Bank of Marin Bancorp

05/09/2022 | Press release | Distributed by Public on 05/09/2022 15:24

Quarterly Report (Form 10-Q)

bmrc-20220331

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________
Commission File Number 001-33572
Bank of Marin Bancorp
(Exact name of Registrant as specified in its charter)
California 20-8859754
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
504 Redwood Blvd. Suite 100 Novato CA 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 April 30, 2022, there were 15,997,180 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
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
41
ITEM 4.
Controls and Procedures
42
PART II
OTHER INFORMATION
42
ITEM 1.
Legal Proceedings
42
ITEM 1A.
Risk Factors
42
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
ITEM 3.
Defaults Upon Senior Securities
43
ITEM 4.
Mine Safety Disclosures
43
ITEM 5.
Other Information
43
ITEM 6.
Exhibits
44
SIGNATURES



Page-2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except share data; unaudited) March 31, 2022 December 31, 2021
Assets
Cash, cash equivalents and restricted cash $ 170,901 $ 347,641
Investment securities
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at March 31, 2022 and December 31, 2021)
790,264 342,222
Available-for-sale, at fair value (net of zero allowance for credit losses at March 31, 2022 and December 31, 2021)
955,457 1,167,568
Total investment securities 1,745,721 1,509,790
Loans, at amortized cost 2,201,854 2,255,645
Allowance for credit losses on loans (22,547) (23,023)
Loans, net of allowance for credit losses on loans
2,179,307 2,232,622
Goodwill 72,754 72,754
Bank-owned life insurance 61,536 61,473
Operating lease right-of-use assets 23,544 23,604
Bank premises and equipment, net 7,236 7,558
Core deposit intangible, net 6,225 6,605
Other real estate owned 800 800
Interest receivable and other assets 62,400 51,362
Total assets $ 4,330,424 $ 4,314,209
Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing $ 1,960,684 $ 1,910,240
Interest bearing
Transaction accounts 299,336 290,813
Savings accounts 347,335 340,959
Money market accounts 1,108,852 1,116,303
Time accounts 145,135 150,235
Total deposits 3,861,342 3,808,550
Borrowings and other obligations 388 419
Operating lease liabilities 25,351 25,429
Interest payable and other liabilities 22,935 29,443
Total liabilities 3,910,016 3,863,841
Commitments and contingent liabilities (Note 8)
Stockholders' Equity
Preferred stock, no par value,
Authorized - 5,000,000 shares, none issued
- -
Common stock, no par value,
Authorized - 30,000,000 shares; issued and outstanding - 16,003,847 and 15,929,243 at March 31, 2022 and December 31, 2021, respectively
213,204 212,524
Retained earnings 246,511 239,868
Accumulated other comprehensive loss, net of taxes (39,307) (2,024)
Total stockholders' equity 420,408 450,368
Total liabilities and stockholders' equity $ 4,330,424 $ 4,314,209
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Page-3
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Three months ended
(in thousands, except per share amounts; unaudited) March 31, 2022 December 31, 2021 March 31, 2021
Interest income
Interest and fees on loans $ 23,677 25,495 $ 20,661
Interest on investment securities 6,693 5,625 3,129
Interest on federal funds sold and due from banks 106 125 42
Total interest income 30,476 31,245 23,832
Interest expense
Interest on interest-bearing transaction accounts 56 53 39
Interest on savings accounts 29 28 19
Interest on money market accounts 478 505 286
Interest on time accounts 14 25 96
Interest on borrowings and other obligations 1 1 -
Interest on subordinated debenture - - 1,361
Total interest expense 578 612 1,801
Net interest income 29,898 30,633 22,031
(Reversal of) provision for credit losses on loans (485) 600 (2,929)
(Reversal of) provision for credit losses on unfunded loan commitments (318) 210 (590)
Net interest income after (reversal of) provision for credit losses 30,701 29,823 25,550
Non-interest income
Wealth Management and Trust Services 600 607 488
Debit card interchange fees, net 505 544 366
Service charges on deposit accounts 488 531 281
Earnings on bank-owned life insurance, net 413 302 257
Dividends on Federal Home Loan Bank stock 259 255 149
Merchant interchange fees, net 140 175 57
Losses on sale of investment securities, net - (17) -
Other income 462 322 228
Total non-interest income 2,867 2,719 1,826
Non-interest expense
Salaries and related benefits 11,548 10,716 9,208
Occupancy and equipment 1,909 1,929 1,751
Data processing 1,277 1,887 819
Professional services 913 653 863
Information technology 478 445 313
Depreciation and amortization 452 461 459
Amortization of core deposit intangible 380 393 204
Directors' expense 311 297 175
Federal Deposit Insurance Corporation insurance 290 292 179
Charitable contributions 45 90 31
Other expense 1,772 1,821 1,410
Total non-interest expense 19,375 18,984 15,412
Income before provision for income taxes 14,193 13,558 11,964
Provision for income taxes 3,728 3,844 3,017
Net income $ 10,465 $ 9,714 $ 8,947
Net income per common share:
Basic $ 0.66 $ 0.61 $ 0.67
Diluted $ 0.66 $ 0.61 $ 0.66
Weighted average shares:
Basic 15,876 15,948 13,363
Diluted 15,946 16,027 13,469
Comprehensive income (loss):
Net income $ 10,465 $ 9,714 $ 8,947
Other comprehensive income (loss):
Change in net unrealized (losses) gains on available-for-sale securities (38,228) (12,723) (9,082)
Reclassification adjustment for losses on available-for-sale securities included in net income - 17 -
Net unrealized losses on securities transferred from available-for-sale to held-to-maturity (14,847) - -
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity 144 108 143
Other comprehensive loss, before tax (52,931) (12,598) (8,939)
Deferred tax benefit (15,648) (3,726) (2,644)
Other comprehensive loss, net of tax (37,283) (8,872) (6,295)
Total comprehensive (loss) income $ (26,818) $ 842 $ 2,652
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Page-4
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended March 31, 2022 and 2021
(in thousands, except share data; unaudited) Common Stock Retained
Earnings 		Accumulated Other
Comprehensive (Loss) Income,
Net of Taxes 		Total
Shares Amount
Three months ended March 31, 2022
Balance at January 1, 2022 15,929,243 $ 212,524 $ 239,868 $ (2,024) $ 450,368
Net income - - 10,465 - 10,465
Other comprehensive loss - - - (37,283) (37,283)
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 35,543 739 - - 739
Stock issued under employee stock ownership plan 12,000 417 - - 417
Restricted stock granted 46,672 - - - -
Restricted stock surrendered for tax withholdings upon vesting (836) (29) - - (29)
Restricted stock forfeited / cancelled (649) - - - -
Stock-based compensation - stock options - 86 - - 86
Stock-based compensation - restricted stock - 151 - - 151
Cash dividends paid on common stock ($0.24 per share)
- - (3,822) - (3,822)
Stock issued in payment of director fees 5,149 193 - - 193
Stock repurchased, including commissions (23,275) (877) - - (877)
Balance at March 31, 2022 16,003,847 $ 213,204 $ 246,511 $ (39,307) $ 420,408
Three months ended March 31, 2021
Balance at January 1, 2021 13,500,453 $ 125,905 $ 219,747 $ 12,601 $ 358,253
Net income - - 8,947 - 8,947
Other comprehensive loss - - - (6,295) (6,295)
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 17,180 38 - - 38
Stock issued under employee stock purchase plan 778 28 - - 28
Stock issued under employee stock ownership plan 9,000 332 - - 332
Restricted stock granted 27,054 - - - -
Restricted stock surrendered for tax withholdings upon vesting (3,961) (156) - - (156)
Restricted stock forfeited / cancelled (3,848) - - - -
Stock-based compensation - stock options - 172 - - 172
Stock-based compensation - restricted stock - 443 - - 443
Cash dividends paid on common stock ($0.23 per share)
- - (3,094) - (3,094)
Stock purchased by directors under director stock plan 519 18 - - 18
Stock issued in payment of director fees 3,347 117 - - 117
Stock repurchased, including commissions (224,013) (8,511) - - (8,511)
Balance at March 31, 2021 13,326,509 $ 118,386 $ 225,600 $ 6,306 $ 350,292

