for income taxes	12,878		17,647		14,193
Provision for income taxes	3,438		4,766		3,728
Net income	$	9,440	$	12,881	$	10,465
Net income per common share:
Basic	$	0.59	$	0.81	$	0.66
Diluted	$	0.59	$	0.81	$	0.66
Weighted average shares:
Basic	15,970		15,948		15,876
Diluted	15,999		16,001		15,946
Comprehensive income (loss):
Net income	$	9,440	$	12,881	$	10,465
Other comprehensive income (loss):
Change in net unrealized gains or losses on available-for-sale securities	16,213		8,474		(38,228)

Net unrealized losses on securities transferred from available-for-sale to held-to-maturity	—		—		(14,847)
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity	463		454		144
Other comprehensive income (loss), before tax	16,676		8,928		(52,931)
Deferred tax expense (benefit)	4,930		2,639		(15,648)
Other comprehensive income (loss), net of tax	11,746		6,289		(37,283)
Total comprehensive income (loss)	$	21,186	$	19,170	$	(26,818)

Three months ended Six months ended
(in thousands, except per share amounts; unaudited) June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Interest income
Interest and fees on loans $ 23,334 $ 23,677 $ 21,429 $ 47,011 $ 42,090
Interest on investment securities 8,273 6,693 3,504 14,966 6,633
Interest on federal funds sold and due from banks 180 106 54 286 96
Total interest income 31,787 30,476 24,987 62,263 48,819
Interest expense
Interest on interest-bearing transaction accounts 53 56 39 109 78
Interest on savings accounts 32 29 21 61 40
Interest on money market accounts 438 478 312 916 598
Interest on time accounts 67 14 81 81 177
Interest on borrowings and other obligations — 1 — 1 —
Interest on subordinated debenture — — — — 1,361
Total interest expense 590 578 453 1,168 2,254
Net interest income 31,197 29,898 24,534 61,095 46,565
Reversal of credit losses on loans — (485) (920) (485) (3,849)
Reversal of credit losses on unfunded loan commitments — (318) (612) (318) (1,202)
Net interest income after reversal of credit losses 31,197 30,701 26,066 61,898 51,616
Non-interest income
Wealth Management and Trust Services 630 600 530 1,230 1,018
Debit card interchange fees, net 531 505 419 1,036 785
Service charges on deposit accounts 465 488 317 953 598
Earnings on bank-owned life insurance, net 298 413 233 711 490
Dividends on Federal Home Loan Bank stock 249 259 177 508 326
Merchant interchange fees, net 149 140 61 289 118
Other income 406 462 285 868 513
Total non-interest income 2,728 2,867 2,022 5,595 3,848
Non-interest expense
Salaries and related benefits 10,341 11,548 8,888 21,889 18,096
Occupancy and equipment 1,894 1,909 1,751 3,803 3,502
Data processing 1,199 1,277 820 2,476 1,639
Professional services 665 913 986 1,578 1,849
Information technology 468 478 296 946 609
Depreciation and amortization 393 452 389 845 848
Amortization of core deposit intangible 374 380 204 754 408
Directors' expense 294 311 230 605 405
Federal Deposit Insurance Corporation insurance 296 290 182 586 361
Charitable contributions 511 45 462 556 493
Other expense 2,471 1,772 1,348 4,243 2,758
Total non-interest expense 18,906 19,375 15,556 38,281 30,968
Income before provision for income taxes 15,019 14,193 12,532 29,212 24,496
Provision for income taxes 3,953 3,728 3,247 7,681 6,264
Net income $ 11,066 $ 10,465 $ 9,285 $ 21,531 $ 18,232
Net income per common share:
Basic $ 0.70 $ 0.66 $ 0.71 $ 1.35 $ 1.38
Diluted $ 0.69 $ 0.66 $ 0.71 $ 1.35 $ 1.37
Weighted average shares:
Basic 15,921 15,876 13,092 15,898 13,227
Diluted 15,955 15,946 13,164 15,950 13,316
Comprehensive (loss) income:
Net income $ 11,066 $ 10,465 $ 9,285 $ 21,531 $ 18,232
Other comprehensive (loss) income:
Change in net unrealized (losses) gains on available-for-sale securities (27,050) (38,228) 2,798 (65,278) (6,284)
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-maturity 472 144 138 616 281
Other comprehensive (loss) income, before tax (26,578) (52,931) 2,936 (79,509) (6,003)
Deferred tax (benefit) expense (7,857) (15,648) 864 (23,505) (1,780)
Other comprehensive (loss) income, net of tax (18,721) (37,283) 2,072 (56,004) (4,223)
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 ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~


(in thousands, except share data; unaudited)	(in thousands, except share data; unaudited)	Common Stock			Retained Earnings		Accumulated Other Comprehensive (Loss) Income, Net of Taxes		Total		(in thousands, except share data; unaudited)	Common Stock			Retained Earnings		Accumulated Other Comprehensive (Loss) Income, Net of Taxes		Total
		Shares	Amount									Shares	Amount
		Three months ended June 30, 2022										Three months ended March 31, 2023
Balance at April 1, 2022		16,003,847	$	213,204	$	246,511	$	(39,307)	$	420,408
Net income		—	—		11,066		—		11,066
Other comprehensive loss, net of tax		—	—		—		(18,721)		(18,721)

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings		4,768	81		—		—		81
Stock issued under employee stock purchase plan		936	30		—		—		30
Stock issued under employee stock ownership plan		13,000	412		—		—		412

Restricted stock surrendered for tax withholdings upon vesting		(333)	(11)		—		—		(11)
Restricted stock forfeited / cancelled		(12,618)	—		—		—		—
Stock-based compensation - stock options		—	29		—		—		29
Stock-based compensation - restricted stock		—	119		—		—		119
Cash dividends paid on common stock ($0.24 per share)		—	—		(3,840)		—		(3,840)

Balance at June 30, 2022		16,009,600	$	213,864	$	253,737	$	(58,028)	$	409,573
		Three months ended June 30, 2021
Balance at April 1, 2021		13,326,509	$	118,386	$	225,600	$	6,306	$	350,292
Balance at January 1, 2023											Balance at January 1, 2023	16,029,138	$	215,057	$	270,781	$	(73,746)	$	412,092
Net income	Net income	—	—		9,285		—		9,285		Net income	—	—		9,440		—		9,440
Other comprehensive income, net of tax	Other comprehensive income, net of tax	—	—		—		2,072		2,072		Other comprehensive income, net of tax	—	—		—		11,746		11,746

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	14,000	314		—		—		314		Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	11,530	230		—		—		230
Stock issued under employee stock purchase plan	Stock issued under employee stock purchase plan	831	25		—		—		25		Stock issued under employee stock purchase plan	415	9		—		—		9
Stock issued under employee stock ownership plan	Stock issued under employee stock ownership plan	9,300	336		—		—		336		Stock issued under employee stock ownership plan	14,300	423		—		—		423
Restricted stock granted	Restricted stock granted	2,400	—		—		—		—		Restricted stock granted	49,428	—		—		—		—

Restricted stock surrendered for tax withholdings upon vesting											Restricted stock surrendered for tax withholdings upon vesting	(2,213)	(65)		—		—		(65)

Stock-based compensation - stock options	Stock-based compensation - stock options	—	28		—		—		28		Stock-based compensation - stock options	—	116		—		—		116
Stock-based compensation - restricted stock	Stock-based compensation - restricted stock	—	95		—		—		95		Stock-based compensation - restricted stock	—	45		—		—		45
Cash dividends paid on common stock ($0.23 per share)		—	—		(3,044)		—		(3,044)
Cash dividends paid on common stock ($0.25 per share)											Cash dividends paid on common stock ($0.25 per share)	—	—		(4,012)		—		(4,012)

Stock issued in payment of director fees											Stock issued in payment of director fees	4,612	150		—		—		150

Balance at March 31, 2023											Balance at March 31, 2023	16,107,210	$	215,965	$	276,209	$	(62,000)	$	430,174
												Three months ended March 31, 2022
Balance at January 1, 2022											Balance at January 1, 2022	15,929,243	$	212,524	$	239,868	$	(2,024)	$	450,368
Net income											Net income	—	—		10,465		—		10,465
Other comprehensive loss, net of tax											Other comprehensive loss, net of tax	—	—		—		(37,283)		(37,283)

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings											Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	35,543	739		—		—		739

Stock issued under employee stock ownership plan											Stock issued under employee stock ownership plan	12,000	417		—		—		417
Restricted stock granted											Restricted stock granted	46,672	—		—		—		—
Restricted stock surrendered for tax withholdings upon vesting											Restricted stock surrendered for tax withholdings upon vesting	(836)	(29)		—		—		(29)
Restricted stock forfeited / cancelled											Restricted stock forfeited / cancelled	(649)	—		—		—		—
Stock-based compensation - stock options											Stock-based compensation - stock options	—	86		—		—		86
Stock-based compensation - restricted stock											Stock-based compensation - restricted stock	—	151		—		—		151
Cash dividends paid on common stock ($0.24 per share)											Cash dividends paid on common stock ($0.24 per share)	—	—		(3,822)		—		(3,822)

Stock issued in payment of director fees											Stock issued in payment of director fees	5,149	193		—		—		193

Stock repurchased, including commissions	Stock repurchased, including commissions	(297,935)	(10,754)		—		—		(10,754)		Stock repurchased, including commissions	(23,275)	(877)		—		—		(877)
Balance at June 30, 2021		13,055,105	$	108,430	$	231,841	$	8,378	$	348,649
Balance at March 31, 2022											Balance at March 31, 2022	16,003,847	$	213,204	$	246,511	$	(39,307)	$	420,408

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 Stock Retained
Earnings Accumulated Other
Comprehensive (Loss) Income,
Net of Taxes Total
Shares Amount
Six months ended June 30, 2022
Balance at January 1, 2022 15,929,243 $ 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 withholdings 40,311 820 — — 820
Stock issued under employee stock purchase plan 936 30 — — 30
Stock issued under employee stock ownership plan 25,000 829 — — 829
Restricted stock granted 46,672 — — — —
Restricted stock surrendered for tax withholdings upon vesting (1,169) (40) — — (40)
Restricted stock forfeited / cancelled (13,267) — — — —
Stock-based compensation - stock options — 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 fees 5,149 193 — — 193
Stock repurchased, net of commissions (23,275) (877) — — (877)
Balance at June 30, 2022 16,009,600 $ 213,864 $ 253,737 $ (58,028) $ 409,573
Six months ended June 30, 2021
Balance at January 1, 2021 13,500,453 $ 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 withholdings 31,180 351 — — 351
Stock issued under employee stock purchase plan 1,609 53 — — 53
Stock issued under employee stock ownership plan 18,300 668 — — 668
Restricted stock granted 29,454 — — — —
Restricted stock surrendered for tax withholdings upon vesting (3,961) (156) — — (156)
Restricted stock forfeited / cancelled (3,848) — — — —
Stock-based compensation - stock options — 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 plan 519 18 — — 18
Stock issued in payment of director fees 3,347 117 — — 117
Stock repurchased, net of commissions (521,948) (19,264) — — (19,264)
Balance at June 30, 2021 13,055,105 $ 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 ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~


(in thousands; unaudited)	(in thousands; unaudited)	June 30, 2022		June 30, 2021		(in thousands; unaudited)	2023		2022
Cash Flows from Operating Activities:	Cash Flows from Operating Activities:					Cash Flows from Operating Activities:
Net income	Net income	$	21,531	$	18,232	Net income	$	9,440	$	10,465
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 credit losses on loans		(485)		(3,849)
Provision for (reversal of) credit losses on loans						Provision for (reversal of) credit losses on loans	350		(485)
Reversal of credit losses on unfunded loan commitments	Reversal of credit losses on unfunded loan commitments	(318)		(1,202)		Reversal of credit losses on unfunded loan commitments	(174)		(318)

Noncash contribution expense to employee stock ownership plan	Noncash contribution expense to employee stock ownership plan	829		668		Noncash contribution expense to employee stock ownership plan	423		417
Noncash director compensation expense	Noncash director compensation expense	193		117		Noncash director compensation expense	150		193
Stock-based compensation expense	Stock-based compensation expense	385		738		Stock-based compensation expense	161		237
Amortization of core deposit intangible	Amortization of core deposit intangible	754		408		Amortization of core deposit intangible	345		380
Amortization of investment security premiums, net of accretion of discounts	Amortization of investment security premiums, net of accretion of discounts	4,963		1,753		Amortization of investment security premiums, net of accretion of discounts	1,964		2,497
Accretion of premiums (discounts) on acquired loans		281		(78)
Accretion of discount on subordinated debenture		—		1,347
(Accretion of discounts) amortization of premiums on acquired loans, net						(Accretion of discounts) amortization of premiums on acquired loans, net	(168)		115

Net change in deferred loan origination costs/fees	Net change in deferred loan origination costs/fees	(2,322)		1,146		Net change in deferred loan origination costs/fees	(324)		(1,591)

Depreciation and amortization	Depreciation and amortization	845		848		Depreciation and amortization	882		452

Earnings on bank-owned life insurance policies	Earnings on bank-owned life insurance policies	(711)		(490)		Earnings on bank-owned life insurance policies	(705)		(413)

Net changes in interest receivable and other assets	Net changes in interest receivable and other assets	(443)		952		Net changes in interest receivable and other assets	(203)		4,648
Net changes in interest payable and other liabilities	Net changes in interest payable and other liabilities	(5,894)		(821)		Net changes in interest payable and other liabilities	1,303		(5,118)
Total adjustments	Total adjustments	(1,923)		1,537		Total adjustments	4,004		1,014
Net cash provided by operating activities	Net cash provided by operating activities	19,608		19,769		Net cash provided by operating activities	13,444		11,479
Cash Flows from Investing Activities:	Cash Flows from Investing Activities:					Cash Flows from Investing Activities:

Purchase of held-to-maturity securities	Purchase of held-to-maturity securities	(208,784)		(74,521)		Purchase of held-to-maturity securities	—		(95,932)
Purchase of available-for-sale securities	Purchase of available-for-sale securities	(243,459)		(170,161)		Purchase of available-for-sale securities	—		(243,459)

Proceeds from paydowns/maturities of held-to-maturity securities	Proceeds from paydowns/maturities of held-to-maturity securities	16,827		14,376		Proceeds from paydowns/maturities of held-to-maturity securities	13,634		5,067
Proceeds from paydowns/maturities of available-for-sale securities	Proceeds from paydowns/maturities of available-for-sale securities	76,276		36,936		Proceeds from paydowns/maturities of available-for-sale securities	19,288		42,966

Loan principal collected, net of originations		93,875		84,259
Purchase of bank-owned life insurance policies		—		(1,943)
Cash receipts from bank-owned life insurance policies		350		—
(Increase) decrease in loans receivable, net						(Increase) decrease in loans receivable, net	(19,072)		54,524

Proceeds from bank-owned life insurance policies						Proceeds from bank-owned life insurance policies	—		350
Purchase of premises and equipment	Purchase of premises and equipment	(354)		(765)		Purchase of premises and equipment	(1,438)		(130)

Cash paid for low income housing tax credit investment	Cash paid for low income housing tax credit investment	(30)		(346)		Cash paid for low income housing tax credit investment	(38)		(4)
Net cash used in investing activities		(265,299)		(112,165)
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	12,374		(236,618)
Cash Flows from Financing Activities:	Cash Flows from Financing Activities:					Cash Flows from Financing Activities:
Net increase in deposits		22,120		179,326
Net (decrease) increase in deposits						Net (decrease) increase in deposits	(322,774)		52,792
Proceeds from short-term Federal Home Loan Bank borrowings, net						Proceeds from short-term Federal Home Loan Bank borrowings, net	293,400		—
Repayment of finance lease obligations						Repayment of finance lease obligations	(37)		(31)
Proceeds from stock options exercised	Proceeds from stock options exercised	820		351		Proceeds from stock options exercised	230		739
Restricted stock surrendered for tax withholdings upon vesting						Restricted stock surrendered for tax withholdings upon vesting	(65)		(29)
Cash dividends paid on common stock						Cash dividends paid on common stock	(4,012)		(3,822)
Stock repurchased, including commissions						Stock repurchased, including commissions	—		(1,250)
Proceeds from stock issued under employee and director stock purchase plans						Proceeds from stock issued under employee and director stock purchase plans	9		—

Restricted stock surrendered for tax withholdings upon vesting		(40)		(156)
Proceeds from stock issued under employee and director stock purchase plans		30		71
Stock repurchased, including commissions		(1,250)		(19,677)
Repayment of subordinated debenture including execution costs		—		(4,126)

Repayment of finance lease obligations		(63)		(32)
Cash dividends paid on common stock		(7,662)		(6,138)

Net cash provided by financing activities		13,955		149,619
Net (decrease) increase in cash, cash equivalents and restricted cash		(231,736)		57,223
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(33,249)		48,399
Net decrease in cash, cash equivalents and restricted cash						Net decrease in cash, cash equivalents and restricted cash	(7,431)		(176,740)
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	347,641		200,320		Cash, cash equivalents and restricted cash at beginning of period	45,424		347,641
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	115,905	$	257,543	Cash, cash equivalents and restricted cash at end of period	$	37,993	$	170,901
Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid in interest	Cash paid in interest	$	1,175	$	951	Cash paid in interest	$	4,290	$	588
Cash paid in income taxes	Cash paid in income taxes	$	8,450	$	6,000	Cash paid in income taxes	$	—	$	—
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		$	(65,278)	$	(6,284)
Change in net unrealized gains or losses on available-for-sale securities						Change in net unrealized gains or losses on available-for-sale securities	$	16,213	$	(38,228)

Securities transferred from available-for-sale to held-to-maturity, at fair value	Securities transferred from available-for-sale to held-to-maturity, at fair value	$	357,482	$	—	Securities transferred from available-for-sale to held-to-maturity, at fair value	$	—	$	357,482
Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	$	616	$	281	Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	$	463	$	144
Purchase of investment securities not yet settled		$	40,278	$	—

Bank-owned life insurance benefit receivable						Bank-owned life insurance benefit receivable	$	765	$	—

Stock issued to employee stock ownership plan						Stock issued to employee stock ownership plan	$	423	$	417

Stock issued to employee stock ownership plan		$	829	$	668
Stock issued in payment of director fees		$	193	$	117

Restricted cash1	Restricted cash1	$	930	$	1,930	Restricted cash1	$	—	$	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).

Page-6

NOTES TO CONSOLIDATEDFINANCIAL 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. 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.

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~~2022 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				Six months ended					Three months ended
(in thousands, except per share data)	(in thousands, except per share data)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021		(in thousands, except per share data)	March 31, 2023		March 31, 2022
Weighted average basic common shares outstanding	Weighted average basic common shares outstanding	15,921		13,092		15,898		13,227		Weighted average basic common shares outstanding	15,970		15,876
Potentially dilutive common shares related to:	Potentially dilutive common shares related to:									Potentially dilutive common shares related to:
Stock options	Stock options	24		54		38		67		Stock options	14		52
Unvested restricted stock awards	Unvested restricted stock awards	10		18		14		22		Unvested restricted stock awards	15		18
Weighted average diluted shares outstanding		15,955		13,164		15,950		13,316
Weighted average diluted common shares outstanding										Weighted average diluted common shares outstanding	15,999		15,946
Net income	Net income	$	11,066	$	9,285	$	21,531	$	18,232	Net income	$	9,440	$	10,465
Basic EPS	Basic EPS	$	0.70	$	0.71	$	1.35	$	1.38	Basic EPS	$	0.59	$	0.66
Diluted EPS	Diluted EPS	$	0.69	$	0.71	$	1.35	$	1.37	Diluted EPS	$	0.59	$	0.66
Weighted average anti-dilutive common shares not included in the calculation of diluted EPS	Weighted average anti-dilutive common shares not included in the calculation of diluted EPS	230		111		167		88		Weighted average anti-dilutive common shares not included in the calculation of diluted EPS	250		125

Note 2: Recently Adopted and Issued Accounting Standards

Accounting Standards Adopted in 2023

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendment eliminated the recognition measurement guidance for troubled debt restructured ("TDR") loans and instead enhanced disclosure requirements for certain loan modifications when a borrower is experiencing financial difficulty. In addition, the amendment required that an entity include in its vintage disclosures the current period gross loan charge-offs by year of origination. We early adopted the current period charge-off disclosures in the first quarter of 2022. We adopted the loan modification provisions as of January 1, 2023 using a modified retrospective method. The cumulative-effect adjustment to retained earnings was considered immaterial. Refer to Note 5, Loans and Allowance for Credit Losses on Loans, for additional information.

Page-7

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 renamed the "last-of-layer" method to the "portfolio layer" method and made 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. We adopted the amendments on January 1, 2023, which had no effect on our existing hedge accounting, disclosures, financial condition or results of operations.