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 three months ended March 31, 2022 and 2021
(in thousands; unaudited) March 31, 2022 March 31, 2021
Cash Flows from Operating Activities:
Net income $ 10,465 $ 8,947
Adjustments to reconcile net income to net cash provided by operating activities:
(Reversal of) provision for credit losses on loans (485) (2,929)
(Reversal of) provision for credit losses on unfunded loan commitments (318) (590)
Noncash contribution expense to employee stock ownership plan 417 332
Noncash director compensation expense 244 162
Stock-based compensation expense 237 615
Amortization of core deposit intangible 380 204
Amortization of investment security premiums, net of accretion of discounts 2,497 685
Accretion of premiums (discounts) on acquired loans 115 (33)
Accretion of discount on subordinated debenture - 1,347
Net change in deferred loan origination costs/fees (1,591) 2,658
Depreciation and amortization 452 459
Earnings on bank-owned life insurance policies (413) (257)
Net changes in interest receivable and other assets 4,648 2,901
Net changes in interest payable and other liabilities (5,169) (2,065)
Total adjustments 1,014 3,489
Net cash provided by operating activities 11,479 12,436
Cash Flows from Investing Activities:
Purchase of held-to-maturity securities (95,932) (41,607)
Purchase of available-for-sale securities (243,459) (151,828)
Proceeds from paydowns/maturities of held-to-maturity securities 5,067 8,600
Proceeds from paydowns/maturities of available-for-sale securities 42,966 16,060
Loan principal collected, net of originations 54,524 (36,543)
Cash receipts from bank-owned life insurance policies 350 -
Purchase of premises and equipment (130) (144)
Cash paid for low income housing tax credit investment (4) (313)
Net cash used in investing activities (236,618) (205,775)
Cash Flows from Financing Activities:
Net increase in deposits 52,792 151,950
Proceeds from stock options exercised 739 38
Restricted stock surrendered for tax withholdings upon vesting (29) (156)
Proceeds from stock issued under employee and director stock purchase plans - 46
Stock repurchased, including commissions (1,250) (8,792)
Repayment of subordinated debenture including execution costs - (4,126)
Repayment of finance lease obligations (31) (28)
Cash dividends paid on common stock (3,822) (3,094)
Net cash provided by financing activities 48,399 135,838
Net decrease in cash, cash equivalents and restricted cash (176,740) (57,501)
Cash, cash equivalents and restricted cash at beginning of period 347,641 200,320
Cash, cash equivalents and restricted cash at end of period $ 170,901 $ 142,819
Supplemental disclosure of cash flow information:
Cash paid in interest $ 588 $ 492
Cash paid in income taxes $ - $ -
Supplemental disclosure of noncash investing and financing activities:
Change in net unrealized gain or loss on available-for-sale securities $ (38,228) $ (9,092)
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 $ 144 $ 143
Purchase of investment security not yet settled $ - $ 10,000
Stock issued to employee stock ownership plan $ 417 $ 332
Stock issued in payment of director fees $ 193 $ 117
Repurchase of stock not yet settled $ - $ 132
Restricted cash1
$ 930 $ 1,930
1Restricted 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 CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
Note 1: Basis of Presentation

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

Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our 2021 Annual Report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in stockholders' equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period.
The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic earnings per share ("EPS") are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in the quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period under the treasury stock method. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, the difference in EPS is nominal for these participating securities.
Three months ended
(in thousands, except per share data) March 31, 2022 March 31, 2021
Weighted average basic common shares outstanding 15,876 13,363
Potentially dilutive common shares related to:
Stock options 52 81
Unvested restricted stock awards 18 25
Weighted average diluted shares outstanding 15,946 13,469
Net income $ 10,465 $ 8,947
Basic EPS $ 0.66 $ 0.67
Diluted EPS $ 0.66 $ 0.66
Weighted average anti-dilutive common shares not included in the calculation of diluted EPS 125 80


Page-7
Note 2: Recently Adopted and Issued Accounting Standards

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

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU are intended to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. As of March 31, 2022, we had fourinterest rate swap contracts with notional values totaling $12.8 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 us and our counterparty. 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 requires acquiring companies to apply ASC 606, Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination, as opposed to other methods such as fair value. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination. The amendments are to be applied prospectively to business combinations occurring on or after December 15, 2022 and early adoption is permitted. In the event of a future business combination, we will assess the impact of the ASU on our financial condition and results of operations.

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

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


Page-8
Note 3: Fair Value of Assets and Liabilities
Fair Value Hierarchy and Fair Value Measurement
We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant management judgment and estimation.

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

The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.
(in thousands)
Description of Financial Instruments
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, 2022
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 585,224 $ - $ 585,224 $ - OCI
SBA-backed securities $ 54,652 $ - $ 54,652 $ - OCI
Debentures of government sponsored agencies $ 143,297 $ - $ 143,297 $ - OCI
U.S. Treasury securities $ 10,973 $ 10,973 $ - $ - OCI
Obligations of state and political subdivisions $ 124,690 $ - $ 124,690 $ - OCI
Corporate bonds $ 34,860 $ - $ 34,860 $ - OCI
Asset-backed securities $ 1,761 $ - $ 1,761 $ - OCI
Derivative financial assets (interest rate contracts) $ 42 $ - $ 42 $ - NI
Derivative financial liabilities (interest rate contracts) $ 370 $ - $ 370 $ - 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
1 Other comprehensive income ("OCI") or net income ("NI").

Page-9
Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2). Level 2 securities include asset-backed securities, obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, and corporate bonds. As of March 31, 2022 and December 31, 2021, there were no Level 3 securities.