Accounting Standards Not Yet Effective

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

~~Page-7~~

reference rate reform. The amendments in this ASU may be elected ~~as of March 12, 2020 through~~ December 31, ~~2022.~~ 2024 (as amended by ASU No. 2022-06 discussed below).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 not elected ~~not~~ to apply amendments at this time and towill 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 intend to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. As of ~~June 30, 2022,~~March 31, 2023, we had 4four interest rate swap contracts with notional values totaling ~~$12.5~~$11.8 million indexed to LIBOR that will either be subject to the fall-back index rate stipulated by the ISDA protocol or modified to other reference rates such as Prime or SOFR as mutually agreed by our counterparty anand 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 require acquiring companies to apply ASC 606,~~ ~~Revenue from Contracts with Customers~~ to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination, as opposed to other methods such as fair value. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination. The amendments are to be applied prospectively to business combinations occurring on or after December ~~15, 2022 and early adoption is permitted. In the event of a future business combination, we will assess the impact of the ASU on our financial condition and results of operations.~~

~~In March~~ 2022, the FASB issued ASU No. ~~2022-02,~~2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The objective of the guidance in Topic 848 was to provide temporary relief during the transition period, as noted in the discussion of ASU 2020-04 above, under which the sunset provision was based on an expectation that LIBOR would cease being published after December 31, 2021. In March 2021, the UK Financial ~~Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendment eliminates~~Conduct Authority ("FCA") announced that 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~~intended cessation date 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~~certain tenors of USD LIBOR would be June 30, 2023, which is beyond the current ~~period-gross loan charge-offs by year~~sunset date of ~~origination. The amendments are effective for years beginning after~~Topic 848. Therefore, this amendment deferred the sunset date of Topic 848 from December ~~15,~~31, 2022 ~~and should be applied prospectively, except that an entity has the option~~ to apply a modified retrospective method for TDR loans, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. An entity may elect to early adopt each of the amendments separately. As such, we early adopted the current period charge-off disclosures in the first quarter of 2022 and intend to adopt the loan modification amendments when effective in the first quarter of 2023. Neither the early adoption of the amendments related to gross charge-off disclosures nor the future adoption of the TDR amendments had or will have a material impact on our financial condition or results of operations.

~~In March 2022, the FASB issued ASU No. 2022-01,~~ ~~Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method~~. Among other things, the ASU renames the "last-of-layer" method to the "portfolio layer" method and makes fair value hedging more accessible for hedge accounting of interest rate risk for portfolios and financial assets. For example, the guidance permits an entity to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby providing for consistency between accounting for similar hedges. The amendments are effective for years beginning after December ~~15, 2022. The adoption of the amendments will not affect our existing hedge accounting, disclosures, financial condition or results of operations.~~31, 2024.

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.

In March 2023, the FASB issued ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements. For public companies, the amendment requires entities to amortize leasehold improvements associated with common control lease arrangements over the useful life of the improvements to the common control group, as opposed to the shorter of the remaining lease term and the useful life of the improvements for all other operating leases. The amendments are effective for years beginning after December 15, 2023, and may be adopted either prospectively or retrospectively. Early adoption is permitted for both interim and annual financial statements. We currently do not

Page-8

have common control lease arrangements, and therefore do not anticipate that the amendments will impact our financial condition and results of operations.

In March 2023, the FASB issued ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. Under current GAAP, an entity can only elect to apply the proportional amortization method to investments in low-income housing tax credit ("LIHTC") structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the consolidated statements of income as a component of income tax expense (benefit). The amendments will allow entities to elect to account for all other equity investments made primarily for the purpose of receiving income tax credits to using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, when certain conditions are met. The amendments are effective for fiscal years beginning after December 15, 2023, and may be adopted either on a modified retrospective basis or retrospectively. Other than investments in LIHTC funds, as disclosed in Note 4, Investment Securities, we currently have no other equity investments made primarily for the purpose of receiving income tax credits, and therefore do not anticipate that the amendments will impact our financial condition and results of operations.

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
Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3)
Measurement Categories: Changes in Fair Value Recorded In1
June 30, 2022
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 539,991 $ — $ 539,991 $ — OCI
SBA-backed securities $ 53,168 $ — $ 53,168 $ — OCI
Debentures of government sponsored agencies $ 139,340 $ — $ 139,340 $ — OCI
U.S. Treasury securities $ 10,644 $ 10,644 $ — $ — OCI
Obligations of state and political subdivisions $ 114,263 $ — $ 114,263 $ — OCI
Corporate bonds $ 34,092 $ — $ 34,092 $ — OCI
Asset-backed securities $ 1,651 $ — $ 1,651 $ — OCI
Derivative financial assets (interest rate contracts) $ 206 $ — $ 206 $ — NI
Derivative financial liabilities (interest rate contracts) $ 104 $ — $ 104 $ — NI
December 31, 2021
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 759,576 $ — $ 759,576 $ — OCI
SBA-backed securities $ 33,478 $ — $ 33,478 $ — OCI
Debentures of government sponsored agencies $ 188,527 $ — $ 188,527 $ — OCI
U.S. Treasury securities $ 11,630 $ 11,630 $ — $ — OCI
Obligations of state and political subdivisions $ 134,000 $ — $ 134,000 $ — OCI
Corporate bonds $ 38,495 $ — $ 38,495 $ — OCI
Asset-backed securities $ 1,862 $ — $ 1,862 $ — OCI
Derivative financial liabilities (interest rate contracts) $ 1,085 $ — $ 1,085 $ — NI

Page-9


(in thousands) Description of Financial Instruments	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Measurement Categories: Changes in Fair Value Recorded In1
March 31, 2023
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	471,458	$	—	$	471,458	$	—	OCI
SBA-backed securities	$	37,971	$	—	$	37,971	$	—	OCI
Debentures of government sponsored agencies	$	137,121	$	—	$	137,121	$	—	OCI
U.S. Treasury securities	$	10,524	$	10,524	$	—	$	—	OCI

Obligations of state and political subdivisions	$	105,136	$	—	$	105,136	$	—	OCI
Corporate bonds	$	33,961	$	—	$	33,961	$	—	OCI
Asset-backed securities	$	1,362	$	—	$	1,362	$	—	OCI
Derivative financial assets (interest rate contracts)	$	404	$	—	$	404	$	—	NI
Derivative financial liabilities (interest rate contracts)	$	23	$	—	$	23	$	—	NI
December 31, 2022
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	475,505	$	—	$	475,505	$	—	OCI
SBA-backed securities	$	44,355	$	—	$	44,355	$	—	OCI
Debentures of government sponsored agencies	$	135,106	$	—	$	135,106	$	—	OCI
U.S. Treasury securities	$	10,269	$	10,269	$	—	$	—	OCI

Obligations of state and political subdivisions	$	102,123	$	—	$	102,123	$	—	OCI
Corporate bonds	$	33,276	$	—	$	33,276	$	—	OCI
Asset-backed securities	$	1,462	$	—	$	1,462	$	—	OCI
Derivative financial assets (interest rate contracts)	$	602	$	—	$	602	$	—	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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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,~~credit losses or other factors, and we did not record any write-downs during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 or ~~June 30, 2021.~~March 31, 2022. Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities.

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. These unobservable inputs are not considered significant inputs to the fair value measurement overall. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as

Page-10

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 American River Bankshares ("~~ARB"~~AMRB") merger in 2021.

The following table presents the carrying value of assets measured at fair value on a non-recurring basis and that were held in the consolidated statements of condition at each respective period end, by level within the fair value hierarchy as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


(in thousands)	(in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2022
March 31, 2023										March 31, 2023
Other real estate owned	Other real estate owned	$	800	$	—	$	—	$	800	Other real estate owned	$	455	$	—	$	—	$	455
December 31, 2021
December 31, 2022										December 31, 2022
Other real estate owned	Other real estate owned	$	800	$	—	$	—	$	800	Other real estate owned	$	455	$	—	$	—	$	455

~~Page-10~~

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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 ~~June 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022. The values are discussed in Note 4, Investment Securities.


		June 30, 2022					December 31, 2021						March 31, 2023					December 31, 2022
(in thousands)	(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy	(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy
Financial assets (recorded at amortized cost):	Financial assets (recorded at amortized cost):											Financial assets (recorded at amortized cost):
Cash and cash equivalents	Cash and cash equivalents	$	115,905	$	115,905	Level 1	$	347,641	$	347,641	Level 1	Cash and cash equivalents	$	37,993	$	37,993	Level 1	$	45,424	$	45,424	Level 1
Investment securities held-to-maturity	Investment securities held-to-maturity	931,587		847,386		Level 2	342,222		342,755		Level 2	Investment securities held-to-maturity	958,560		850,125		Level 2	972,207		845,239		Level 2
Loans, net	Loans, net	2,140,093		2,123,254		Level 3	2,232,622		2,234,430		Level 3	Loans, net	2,088,998		1,999,187		Level 3	2,069,563		1,993,866		Level 3
Interest receivable	Interest receivable	12,248		12,248		Level 2	11,889		11,889		Level 2	Interest receivable	11,791		11,791		Level 2	13,069		13,069		Level 2
Financial liabilities (recorded at amortized cost):	Financial liabilities (recorded at amortized cost):											Financial liabilities (recorded at amortized cost):
Time deposits	Time deposits	141,674		141,857		Level 2	150,235		150,475		Level 2	Time deposits	144,067		144,071		Level 2	119,030		118,333		Level 2

Federal Home Loan Bank short-term borrowings												Federal Home Loan Bank short-term borrowings	405,400		405,400		Level 2	112,000		112,000		Level 2

Interest payable	Interest payable	74		74		Level 2	81		81		Level 2	Interest payable	234		234		Level 2	75		75		Level 2

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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.

Due to the short-term nature of the FHLB borrowings, the carrying value approximates fair value.

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 ~~June 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022.

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.

A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 is presented below.

~~Page-11~~


Held-to-maturity:	Amortized Cost 1		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized				Fair Value
(in thousands)							Gains		(Losses)
March 31, 2023
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	322,691	$	—	$	322,691	$	—	$	(45,007)	$	277,684
CMOs issued by FHLMC	233,796		—		233,796		139		(24,973)		208,962
CMOs issued by FNMA	109,694		—		109,694		176		(3,729)		106,141
CMOs issued by GNMA	52,120		—		52,120		164		(3,020)		49,264
SBA-backed securities	1,977		—		1,977		—		(99)		1,878
Debentures of government-sponsored agencies	145,898		—		145,898		—		(22,149)		123,749
Obligations of state and political subdivisions	62,384		—		62,384		24		(8,728)		53,680
Corporate bonds	30,000		—		30,000		—		(1,233)		28,767
Total held-to-maturity	$	958,560	$	—	$	958,560	$	503	$	(108,938)	$	850,125
December 31, 2022

Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	331,281	$	—	$	331,281	$	—	$	(50,147)	$	281,134
CMOs issued by FHLMC	235,971		—		235,971		59		(29,503)		206,527
CMOs issued by FNMA	111,904		—		111,904		—		(5,419)		106,485
CMOs issued by GNMA	52,356		—		52,356		11		(3,076)		49,291
SBA-backed securities	2,372		—		2,372		—		(133)		2,239
Debentures of government-sponsored agencies	145,823		—		145,823		—		(26,467)		119,356
Obligations of state and political subdivisions	62,500		—		62,500		—		(10,741)		51,759
Corporate bonds	30,000		—		30,000		—		(1,552)		28,448
Total held-to-maturity	$	972,207	$	—	$	972,207	$	70	$	(127,038)	$	845,239
1 Amortized cost and fair values exclude accrued interest receivable of $2.6 million and $3.7 million at March 31, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

Held-to-maturity:
Amortized Cost 1
Allowance for Credit Losses Net Carrying Amount Gross Unrealized Fair 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 $ 4 $ (34,731) $ 303,271
CMOs issued by FHLMC 230,553 — 230,553 172 (20,766) 209,959
CMOs issued by FNMA 118,956 — 118,956 853 (2,574) 117,235
CMOs issued by GNMA 12,329 — 12,329 — (982) 11,347
SBA-backed securities 3,244 — 3,244 — (66) 3,178
Debentures of government-sponsored agencies 135,678 — 135,678 — (17,457) 118,221
Obligations of state and political subdivisions 62,829 — 62,829 19 (8,304) 54,544
Corporate bonds 30,000 — 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 FHLMC 106,851 — 106,851 668 (1,045) 106,474
CMOs issued by FNMA 4,866 — 4,866 128 — 4,994
SBA-backed securities 4,840 — 4,840 198 — 5,038
Debentures of government-sponsored agencies 51,472 — 51,472 — (901) 50,571
Obligations of state and political subdivisions 47,203 — 47,203 296 (209) 47,290
Total held-to-maturity $ 342,222 $ — $ 342,222 $ 3,400 $ (2,867) $ 342,755
1 Amortized cost and fair values exclude accrued interest receivable of $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 collectively by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued or

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guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions and corporate bonds, management considers: (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 ~~June 30, 2022.~~March 31, 2023.


		Obligations of state and political subdivisions				Corporate bonds					Obligations of state and political subdivisions				Corporate bonds
(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022
AAA / Aaa	AAA / Aaa	$	43,188	$	34,229	$	—	$	—	AAA / Aaa	$	42,884	$	42,986	$	—	$	—
AA / Aa	AA / Aa	19,541		12,873		—		—		AA / Aa	19,500		19,514		—		—
A2 / A	A2 / A	100		101		30,000		—		A2 / A	—		—		30,000		30,000
Total	Total	$	62,829	$	47,203	$	30,000	$	—	Total	$	62,384	$	62,500	$	30,000	$	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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 is presented below.


Available-for-sale:	Available-for-sale:	Amortized Cost 1		Gross Unrealized				Allowance for Credit Losses		Fair Value		Available-for-sale:	Amortized Cost 1		Gross Unrealized				Allowance for Credit Losses		Fair Value
(in thousands)	(in thousands)			Gains		(Losses)						(in thousands)			Gains		(Losses)
June 30, 2022
March 31, 2023												March 31, 2023
Securities of U.S. government-sponsored enterprises:	Securities of U.S. government-sponsored enterprises:											Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	127,526	$	23	$	(8,784)	$	—	$	118,765	MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	106,151	$	4	$	(10,423)	$	—	$	95,732
CMOs issued by FHLMC	CMOs issued by FHLMC	370,610		1		(23,017)		—		347,594		CMOs issued by FHLMC	340,647		—		(27,514)		—		313,133
CMOs issued by FNMA	CMOs issued by FNMA	40,375		1		(2,960)		—		37,416		CMOs issued by FNMA	34,782		—		(3,182)		—		31,600
CMOs issued by GNMA	CMOs issued by GNMA	38,629		1		(2,414)		—		36,216		CMOs issued by GNMA	33,714		22		(2,743)		—		30,993
SBA-backed securities	SBA-backed securities	55,297		4		(2,133)		—		53,168		SBA-backed securities	40,547		2		(2,578)		—		37,971
Debentures of government- sponsored agencies	Debentures of government- sponsored agencies	149,099		—		(9,759)		—		139,340		Debentures of government- sponsored agencies	149,121		—		(12,000)		—		137,121

U.S. Treasury securities	U.S. Treasury securities	11,895		—		(1,251)		—		10,644		U.S. Treasury securities	11,909		—		(1,385)		—		10,524
Obligations of state and political subdivisions	Obligations of state and political subdivisions	128,238		50		(14,025)		—		114,263		Obligations of state and political subdivisions	116,549		84		(11,497)		—		105,136
Corporate bonds	Corporate bonds	36,989		—		(2,897)		—		34,092		Corporate bonds	36,990		—		(3,029)		—		33,961
Asset-backed securities	Asset-backed securities	1,721		—		(70)		—		1,651		Asset-backed securities	1,419		—		(57)		—		1,362
Total available-for-sale	Total available-for-sale	$	960,379	$	80	$	(67,310)	$	—	$	893,149	Total available-for-sale	$	871,829	$	112	$	(74,408)	$	—	$	797,533
December 31, 2021
December 31, 2022												December 31, 2022
Securities of U.S. government-sponsored enterprises:	Securities of U.S. government-sponsored enterprises:											Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	316,090	$	1,224	$	(2,784)	$	—	$	314,530	MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	109,736	$	3	$	(12,133)	$	—	$	97,606
CMOs issued by FHLMC	CMOs issued by FHLMC	343,047		3,209		(4,829)		—		341,427		CMOs issued by FHLMC	347,437		—		(33,682)		—		313,755
CMOs issued by FNMA	CMOs issued by FNMA	48,187		152		(611)		—		47,728		CMOs issued by FNMA	36,172		—		(3,852)		—		32,320
CMOs issued by GNMA	CMOs issued by GNMA	56,345		99		(553)		—		55,891		CMOs issued by GNMA	35,120		—		(3,296)		—		31,824
SBA-backed securities	SBA-backed securities	32,640		993		(155)		—		33,478		SBA-backed securities	47,724		2		(3,371)		—		44,355
Debentures of government- sponsored agencies	Debentures of government- sponsored agencies	191,449		25		(2,947)		—		188,527		Debentures of government- sponsored agencies	149,114		—		(14,008)		—		135,106

U.S. Treasury securities	U.S. Treasury securities	11,886		—		(256)		0		11,630		U.S. Treasury securities	11,904		—		(1,635)				10,269
Obligations of state and political subdivisions	Obligations of state and political subdivisions	129,009		5,372		(381)		—		134,000		Obligations of state and political subdivisions	116,855		29		(14,761)		—		102,123
Corporate bonds	Corporate bonds	39,001		—		(506)		—		38,495		Corporate bonds	36,990		—		(3,714)		—		33,276
Asset-backed securities	Asset-backed securities	1,866		—		(4)		—		1,862		Asset-backed securities	1,553		—		(91)		—		1,462
Total available-for-sale	Total available-for-sale	$	1,169,520	$	11,074	$	(13,026)	$	—	$	1,167,568	Total available-for-sale	$	892,605	$	34	$	(90,543)	$	—	$	802,096
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 $3.1 million and $3.2 million at March 31, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.												1 Amortized cost and fair value exclude accrued interest receivable of $3.1 million and $3.2 million at March 31, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

Page-13

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 inand the related accumulated other comprehensive loss isare accreted to interest income over the remaining lives of the securities. Because these entries offset each other, there is no impact to net income.

The amortized cost and fair value of investment debt securities by contractual maturity at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 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.


		June 30, 2022								December 31, 2021									March 31, 2023								December 31, 2022
		Held-to-Maturity				Available-for-Sale				Held-to-Maturity				Available-for-Sale					Held-to-Maturity				Available-for-Sale				Held-to-Maturity				Available-for-Sale
(in thousands)	(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	Within one year	$	100	$	100	$	3,369	$	3,366	$	101	$	103	$	10,785	$	10,841	Within one year	$	52	$	51	$	1,132	$	1,124	$	450	$	446	$	1,254	$	1,239
After one but within five years	After one but within five years	83,024		81,968		260,444		247,749		25,666		26,559		219,474		219,957		After one but within five years	85,323		82,266		362,588		336,054		87,418		83,663		335,813		307,843
After five years through ten years	After five years through ten years	255,978		228,380		300,994		280,179		182,604		182,303		299,937		300,187		After five years through ten years	268,433		232,936		154,572		141,260		262,072		222,280		185,997		166,273
After ten years	After ten years	592,485		536,938		395,572		361,855		133,851		133,790		639,324		636,583		After ten years	604,752		534,872		353,537		319,095		622,267		538,850		369,541		326,741
Total	Total	$	931,587	$	847,386	$	960,379	$	893,149	$	342,222	$	342,755	$	1,169,520	$	1,167,568	Total	$	958,560	$	850,125	$	871,829	$	797,533	$	972,207	$	845,239	$	892,605	$	802,096

There were no sales of investment securities in the first ~~half~~quarter of ~~2022~~2023 or ~~2021.~~

~~Page-13~~

2022.