Held-to-maturity securities may be written down to fair value as a result of an other-than-temporary impairment, and we did not record any write-downs during the three months ended March 31, 2022 or March 31, 2021. Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities.
On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties' credit risk in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as of the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties. We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities.

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

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

The following table presents the carrying value of assets measured at fair value on a non-recurring basis and that were held in the consolidated statements of condition at each respective period end, by level within the fair value hierarchy as of March 31, 2022 and December 31, 2021.
(in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs
(Level 2) 		Significant Unobservable Inputs
(Level 3)
March 31, 2022
Other real estate owned $ 800 $ - $ - $ 800
December 31, 2021
Other real estate owned $ 800 $ - $ - $ 800


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Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments as of March 31, 2022 and December 31, 2021, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI") and non-maturity deposit liabilities. Additionally, we held shares of Federal Home Loan Bank ("FHLB") of San Francisco stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of March 31, 2022 or December 31, 2021. The values are discussed in Note 4, Investment Securities.
March 31, 2022 December 31, 2021
(in thousands) Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy
Financial assets (recorded at amortized cost):
Cash and cash equivalents $ 170,901 $ 170,901 Level 1 $ 347,641 $ 347,641 Level 1
Investment securities held-to-maturity 790,264 744,512 Level 2 342,222 342,755 Level 2
Loans, net 2,179,307 2,173,298 Level 3 2,232,622 2,234,430 Level 3
Interest receivable 11,298 11,298 Level 2 11,889 11,889 Level 2
Financial liabilities (recorded at amortized cost):
Time deposits 145,135 145,553 Level 2 150,235 150,475 Level 2
Interest payable 71 71 Level 2 81 81 Level 2

Fair value of loans is based on exit price techniques and obtained from an independent third-party that uses its proprietary valuation model and methodology and may differ from actual price from a prospective buyer. The discounted cash flow valuation approach reflects key inputs and assumptions that are unobservable, such as loan probability of default, loss given default, prepayment speed, and market discount rates.
Fair value of fixed-rate time deposits is estimated by discounting future contractual cash flows using discount rates that reflect the current observable market rates offered for time deposits of similar remaining maturities.
The value of off-balance-sheet financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material as of March 31, 2022 or December 31, 2021.

Note 4: Investment Securities
Our investment securities portfolio consists of U.S. Treasury securities, obligations of state and political subdivisions, U.S. federal government agencies such as Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), U.S. government-sponsored enterprises ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB, U.S. Corporations and one asset-backed security collateralized by student loan pools. We also invest in residential and commercial mortgage-backed securities ("MBS"/"CMBS") and collateralized mortgage obligations ("CMOs") issued or guaranteed by the GSEs, as reflected in the following table.


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A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of March 31, 2022 and December 31, 2021 is presented below.
Held-to-maturity:
Amortized Cost 1
Allowance for Credit Losses Net Carrying Amount Gross Unrealized Fair Value
(in thousands) Gains (Losses)
March 31, 2022
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 339,149 $ - $ 339,149 $ 148 $ (18,528) $ 320,769
CMOs issued by FHLMC 187,459 - 187,459 42 (11,811) 175,690
CMOs issued by FNMA 51,732 - 51,732 - (1,000) 50,732
CMOs issued by GNMA 12,375 - 12,375 - (431) 11,944
SBA-backed securities 3,245 - 3,245 - (29) 3,216
Debentures of government-sponsored agencies 115,603 - 115,603 - (9,477) 106,126
Obligations of state and political subdivisions 50,701 - 50,701 1 (4,667) 46,035
Corporate bonds 30,000 30,000 - - 30,000
Total held-to-maturity $ 790,264 $ - $ 790,264 $ 191 $ (45,943) $ 744,512
December 31, 2021
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 126,990 $ - $ 126,990 $ 2,110 $ (712) $ 128,388
CMOs issued by 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 $1.8 million and $1.1 million at March 31, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.
Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued or guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions, 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 March 31, 2022.
Obligations of state and political subdivisions Corporate bonds
(in thousands) March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021
AAA / Aaa $ 37,735 $ 34,229 $ - $ -
AA / Aa 12,866 12,873 - -
A2 / A 100 101 30,000 -
Total $ 50,701 $ 47,203 $ 30,000 $ -