Three months ended

~~Pledged~~The carrying values of pledged investment securities are shown in the following table:


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Pledged to the State of California:	Pledged to the State of California:					Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	Secure public deposits in compliance with the Local Agency Security Program	$	217,143	$	213,861	Secure public deposits in compliance with the Local Agency Security Program	$	228,970	$	235,587
Collateral for trust deposits	Collateral for trust deposits	676		729		Collateral for trust deposits	674		677
Collateral for Wealth Management and Trust Services checking account	Collateral for Wealth Management and Trust Services checking account	568		614		Collateral for Wealth Management and Trust Services checking account	567		569
Total investment securities pledged to the State of California	Total investment securities pledged to the State of California	218,387		215,204		Total investment securities pledged to the State of California	230,211		236,833
Bankruptcy trustee deposits pledged with Federal Reserve Bank	Bankruptcy trustee deposits pledged with Federal Reserve Bank	1,905		2,645		Bankruptcy trustee deposits pledged with Federal Reserve Bank	1,700		1,737
Pledged to FHLB Securities-Backed Credit Program						Pledged to FHLB Securities-Backed Credit Program	395,780		—
Pledged to the Federal Reserve Bank Term Funding Program ("BTFP")						Pledged to the Federal Reserve Bank Term Funding Program ("BTFP")	278,638		—
Total pledged investment securities	Total pledged investment securities	$	220,292	$	217,849	Total pledged investment securities	$	906,329	$	238,570

There were ~~409~~397 and ~~217~~407 securities in unrealized loss positions at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:

June 30, 2022 < 12 continuous months ≥ 12 continuous months Total securities
in a loss position
(in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss
Held-to-maturity:
MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 302,998 $ (34,731) $ — $ — $ 302,998 $ (34,731)
CMOs issued by FHLMC 194,163 (20,136) 4,018 (630) 198,181 (20,766)
CMOs issued by FNMA 67,069 (2,574) — — 67,069 (2,574)
CMOs issued by GNMA 11,347 (982) — — 11,347 (982)
SBA-backed securities 3,178 (66) — — 3,178 (66)
Debentures of government-sponsored agencies 61,339 (11,007) 36,881 (6,450) 98,220 (17,457)
Obligations of state and political subdivisions 51,313 (8,304) — — 51,313 (8,304)
Corporate bonds 29,631 (369) — — 29,631 (369)
Total held-to-maturity 721,038 (78,169) 40,899 (7,080) 761,937 (85,249)
Available-for-sale:
MBS pass-through securities issued by FHLMC, FNMA and GNMA 113,127 (8,784) — — 113,127 (8,784)
CMOs issued by FHLMC 343,897 (22,540) 3,538 (477) 347,435 (23,017)
CMOs issued by FNMA 33,201 (2,674) 4,156 (286) 37,357 (2,960)
CMOs issued by GNMA 34,696 (2,414) — — 34,696 (2,414)
SBA-backed securities 51,556 (2,091) 1,059 (42) 52,615 (2,133)
Debentures of government- sponsored agencies 132,004 (8,126) 7,336 (1,633) 139,340 (9,759)
U.S. Treasury securities 10,644 (1,251) — — 10,644 (1,251)
Obligations of state and political subdivisions 101,078 (13,425) 2,001 (600) 103,079 (14,025)
Corporate bonds 28,833 (2,167) 5,259 (730) 34,092 (2,897)
Asset-backed securities 1,651 (70) — — 1,651 (70)
Total available-for-sale 850,687 (63,542) 23,349 (3,768) 874,036 (67,310)
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, 2021		< 12 continuous months				≥ 12 continuous months				Total securities in a loss position
March 31, 2023														March 31, 2023	< 12 continuous months				≥ 12 continuous months				Total securities in a loss position
(in thousands)	(in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss		(in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Held-to-maturity:	Held-to-maturity:													Held-to-maturity:
MBS pass-through securities issued by FHLMC and FNMA		$	76,619	$	(712)	$	—	$	—	$	76,619	$	(712)

MBS pass-through securities issued by FHLMC, FNMA and GNMA														MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	9,107	$	(316)	$	268,577	$	(44,691)	$	277,684	$	(45,007)
CMOs issued by FHLMC	CMOs issued by FHLMC	54,811		(1,045)		—		—		54,811		(1,045)		CMOs issued by FHLMC	44,217		(1,091)		150,466		(23,882)		194,683		(24,973)
CMOs issued by FNMA														CMOs issued by FNMA	37,106		(353)		41,538		(3,376)		78,644		(3,729)
CMOs issued by GNMA														CMOs issued by GNMA	27,285		(1,802)		10,467		(1,218)		37,752		(3,020)
SBA-backed securities														SBA-backed securities	—		—		1,878		(99)		1,878		(99)
Debentures of government-sponsored agencies														Debentures of government-sponsored agencies	29,433		(561)		94,316		(21,588)		123,749		(22,149)
Obligations of state and political subdivisions	Obligations of state and political subdivisions	19,203		(209)		—		—		19,203		(209)		Obligations of state and political subdivisions	9,000		(74)		41,565		(8,654)		50,565		(8,728)
Debentures of government-sponsored agencies		50,571		(901)		—		—		50,571		(901)
Corporate bonds														Corporate bonds	—		—		28,767		(1,233)		28,767		(1,233)
Total held-to-maturity	Total held-to-maturity	201,204		(2,867)		—		—		201,204		(2,867)		Total held-to-maturity	156,148		(4,197)		637,574		(104,741)		793,722		(108,938)
Available-for-sale:	Available-for-sale:													Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA		263,474		(2,784)		—		—		263,474		(2,784)
MBS pass-through securities issued by FHLMC, FNMA and GNMA														MBS pass-through securities issued by FHLMC, FNMA and GNMA	7,729		(233)		87,173		(10,190)		94,902		(10,423)
CMOs issued by FHLMC														CMOs issued by FHLMC	13,194		(263)		299,939		(27,251)		313,133		(27,514)
CMOs issued by FNMA														CMOs issued by FNMA	279		(4)		31,321		(3,178)		31,600		(3,182)
CMOs issued by GNMA														CMOs issued by GNMA	71		(1)		27,014		(2,742)		27,085		(2,743)
SBA-backed securities	SBA-backed securities	7,478		(112)		1,209		(43)		8,687		(155)		SBA-backed securities	30		—		37,580		(2,578)		37,610		(2,578)
CMOs issued by FHLMC		226,175		(4,677)		4,415		(152)		230,590		(4,829)
CMOs issued by GNMA		44,790		(553)		—		—		44,790		(553)
CMOs issued by FNMA		37,348		(611)		—		—		37,348		(611)
Debentures of government- sponsored agencies	Debentures of government- sponsored agencies	148,979		(2,527)		8,549		(420)		157,528		(2,947)		Debentures of government- sponsored agencies	—		—		137,121		(12,000)		137,121		(12,000)
U.S. Treasury securities	U.S. Treasury securities	11,629		(256)		—		—		11,629		(256)		U.S. Treasury securities	—		—		10,523		(1,385)		10,523		(1,385)

Obligations of state and political subdivisions	Obligations of state and political subdivisions	17,552		(381)		—		—		17,552		(381)		Obligations of state and political subdivisions	4,486		(11)		92,776		(11,486)		97,262		(11,497)
Corporate Bonds		38,495		(506)		—		—		38,495		(506)

Corporate bonds														Corporate bonds	—		—		33,962		(3,029)		33,962		(3,029)
Asset-backed securities	Asset-backed securities	1,861		(4)		—		—		1,861		(4)		Asset-backed securities	—		—		1,361		(57)		1,361		(57)
Total available-for-sale	Total available-for-sale	797,781		(12,411)		14,173		(615)		811,954		(13,026)		Total available-for-sale	25,789		(512)		758,770		(73,896)		784,559		(74,408)
Total securities at loss position	Total securities at loss position	$	998,985	$	(15,278)	$	14,173	$	(615)	$	1,013,158	$	(15,893)	Total securities at loss position	$	181,937	$	(4,709)	$	1,396,344	$	(178,637)	$	1,578,281	$	(183,346)

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December 31, 2022	< 12 continuous months				≥ 12 continuous months				Total securities in a loss position
(in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Held-to-maturity:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	62,627	$	(5,960)	$	218,507	$	(44,187)	$	281,134	$	(50,147)
CMOs issued by FHLMC	78,144		(5,874)		113,796		(23,629)		191,940		(29,503)
CMOs issued by FNMA	106,485		(5,419)		—		—		106,485		(5,419)
CMOs issued by GNMA	27,570		(1,676)		10,331		(1,400)		37,901		(3,076)
SBA-backed securities	2,239		(133)		—		—		2,239		(133)
Debentures of government- sponsored agencies	38,645		(2,530)		80,711		(23,937)		119,356		(26,467)
Obligations of state and political subdivisions	15,155		(589)		36,603		(10,152)		51,758		(10,741)
Corporate Bonds	28,448		(1,552)		—		—		28,448		(1,552)
Total held-to-maturity	359,313		(23,733)		459,948		(103,305)		819,261		(127,038)
Available-for-sale:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	44,630		(4,501)		52,235		(7,632)		96,865		(12,133)
CMOs issued by FHLMC	169,760		(15,144)		143,995		(18,538)		313,755		(33,682)
CMOs issued by FNMA	4,790		(235)		27,529		(3,617)		32,319		(3,852)
CMOs issued by GNMA	8,214		(374)		23,612		(2,922)		31,826		(3,296)
SBA-backed securities	37,845		(3,228)		6,133		(143)		43,978		(3,371)
Debentures of government- sponsored agencies	19,054		(946)		116,052		(13,062)		135,106		(14,008)
U.S. Treasury securities	—		—		10,269		(1,635)		10,269		(1,635)
Obligations of state and political subdivisions	70,402		(9,459)		28,711		(5,302)		99,113		(14,761)
Corporate Bonds	—		—		33,276		(3,714)		33,276		(3,714)

Asset-backed securities	—		—		1,462		(91)		1,462		(91)
Total available-for-sale	354,695		(33,887)		443,274		(56,656)		797,969		(90,543)
Total securities at loss position	$	714,008	$	(57,620)	$	903,222	$	(159,961)	$	1,617,230	$	(217,581)

As of ~~June 30, 2022,~~March 31, 2023, the investment portfolio included 18353 investment securities that had been in a continuous loss position for twelve months or more and ~~391~~44 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 ~~June 30, 2022,~~March 31, 2023, 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 ~~June 30, 2022.~~March 31, 2023.

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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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. The carrying amounts of

~~Page-15~~

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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. On ~~July 28, 2022,~~April 27, 2023, FHLB announced a cash dividend for the first quarter of ~~2022~~2023 at an annualized dividend rate of ~~6.00%~~7.00% to be distributed ~~in mid-August 2022.~~on May 11, 2023. 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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. 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~~1.5991 at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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~~$3.8 million and ~~$3.7~~$3.5 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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 ~~$2.7~~$2.4 million and ~~$3.0~~$2.5 million recorded in other assets as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. In the first ~~six~~three months of ~~2022,~~2023, we recognized ~~$317~~$151 thousand of low-income housing tax credits and other tax benefits, offset by ~~$267~~$127 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of ~~June 30, 2022,~~March 31, 2023, our unfunded commitments for these low-income housing tax credit funds totaled ~~$392~~$347 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first ~~six~~three months of ~~2022~~2023 or ~~2021,~~2022, as the value of the future tax benefits exceeds the carrying value of the investments.

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Note 5: Loans and Allowance for Credit Losses on Loans

The following table presents the amortized cost of loans by class as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Commercial and industrial	Commercial and industrial	$	213,122	$	301,602	Commercial and industrial	$	195,964	$	173,547
Real estate:	Real estate:					Real estate:
Commercial owner-occupied	Commercial owner-occupied	382,897		392,345		Commercial owner-occupied	352,529		354,877
Commercial investor-owned		1,190,419		1,189,021
Commercial non-owner occupied						Commercial non-owner occupied	1,189,962		1,191,889
Construction	Construction	118,147		119,840		Construction	110,386		114,373
Home equity	Home equity	90,629		88,746		Home equity	86,572		88,748
Other residential	Other residential	113,361		114,558		Other residential	116,447		112,123
Installment and other consumer loans	Installment and other consumer loans	54,057		49,533		Installment and other consumer loans	60,468		56,989
Total loans, at amortized cost 1	Total loans, at amortized cost 1	2,162,632		2,255,645		Total loans, at amortized cost 1	2,112,328		2,092,546
Allowance for credit losses on loans	Allowance for credit losses on loans	(22,539)		(23,023)		Allowance for credit losses on loans	(23,330)		(22,983)
Total loans, net of allowance for credit losses on loans	Total loans, net of allowance for credit losses on loans	$	2,140,093	$	2,232,622	Total loans, net of allowance for credit losses on loans	$	2,088,998	$	2,069,563

1 Amortized cost includes net deferred loan origination costs ~~(fees)~~ of ~~$1.4~~$2.1 million and ~~$(901) thousand~~$1.8 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Amounts are also net of unrecognized purchase discounts of ~~$2.7~~$2.4 million and ~~$2.5~~$2.6 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Amortized cost excludes accrued interest, which totaled ~~$5.8 million and $7.1~~$6.1 million at ~~June 30, 2022~~both March 31, 2023 and December 31, ~~2021, respectively,~~2022, 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 of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers,

~~Page-16~~

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 June 30, 2022, there were 112 PPP loans outstanding totaling $17.0 million (net of $420 thousand in unrecognized fees and costs), compared to 368 loans outstanding 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.

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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.

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:

~~Page-17~~

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.~~information and at each quarterly and year-end reporting period. 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 ~~June 30, 2022~~March 31, 2023 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~~The current year vintage table reflects gross charge-offs by loan class and year of origination. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination.

(in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost
June 30, 2022 2022 2021 2020 2019 2018 Prior Total
Commercial and industrial:
Pass and Watch $ 9,586 $ 21,160 $ 9,230 $ 24,730 $ 6,988 $ 28,168 $ 102,567 $ 202,429
Special Mention — — — 503 4,248 — 123 4,874
Substandard — — 1,469 — — — 4,350 5,819
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:
Pass and Watch $ 55,263 $ 53,245 $ 41,565 $ 45,948 $ 30,419 $ 116,659 $ — $ 343,099
Special Mention — 16,471 — 317 5,386 4,567 — 26,741
Substandard — — 7,142 1,754 — 4,055 — 12,951
Doubtful — — 106 — — — — 106
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:
Pass and Watch $ 118,868 $ 221,908 $ 164,765 $ 171,674 $ 125,646 $ 343,000 $ 73 $ 1,145,934
Special Mention — — 4,531 2,714 9,729 9,980 — 26,954
Substandard — — — — — 17,531 — 17,531
Total commercial real estate, investor-owned $ 118,868 $ 221,908 $ 169,296 $ 174,388 $ 135,375 $ 370,511 $ 73 $ 1,190,419

~~Page-18~~

(in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost
June 30, 2022 2022 2021 2020 2019 2018 Prior Total
Construction:
Pass and Watch $ 33,184 $ 24,274 $ 42,658 $ 8,921 $ 9,110 $ — $ — $ 118,147
Total construction $ 33,184 $ 24,274 $ 42,658 $ 8,921 $ 9,110 $ — $ — $ 118,147
Home equity:
Pass and Watch $ — $ 24 $ — $ — $ — $ 600 $ 89,369 $ 89,993
Substandard — — — — — 433 203 636
Total home equity $ — $ 24 $ — $ — $ — $ 1,033 $ 89,572 $ 90,629
Other residential:
Pass and Watch $ 11,504 $ 15,575 $ 30,158 $ 22,869 $ 13,186 $ 20,069 $ — $ 113,361
Total other residential $ 11,504 $ 15,575 $ 30,158 $ 22,869 $ 13,186 $ 20,069 $ — $ 113,361
Installment and other consumer:
Pass and Watch $ 10,938 $ 15,523 $ 6,850 $ 7,441 $ 4,696 $ 6,888 $ 1,721 $ 54,057
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-offs $ — $ — $ — $ — $ — $ (18) $ (4) $ (22)
Total loans:
Pass and Watch $ 239,343 $ 351,709 $ 295,226 $ 281,583 $ 190,045 $ 515,384 $ 193,730 $ 2,067,020
Total Special Mention $ — $ 16,471 $ 4,531 $ 3,534 $ 19,363 $ 14,547 $ 123 $ 58,569
Total Substandard $ — $ — $ 8,611 $ 1,754 $ — $ 22,019 $ 4,553 $ 36,937
Total Doubtful $ — $ — $ 106 $ — $ — $ — $ — $ 106
Totals $ 239,343 $ 368,180 $ 308,474 $ 286,871 $ 209,408 $ 551,950 $ 198,406 $ 2,162,632
Total gross current period charge-offs $ — $ — $ — $ — $ — $ (18) $ (4) $ (22)

(in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost
December 31, 2021 2021 2020 2019 2018 2017 Prior Total
Commercial and industrial:
Pass and Watch $ 96,643 $ 35,967 $ 25,754 $ 12,763 $ 2,729 $ 31,280 $ 90,744 $ 295,880
Special Mention — 1,700 584 273 — — 2,088 4,645
Substandard — — — — — — 1,077 1,077
Total commercial and industrial $ 96,643 $ 37,667 $ 26,338 $ 13,036 $ 2,729 $ 31,280 $ 93,909 $ 301,602
Commercial real estate, owner-occupied:
Pass and Watch $ 58,395 $ 43,216 $ 49,485 $ 36,174 $ 42,430 $ 104,898 $ — $ 334,598
Special Mention 16,748 — — 7,846 — 16,996 — 41,590
Substandard — 7,155 285 — — 8,603 — 16,043
Doubtful — 114 — — — — — 114
Total commercial real estate, owner-occupied $ 75,143 $ 50,485 $ 49,770 $ 44,020 $ 42,430 $ 130,497 $ — $ 392,345
Commercial real estate, investor-owned:
Pass and Watch $ 225,722 $ 186,214 $ 187,418 $ 143,028 $ 75,419 $ 325,882 $ 84 $ 1,143,767
Special Mention — 1,214 2,714 11,773 1,787 9,540 — 27,028
Substandard — — — 695 — 17,531 — 18,226
Total commercial real estate, investor-owned $ 225,722 $ 187,428 $ 190,132 $ 155,496 $ 77,206 $ 352,953 $ 84 $ 1,189,021
Construction:
Pass and Watch $ 31,269 $ 70,528 $ 8,935 $ 9,108 $ — $ — $ — $ 119,840
Total construction $ 31,269 $ 70,528 $ 8,935 $ 9,108 $ — $ — $ — $ 119,840
Home equity:
Pass and Watch $ — $ — $ — $ — $ 10 $ 268 $ 87,693 $ 87,971
Substandard — — — — — 377 398 775
Total home equity $ — $ — $ — $ — $ 10 $ 645 $ 88,091 $ 88,746
Other residential:
Pass and Watch $ 15,800 $ 31,981 $ 25,529 $ 15,411 $ 7,964 $ 17,873 $ — $ 114,558
Total other residential $ 15,800 $ 31,981 $ 25,529 $ 15,411 $ 7,964 $ 17,873 $ — $ 114,558
Installment and other consumer:
Pass and Watch $ 17,207 $ 7,748 $ 9,436 $ 5,633 $ 1,123 $ 6,620 $ 1,766 $ 49,533
Total installment and other consumer $ 17,207 $ 7,748 $ 9,436 $ 5,633 $ 1,123 $ 6,620 $ 1,766 $ 49,533
Total loans:
Pass and Watch $ 445,036 $ 375,654 $ 306,557 $ 222,117 $ 129,675 $ 486,821 $ 180,287 $ 2,146,147
Total Special Mention $ 16,748 $ 2,914 $ 3,298 $ 19,892 $ 1,787 $ 26,536 $ 2,088 $ 73,263
Total Substandard $ — $ 7,155 $ 285 $ 695 $ — $ 26,511 $ 1,475 $ 36,121
Doubtful $ — $ 114 $ — $ — $ — $ — $ — $ 114
Totals $ 461,784 $ 385,837 $ 310,140 $ 242,704 $ 131,462 $ 539,868 $ 183,850 $ 2,255,645

Page-19


(in thousands)	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost
March 31, 2023	2023		2022		2021		2020		2019		Prior				Total
Commercial and industrial:
Pass and Watch	$	25,074	$	13,349	$	5,414	$	6,732	$	17,105	$	27,065	$	87,069	$	181,808
Special Mention	3		275		—		—		2,743		4,395		1,089		8,505
Substandard	—		—		—		1,141		—		585		3,925		5,651
Total commercial and industrial	$	25,077	$	13,624	$	5,414	$	7,873	$	19,848	$	32,045	$	92,083	$	195,964
Gross current period charge-offs	$	—	$	—	$	—	$	—	$	(3)	$	—	$	—	$	(3)

Commercial real estate, owner-occupied:
Pass and Watch	$	371	$	55,727	$	51,067	$	39,903	$	47,400	$	130,314	$	—	$	324,782
Special Mention	—		—		16,058		—		298		9,680		—		26,036
Substandard	—		—		—		—		—		1,711		—		1,711

Total commercial real estate, owner-occupied	$	371	$	55,727	$	67,125	$	39,903	$	47,698	$	141,705	$	—	$	352,529

Commercial real estate, non-owner occupied:
Pass and Watch	$	5,456	$	179,181	$	210,546	$	154,342	$	162,111	$	426,972	$	48	$	1,138,656
Special Mention	—		—		1,166		11,998		3,907		11,466		—		28,537
Substandard	—		—		2,246		—		—		20,523		—		22,769

Total commercial real estate, non-owner occupied	$	5,456	$	179,181	$	213,958	$	166,340	$	166,018	$	458,961	$	48	$	1,189,962

Construction:
Pass and Watch	$	4,578	$	44,693	$	24,804	$	27,198	$	—	$	9,113	$	—	$	110,386


Total construction	$	4,578	$	44,693	$	24,804	$	27,198	$	—	$	9,113	$	—	$	110,386

Home equity:
Pass and Watch	$	—	$	—	$	—	$	—	$	—	$	966	$	84,723	$	85,689

Substandard	—		—		—		—		—		228		655		883
Total home equity	$	—	$	—	$	—	$	—	$	—	$	1,194	$	85,378	$	86,572

Other residential:
Pass and Watch	$	6,223	$	21,047	$	14,386	$	28,542	$	21,750	$	24,499	$	—	$	116,447


Total other residential	$	6,223	$	21,047	$	14,386	$	28,542	$	21,750	$	24,499	$	—	$	116,447

Installment and other consumer:
Pass and Watch	$	6,591	$	18,531	$	12,501	$	5,443	$	5,951	$	10,501	$	950	$	60,468


Total installment and other consumer	$	6,591	$	18,531	$	12,501	$	5,443	$	5,951	$	10,501	$	950	$	60,468
Gross current period charge-offs	$	—	$	(5)	$	—	$	(3)	$	—	$	(1)	$	(2)	$	(11)
Total loans:
Pass and Watch	$	48,293	$	332,528	$	318,718	$	262,160	$	254,317	$	629,430	$	172,790	$	2,018,236
Total Special Mention	$	3	$	275	$	17,224	$	11,998	$	6,948	$	25,541	$	1,089	$	63,078
Total Substandard	$	—	$	—	$	2,246	$	1,141	$	—	$	23,047	$	4,580	$	31,014
Total Doubtful	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Totals	$	48,296	$	332,803	$	338,188	$	275,299	$	261,265	$	678,018	$	178,459	$	2,112,328
Total gross current period charge-offs	$	—	$	(5)	$	—	$	(3)	$	(3)	$	(1)	$	(2)	$	(14)


(in thousands)	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost
December 31, 2022	2022		2021		2020		2019		2018		Prior				Total
Commercial and industrial:
Pass and Watch	$	15,349	$	6,679	$	7,603	$	19,982	$	5,362	$	24,954	$	84,655	$	164,584
Special Mention	275		—		—		2,272		3,836		—		402		6,785
Substandard	—		—		1,252		—		—		625		301		2,178
Total commercial and industrial	$	15,624	$	6,679	$	8,855	$	22,254	$	9,198	$	25,579	$	85,358	$	173,547

Commercial real estate, owner-occupied:
Pass and Watch	$	54,188	$	52,080	$	40,369	$	44,798	$	29,856	$	104,377	$	—	$	325,668
Special Mention	—		16,199		—		304		5,255		4,493		—		26,251
Substandard	—		—		—		1,160		—		1,699		—		2,859
Doubtful	—		—		99		—		—		—		—		99
Total commercial real estate, owner-occupied	$	54,188	$	68,279	$	40,468	$	46,262	$	35,111	$	110,569	$	—	$	354,877
Commercial real estate, non-owner occupied:
Pass and Watch	$	177,822	$	211,228	$	155,278	$	160,670	$	129,166	$	308,509	$	57	$	1,142,730
Special Mention	—		1,172		12,097		3,934		678		9,290		—		27,171
Substandard	—		2,264		—		—		—		19,724		—		21,988
Total commercial real estate, non-owner occupied	$	177,822	$	214,664	$	167,375	$	164,604	$	129,844	$	337,523	$	57	$	1,191,889
Construction:
Pass and Watch	$	49,262	$	19,393	$	28,861	$	7,745	$	9,112	$	—	$	—	$	114,373


Total construction	$	49,262	$	19,393	$	28,861	$	7,745	$	9,112	$	—	$	—	$	114,373
Home equity:
Pass and Watch	$	—	$	—	$	—	$	—	$	—	$	883	$	86,971	$	87,854

Substandard	—		—		—		—		—		480		414		894
Total home equity	$	—	$	—	$	—	$	—	$	—	$	1,363	$	87,385	$	88,748
Other residential:
Pass and Watch	$	21,154	$	14,547	$	29,018	$	21,890	$	11,064	$	14,450	$	—	$	112,123

Page-20


(in thousands)	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost
December 31, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost		Total
Total other residential	$	21,154	$	14,547	$	29,018	$	21,890	$	11,064	$	14,450	$	—	$	112,123
Installment and other consumer:
Pass and Watch	$	20,054	$	13,022	$	5,727	$	6,492	$	4,181	$	6,478	$	944	$	56,898

Substandard	—		—		—		—		—		91		—		91
Total installment and other consumer	$	20,054	$	13,022	$	5,727	$	6,492	$	4,181	$	6,569	$	944	$	56,989

Total loans:
Pass and Watch	$	337,829	$	316,949	$	266,856	$	261,577	$	188,741	$	459,651	$	172,627	$	2,004,230
Total Special Mention	$	275	$	17,371	$	12,097	$	6,510	$	9,769	$	13,783	$	402	$	60,207
Total Substandard	$	—	$	2,264	$	1,252	$	1,160	$	—	$	22,619	$	715	$	28,010
Total Doubtful	$	—	$	—	$	99	$	—	$	—	$	—	$	—	$	99
Totals	$	338,104	$	336,584	$	280,304	$	269,247	$	198,510	$	496,053	$	173,744	$	2,092,546

The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


Loan Aging Analysis by Class	Loan Aging Analysis by Class																	Loan Aging Analysis by Class
(in thousands)	(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Total		(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, non-owner occupied		Construction		Home equity		Other residential		Installment and other consumer		Total
June 30, 2022
March 31, 2023																		March 31, 2023
30-59 days past due	30-59 days past due	$	1,065	$	660	$	—	$	—	$	100	$	—	$	166	$	1,991	30-59 days past due	$	822	$	—	$	924	$	—	$	399	$	—	$	1	$	2,146
60-89 days past due	60-89 days past due	589		545		—		—		—		—		28		1,162		60-89 days past due	—		—		—		—		—		—		—		—
90 days or more past due	90 days or more past due	202		—		—		—		54		—		—		256		90 days or more past due	—		33		—		—		598		—		3		634
Total past due	Total past due	1,856		1,205		—		—		154		—		194		3,409		Total past due	822		33		924		—		997		—		4		2,780
Current	Current	211,266		381,692		1,190,419		118,147		90,475		113,361		53,863		2,159,223		Current	195,142		352,496		1,189,038		110,386		85,575		116,447		60,464		2,109,548
Total loans 1	Total loans 1	$	213,122	$	382,897	$	1,190,419	$	118,147	$	90,629	$	113,361	$	54,057	$	2,162,632	Total loans 1	$	195,964	$	352,529	$	1,189,962	$	110,386	$	86,572	$	116,447	$	60,468	$	2,112,328
Non-accrual loans 2	Non-accrual loans 2	$	—	$	7,564	$	—	$	—	$	454	$	—	$	—	$	8,018	Non-accrual loans 2	$	—	$	331	$	924	$	—	$	768	$	—	$	3	$	2,026
Non-accrual loans with no allowance	Non-accrual loans with no allowance	$	—	$	7,564	$	—	$	—	$	454	$	—	$	—	$	8,018	Non-accrual loans with no allowance	$	—	$	331	$	924	$	—	$	768	$	—	$	—	$	2,023
December 31, 2021
December 31, 2022																		December 31, 2022
30-59 days past due	30-59 days past due	$	2	$	—	$	—	$	—	$	498	$	—	$	1,036	$	1,536	30-59 days past due	$	3	$	—	$	—	$	—	$	319	$	93	$	5	$	420
60-89 days past due	60-89 days past due	394		—		—		—		67		—		—		461		60-89 days past due	—		—		—		—		244		—		—		244
90 days or more past due	90 days or more past due	229		—		—		—		88		—		—		317		90 days or more past due	264		—		—		—		414		—		—		678
Total past due	Total past due	625		—		—		—		653		—		1,036		2,314		Total past due	267		—		—		—		977		93		5		1,342
Current	Current	300,977		392,345		1,189,021		119,840		88,093		114,558		48,497		2,253,331		Current	173,280		354,877		1,191,889		114,373		87,771		112,030		56,984		2,091,204
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	$	173,547	$	354,877	$	1,191,889	$	114,373	$	88,748	$	112,123	$	56,989	$	2,092,546
Non-accrual loans 2	Non-accrual loans 2	$	—	$	7,269	$	694	$	—	$	413	$	—	$	—	$	8,376	Non-accrual loans 2	$	—	$	1,563	$	—	$	—	$	778	$	—	$	91	$	2,432
Non-accrual loans with no allowance	Non-accrual loans with no allowance	$	—	$	7,269	$	694	$	—	$	413	$	—	$	—	$	8,376	Non-accrual loans with no allowance	$	—	$	1,563	$	—	$	—	$	778	$	—	$	91	$	2,432

1 There were 0no non-performing loans past due more than ninety days and accruing interest as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

2 None of the non-accrual loans as of ~~June 30, 2022~~March 31, 2023 or December 31, ~~2021~~2022 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~2021. There were 3~~2022. We reversed interest income totaling $16 thousand and less than one thousand for loans ~~totaling $397 thousand~~ placed on non-accrual status during the ~~six~~three months ended ~~June 30,~~March 31, 2023 and March 31, 2022, ~~for which we reversed $8 thousand in interest income at the time of change in status, 1 of which for $16 thousand was subsequently charged off in the second quarter.~~respectively.

Collateral Dependent Loans

The following table presents the amortized cost basis of individually analyzed collateral-dependent loans, which are all on non-accrual status, by class at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


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

June 30, 2022
March 31, 2023													March 31, 2023
Commercial real estate, owner-occupied	Commercial real estate, owner-occupied	$	7,564	$	—	$	—	$	7,564	$	—		Commercial real estate, owner-occupied	$	331	$	—	$	—	$	331	$	—

Commercial real estate, non-owner occupied													Commercial real estate, non-owner occupied	924		—		—		924		—

Home equity	Home equity	—		454		—		454		—			Home equity	—		768		—		768		—

Installment and other consumer													Installment and other consumer	—		—		3		3		3
Total													Total	$	1,255	$	768	$	3	$	2,026	$	3
December 31, 2022													December 31, 2022
Commercial real estate, owner-occupied													Commercial real estate, owner-occupied	$	1,563	$	—	$	—	$	1,563	$	—
Home equity													Home equity	—		778		—		778		—

Total		$	7,564	$	454	$	—	$	8,018	$	—
December 31, 2021
Commercial real estate, owner-occupied		$	7,269	$	—	$	—	$	7,269	$	—
Commercial real estate, investor-owned		694		—		—		694		—

Home equity		—		413		—		413		—
Installment and other consumer													Installment and other consumer	—		—		91		91		—

Total	Total	$	7,963	$	413	$	—	$	8,376	$	—		Total	$	1,563	$	778	$	91	$	2,432	$	—

1 There were no collateral-dependent residential real estate mortgage loans in process of foreclosure or in substance repossessed at ~~June 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022. The weighted average loan-to-value of collateral dependent loans was approximately ~~67%~~42% at both ~~June 30, 2022~~March 31, 2023 and 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 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;~~2022.

~~Page-20~~Page-21

Loan Modifications

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

•We adopted ASU No. 2022-02, ~~Performance~~Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023, as described in Note 2, Recently Adopted and Issued Accounting Standards. The amendments enhanced disclosures related to certain types of loan modifications for borrowers experiencing financial difficulty, including principal forgiveness, interest rate reductions, other-than-insignificant payment delays, and/or term extensions. There were no such modifications during the ~~loan is reasonably assured; and~~

•~~Existing loan did not have any forgiveness of principal or interest.~~three months ended March 31, 2023 requiring disclosure.

~~There were no loans removed from TDR designation during the six months ended June 30, 2022 and 2021.~~

~~In accordance with section 4013~~Allocation of the ~~CARES Act, subsequently amended by section 541 of the 2020 Economic Aid Act, we elected to apply the temporary accounting relief provisions~~Allowance for loan modifications that met certain criteria, which would otherwise be designated as TDRs under existing GAAP. As of 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 incomeCredit Losses 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 will continue to work closely with both of these clients and monitor their performance.Loans

The following table ~~summarizes~~presents the ~~amortized cost~~details of ~~TDR~~the allowance for credit losses on loans segregated by loan ~~class~~portfolio segments as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~

(in thousands) June 30, 2022 December 31, 2021
Commercial and industrial $ 1,178 $ 1,183
Commercial real estate, owner-occupied 7,141 7,155
Commercial real estate, investor-owned 170 179
Home equity 479 386
Installment and other consumer 571 607
Total 1
$ 9,539 $ 9,510
2022.

1 TDR loans on non-accrual status totaled $7.4 million at both June 30, 2022 and December 31, 2021. Unfunded commitments for TDR loans totaled $241 thousand and $441 thousand as of June 30, 2022 and December 31, 2021, respectively.

There was 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 June 30, 2021. The modification in the second quarter of 2022 included a maturity date extension and interest rate concession. During the three and six months ended June 30, 2022 and 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.


Allocation of the Allowance for Credit Losses on Loans
(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, non-owner occupied		Construction		Home equity		Other residential		Installment and other consumer		Unallocated		Total
March 31, 2023
Modeled expected credit losses	$	1,137	$	1,349	$	7,409	$	239	$	459	$	535	$	574	$	—	$	11,702
Qualitative adjustments	784		1,291		5,292		1,780		79		42		305		2,032		11,605
Specific allocations	20		—		—		—		—		—		3		—		23
Total	$	1,941	$	2,640	$	12,701	$	2,019	$	538	$	577	$	882	$	2,032	$	23,330
December 31, 2022
Modeled expected credit losses	$	1,079	$	1,497	$	7,937	$	453	$	504	$	571	$	610	$	—	$	12,651
Qualitative adjustments	706		990		4,739		1,484		54		24		258		2,068		10,323
Specific allocations	9		—		—		—		—		—		—		—		9
Total	$	1,794	$	2,487	$	12,676	$	1,937	$	558	$	595	$	868	$	2,068	$	22,983

Allowance for Credit Losses on Loans Rollforward

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


Allowance for Credit Losses on Loans Rollforward	Allowance for Credit Losses on Loans Rollforward																			Allowance for Credit Losses on Loans Rollforward
(in thousands)	(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Unallocated		Total		(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, non-owner occupied		Construction		Home equity		Other residential		Installment and other consumer		Unallocated		Total
Three months ended June 30, 2022
Three months ended March 31, 2023																				Three months ended March 31, 2023
Beginning balance	Beginning balance	$	1,784	$	2,622	$	12,301	$	1,717	$	549	$	628	$	641	$	2,305	$	22,547	Beginning balance	$	1,794	$	2,487	$	12,676	$	1,937	$	558	$	595	$	868	$	2,068	$	22,983
(Reversal) Provision		(89)		(5)		138		12		(19)		(43)		112		(106)		—
Charge-offs		—		—		—		—		—		—		(20)		—		(20)
Provision (reversal)																				Provision (reversal)	147		153		25		74		(20)		(18)		25		(36)		350
(Charge-offs)																				(Charge-offs)	(3)		—		—		—		—		—		(11)		—		(14)
Recoveries	Recoveries	4		—		—		8		—		—		—		—		12		Recoveries	3		—		—		8		—		—		—		—		11
Ending balance	Ending balance	$	1,699	$	2,617	$	12,439	$	1,737	$	530	$	585	$	733	$	2,199	$	22,539	Ending balance	$	1,941	$	2,640	$	12,701	$	2,019	$	538	$	577	$	882	$	2,032	$	23,330
Three months ended June 30, 2021
Three months ended March 31, 2022																				Three months ended March 31, 2022
Beginning balance	Beginning balance	$	1,654	$	2,304	$	10,856	$	1,312	$	520	$	757	$	255	$	2,300	$	19,958	Beginning balance	$	1,709	$	2,776	$	12,739	$	1,653	$	595	$	644	$	621	$	2,286	$	23,023
(Reversal) Provision		(68)		(267)		(95)		(178)		(158)		(144)		(17)		7		(920)
Charge-offs		—		—		—		—		—		—		—		—		—
Provision (reversal)																				Provision (reversal)	72		(154)		(438)		56		(46)		(16)		22		19		(485)

(Charge-offs)																				(Charge-offs)	—		—		—		—		—		—		(2)		—		(2)
Recoveries	Recoveries	4		—		—		8		50		—		—		—		62		Recoveries	3		—		—		8		—		—		—		—		11
Ending balance	Ending balance	$	1,590	$	2,037	$	10,761	$	1,142	$	412	$	613	$	238	$	2,307	$	19,100	Ending balance	$	1,784	$	2,622	$	12,301	$	1,717	$	549	$	628	$	641	$	2,305	$	22,547

~~Page-21~~

Allowance for Credit Losses on Loans Rollforward
(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor Construction Home equity Other residential Installment and other consumer Unallocated Total
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 7 — — 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 7 — — 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 ~~$1.293~~$1.308 billion and ~~$1.330~~$1.298 billion at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. In addition, we pledge eligible TIC loans, which totaled ~~$102.6~~$106.2 million and ~~$106.2~~$105.0 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). For additional information, see Note 6, Borrowings.

Page-22

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 ~~$6.6~~$6.4 million at ~~June 30, 2022~~March 31, 2023 and ~~$7.9 million~~ at December 31, ~~2021.~~2022. In addition, undisbursed commitments to related parties totaled $562 thousand at ~~June 30, 2022~~both March 31, 2023 and ~~$8.6 million at~~ December 31, ~~2021. The decreases in both the outstanding amount and undisbursed commitment as of June 30, 2022 were primarily due to a Director retirement in the first quarter.~~2022.

Note 6: Short-Term Borrowings and Other Obligations

Federal Home Loan Bank – As of March 31, 2023 and December 31, 2022, the Bank had total lines of credit with the FHLB totaling $1.037 billion and $711.6 million, respectively, based on eligible collateral of certain loans and investment securities.

Federal Funds ~~Purchased~~Lines of Credit – The Bank had unsecured ~~available~~ lines of credit with correspondent banks for overnight borrowings totaling $150.0 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. In general, interest rates on these lines approximate the federal funds target rate. ~~We had no overnight borrowings under these credit facilities at June 30, 2022 or December 31, 2021~~.

Federal Home Loan Bank Borrowings – As of June 30, 2022 and December 31, 2021, the Bank had available lines of credit with the FHLB totaling $762.6 million and $820.5 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at June 30, 2022 or December 31, 2021.

Federal Reserve ~~Line of Credit~~Bank – The Bank has ~~an available~~a line of credit with the Federal Reserve Bank of San Francisco ("FRBSF") secured by certain residential loans. At ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Bank had total borrowing capacity under this line ~~totaling $57.3~~of $60.6 million and ~~$70.8~~$58.7 million, ~~respectively, and had no outstanding borrowings with~~respectively. In addition, under the ~~FRBSF.~~Federal Reserve’s new BTFP facility, the Bank could borrow up to an additional $283.6 million based on the par value of pledged investment securities as of March 31, 2023.

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 six months of 2021, and included accelerated accretion of the $1.3 million remaining purchase discount due to the early redemption.

~~Page-22~~

Other Obligations – Finance lease liabilities totaling ~~$356~~$402 thousand and ~~$419~~$439 thousand at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, are included in short-term borrowings and other obligations in the consolidated statements of condition. See Note 8, Commitments and Contingencies, for additional information.

Outstanding balances and weighted average interest rates on short-term borrowings and other obligations as of March 31, 2023 and December 31, 2022 are summarized in the following table.


	March 31, 2023				December 31, 2022
(dollars in thousands)	Outstanding Balance		Weighted Average Rate		Outstanding Balance		Weighted Average Rate
FHLB - short-term borrowings	$	405,400	5.17	%	$	112,000	4.65	%
Federal funds lines of credit	—		—	%	—		—	%
FRBSF - federal funds purchased	—		—	%	—		—	%
FRBSF - short-term borrowings under the BTFP	—		—	%	—		—	%
Other obligations (finance leases)	402		1.89	%	439		1.86	%
Total short-term borrowings and other obligations	$	405,802	5.17	%	$	112,439	4.64	%

Note 7: Stockholders' Equity

Dividends

On ~~July 22, 2022,~~January 20, 2023, Bancorp declared a $0.25 per share cash dividend, paid February 10, 2023 to shareholders of record at the close of business on February 3, 2023. Subsequent to quarter end on April 21, 2023, Bancorp declared a $0.25 per share cash dividend, payable on ~~August~~May 12, ~~2022~~2023 to shareholders of record at the close of business on ~~August~~May 5, ~~2022.~~2023.

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,

Page-23

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 ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, we withheld ~~10,208~~2,847 shares totaling ~~$351~~$82 thousand at a weighted-average price of ~~$34.38~~$28.74 for cashless exercises. During the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, we withheld ~~27,547~~8,003 shares totaling ~~$1.1 million~~$278 thousand at a weighted-average price of ~~$38.87~~$34.76 for cashless exercises. Shares withheld under net settlement arrangements are available for future grants.

Share Repurchase Program

Bancorp has an approved share repurchase program with $34.7 million ~~outstanding. The last activity under the program was~~outstanding at March 31, 2023. There have been no repurchases in ~~the first quarter of 2022. Bancorp repurchased 23,275 shares totaling $877 thousand in the first half of 2022.~~2023. Cumulative shares repurchased under the current program totaled 618,991 shares as of ~~June 30, 2022~~March 31, 2023 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.~~

~~Page-23~~

Note 8: Commitments and Contingent Liabilities

Financial Instruments with Off-Balance Sheet Risk

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

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

Page-24

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)	June 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Commercial lines of credit	Commercial lines of credit	$	318,400	$	330,234	Commercial lines of credit	$	266,082	$	292,204
Revolving home equity lines	Revolving home equity lines	212,208		210,938		Revolving home equity lines	218,353		218,907
Undisbursed construction loans	Undisbursed construction loans	48,671		78,381		Undisbursed construction loans	32,471		43,179
Personal and other lines of credit	Personal and other lines of credit	11,044		11,001		Personal and other lines of credit	10,851		10,842
Standby letters of credit	Standby letters of credit	2,150		3,657		Standby letters of credit	1,720		1,738
Total commitments and standby letters of credit		$	592,473	$	634,211
Total unfunded loan commitments and standby letters of credit						Total unfunded loan commitments and standby letters of credit	$	529,477	$	566,870

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~~$1.3 million and ~~$1.8~~$1.5 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition. ~~There was no adjustment to~~The $174 thousand reversal of the ~~allowance~~provision for credit losses on unfunded loan commitments ~~for~~in the ~~second~~first quarter of 2023 was due primarily to a $37.4 million decrease in total unfunded commitments, compared to a $318 thousand provision reversal in the first quarter of 2022, ~~compared~~due mainly to ~~a reversal of $612 thousand for the second quarter of 2021. This compares to year-to-date reversals of $318 thousand and $1.2 million~~an improvement in the ~~six months ended June 30, 2022 and 2021 respectively, due to improved~~underlying economic forecasts at the time.

Leases

We lease premises under long-term non-cancelable operating leases with remaining terms of 54 months to 1019 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.

~~Page-24~~

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


(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Operating leases:	Operating leases:					Operating leases:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	22,353	$	23,604	Operating lease right-of-use assets	$	22,854	$	24,821
Operating lease liabilities	Operating lease liabilities	$	24,117	$	25,429	Operating lease liabilities	$	25,433	$	26,639
Finance leases:	Finance leases:					Finance leases:
Finance lease right-of-use assets	Finance lease right-of-use assets	$	499	$	499	Finance lease right-of-use assets	$	606	$	616
Accumulated amortization	Accumulated amortization	(155)		(93)		Accumulated amortization	(214)		(187)
Finance lease right-of-use assets, net1	Finance lease right-of-use assets, net1	$	344	$	406	Finance lease right-of-use assets, net1	$	392	$	429
Finance lease liabilities2	Finance lease liabilities2	$	356	$	419	Finance lease liabilities2	$	402	$	439
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 periods presented.


	~~Six~~Three months ended
(in thousands)	~~June 30, 2022~~March 31, 2023		~~June 30, 2021~~March 31, 2022
Right-of-use assets obtained in exchange for operating lease liabilities	$	~~1,124~~	$	—
~~Right-of-use assets obtained in exchange for finance lease liabilities~~	$	—	$	~~412~~1,120

Page-25

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


		Three months ended				Six months ended					Three months ended
(in thousands)	(in thousands)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021		(in thousands)	March 31, 2023		March 31, 2022
Operating lease cost	Operating lease cost	$	1,295	$	1,164	$	2,579	$	2,328	Operating lease cost	$	1,610	$	1,284
Variable lease cost	Variable lease cost	—		—		—		—		Variable lease cost	—		—
Total operating lease cost1	Total operating lease cost1	$	1,295	$	1,164	$	2,579	$	2,328	Total operating lease cost1	$	1,610	$	1,284
Finance lease cost:	Finance lease cost:									Finance lease cost:
Amortization of right-of-use assets2	Amortization of right-of-use assets2	$	31	$	7	$	62	$	34	Amortization of right-of-use assets2	$	37	$	31
Interest on finance lease liabilities3	Interest on finance lease liabilities3	—		—		1		—		Interest on finance lease liabilities3	2		1
Total finance lease cost	Total finance lease cost	$	31	$	7	$	63	$	34	Total finance lease cost	$	39	$	32
Total lease cost	Total lease cost	$	1,326	$	1,171	$	2,642	$	2,362	Total lease cost	$	1,649	$	1,316
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 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.March 31, 2023. 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)	(in thousands)	June 30, 2022						(in thousands)	March 31, 2023
Year	Year	Operating Leases			Finance Leases			Year	Operating Leases			Finance Leases
2022		$	2,701		$	62
2023	2023	4,745			117			2023	$	3,997		$	115
2024	2024	3,837			113			2024	4,585			153
2025	2025	3,327			67			2025	3,875			106
2026	2026	2,535			—			2026	3,129			36
2027								2027	2,845			5
Thereafter	Thereafter	8,467			—			Thereafter	9,693			—
Total minimum lease payments	Total minimum lease payments	25,612			359			Total minimum lease payments	28,124			415
Amounts representing interest (present value discount)	Amounts representing interest (present value discount)	(1,495)			(3)			Amounts representing interest (present value discount)	(2,691)			(13)
Present value of net minimum lease payments (lease liability)	Present value of net minimum lease payments (lease liability)	$	24,117		$	356		Present value of net minimum lease payments (lease liability)	$	25,433		$	402
Weighted average remaining term (in years)	Weighted average remaining term (in years)	6.7			3.0			Weighted average remaining term (in years)	7.6			2.9
Weighted average discount rate	Weighted average discount rate	1.68		%	0.59		%	Weighted average discount rate	2.27		%	1.89		%

~~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 reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. During ~~the three months~~its six month fiscal reporting period ended ~~June 30, 2022,~~March 31, 2023, Visa deposited an additional ~~$600~~$350 million into the litigation escrow account to address claims of certain merchants who opted out of the Amended Settlement Agreement for a balance of ~~$1.5~~$1.6 billion. Combined with funds previously deposited with the court, these funds are expected to cover the settlement payment obligations.

Page-26

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 ~~June 30, 2022,~~March 31, 2023, we had 4four interest rate swap agreements, which are scheduled to mature inat various dates ranging from June 2031 ~~October 2031, July 2032, and~~to 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 receivable on the swaps totaled $5$6 thousand at ~~June 30, 2022~~March 31, 2023 and ~~$11~~$5 thousand at December 31, ~~2021.~~2022. Information on our derivatives follows:

~~Page-26~~


		Asset Derivatives				Liability Derivatives					Asset Derivatives				Liability Derivatives
(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022
Fair value hedges:	Fair value hedges:									Fair value hedges:
Interest rate contracts notional amount	Interest rate contracts notional amount	$	5,616	$	—	$	6,929	$	13,037	Interest rate contracts notional amount	$	9,450	$	12,046	$	2,340	$	—
Interest rate contracts fair value1	Interest rate contracts fair value1	$	206	$	—	$	104	$	1,085	Interest rate contracts fair value1	$	404	$	602	$	23	$	—

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

The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


		Carrying Amounts of Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans					Carrying Amounts of Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands)	(in thousands)	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022
Loans	Loans	$	12,305	$	13,976	$	(241)	$	939	Loans	$	11,284	$	11,319	$	(506)	$	(726)

Page-27

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

Three months ended Six months ended
(in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Interest and fees on loans 1
$ 23,334 $ 21,429 $ 47,011 $ 42,090
Increase (decrease) in fair value of designated interest rate swaps due to LIBOR interest rate movements $ 430 $ (170) $ 1,187 $ 549
Payment on interest rate swaps (65) (93) (150) (185)
Decrease (increase) in fair value hedging adjustment of hedged loans (428) 177 (1,180) (537)
Decrease in value of yield maintenance agreement (2) (2) (5) (6)
Net losses on fair value hedging relationships recognized in interest income $ (65) $ (88) $ (148) $ (179)


	Three months ended
(in thousands)	March 31, 2023		March 31, 2022
Interest and fees on loans 1	$	24,258	$	23,677
(Decrease) increase in fair value of designated interest rate swaps due to LIBOR interest rate movements	$	(221)	$	757
Receivable (payment) on interest rate swaps	51		(85)
Increase (decrease) in fair value hedging adjustment of hedged loans	221		(752)
Decrease in value of yield maintenance agreement	(2)		(3)
Net gain (losses) on fair value hedging relationships recognized in interest income	$	49	$	(83)

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 Assets
Gross Amounts Net Amounts of Gross Amounts Not Offset in
Gross Amounts Offset in the Assets Presented the Statements of Condition
of Recognized Statements of in the Statements Financial Cash Collateral
(in thousands)
Assets Condition of Condition Instruments Received Net Amount
June 30, 2022
Derivatives by Counterparty:
Counterparty A $ 206 $ — $ 206 $ (206) $ — $ —
December 31, 2021
Derivatives by Counterparty:
Counterparty A $ — $ — $ — $ — $ — $ —



Offsetting of Financial Assets and Derivative Assets
			Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
	Gross Amounts		Offset in the		Assets Presented		the Statements of Condition
	of Recognized		Statements of		in the Statements		Financial		Cash Collateral
(in thousands)	Assets		Condition		of Condition		Instruments		Received		Net Amount
March 31, 2023

Counterparty	$	404	$	—	$	404	$	(23)	$	—	$	381


December 31, 2022

Counterparty	$	602	$	—	$	602	$	—	$	—	$	602

~~Page-27~~

Offsetting of Financial Liabilities and Derivative Liabilities
Gross Amounts Net Amounts of Gross Amounts Not Offset in
Gross Amounts Offset in the Liabilities Presented the Statements of Condition
of Recognized Statements of in the Statements Financial Cash Collateral
(in thousands)
Liabilities1
Condition
of Condition1
Instruments Pledged Net Amount
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) $ —


Offsetting of Financial Liabilities and Derivative Liabilities
			Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
	Gross Amounts		Offset in the		Liabilities Presented		the Statements of Condition
	of Recognized		Statements of		in the Statements		Financial		Cash Collateral
(in thousands)	Liabilities1		Condition		of Condition1		Instruments		Pledged		Net Amount
March 31, 2023

Counterparty	$	23	$	—	$	23	$	(23)	$	—	$	—


December 31, 2022

Counterparty	$	—	$	—	$	—	$	—	$	—	$	—

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~~2022 Form 10-K filed with the SEC on March ~~15, 2022.~~16, 2023.

~~Note 10: Merger~~

~~Bancorp completed its merger and~~ ~~acquired all assets and assumed all liabilities of~~ ~~American River Bankshares on 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. T~~he 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 options~~	63
~~Cash paid in lieu of fractional shares~~	13
~~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 w~~hich $179 thousand and $363 thousand, respectively, were amort~~ized in the three and six month periods ended June 30, 2022. No amortization was recognized in the comparable periods 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 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 Six months ended
(in thousands, unaudited) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Personnel and severance $ 58 $ — $ 393 $ —
Professional services — 201 67 201
Data processing 29 — 77 —
Other expense 224 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~~2022 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 throughout the Management's Discussion and Analysis sections, where applicable.

Forward-Looking Statements

This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "1934 Act"). Those sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.

Our forward-looking statements include descriptions of plans or objectives of management for future operations, products or services, and forecasts of revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs preceded by "will," "would," "should," "could" or "may."

Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues that may impact Bancorp's earnings in future periods. Factors that could cause future results to vary materially from current management expectations include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including economic or other disruptions to financial markets caused by acts of terrorism, war or other conflicts such as Russia's military action in Ukraine, impacts from inflation, supply change disruptions, changes in interest rates (including the actions taken by the Federal Reserve to control inflation), California's unemployment rate, deposit flows, real estate values, and expected future cash flows on loans and securities; the impact of adverse developments at other banks, including bank failures, that impact general sentiment regarding the stability and liquidity of banks; costs or effects of acquisitions; competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; natural disasters (such as wildfires and earthquakes in our area); adverse weather conditions; interruptions of utility service in our markets for sustained periods; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting our operations, pricing, products and services; and successful integration of acquisitions.

Important factors that could cause results or performance to materially differ from those expressed in our prior forward-looking statements are detailed in ITEM 1A, Risk Factors section of our ~~2021~~2022 Form 10-K as filed with the SEC, and ITEM 1A Risk Factors herein, 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, and Business Combinations. . For a detailed discussion, refer to the Critical Accounting Estimates section of our ~~2021~~2022 Form 10-K filed with the SEC on March ~~15, 2022.~~16, 2023.

Page-29

Executive Summary

We generated ~~record net income~~earnings of $9.4 million for the ~~second~~first quarter of 2023, compared to $12.9 million for the fourth quarter of 2022 ~~totaled $11.1 million, compared to~~and $10.5 million in the first quarter of 2022. Diluted earnings per share were ~~$0.69 in~~$0.59 for the ~~second~~first quarter of ~~2022,~~2023, compared to $0.81 for the preceding quarter and $0.66 in the ~~immediately preceding quarter.~~same quarter a year ago. Earnings ~~for the first six months of 2022 totaled $21.5 million, compared to $18.2 million in the same period last year. Diluted earnings per share were $1.35 and $1.37~~declined in the first ~~six months~~quarter of 2022 and 2021, respectively. All periods of earnings presented were impacted by the costs associated with our most recent acquisition, the details of which are discussed throughout this report. In particular, diluted earnings per share for the first half of 2022 would have increased by one cent per share over 2021 without those costs.2023, as an increase in interest expense reflected market interest rate increases on a lagged basis.

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

•~~Return~~Following recent industry events, our deposit franchise remained strong at $3.251 billion on ~~assets~~March 31, 2023, a decrease of ~~1.03% and return on equity of 10.74% for the three months ended June 30, 2022, would~~$322.8 million from $3.573 billion at December 31, 2022. While there have been ~~1.05%~~some outflows related to industry concerns in March and ~~10.95%, respectively, without one-time and conversion costs~~pandemic surge deposits redeploying to money market funds, the largest transactions were related to the ~~2021 merger with American River Bankshares ("ARB"). That compares~~normal operating activities of our customers. Those activities include vendor payments, taxes, payroll and singular events such as disbursement of proceeds from the sale of a business, real property acquisitions for cash, trust distributions or estate settlements. The cost of deposits increased 12 basis points quarter over quarter due to ~~0.98% and 9.61% (GAAP) and 1.01% and 9.96% (non-GAAP), respectively, for the three months ended~~targeted relationship-based pricing adjustments. Non-interest bearing deposits made up 50.3% of total deposits at March 31, ~~2022. As shown in the reconciliation~~2023, compared to 51.5% at December 31, 2022, and we estimated that 67% of ~~GAAP to non-GAAP financial measures on page 35, merger-related costs reduced net income~~total deposits were fully covered by ~~$219 thousand, net~~FDIC insurance as of ~~taxes, or $0.02 per share in the second quarter.~~March 31, 2023.

•Liquidity is strong, providing 181% coverage of estimated uninsured deposits. The ~~second quarter tax-equivalent net interest margin improved 9 basis points over~~Bank has long followed liquidity management practices similar to larger banks with robust liquidity requirements and regular liquidity stress testing. While the ~~preceding quarter despite~~Bank has the ~~7 basis point drag of declining PPP loan fee recognition. Rising interest rates had a positive impact on~~ability to utilize the ~~Bank's asset sensitive portfolio, as did~~Federal Reserve Bank Term Funding Program ("BTFP") and has tested it for contingency planning purposes, there has been no need to utilize the ~~deployment of excess cash into securities and flat deposit costs.~~

•~~Deposits increased by $22.1 million to $3.831 billion~~facility at June 30, 2022, compared to $3.809 billion at December 31, 2021. Non-interest bearing deposits made up 53% of total deposits as of June 30, 2022 versus 50% as of December 31, 2021, representing one of the strongest deposit franchises among peers. The cost of average deposits in the second quarter of 2022 was 0.06%, unchanged from the preceding quarter. The cost of average deposits in the first half of 2022 was 0.06%, a decrease from 0.07% in the first half of prior year.this time.

•Loan balances of ~~$2.163~~$2.112 billion at ~~June 30,~~March 31, 2023, increased $19.8 million from $2.093 billion at December 31, 2022 ~~reflected record second quarter~~reflecting originations of ~~$102.2~~$44.9 million and ~~first half~~payoffs of $22.2 million. Utilization of credit lines was offset by loan amortization from scheduled repayments during the ~~year originations of $152.0 million. While our production was strong~~quarter and ~~more than double the first half of 2021, total loans decreased modestly~~unfunded commitments declined $37.4 million from December 31, ~~2021 balances driven by payoffs including expected construction project completions, borrowers' sales~~2022 to $529.5 million at March 31, 2023.

•Non-accrual loans were only 0.10% of ~~underlying real estate~~total loans as of March 31, 2023, compared to 0.12% at December 31, 2022. We recorded a $350 thousand provision for credit losses on loans in the first quarter, compared to no provision in the previous quarter and ~~business assets, PPP loan payoffs, and third-party refinancing~~a $485 thousand provision reversal in the same quarter of ~~acquired loans outside~~2022. The provision in the ~~Bank's credit~~first quarter of 2023 was due primarily to qualitative risk ~~appetite.~~factor adjustments.

•Credit quality remains ~~strong,~~sound notwithstanding the trends in the commercial real estate market. Our loan portfolio continues to perform well, with ~~non-accrual~~classified loans ~~representing 0.37%~~at only 1.47% of total loans and manageable delinquencies. Non-owner occupied commercial real estate loans made up 73% of total classified loans as of ~~June 30,~~March 31, 2023, compared to 76% at December 31, 2022, and ~~December 31, 2021. There was not a significant change in classified loans. There was no provision made~~all are currently paying as agreed. We continue to ~~the allowance for credit losses on loans or to the allowance for credit losses on unfunded loan commitments this quarter as an improvement~~maintain diversity among property types and within our geographic footprint. In particular, our office commercial real estate portfolio in the ~~California unemployment rate forecast~~City of San Francisco represents just 3% of our total loan portfolio and 6% of our total non-owner occupied commercial real estate portfolio. As of the last measurement period, the average loan-to-value and debt-service coverage for the entire non-owner occupied office portfolio were 55% and 1.67x, respectively. For the eleven non-owner occupied office loans in the City of San Francisco, the average loan-to-value and debt-service coverage were 60% and 1.20x, respectively. More details are available in the supplementary earnings presentation filed as Exhibit 99.2 to our 8-K on April 24, 2023, and also available on our website.

•The first quarter tax-equivalent net interest margin decreased 22 basis points to 3.04% from 3.26% for the ~~quantitative portion of estimated credit losses while ongoing supply chain issues, inflation and recession risks increased qualitative factors. The preceding quarter's provision reversals were~~previous quarter due primarily to increased deposit costs and average borrowing balances, partially offset by higher loan yields. The margin was up from 2.96% in the ~~improved economic forecast at the time.~~same period of 2022.

•Return on average assets ("ROA") was 0.92% for the first quarter of 2023, compared to 1.21% for the fourth quarter of 2022 and 0.98% for the first quarter of 2022, and return on average equity ("ROE") was 9.12%, compared to 12.77% for the prior quarter and 9.61% for the first quarter in the prior year. The efficiency

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%ratio for the first quarter of ~~2022 and year~~2023 was 60.24%, compared to ~~date 2021, respectively. Changes from~~50.92% for the prior quarter and 59.13% for the first quarter of 2022. The sequential declines in ROA and ROE and increase in the efficiency ratio were due primarily ~~visible~~to the $3.6 million increase in ~~salaries, benefits~~interest expense.

•The Bank finalized the closure of four branch locations which were announced in January 2023. The acquisition of American River Bank ("ARB") resulted in an overlap in the Bank’s branch network in Santa Rosa and ~~professional services expenses.~~Healdsburg, prompting branch consolidations within Northern Sonoma County. In addition, our Tiburon and Buckhorn branches in Marin and Amador counties were in close proximity to other branches fully able to meet our customers' needs. These closures represented the remaining expense savings anticipated from the acquisition, optimizing efficiency and our ability to fund strategic initiatives going forward. The pre-tax savings in 2023 from the branch closures, net of accelerated costs, is expected to be approximately $470 thousand, and future annual pre-tax savings are expected to be approximately $1.4 million.

•All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ~~ratio~~ratios at March 31, 2023 for Bancorp ~~was 14.7% at June 30, 2022, compared to 14.6% at December 31, 2021.~~and the Bank were 16.2% and 15.6%, respectively. Bancorp's tangible common equity to tangible assets ("TCE ratio") was ~~7.8%~~8.7% at ~~June 30, 2022, compared to 8.8% at December~~March 31, ~~2021 (refer to footnote 4 on page 36 for~~ a discussion of this non-GAAP financial measure). The total risk-based capital ratio for the Bank was 14.2% at June 30, 2022, compared to 14.4% at December 31, 2021. The Bank's tangible common equity to tangible assets was 7.5% at June 30, 2022, compared to 8.6% at December 31, 2021. Declines in2023, and 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.~~TCE ratio was 8.3%.

•Given the strength and durability of the Bank's financial performance, the Board of Directors declared a cash dividend of $0.25 per share ~~an increase from $0.24 per share in the prior quarter,~~ on ~~July 22, 2022,~~April 21, 2023, which represents the 6972thnd consecutive quarterly dividend paid by Bancorp. The dividend is payable on ~~August~~May 12, ~~2022,~~2023, to shareholders of record at the close of business on ~~August~~May 5, ~~2022.~~2023.

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 with reference to certain non-GAAP financial measures. Management believes that presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of Bancorp's operating results and comparison of operating results across reporting periods. Management also uses non-GAAP financial measures to establish budgets and manage Bancorp's business. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below.

~~Reconciliation of GAAP and Non-GAAP Financial Measures~~

Three months ended Six months ended
(in thousands, unaudited) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021
Net income
Net income (GAAP) $ 11,066 $ 10,465 $ 21,531 $ 18,232
Merger-related one-time and conversion costs:
Personnel and severance 58 335 393 —
Professional services — 67 67 201
Data processing 29 48 77 —
Other 224 97 321 16
Total merger costs before tax benefits 311 547 858 217
Income tax benefit of merger-related expenses (92) (162) (254) (17)
Total merger-related one-time and conversion costs, net of tax benefits 219 385 604 200
Comparable net income (non-GAAP) $ 11,285 $ 10,850 $ 22,135 $ 18,432
Diluted earnings per share
Weighted average diluted shares 15,955 15,946 15,950 13,316
Diluted earnings per share (GAAP) $ 0.69 $ 0.66 $ 1.35 $ 1.37
Merger-related one-time and conversion costs, net of tax benefits 0.02 0.02 0.04 0.01
Comparable diluted earnings per share (non-GAAP) $ 0.71 $ 0.68 $ 1.39 $ 1.38
Return on average assets
Average assets $ 4,312,919 $ 4,345,258 $ 4,328,999 $ 3,044,933
Return on average assets (GAAP) 1.03 % 0.98 % 1.00 % 1.21 %
Comparable return on average assets (non-GAAP) 1.05 % 1.01 % 1.03 % 1.22 %
Return on average equity
Average stockholders' equity $ 413,271 $ 441,626 $ 427,370 $ 351,227
Return on average equity (GAAP) 10.74 % 9.61 % 10.16 % 10.47 %
Comparable return on average equity (non-GAAP) 10.95 % 9.96 % 10.44 % 10.58 %
Efficiency ratio
Non-interest expense (GAAP) $ 18,906 $ 19,375 $ 38,281 $ 30,968
Merger-related expenses (311) (547) (858) (217)
Non-interest expense (non-GAAP) $ 18,595 $ 18,828 $ 37,423 $ 30,751
Net interest income $ 31,197 $ 29,898 $ 61,095 $ 46,565
Non-interest income $ 2,728 $ 2,867 $ 5,595 $ 3,848
Efficiency ratio (GAAP) 55.73 % 59.13 % 57.40 % 61.43 %
Comparable efficiency ratio (non-GAAP) 54.81 % 57.46 % 56.11 % 61.00 %

~~Page-32~~

RESULTS OF OPERATIONS

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


		Three months ended						Six months ended						Three months ended
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	June 30, 2022			March 31, 2022				June 30, 2022			June 30, 2021			(dollars in thousands, except per share data)	March 31, 2023			December 31, 2022			March 31, 2022
Selected operating data:	Selected operating data:														Selected operating data:
Net interest income	Net interest income	$	31,197		$	29,898			$	61,095		$	46,565		Net interest income	$	29,899		$	33,370		$	29,898
Reversal of credit losses on loans		—			(485)				(485)			(3,849)
Provision for (reversal of) credit losses on loans															Provision for (reversal of) credit losses on loans	350			—			(485)
Reversal of credit losses on unfunded loan commitments	Reversal of credit losses on unfunded loan commitments	—			(318)				(318)			(1,202)			Reversal of credit losses on unfunded loan commitments	(174)			—			(318)
Non-interest income	Non-interest income	2,728			2,867				5,595			3,848			Non-interest income	2,935			2,587			2,867
Non-interest expense	Non-interest expense	18,906			19,375				38,281			30,968			Non-interest expense	19,780			18,310			19,375
Net income	Net income	11,066			10,465				21,531			18,232			Net income	9,440			12,881			10,465
Net income per common share:	Net income per common share:														Net income per common share:
Basic	Basic	$	0.70		$	0.66			$	1.35		$	1.38		Basic	$	0.59		$	0.81		$	0.66
Diluted	Diluted	$	0.69		$	0.66			$	1.35		$	1.37		Diluted	$	0.59		$	0.81		$	0.66
Performance and other financial ratios:	Performance and other financial ratios:														Performance and other financial ratios:
Return on average assets	Return on average assets	1.03		%	0.98		%		1.00		%	1.21		%	Return on average assets	0.92		%	1.21		%	0.98		%
Return on average equity	Return on average equity	10.74		%	9.61		%		10.16		%	10.47		%	Return on average equity	9.12		%	12.77		%	9.61		%
Tax-equivalent net interest margin 1		3.05		%	2.96		%		3.01		%	3.28		%
Tax-equivalent net interest margin															Tax-equivalent net interest margin	3.04		%	3.26		%	2.96		%
Cost of deposits	Cost of deposits	0.06		%	0.06		%		0.06		%	0.07		%	Cost of deposits	0.20		%	0.08		%	0.06		%
Efficiency ratio	Efficiency ratio	55.73		%	59.13		%		57.40		%	61.43		%	Efficiency ratio	60.24		%	50.92		%	59.13		%
Net charge-offs (recoveries)		$	8		$	(9)			$	(1)		$	(75)
Cash dividend payout ratio on common stock 2		34.29		%	36.36		%		35.56		%	33.33		%
Net (recoveries) charge-offs															Net (recoveries) charge-offs	$	3		$	(20)		$	(9)
Cash dividend payout ratio on common stock 1															Cash dividend payout ratio on common stock 1	42.37		%	30.86		%	36.36		%


(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	June 30, 2022			December 31, 2021			(dollars in thousands, except per share data)	March 31, 2023			December 31, 2022
Selected financial condition data:	Selected financial condition data:							Selected financial condition data:
Total assets	Total assets	$	4,326,904		$	4,314,209		Total assets	$	4,135,279		$	4,147,464
Investment securities								Investment securities	1,756,093			1,774,303
Loans, net	Loans, net	2,140,093			2,232,622			Loans, net	2,088,998			2,069,563
Deposits	Deposits	3,830,670			3,808,550			Deposits	3,250,574			3,573,348
Borrowings and other obligations		356			419
Short-term borrowings and other obligations								Short-term borrowings and other obligations	405,802			112,439

Stockholders' equity	Stockholders' equity	409,573			450,368			Stockholders' equity	430,174			412,092
Book value per share	Book value per share	25.58			28.27			Book value per share	26.71			25.71
Asset quality ratios:	Asset quality ratios:							Asset quality ratios:
Allowance for credit losses on loans to total loans	Allowance for credit losses on loans to total loans	1.04		%	1.02		%	Allowance for credit losses on loans to total loans	1.10		%	1.10		%
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-performing loans	Allowance for credit losses on loans to non-performing loans	2.81x			2.75x			Allowance for credit losses on loans to non-performing loans	11.52x			9.45x
Non-accrual loans to total loans	Non-accrual loans to total loans	0.37		%	0.37		%	Non-accrual loans to total loans	0.10		%	0.12		%
Capital ratios:	Capital ratios:							Capital ratios:
Equity to total assets ratio	Equity to total assets ratio	9.47		%	10.44		%	Equity to total assets ratio	10.40		%	9.94		%
Tangible common equity to tangible assets 4		7.79		%	8.76		%
Tangible common equity to tangible assets								Tangible common equity to tangible assets	8.69		%	8.21		%
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)	14.67		%	14.58		%	Total capital (to risk-weighted assets)	16.15		%	15.90		%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)	13.84		%	13.70		%	Tier 1 capital (to risk-weighted assets)	15.27		%	15.02		%
Tier 1 capital (to average assets)	Tier 1 capital (to average assets)	9.07		%	8.85		%	Tier 1 capital (to average assets)	9.94		%	9.60		%
Common equity Tier 1 capital (to risk weighted assets)	Common equity Tier 1 capital (to risk weighted assets)	13.84		%	13.70		%	Common equity Tier 1 capital (to risk weighted assets)	15.27		%	15.02		%
1 Tax-equivalent net interest margin is computed by dividing taxable equivalent net interest income, which is adjusted for taxable equivalent income on tax-exempt loans and securities based on Federal statutory rate of 21 percent, by total average interest-earning assets.
2 Calculated as dividends on common shares divided by basic net income per common share.
3 The allowance for credit losses on loans to total loans, excluding SBA-guaranteed PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for credit losses on loans. SBA PPP loans at 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.
1 Calculated as dividends on common shares divided by basic net income per common share.								1 Calculated as dividends on common shares divided by basic net income per common share.

~~Page-33~~Page-32

Net Interest Income

Net interest income is the interest earned on loans, ~~investment~~investments and other interest-earning assets minus the interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in the net interest income and/or margin due to an imbalance in the timing of repricing and maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income. For more information, refer to Item 3. Quantitative and Qualitative Disclosure about Market Risk in this Form 10-Q.

Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders’ equity.

Average Statements of Condition and Analysis of Net Interest Income

The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for each period reported.


			Three months ended						Three months ended						Three months ended					Three months ended
			June 30, 2022						March 31, 2022						March 31, 2023					December 31, 2022						March 31, 2022
					Interest						Interest									Interest						Interest						Interest
			Average		Income/		Yield/		Average		Income/		Yield/					Average		Income/		Yield/		Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	(dollars in thousands)		Balance		Expense		Rate		Balance		Expense		Rate			(dollars in thousands)		Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate
Assets	Assets															Assets
		Interest-earning deposits with banks 1	$	95,326	$	180	0.75	%	$	231,555	$	106	0.18	%			Interest-earning deposits with banks 1	$	4,863	$	56	4.58	%	$	61,878	$	575	3.64	%	$	231,555	$	106	0.18	%
		Investment securities 2, 3	1,807,710		8,469		1.87	%	1,626,537		6,871		1.69	%			Investment securities 2, 3	1,851,743		10,194		2.20	%	1,873,028		10,319		2.20	%	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	%			Loans 1, 3, 4	2,121,718		24,415		4.60	%	2,113,201		23,670		4.38	%	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	%			Total interest-earning assets 1	3,978,324		34,665		3.49	%	4,048,107		34,564		3.34	%	4,085,587		30,858		3.02	%
		Cash and non-interest-bearing due from banks	56,408						69,019								Cash and non-interest-bearing due from banks	39,826						44,480						69,019
		Bank premises and equipment, net	7,182						7,430								Bank premises and equipment, net	8,396						7,933						7,430
		Interest receivable and other assets, net	151,483						183,222								Interest receivable and other assets, net	137,114						125,483						183,222
Total assets	Total assets		$	4,312,919					$	4,345,258						Total assets		$	4,163,660					$	4,226,003					$	4,345,258
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity															Liabilities and Stockholders' Equity
		Interest-bearing transaction accounts	$	300,258	$	53	0.07	%	$	295,183	$	56	0.08	%			Interest-bearing transaction accounts	$	272,353	$	254	0.38	%	$	290,064	$	191	0.26	%	$	295,183	$	56	0.08	%
		Savings accounts	343,338		32		0.04	%	343,327		29		0.03	%			Savings accounts	329,299		170		0.21	%	338,760		32		0.04	%	343,327		29		0.03	%
		Money market accounts	1,076,912		438		0.16	%	1,122,215		478		0.17	%			Money market accounts	952,479		1,085		0.46	%	1,036,932		405		0.15	%	1,122,215		478		0.17	%
		Time accounts including CDARS	144,432		67		0.19	%	147,707		14		0.04	%			Time accounts including CDARS	126,030		223		0.72	%	127,906		114		0.35	%	147,707		14		0.04	%
		Borrowings and other obligations 1	370		—		0.61	%	399		1		0.62	%			Short-term borrowings and other obligations 1	222,571		2,716		4.88	%	8,014		89		4.34	%	399		1		0.62	%
		Subordinated debenture 1, 5	—		—		—	%	—		—		—	%
		Total interest-bearing liabilities	1,865,310		590		0.13	%	1,908,831		578		0.12	%			Total interest-bearing liabilities	1,902,732		4,448		0.95	%	1,801,676		831		0.18	%	1,908,831		578		0.12	%
		Demand accounts	1,984,629						1,942,804								Demand accounts	1,792,998						1,975,390						1,942,804
		Interest payable and other liabilities	49,709						51,997								Interest payable and other liabilities	48,233						48,592						51,997
		Stockholders' equity	413,271						441,626								Stockholders' equity	419,697						400,345						441,626
Total liabilities & stockholders' equity	Total liabilities & stockholders' equity		$	4,312,919					$	4,345,258						Total liabilities & stockholders' equity		$	4,163,660					$	4,226,003					$	4,345,258
Tax-equivalent net interest income/margin 1	Tax-equivalent net interest income/margin 1				$	31,581	3.05	%			$	30,280	2.96	%		Tax-equivalent net interest income/margin 1				$	30,217	3.04	%			$	33,733	3.26	%			$	30,280	2.96	%
Reported net interest income/margin 1	Reported net interest income/margin 1				$	31,197	3.01	%			$	29,898	2.93	%		Reported net interest income/margin 1				$	29,899	3.01	%			$	33,370	3.23	%			$	29,898	2.93	%
Tax-equivalent net interest rate spread	Tax-equivalent net interest rate spread						2.98	%					2.90	%		Tax-equivalent net interest rate spread						2.54	%					3.16	%					2.90	%

~~Page-34~~

Six months ended Six months ended
June 30, 2022 June 30, 2021
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(in thousands) Balance Expense Rate Balance Expense Rate
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 banks 62,679 45,059
Bank premises and equipment, net 7,305 4,786
Interest receivable and other assets, net 167,265 132,675
Total assets $ 4,328,999 $ 3,044,933
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts $ 297,734 $ 109 0.07 % $ 170,943 $ 78 0.09 %
Savings accounts 343,333 61 0.04 % 220,946 40 0.04 %
Money market accounts 1,099,439 916 0.17 % 719,769 598 0.17 %
Time accounts including CDARS 146,061 81 0.11 % 95,849 177 0.37 %
Borrowings and other obligations 1
384 1 0.62 % 50 — 1.46 %
Subordinated debenture 1, 5
— — — % 1,076 1,361 251.54 %
Total interest-bearing liabilities 1,886,951 1,168 0.12 % 1,208,633 2,254 0.38 %
Demand accounts 1,963,832 1,442,320
Interest payable and other liabilities 50,846 42,753
Stockholders' equity 427,370 351,227
Total liabilities & stockholders' equity $ 4,328,999 $ 3,044,933
Tax-equivalent net interest income/margin 1
$ 61,861 3.01 % $ 47,227 3.28 %
Reported net interest income/margin 1
$ 61,095 2.97 % $ 46,565 3.24 %
Tax-equivalent net interest rate spread 2.94 % 3.06 %
1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.
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~~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 2023 and 2022.

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.

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

Page-33

decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including ~~one more day~~two fewer days in the three months ended ~~June 30, 2022~~March 31, 2023 compared to ~~March~~December 31, 2022.

~~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									Three Months Ended March 31, 2023 Compared to Three Months Ended December 31, 2022								Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
(in thousands)	(in thousands)	Volume		Yield/Rate		Mix		Total		Volume		Yield/Rate		Mix		Total		(in thousands)	Volume		Yield/Rate		Mix		Total		Volume		Yield/Rate		Mix		Total
Interest-earning deposits with banks	Interest-earning deposits with banks	$	(63)	$	325	$	(188)	$	74	$	(9)	$	221	$	(22)	$	190	Interest-earning deposits with banks	$	(530)	$	153	$	(142)	$	(519)	$	(105)	$	2,559	$	(2,504)	$	(50)
Investment securities 1	Investment securities 1	765		749		84		1,598		12,893		(1,576)		(2,925)		8,392		Investment securities 1	(117)		(8)		—		(125)		951		2,083		289		3,323
Loans 1	Loans 1	(350)		(271)		262		(359)		2,651		2,179		136		4,966		Loans 1	95		1,187		(537)		745		(1,134)		1,751		(83)		534
Total interest-earning assets	Total interest-earning assets	352		803		158		1,313		15,535		824		(2,811)		13,548		Total interest-earning assets	(552)		1,332		(679)		101		(288)		6,393		(2,298)		3,807
Interest-bearing transaction accounts	Interest-bearing transaction accounts	1		(4)		—		(3)		58		(15)		(12)		31		Interest-bearing transaction accounts	(12)		86		(11)		63		(4)		219		(17)		198
Savings accounts	Savings accounts	—		3		—		3		22		(1)		—		21		Savings accounts	(1)		147		(8)		138		(1)		148		(6)		141
Money market accounts	Money market accounts	(19)		(27)		6		(40)		315		2		1		318		Money market accounts	(33)		802		(89)		680		(72)		800		(121)		607
Time accounts, including CDARS	Time accounts, including CDARS	—		54		(1)		53		93		(124)		(65)		(96)		Time accounts, including CDARS	(2)		117		(6)		109		(2)		247		(36)		209
Borrowings and other obligations		—		—		(1)		(1)		—		—		1		1
Subordinated debenture 2		—		—		—		—		—		(1,361)		—		(1,361)
Short-term borrowings and other obligations																		Short-term borrowings and other obligations	2,383		11		233		2,627		557		4		2,154		2,715

Total interest-bearing liabilities	Total interest-bearing liabilities	(18)		26		4		12		488		(1,499)		(75)		(1,086)		Total interest-bearing liabilities	2,335		1,163		119		3,617		478		1,418		1,974		3,870
Changes in tax-equivalent net interest income	Changes in tax-equivalent net interest income	$	370	$	777	$	154	$	1,301	$	15,047	$	2,323	$	(2,736)	$	14,634	Changes in tax-equivalent net interest income	$	(2,887)	$	169	$	(798)	$	(3,516)	$	(766)	$	4,975	$	(4,272)	$	(63)
1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.	1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.																	1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.
2 Six months ended June 30, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.

~~Second~~First Quarter of ~~2022~~2023 Compared to the ~~First~~Fourth Quarter of 2022

Net interest income totaled ~~$31.2 million in the second quarter of 2022, compared to~~ $29.9 million in the first quarter of 2023, compared to $33.4 million in the fourth quarter of 2022. The ~~$1.3~~$3.5 million ~~increase~~decrease from the prior quarter was primarily ~~attributable~~related to an increase in the cost of deposits and higher average ~~balances and yields on investment securities driving an increase of $1.6 million, quarter-over-quarter in investment interest income.~~borrowing balances.

The tax-equivalent net interest margin was ~~3.05% in the second quarter of 2022, compared to 2.96%~~3.04% in the first quarter of 2023, compared to 3.26% in the fourth quarter of 2022. The ~~increase~~decline from ~~the~~ prior quarter was primarily due to ~~continued deployment of cash into~~ higher ~~yielding investment securities~~borrowing and deposit costs partially offset by higher interest rates on ~~non-PPP loans, partially offset by lower interest and fee income~~ loans. The tax-equivalent yield on ~~PPP loans. Average yields on the investment portfolio increased from 1.69%~~interest-earning assets was 3.49% in the first quarter of ~~2022 to 1.87% in the second quarter reflecting recent increases in market interest rates, and the average rate on gross loans increased 10~~2023, an increase of 15 basis points over the fourth quarter of 2022. For the first quarter of 2023, interest-bearing liabilities costs were 0.95%, which ~~excludes~~was a 77 basis point increase over the ~~impact~~fourth quarter of ~~loan origination fees/costs and purchase discounts/premiums.~~2022.

First ~~Six Months~~Quarter of ~~2022~~2023 Compared to the First ~~Six Months~~Quarter of ~~2021~~2022

Net interest income totaled ~~$61.1~~$29.9 million for the ~~six months ended June 30, 2022,~~first quarter of 2023, largely unchanged compared to ~~$46.6 million for~~ the ~~same period in~~first quarter of 2022, as the ~~prior year. The $14.5 million~~ increase from the prior year was primarily due to the larger investment portfolio generating an incremental $8.3 million, and $4.9 million related to higher balances and yields on the loan portfolio (net of a $3.7 million decrease in interest income on loans and ~~fees~~investments offset the increases in interest expense on ~~PPP loans). Additionally, 2021 included a $1.3 million accelerated discount from the early redemption of a subordinated debenture.~~deposits and borrowings.

The tax-equivalent net interest margin was ~~3.01%~~3.04% in the ~~six months ended June 30, 2022,~~first quarter of 2023, compared to ~~3.28%~~2.96% in the same period in the prior year. The ~~decrease~~increase over the same quarter last year was primarily ~~attributed~~due to a higher ~~proportion of investment securities in the larger balance sheet associated with ARB's lower loan-to-deposit ratio~~yields on loans and ~~other deposit growth over the period. The decrease was~~investments partially offset by ~~a shift to a~~ higher ~~percentage of non-PPP loans within the loan portfolio~~deposit and ~~the absence of trust preferred securities redemption that occurred in 2021.~~borrowing costs.

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 evolving risks to economic ~~risks posed~~activity caused by the COVID-19 pandemic, the FOMC made two emergency federal funds rate cuts totaling 150 basis points ~~to the federal funds rate~~ in March 2020. The federal funds ~~target~~ rate range ~~resided~~remained between 0.0% andto 0.25% ~~after March 15, 2020~~ through the beginning of 2022, putting downward pressure on our asset yields and net interest ~~margin through early 2022. I~~n ~~its~~margin. Beginning in March ~~16,~~ 2022, ~~meeting,~~ the FOMC ~~raised~~began successive increases to the federal funds rate due to the evolving inflation risks, complicated by international political unrest and supply chain disruptions. As a result of five rate adjustments during 2022, the federal funds target rate increased to a range of 4.25% to 4.50% at year-end. In 2023, on both February 1st and March 2nd, the FOMC increased the target ~~federal funds~~rate 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 ~~2.25% - 2.50%~~4.75% to 5.00%. ~~It is widely~~ ~~anticipated that additional increases in the target range will occur in 2022. Our net interest margin should benefit from a rising interest rate environment.~~Federal Reserve policymakers continue to monitor inflation and economic developments throughout 2023. See ITEM 3. Quantitative and Qualitative Disclosure about Market Risk for further information.

Page-34

Provision for Credit Losses on Loans

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

The following table shows the activity for the periods presented.


		Three months ended				Six months ended					Three months ended
(dollars in thousands)	(dollars in thousands)	June 30, 2022		March 31, 2022			June 30, 2022		June 30, 2021			(dollars in thousands)	March 31, 2023		December 31, 2022		March 31, 2022
Reversal of credit losses on loans		$	—	$	(485)		$	(485)	$	(3,849)
Provision for (reversal of) credit losses on loans												Provision for (reversal of) credit losses on loans	$	350	$	—	$	(485)

~~There was no~~We recorded a $350 thousand provision ~~made to the allowance~~ for credit losses on loans in the ~~second~~first quarter. AnThe provision was due primarily to increases in qualitative risk factors to account for continued uncertainty about inflation and recession risks. Management believed that these risk factors were not adequately captured in the modeled quantitative portion of the allowance and took the more prudent approach to account for loan and collateral concentration risks, mainly in our construction and commercial real estate portfolios, and the need for heightened portfolio management in light of current economic conditions. In addition, the $19.8 million increase in loans contributed modestly to the provision. These increases were partially offset by the quantitative impact of an improvement in ~~the~~Moody's Analytics' baseline California unemployment rate ~~forecast decreased~~forecasts over the ~~quantitative portion of estimated credit losses while ongoing supply chain issues, inflation and recession risks increased qualitative factors. The reversal of the allowance for credit losses on loans~~next four quarters.

There was no provision in the prior quarter and a $485 thousand provision reversal in the first quarter of 2022, due primarily ~~resulted from improved forecasted~~to an improvement in underlying economic ~~conditions~~forecasts at the time. ~~The provision reversals in the six months ended June 30, 2021 were primarily due to improvements in the forecasted California unemployment rates at the time and decrease in non-PPP loan balances.~~

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

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

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

For more information, refer to Note 5,Loans and Allowance for Credit Losses on Loans, to the consolidated financial statements in this Form 10-Q.

~~Page-37~~

Non-interest Income

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


		Three months ended				Amount Change	Percent Change				Three months ended				Quarter over quarter				Year over year
(dollars in thousands)	(dollars in thousands)	June 30, 2022		March 31, 2022								(dollars in thousands)	March 31, 2023		December 31, 2022		March 31, 2022		Amount Change		Percent Change		Amount Change		Percent Change
Earnings on bank-owned life insurance, net												Earnings on bank-owned life insurance, net	$	705	$	296	$	413	$	409	138.2	%	$	292	70.7	%
Service charges on deposit accounts												Service charges on deposit accounts	533		519		488		14		2.7	%	45		9.2	%
Wealth Management and Trust Services	Wealth Management and Trust Services	$	630	$	600		$	30	5.0	%		Wealth Management and Trust Services	511		$	490	600		21		4.3	%	(89)		(14.8)	%
Debit card interchange fees, net	Debit card interchange fees, net	531		505			26		5.1	%		Debit card interchange fees, net	447		513		505		(66)		(12.9)	%	(58)		(11.5)	%
Service charges on deposit accounts		465		488			(23)		(4.7)	%
Earnings on bank-owned life insurance, net		298		413			(115)		(27.8)	%
Dividends on Federal Home Loan Bank stock	Dividends on Federal Home Loan Bank stock	249		259			(10)		(3.9)	%		Dividends on Federal Home Loan Bank stock	302		297		259		5		1.7	%	43		16.6	%
Merchant interchange fees, net	Merchant interchange fees, net	149		140			9		6.4	%		Merchant interchange fees, net	133		119		140		14		11.8	%	(7)		(5.0)	%

Other income	Other income	406		462			(56)		(12.1)	%		Other income	304		353		462		(49)		(13.9)	%	(158)		(34.2)	%
Total non-interest income	Total non-interest income	$	2,728	$	2,867		$	(139)	(4.8)	%		Total non-interest income	$	2,935	$	2,587	$	2,867	$	348	13.5	%	$	68	2.4	%

Six months ended Amount Change Percent Change
(dollars in thousands) June 30, 2022 June 30, 2021
Wealth Management and Trust Services $ 1,230 $ 1,018 $ 212 20.8 %
Debit card interchange fees, net 1,036 785 251 32.0 %
Service charges on deposit accounts 953 598 355 59.4 %
Earnings on bank-owned life insurance, net 711 490 221 45.1 %
Dividends on Federal Home Loan Bank stock 508 326 182 55.8 %
Merchant interchange fees, net 289 118 171 144.9 %
Other income 868 513 355 69.2 %
Total non-interest income $ 5,595 $ 3,848 $ 1,747 45.4 %

First Quarter of 2023 Compared to the Fourth Quarter of 2022

~~Second~~Non-interest income totaled $2.9 million in the first quarter of 2023, compared to $2.6 million in the prior quarter. The $348 thousand increase from the prior quarter was primarily related to the recognition of a death benefit on bank-owned life insurance, partially offset by decreases in debit card interchange fees and other income.

First Quarter of ~~2022~~2023 Compared to the First Quarter of 2022

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

~~First Six Months~~first quarter of ~~2022 Compared to the First Six Months of 2021~~

~~Non-interest income totaled $5.6 million in the six months ended June 30, 2022,~~2023, compared to ~~$3.8~~$2.9 million in the same period of the prior year. The ~~$1.7 million~~$68 thousand improvement from the ~~prior year period~~first quarter of 2022, was ~~evident~~primary due to the death benefit, partially offset by decreases in ~~all categories~~wealth management and ~~mostly attributable to increased activity associated with the ARB acquisition~~trust services income and ~~higher Wealth Management and Trust Services~~other income.

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Non-interest Expense

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


		Three months ended				Amount Change	Percent Change				Three months ended				Quarter over quarter				Year over year
(dollars in thousands)	(dollars in thousands)	June 30, 2022		March 31, 2022								(dollars in thousands)	March 31, 2023		December 31, 2022		March 31, 2022		Amount Change		Percent Change		Amount Change		Percent Change
Salaries and related benefits	Salaries and related benefits	$	10,341	$	11,548		$	(1,207)	(10.5)	%		Salaries and related benefits	$	10,930	$	9,600	$	11,548	$	1,330	13.9	%	$	(618)	(5.4)	%
Occupancy and equipment	Occupancy and equipment	1,894		1,909			(15)		(0.8)	%		Occupancy and equipment	2,414		2,084		1,907		330		15.8	%	507		26.6	%
Professional services												Professional services	1,123		985		913		138		14.0	%	210		23.0	%
Data processing	Data processing	1,199		1,277			(78)		(6.1)	%		Data processing	1,045		1,080		1,277		(35)		(3.2)	%	(232)		(18.2)	%
Professional services		665		913			(248)		(27.2)	%
Depreciation and amortization												Depreciation and amortization	882		581		452		301		51.8	%	430		95.1	%
Information technology	Information technology	468		478			(10)		(2.1)	%		Information technology	370		678		478		(308)		(45.4)	%	(108)		(22.6)	%
Depreciation and amortization		393		452			(59)		(13.1)	%
Amortization of core deposit intangible	Amortization of core deposit intangible	374		380			(6)		(1.6)	%		Amortization of core deposit intangible	345		365		380		(20)		(5.5)	%	(35)		(9.2)	%
Directors' expense	Directors' expense	294		311			(17)		(5.5)	%		Directors' expense	321		269		311		52		19.3	%	10		3.2	%
Federal Deposit Insurance Corporation insurance	Federal Deposit Insurance Corporation insurance	296		290			6		2.1	%		Federal Deposit Insurance Corporation insurance	289		293		290		(4)		(1.4)	%	(1)		(0.3)	%
Charitable contributions	Charitable contributions	511		45			466		1,035.6	%		Charitable contributions	49		104		45		(55)		(52.9)	%	4		8.9	%
Other real estate owned												Other real estate owned	4				2		—		—	%	2		100.0	%
Other non-interest expense	Other non-interest expense											Other non-interest expense
Advertising	Advertising	221		347			(126)		(36.3)	%		Advertising	278		281		347		(3)		(1.1)	%	(69)		(19.9)	%
Other expense	Other expense	2,250		1,425			825		57.9	%		Other expense	1,730		1,986		1,425		(256)		(12.9)	%	305		21.4	%
Total other non-interest expense	Total other non-interest expense	2,471		1,772			699		39.4	%		Total other non-interest expense	2,008		2,267		1,772		(259)		(11.4)	%	236		13.3	%
Total non-interest expense	Total non-interest expense	$	18,906	$	19,375		$	(469)	(2.4)	%		Total non-interest expense	$	19,780	$	18,310	$	19,375	$	1,470	8.0	%	$	405	2.1	%

~~Page-38~~

Six months ended Amount Change Percent Change
(dollars in thousands) June 30, 2022 June 30, 2021
Salaries and related benefits $ 21,889 $ 18,096 $ 3,793 21.0 %
Occupancy and equipment 3,803 3,502 301 8.6 %
Data processing 2,476 1,639 837 51.1 %
Professional services 1,578 1,849 (271) (14.7) %
Information technology 946 609 337 55.3 %
Depreciation and amortization 845 848 (3) (0.4) %
Amortization of core deposit intangible 754 408 346 84.8 %
Directors' expense 605 405 200 49.4 %
Federal Deposit Insurance Corporation insurance 586 361 225 62.3 %
Charitable contributions 556 493 63 12.8 %
Other non-interest expense
Advertising 568 414 154 37.2 %
Other expense 3,675 2,344 1,331 56.8 %
Total other non-interest expense 4,243 2,758 1,485 53.8 %
Total non-interest expense $ 38,281 $ 30,968 $ 7,313 23.6 %

First Quarter of 2023 Compared to the Fourth Quarter of 2022

~~Second~~Non-interest expense totaled $19.8 million in the first quarter of 2023, compared to $18.3 million in the prior quarter. The $1.5 million increase from the prior quarter included $417 thousand in adjustments to estimated incentive and supplemental executive retirement plan accruals, and $432 thousand from accelerated amortization and lease costs associated with branch closures. Other increases to salaries and related benefits included $389 thousand in 401(k) matching contributions, which is typically higher in the first quarter, and $383 thousand of additional salaries, insurance and payroll taxes. Meaningful decreases in expenses included $343 thousand in information technology and data processing costs due largely to timing of purchases and the renegotiation of our data processing contract.

First Quarter of ~~2022~~2023 Compared to the First Quarter of 2022

Non-interest expense totaled ~~$18.9~~$19.8 million in the ~~second~~first quarter of ~~2022,~~2023, compared to $19.4 million in the ~~prior quarter.~~first quarter of 2022. The ~~decrease~~$405 thousand increase from the ~~prior~~first quarter of 2022 was primarily ~~due~~related to $646 thousand in accelerated amortization and lease costs for branches closed and a ~~$1.2 million reduction~~$210 thousand increase in ~~salaries and benefits after~~professional services fees from the completion of ~~the acquisition-related conversion in March 2022~~multiple internal audit and ~~22 fewer full-time equivalent employees. Decreases~~consulting engagements. These increases were partially offset by a $466 thousand ~~increase~~ in ~~charitable contributions in the quarter due~~net changes to ~~the annual distribution of grant funding related to the Bank's corporate giving program.~~

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

~~Non-interest expense totaled $38.3 million in the six months ended June 30, 2022, compared to $31.0 million in the same period of prior year. The largest increases over prior year expenses came from~~estimated incentive, vacation and retirement plan accruals included within salaries and related benefits ~~which rose $3.8 million due to increased numbers of employees in acquired branch~~expense and ~~loan offices, regularly scheduled annual merit and related increases, and lower deferred loan origination~~acquisition costs ~~(the first six months of 2021~~ included ~~PPP round two origination activity). Higher expenses across most other categories reflect the acquisition, including one-time and conversion costs of $858 thousand, an increase in other~~within data processing ~~of $762 thousand, and an additional $346 thousand in amortization associated with the ARB core deposit intangible asset in the first half of 2022.~~expense.

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 ~~second~~first quarter of ~~2022~~2023 totaled ~~$4.0~~$3.4 million at an effective tax rate of ~~26.3%~~26.7%, compared to $4.8 million at an effective tax rate of 27.0% in the prior quarter and $3.7 million at an effective tax rate of 26.3% in the ~~prior quarter.~~same quarter last year. The provision for income taxes for the first half of 2022 totaled $7.7 million at an effective tax rate of 26.3%, compared to $6.3 million at an effective tax rate of 25.6% for the first half of 2021. The increasedecrease in the provision in the ~~second~~first quarter of ~~2022~~2023 reflected ~~higher~~lower pre-tax income as compared to the prior ~~quarter.~~quarter and the same quarter a year ago. The 7030 basis point decrease in the effective tax rate in the first quarter of 2023 as compared to the prior quarter was primarily due to higher nontaxable BOLI income in 2023. The 40 basis point increase in the effective tax rate in the first ~~half~~quarter of ~~2022~~2023 as compared to the ~~first half of 2021~~same quarter a year ago was primarily due to lower income from tax exempt loans and municipal securities

Page-36

and a higher level of tax benefits in ~~2021~~2022 from the exercise of stock options and 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 ~~June 30, 2022,~~March 31, 2023, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

~~Page-39~~

FINANCIAL CONDITION SUMMARY

Cash, Cash Equivalents and Restricted Cash

Total cash, cash equivalents and restricted cash were ~~$115.9~~$38.0 million at ~~June 30, 2022,~~March 31, 2023, compared to ~~$347.6~~$45.4 million at December 31, ~~2021.~~2022. The ~~$231.7~~$7.4 million decrease was due primarily ~~due~~ to ~~the deployment of funds into~~increases in loans and decreases in deposits partially offset by cash flows from investment securities ~~as noted below. Cash~~ and cash equivalents do not include $152.4 million and $173.1 million in temporary one-way sale transfers of deposits to third-party deposit networks as part of our liquidity management at June 30, 2022 and December 31, 2021, respectively.increased borrowings.

Investment Securities

The investment securities portfolio totaled ~~$1.825~~$1.756 billion at ~~June 30, 2022, an increase~~March 31, 2023, a decrease of ~~$314.9~~$18.2 million from December 31, ~~2021.~~2022. The ~~increase~~decrease was primarily ~~due to purchases~~the result of ~~$492.5~~principal repayments totaling $32.9 million, ~~to deploy excess cash into interest earning assets in a more favorable interest rate environment in 2022,~~ partially offset by ~~paydowns, maturities and calls of $93.1 million. Additionally, the~~a $16.2 million reduction in pre-tax unrealized losses on available-for-sale investment securities. The portfolio is comprised of high credit quality investments with average effective durations of approximately 3.8 on available-for-sale securities ~~increased $80.1 million as a result of higher~~and 5.9 on held-to-maturity securities. Both portfolios generate cash flow monthly from interest, ~~rates in~~principal amortization and payoffs, which supports the Bank's liquidity. In the first six months of 2022. In March 2022, we transferred $357.5 million securities at fair value from available-for-sale to held-to-maturity to reduce the effect of future rate increases on the available-for-sale portfolio mark-to-market, other comprehensive income and equity.quarter investment cash flows totaled $46.2 million. See Note 4, Investment Securities, for additional information.

The following table summarizes our investment in obligations of state and political subdivisions at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


			June 30, 2022								December 31, 2021										March 31, 2023								December 31, 2022
(dollars in thousands)	(dollars in thousands)		Amortized Cost			Fair Value			% of Total State and Political Subdivisions		Amortized Cost			Fair Value			% of Total State and Political Subdivisions		(dollars in thousands)		Amortized Cost			Fair Value			% of Total State and Political Subdivisions		Amortized Cost			Fair Value			% of Total State and Political Subdivisions
Within California:	Within California:																		Within California:
		General obligation bonds	$	25,997		$	22,042		13.6	%	$	25,036		$	25,020		14.2	%		General obligation bonds	$	25,780		$	21,491		14.4	%	$	25,806		$	20,768		14.4	%
		Revenue bonds	5,055			4,496			2.6		5,249			5,185			3.0			Revenue bonds	3,716			3,085			2.1		3,719			2,987			2.1
		Tax allocation bonds	501			501			0.3		503			510			0.3
Total within California	Total within California		31,553			27,039			16.5		30,788			30,715			17.5		Total within California		29,496			24,576			16.5		29,525			23,755			16.5
Outside California:	Outside California:																		Outside California:
		General obligation bonds	131,479			118,110			68.8		117,278			121,303			66.5			General obligation bonds	121,571			109,632			67.9		121,908			106,375			68.0
		Revenue bonds	28,035			23,659			14.7		28,146			29,272			16.0			Revenue bonds	27,865			24,608			15.6		27,922			23,752			15.5
Total outside California	Total outside California		159,514			141,769			83.5		145,424			150,575			82.5		Total outside California		149,436			134,240			83.5		149,830			130,127			83.5
Total obligations of state and political subdivisions	Total obligations of state and political subdivisions		$	191,067		$	168,808		100.0	%	$	176,212		$	181,290		100.0	%	Total obligations of state and political subdivisions		$	178,932		$	158,816		100.0	%	$	179,355		$	153,882		100.0	%
Percent of investment portfolio	Percent of investment portfolio		10.2		%	9.8		%			11.7		%	12.0		%			Percent of investment portfolio		9.8		%	9.6		%			9.6		%	9.3		%

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas ~~(38.2%~~(39.6%), Washington ~~(15.0%~~(14.3%) and Wisconsin ~~(9.7%~~(8.9%). Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). ~~We have $6.0 million in obligations of Texas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from PSF.~~

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

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

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

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

Page-37

•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

~~Page-40~~

Loans and Credit Quality

During the first ~~six~~three months of ~~2022,~~2023, loans ~~decreased~~increased by ~~$93.0~~$19.8 million and totaled ~~$2.163~~$2.112 billion at ~~June 30,~~March 31, 2023, compared to $2.093 billion at December 31, 2023. Loan originations for the first quarter of 2023 were $44.9 million, compared to $36.1 million for the fourth quarter of 2022 ~~primarily due~~and $49.8 million for the first quarter of 2022. Loan payoffs were $22.2 million for the first quarter, compared to ~~$94.2~~$55.3 million for the fourth quarter of 2022 and $119.7 million for the first quarter of 2022, which included $70.4 million in PPP loan payoffs. First quarter 2023 loan payoffs were the lowest first quarter payoffs since 2017 and consisted mainly of a large construction project completed.

The ratio of allowance for credit losses on loans ~~being forgiven~~to total loans remained at 1.10% at March 31, 2023 and ~~paid off. New non-PPP related~~December 31, 2022. Net charge-offs for the first quarter of 2023 totaled $3 thousand, compared to net recoveries of $20 thousand for the fourth quarter of 2022 and net recoveries of $9 thousand for the first quarter of 2022.

Non-accrual loans decreased $406 thousand to $2.0 million, or 0.10% of the loan ~~originations totaled $152.0~~portfolio at March 31, 2023 from $2.4 million, or 0.12% at December 31, 2022. Non-accrual loans at March 31, 2023 included the addition of six loans totaling $1.4 million in the first ~~six months~~quarter, 68% of ~~2022. Non-PPP loan~~which were well-secured by commercial real estate, offset by decreases due to payoffs of $1.4 million, upgrades of $413 thousand, and paydowns of $27 thousand. Over 99% of the non-accrual loans were ~~$159.1~~collateralized by real estate with no expected credit loss as of March 31, 2023. Accruing loans past due 30 to 89 days totaled $1.2 million at March 31, 2023, compared to $664 thousand at December 31, 2022.

Classified loans with risk ratings of substandard or doubtful totaled $31.0 million at March 31, 2023, compared to $28.1 million at December 31, 2022, increasing primarily due to higher usage of a revolving line of credit already graded substandard. Other increases included $1.4 million in downgrades, partially offset by $1.7 million in payoffs and paydowns and $314 thousand in upgrades to pass risk rating. All of the downgrades in the first ~~six months of 2022, including construction project completions of $34.6 million. These payoffs also reflected borrowers' sales of underlying~~quarter were for loans that are secured by real estate ~~and business assets and third-party refinancing of acquired loans outside the Bank's credit risk appetite.~~collateral.

AsLoans designated special mention, which are not considered adversely classified, increased year-to-date by $2.9 million to $63.1 million at March 31, 2023 from $60.2 million at December 31, 2022. The increase was largely due to $3.0 million in downgrades from pass risk ratings and balance increases of ~~June 30, 2022, there~~$550 thousand, which were ~~112 PPP loans outstanding totaling $17.0 million (net of $420~~partially offset by $630 thousand in ~~unrecognized fees~~paydowns and costs) compared to 368 loans outstanding December 31, 2021 for a total of $111.2 million (net of $2.5 million in unrecognized fees and costs). In the first half of 2022, Bank of Marin recognized $2.1 million in PPP fees, net of costs, compared to $4.3 million in the same period of 2021.payoffs.

~~As of June 30, 2022, two borrowing relationships with three loans totaling $23.6 million were continuing~~For more information, refer to ~~benefit from payment relief under~~Note 5, Loans and Allowance for Credit Losses on Loans, to the ~~provisions of the 2020 CARES Act. We will continue to work closely with both of these clients and monitor their performance.~~consolidated financial statements in this Form 10-Q.

Liabilities - Deposits and Borrowings

During the first ~~six~~three months of ~~2022,~~2023, total liabilities ~~increased~~decreased by ~~$53.5~~$30.3 million to ~~$3.917~~$3.705 billion. Deposits totaled $3.251 billion at March 31, 2023, a decrease of $322.8 million, compared to $3.573 billion at December 31, 2022. Federal Home Loan Bank borrowings increased ~~$22.1~~$293.4 million to $405.4 million in the first ~~six months~~quarter of 2023.

Up until the regulatory closures of Silicon Valley Bank on March 10, 2023 and Signature Bank on March 12, 2023, deposit fluctuations were fairly consistent with prior years' first quarter customer activity with some additional outflows to alternative investments observed. In 2022, the Bank maintained excess liquidity in anticipation of planned customer activities and expected outflows from pandemic surge deposits received in 2020 and 2021. As outflows materialized, our low cost of funds relative to ~~$3.831 billion.~~ the industry provided an opportunity to balance deposit levels against costs. Early in the first quarter of 2023, our bankers engaged in discussions with clients about account structure and pricing, which positioned the Bank well to navigate uncertainty in the marketplace later in the quarter. The Bank experienced a $203.6 million decline in deposits between March 10th and March 31st. Of the 100 relationships with the largest net outflows totaling approximately $206.4 million, 83% was attributed to normal business activities including vendor payments, taxes, payroll and singular events such as estate settlements and sales of businesses, 14% moved to outside brokerage firms or other financial institutions, and the remaining 3% moved to assets under management of our Wealth Management and Trust Services department. From March 31st

Page-38

through May 5th deposits have been relatively stable. Daily balances have not fluctuated up or down more than 0.70% when compared to total deposits as of March 31st. We believe that our customer outreach has been effective, and it has resulted in a 48 basis point increase in the cost of our deposits to 56 basis points in the month of April from 8 basis points in the month of December, as we balanced the level of deposits against cost. Additionally, we opened over 1,000 accounts in the first quarter with $60 million in new deposits.

Non-interest bearing deposits ~~increased $124.5~~decreased $202.5 million, ~~while~~ money market deposits decreased ~~$103.5~~$78.2 million while time deposits increased $25.0 million in the first ~~six~~three months of 2022, and was partially related to a large transfer to non-interest bearing deposits by a significant customer in preparation for withdrawals in early July consistent with that customer's normal business activity.2023. Non-interest bearing deposits represented ~~53.1%~~50.3% of total deposits at ~~June 30, 2022,~~March 31, 2023, compared to ~~50.2%~~51.5% at December 31, ~~2021.~~2022. The average cost of deposits was ~~0.06%~~0.20% in the first ~~half~~quarter of ~~2022~~2023 compared to ~~0.07%~~0.06% in the same period of ~~2021. Additionally, as part of our liquidity management,~~2022.

At March 31, 2023, the Bank ~~maintained $152.4~~had $155.4 million outstanding in ~~deposits off-balance sheet with deposit networks~~overnight borrowings and $250.0 million outstanding in short-term borrowings from the Federal Home Loan Bank at ~~June 30, 2022,~~rates of 5.11% and 5.21%, respectively. This compared to ~~$173.1~~$112.0 million in overnight borrowings at December 31, ~~2021.~~2022 at a rate of 4.65%. The Bank is actively evaluating strategies for reducing borrowings in the current environment and as market conditions change. Total immediate contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities, and remaining borrowing capacity was $1.932 billion, or 59% of total deposits and 181% of estimated uninsured deposits as of March 31, 2023.

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 ~~June 30, 2022.~~March 31, 2023. 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.

Bancorp's tangible common equity to tangible assets was 8.7% at March 31, 2023, compared to 8.2% at December 31, 2022. The Bank's tangible common equity to tangible assets was 8.3% at March 31, 2023, compared to 8.1% at December 31, 2022 for the Bank. The pro forma TCE ratio if held-to-maturity securities were treated the same as available-for-sale securities at March 31, 2023 would have been 6.9% (refer to page 41 for a discussion and reconciliation of this non-GAAP financial measure). Management believes this non-GAAP measure is important because it reflects the level of capital available to withstand drastic changes in market conditions. Contingent funding sources, such as the Federal Home Loan Bank and the Federal Reserve BTFP facility, ensure that banks have immediate access to liquidity and alleviate the need to sell securities in an unrealized loss position.

~~Page-41~~Page-39

The Bancorp’s and Bank’s capital adequacy ratios as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are presented in the following tables.


Capital Ratios for Bancorp (dollars in thousands)		Actual Ratio				Adequately Capitalized Threshold				Ratio to be a Well Capitalized Bank Holding Company
June 30, 2022		Amount		Ratio		Amount		Ratio		Amount		Ratio
Bancorp Capital Ratios (dollars in thousands)														Bancorp Capital Ratios (dollars in thousands)	Actual				Adequately Capitalized Threshold 1				Threshold to be a Well Capitalized Bank Holding Company
March 31, 2023														March 31, 2023	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk-weighted assets)	Total Capital (to risk-weighted assets)	$	412,325	14.67	%	$	295,112	≥ 10.50	%	$	281,059	≥ 10.00	%	Total Capital (to risk-weighted assets)	$	438,510	16.15	%	$	285,095	10.50	%	$	271,519	10.00	%
Tier 1 Capital (to risk-weighted assets)	Tier 1 Capital (to risk-weighted assets)	$	389,091	13.84	%	$	238,900	≥ 8.50	%	$	224,847	≥ 8.00	%	Tier 1 Capital (to risk-weighted assets)	$	414,524	15.27	%	$	230,791	8.50	%	$	217,215	8.00	%
Tier 1 Capital (to average assets)		$	389,091	9.07	%	$	171,628	≥ 4.00	%	$	214,535	≥ 5.00	%
Tier 1 Leverage Capital (to average assets)														Tier 1 Leverage Capital (to average assets)	$	414,524	9.94	%	$	166,844	4.00	%	$	208,555	5.00	%
Common Equity Tier 1 (to risk-weighted assets)	Common Equity Tier 1 (to risk-weighted assets)	$	389,091	13.84	%	$	196,741	≥ 7.00	%	$	182,689	≥ 6.50	%	Common Equity Tier 1 (to risk-weighted assets)	$	414,524	15.27	%	$	190,063	7.00	%	$	176,487	6.50	%
December 31, 2021
December 31, 2022														December 31, 2022
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)	$	431,667	15.90	%	$	285,079	10.50	%	$	271,504	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)	$	407,912	15.02	%	$	230,778	8.50	%	$	217,203	8.00	%
Tier 1 Capital (to average assets)		$	373,286	8.85	%	≥ $	168,750	≥ 4.00	%	≥ $	210,937	≥ 5.00	%
Tier 1 Leverage Capital (to average assets)														Tier 1 Leverage Capital (to average assets)	$	407,912	9.60	%	$	169,948	4.00	%	$	212,435	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)	$	407,912	15.02	%	$	190,053	7.00	%	$	176,478	6.50	%


Capital Ratios for the Bank (dollars in thousands)		Actual Ratio				Adequately Capitalized Threshold				Ratio to be Well Capitalized under Prompt Corrective Action Provisions
June 30, 2022		Amount		Ratio		Amount		Ratio		Amount		Ratio
Bank Capital Ratios (dollars in thousands)														Bank Capital Ratios (dollars in thousands)	Actual				Adequately Capitalized Threshold 1				Threshold to be Well Capitalized under Prompt Corrective Action Provisions
March 31, 2023														March 31, 2023	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk-weighted assets)	Total Capital (to risk-weighted assets)	$	399,228	14.21	%	$	295,078	≥ 10.50	%	$	281,027	≥ 10.00	%	Total Capital (to risk-weighted assets)	$	424,276	15.63	%	$	285,083	10.50	%	$	271,508	10.00	%
Tier 1 Capital (to risk-weighted assets)	Tier 1 Capital (to risk-weighted assets)	$	375,994	13.38	%	$	238,873	≥ 8.50	%	$	224,822	≥ 8.00	%	Tier 1 Capital (to risk-weighted assets)	$	400,290	14.74	%	$	230,782	8.50	%	$	217,206	8.00	%
Tier 1 Capital (to average assets)		$	375,994	8.76	%	$	171,618	≥ 4.00	%	$	214,523	≥ 5.00	%
Tier 1 Leverage Capital (to average assets)														Tier 1 Leverage Capital (to average assets)	$	400,290	9.60	%	$	166,837	4.00	%	$	208,546	5.00	%
Common Equity Tier 1 (to risk-weighted assets)	Common Equity Tier 1 (to risk-weighted assets)	$	375,994	13.38	%	$	196,719	≥ 7.00	%	$	182,667	≥ 6.50	%	Common Equity Tier 1 (to risk-weighted assets)	$	400,290	14.74	%	$	190,056	7.00	%	$	176,480	6.50	%
December 31, 2021
December 31, 2022														December 31, 2022
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)	$	427,108	15.73	%	$	285,052	10.50	%	$	271,478	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)	$	403,352	14.86	%	$	230,757	8.50	%	$	217,183	8.00	%
Tier 1 Capital (to average assets)		$	367,109	8.70	%	≥ $	168,724	≥ 4.00	%	≥ $	210,905	≥ 5.00	%
Tier 1 Leverage Capital (to average assets)														Tier 1 Leverage Capital (to average assets)	$	403,352	9.49	%	$	169,940	4.00	%	$	212,425	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)	$	403,352	14.86	%	$	190,035	7.00	%	$	176,461	6.50	%

1 Except for Tier 1 Leverage Capital, the adequately capitalized thresholds reflect the regulatory minimum plus a 2.5% capital conservation buffer as required under the Basel III Capital Standards in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.

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 seen in the table below and 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~~strategies. The Bank has long-established minimum liquidity and diversification requirements using tools similar to ~~projection~~larger banks such as the Liquidity Coverage Ratio and multi-scenario, long-horizon stress ~~testing over a two-year horizon. ALCO has adopted a contingency~~testing. Our contingency funding plan ~~that~~ provides for 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 ~~$152.4~~$2.2 million in one-way-sale deposits off-balance sheet with deposit networks at ~~June 30, 2022, compared to $173.1 million at~~March 31, 2023 and December 31, ~~2021.~~2022.

In February 2023, we enhanced our borrowing capacity at the FHLB by pledging certain held-to-maturity securities to the Securities-Backed Credit Program. In addition, under the Federal Reserve’s new BTFP facility, we added $283.6 million to our borrowing capacity. Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.932 billion, or 181% of estimated uninsured deposits as of March 31, 2023. The Federal Reserve BTFP facility offers borrowing capacity

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based on par values of securities pledged and attractive borrowing rates. While the Bank has pledged securities and tested the facility, there has been no need to use it. The following table details the components of liquidity as of March 31, 2023.


(in thousands)	Total Available		Amount Used		Net Availability
Internal Sources
Unrestricted cash	$	37,993	N/A		$	37,993
Unencumbered securities at market value	767,724		N/A		767,724
External Sources
FHLB line of credit	1,037,158		$	(405,400)	631,758
FRB line of credit and BTFP facility	344,181		—		344,181
Lines of credit at correspondent banks	150,000		—		150,000
Total Liquidity	$	2,337,056	$	(405,400)	$	1,931,656

Note: Access to brokered deposit purchases through networks such as Intrafi and Reich & Tang and brokered CD sales is not included above.

We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations. Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, and dividends to common stockholders.

T~~he most~~Customer deposits are a significant component of our daily liquidity ~~position is customer deposits.~~position. The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and

~~Page-42~~

convenience, rates paid to customers, and our financial strength. The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.

Our cash and cash equivalents decreased ~~$231.7~~$7.4 million in the first ~~six~~three months of ~~2022.~~2023. Significant uses of liquidity during ~~2022~~2023 were ~~$452.2~~$322.8 million in ~~investment securities purchased, $7.7~~withdrawals of deposits, $19.1 million in loan originations and advances, net of principal collected, and $4.0 million in cash dividends paid on common stock to our ~~shareholders,~~shareholders.

The most significant sources of liquidity during the first three months of 2023 were increased Federal Home Loan Bank borrowings of $293.4 million, proceeds from principal paydowns of investment securities of $32.9 million, and ~~$1.2~~$13.4 million in ~~common stock repurchases.~~net cash provided by operating activities. 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~~as detailed in the table above is adequate to fund our operations.

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

Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled ~~$592.5~~$529.5 million at ~~June 30, 2022.~~March 31, 2023. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, ~~deposit growth~~principal paydowns of investment securities, and liquid assets. Over the next twelve months, ~~$107.5~~$112.0 million of time deposits will mature. We expect to replace these funds with new deposits or excess liquidity. Our emphasis on local deposits, combined with our ~~liquid investment portfolio,~~immediately available funding sources, provides a very stable ~~funding base. While we~~base for our liquidity needs. We had no borrowings under our credit facilities of $405.4 million at ~~June 30, 2022 or~~March 31, 2023, and $112.0 million at December 31, ~~2021,~~2022, 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.report.

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 ~~$13.0~~$14.1 million in cash at ~~June 30, 2022,~~March 31, 2023, which is expected to be sufficient to cover Bancorp's operational needs and cash dividends to shareholders through ~~2022.~~2023. 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.

Statement Regarding use of Non-GAAP Financial Measures

Our first quarter 2022 was impacted by costs associated with our acquisition of American River Bank ("ARB"), which we considered immaterial to discuss in this release. For additional information regarding the impact of non-GAAP adjustments to our first quarter 2022 performance measures, refer to Form 10-Q filed on May 9, 2022.

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In this Form 10-Q, financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures. Management believes that, given recent industry turmoil, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after tax impact of unrealized losses on HTM securities provides useful supplemental information to investors because it reflects the level of capital available to withstand drastic changes in market conditions. Because there are limits to the usefulness of this measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the Securities and Exchange Commission, and not to rely on any single financial measure. A reconciliation of the non-GAAP TCE ratio is presented below.

Reconciliation of GAAP and Non-GAAP Financial Measures


(in thousands, unaudited)		March 31, 2023
Tangible Common Equity - Bancorp
Total stockholders' equity		$	430,174
Goodwill and core deposit intangible		(77,525)
Total TCE	a	352,649
Unrealized losses on HTM securities, net of tax 1		(76,378)
TCE, net of unrealized losses on HTM securities (non-GAAP)	b	$	276,271
Total assets		$	4,135,279
Goodwill and core deposit intangible		(77,525)
Total tangible assets	d	4,057,754
Unrealized losses on HTM securities, net of tax 1		(76,378)
Total tangible assets, net of unrealized losses on HTM securities (non-GAAP)	e	$	3,981,376
Bancorp TCE ratio	a / d	8.7		%
Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP)	b / e	6.9		%

1 Net unrealized losses on held-to-maturity securities as of March 31, 2023 of $108.4 million, as shown in Note 4, net of an estimated $32.0 million in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%.

ITEM 3. Quantitative and Qualitative Disclosure about MarketRisk

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.~~profitability in the context of policy guidelines. A simplified 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

~~Page-43~~

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. Governing policies are subject to review by regulators and are updated to incorporate their observations and to adapt to changes in idiosyncratic and systemic risks. At ~~June 30, 2022,~~March 31, 2023, 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

Page-42

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 Income		Estimated Change in Net Interest Income in Year 2, as percent of Net Interest Income		Immediate and Parallel Shift in Interest Rates (in basis points)	Estimated Change in Net Interest Income in Year 1, as percent of Net Interest Income		Estimated Change in Net Interest Income in Year 2, as percent of Net Interest Income
up 400	up 400	6.9	%	16.3	%	up 400	(10.2)	%	(0.6)	%
up 300	up 300	2.5	%	9.8	%	up 300	(7.7)	%	(0.5)	%
up 200	up 200	1.8	%	6.8	%	up 200	(5.1)	%	(0.4)	%
up 100	up 100	1.2	%	4.0	%	up 100	(2.4)	%	0.3	%
down 100	down 100	(4.6)	%	(8.1)	%	down 100	(0.5)	%	(2.3)	%

down 200						down 200	(1.5)	%	(4.2)	%

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~~lower deposit growth than modeled may cause the Bank 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.increase its borrowing position, thereby increasing its liability sensitivity. Additionally, assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements. Important deposit modeling assumptions include 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 ~~lowered the average~~applied deposit betas up to 45%, averaging 35%, to rates paid on non-maturity interest-bearing ~~deposit beta to 26% from last quarter's 58%~~deposits in rising rate scenarios, ~~which is much closer to historical levels for Bank of Marin.~~reflected in the table above. 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 that result in changes to the shape of the yield curve could produce different results from those presented in the table. Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates.

ITEM 4. Controlsand 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~~. 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 ~~June 30, 2022,~~March 31, 2023, there were no significant changes that materially affected, or ~~are~~were reasonably likely to affect, our internal control over financial reporting. The term internal control over financial

~~Page-44~~

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.

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PART II OTHER INFORMATION

ITEM 1 Legal Proceedings

Refer to Note 12 to the Consolidated Financial Statements in Item 8 of our ~~2021~~2022 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~~2022 Form 10-K, and the information contained in this quarterly report on Form 10-Q and other reports and registration statements filed ~~with~~with the SEC, which are incorporated herein by reference. ~~There~~Other than as noted below, there have been no material changes in the risk factors disclosed in our ~~2021~~2022 Form 10-K.

Recent Negative Developments Affecting the Banking Industry and Resulting Media Coverage Have Eroded Customer and Investor Confidence in the Banking System

The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank, and First Republic Bank, as well as media and market coverage of the Bay Area economy and local financial institutions, have generated significant market volatility among publicly traded bank holding companies and, in particular, regional and community banks like the Company. These market developments have negatively impacted customer confidence in the safety and soundness of regional and community banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. Additionally, these recent events have, and could continue to, adversely impact the market price and volatility of the Company’s common stock independent from the Company’s actual underlying financial performance.

Rising Interest Rates Have Decreased the Value of the Company’s Held-To-Maturity and Available-for-Sale Securities Portfolio, and the Company Would Realize Losses if It Were Required to Sell Such Securities to Meet Liquidity Needs

As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly. These securities make up a majority of the securities portfolio of most banks in the U.S., including the Company’s, resulting in unrealized losses embedded in the held-to-maturity portion of U.S. banks’ securities portfolios and unrealized losses on available-for-sale securities reflected in the Company’s accumulated other comprehensive income. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and may require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability.

Any Regulatory Examination Scrutiny or New Regulatory Requirements Arising From the Recent Events in the Banking Industry Could Increase the Company’s Expenses and Affect the Company’s Operations

The Company also anticipates increased regulatory scrutiny – in the course of routine examinations and otherwise – and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. As primarily a commercial bank, the Bank has a higher percentage of uninsured deposits compared to primarily retail focused banks. As a result, the Bank could face increased scrutiny or be viewed as higher risk by regulators and the investor community.

Page-44

ITEM 2 Unregistered Sales of Equity Securities and Use ofProceeds

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

Issuer Purchases of Equity Securities

On July 16, 2021, Bancorp Board of Directors approved a share repurchase program under which Bancorp could repurchase up to $25.0 million of its outstanding common stock through July 31, 2023. 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 six months ended June 30, 2022, Bancorp repurchased 23,275 shares at an average price of $37.64 per share for a total cost of $877 thousand.~~ The last activity under the program was in the first quarter of 2022. Cumulative shares repurchased under the current program ~~totaled~~total 618,991 shares at an average price of $36.04 per share, with $34.7 million outstanding as of ~~June 30, 2022. Bancorp continues~~March 31, 2023. The Bank opted not to ~~evaluate the resumption of share repurchases~~repurchase shares in the ~~context~~first quarter, exercising prudence given recent uncertainties in the marketplace and the importance of ~~other~~maintaining capital and ~~strategic initiatives.~~liquidity reserves to absorb the impacts of external events the Bank cannot control.

ITEM 3 Defaults upon Senior Securities

None.

ITEM 4 Mine Safety Disclosures

Not applicable.

ITEM 5 Other Information

None.

Page-45

ITEM 6 Exhibits

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

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

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Herewith

3.01

Articles of Incorporation, as amended

S-4

333-257025

3.01

June 11, 2021

3.02

Bylaws, as amended

S-4

333-257025

3.02

June 11, 2021

4.01

Description of Capital Stock

10-K

001-33572

4.01

March 16, 2023

10.01

Employee Stock Ownership Plan

S-8

333-218274

4.1

May 26, 2017

10.02

2017 Employee Stock Purchase Plan

S-8

333-221219

4.1

October 30, 2017

10.03

2017 Equity Plan, as amended

S-8

333-227840

4.1

October 15, 2018

10.04

2020 Director Stock Plan

S-8

333-239555

4.1

June 30, 2020

10.05

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

10-Q

001-33572

10.06

November 7, 2007

10.06

2010 Annual Individual Incentive Compensation Plan, revised 2019

10-K

001-33572

10.07

March 15, 2021

10.07

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

8-K

001-33572

10.2

November 4, 2014

10.08

2007 Form of Change in Control Agreement

8-K

001-33572

10.1

October 31, 2007

10.09

Director Deferred Fee Plan, dated December 17, 2020

10-K

001-33572

10.13

March 15, 2021

10.10

Employment Agreement with Timothy Myers, dated September 23, 2021

8-K

001-33572

10.1

September 24, 2021

10.11

Salary Continuation Agreement, as amended for executive officer Timothy Myers, Chief Executive Officer, dated January 1, 2022

8-K

001-33572

10.1

December 21, 2022

10.12

Salary Continuation Agreement for executive officer Nicolette Sloan, Head of Commercial Banking, dated January 1, 2022

8-K

001-33572

10.2

December 21, 2022

10.13

Salary Continuation Agreement for executive officer Misako Stewart, Chief Credit Officer, dated January 1, 2022

8-K

001-33572

10.3

December 21, 2022

10.14

Salary Continuation Agreement for executive officer Brandi Campbell, Head of Retail Banking, dated July 1, 2022

8-K

001-33572

10.4

December 21, 2022

31.01

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

Filed

31.02

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

Filed

32.01

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

Filed

101.INS

Inline XBRL Instance Document

Filed

101.SCH

Inline XBRL Taxonomy Extension Schema Document

Filed

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Filed

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

Filed

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

Filed

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

Filed

Page-46

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)


			~~August 8, 2022~~May 9, 2023						/s/ Timothy D. Myers
			Date						Timothy D. Myers
									President and Chief Executive Officer
									(Principal Executive Officer)



			~~August 8, 2022~~May 9, 2023						/s/ Tani Girton
			Date						Tani Girton
									Executive Vice President &
									Chief Financial Officer
									(Principal Financial Officer)


			~~August 8, 2022~~May 9, 2023						/s/ David A. Merck
			Date						David A. Merck
									First Vice President & Controller
									(Principal Accounting Officer)

Page-47


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 Stock			Retained Earnings		Accumulated Other Comprehensive (Loss) Income, Net of Taxes		Total
	Shares	Amount
	Six months ended June 30, 2022
Balance at January 1, 2022	15,929,243	$	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 withholdings	40,311	820		—		—		820
Stock issued under employee stock purchase plan	936	30		—		—		30
Stock issued under employee stock ownership plan	25,000	829		—		—		829
Restricted stock granted	46,672	—		—		—		—
Restricted stock surrendered for tax withholdings upon vesting	(1,169)	(40)		—		—		(40)
Restricted stock forfeited / cancelled	(13,267)	—		—		—		—
Stock-based compensation - stock options	—	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 fees	5,149	193		—		—		193

Stock repurchased, net of commissions	(23,275)	(877)		—		—		(877)
Balance at June 30, 2022	16,009,600	$	213,864	$	253,737	$	(58,028)	$	409,573
	Six months ended June 30, 2021
Balance at January 1, 2021	13,500,453	$	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 withholdings	31,180	351		—		—		351
Stock issued under employee stock purchase plan	1,609	53		—		—		53
Stock issued under employee stock ownership plan	18,300	668		—		—		668
Restricted stock granted	29,454	—		—		—		—
Restricted stock surrendered for tax withholdings upon vesting	(3,961)	(156)		—		—		(156)
Restricted stock forfeited / cancelled	(3,848)	—		—		—		—
Stock-based compensation - stock options	—	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 plan	519	18		—		—		18

Stock issued in payment of director fees	3,347	117		—		—		117
Stock repurchased, net of commissions	(521,948)	(19,264)		—		—		(19,264)
Balance at June 30, 2021	13,055,105	$	108,430	$	231,841	$	8,378	$	348,649
The accompanying notes are an integral part of these consolidated financial statements (unaudited).