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A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of March 31, 2022 and December 31, 2021 is presented below.
Available-for-sale:
Amortized Cost1
Gross Unrealized Allowance for Credit Losses Fair Value
(in thousands) Gains (Losses)
March 31, 2022
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 133,883 $ 252 $ (5,486) $ - $ 128,649
CMOs issued by FHLMC 390,501 103 (14,756) - 375,848
CMOs issued by FNMA 43,750 9 (2,258) - 41,501
CMOs issued by GNMA 40,948 3 (1,725) - 39,226
SBA-backed securities 56,085 11 (1,444) - 54,652
Debentures of government- sponsored agencies 150,091 3 (6,797) - 143,297
U.S. Treasury securities 11,890 - (917) - 10,973
Obligations of state and political subdivisions 129,706 498 (5,514) - 124,690
Corporate bonds 36,988 - (2,128) - 34,860
Asset-backed securities 1,795 - (34) - 1,761
Total available-for-sale $ 995,637 $ 879 $ (41,059) $ - $ 955,457
December 31, 2021
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 316,090 $ 1,224 $ (2,784) $ - $ 314,530
CMOs issued by FHLMC 343,047 3,209 (4,829) - 341,427
CMOs issued by FNMA 48,187 152 (611) - 47,728
CMOs issued by GNMA 56,345 99 (553) - 55,891
SBA-backed securities 32,640 993 (155) - 33,478
Debentures of government- sponsored agencies 191,449 25 (2,947) - 188,527
U.S. Treasury securities 11,886 - (256) 11,630
Obligations of state and political subdivisions 129,009 5,372 (381) - 134,000
Corporate bonds 39,001 - (506) - 38,495
Asset-backed securities 1,866 - (4) - 1,862
Total available-for-sale $ 1,169,520 $ 11,074 $ (13,026) $ - $ 1,167,568
1Amortized cost and fair value exclude accrued interest receivable of $3.3 million and $3.7 million at March 31, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

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 remained in accumulated other comprehensive loss and is accreted over the remaining lives of the securities.

The amortized cost and fair value of investment debt securities by contractual maturity at March 31, 2022 and December 31, 2021 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.
March 31, 2022 December 31, 2021
Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale
(in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Within one year $ 101 $ 102 $ 5,605 $ 5,618 $ 101 $ 103 $ 10,785 $ 10,841
After one but within five years 43,041 42,969 260,143 251,904 25,666 26,559 219,474 219,957
After five years through ten years 244,649 227,772 312,767 298,180 182,604 182,303 299,937 300,187
After ten years 502,473 473,669 417,122 399,755 133,851 133,790 639,324 636,583
Total $ 790,264 $ 744,512 $ 995,637 $ 955,457 $ 342,222 $ 342,755 $ 1,169,520 $ 1,167,568

There were no sales of investment securities in the first quarter of 2022 or 2021.
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Three months ended
Pledged investment securities are shown in the following table:
(in thousands) March 31, 2022 December 31, 2021
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program $ 208,406 $ 213,861
Collateral for trust deposits 691 729
Collateral for Wealth Management and Trust Services checking account 583 614
Total investment securities pledged to the State of California 209,680 215,204
Bankruptcy trustee deposits pledged with Federal Reserve Bank 2,194 2,645
Total pledged investment securities $ 211,874 $ 217,849

There were 354 and 217 securities in unrealized loss positions at March 31, 2022 and December 31, 2021, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:
March 31, 2022 < 12 continuous months ≥ 12 continuous 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 $ 299,200 $ (18,528) $ - $ - $ 299,200 $ (18,528)
CMOs issued by FHLMC 165,101 (11,498) 4,328 (313) 169,429 (11,811)
CMOs issued by FNMA 25,350 (1,000) - - 25,350 (1,000)
CMOs issued by GNMA 11,944 (431) - - 11,944 (431)
SBA-backed securities 3,216 (29) - - 3,216 $ (29)
Debentures of government-sponsored agencies 65,826 (6,510) 40,300 (2,967) 106,126 $ (9,477)
Obligations of state and political subdivisions 42,348 (4,667) - - 42,348 (4,667)
Total held-to-maturity 612,985 (42,663) 44,628 (3,280) 657,613 (45,943)
Available-for-sale:
MBS pass-through securities issued by FHLMC, FNMA and GNMA 108,982 (5,486) - - 108,982 (5,486)
CMOs issued by FHLMC 359,856 (14,357) 4,107 (399) 363,963 (14,756)
CMOs issued by FNMA 40,170 (2,258) - - 40,170 (2,258)
CMOs issued by GNMA 37,732 (1,725) - - 37,732 (1,725)
SBA-backed securities 43,665 (1,400) 1,124 (44) 44,789 (1,444)
Debentures of government- sponsored agencies 114,450 (5,673) 7,845 (1,124) 122,295 (6,797)
U.S. Treasury securities 10,973 (917) - - 10,973 (917)
Obligations of state and political subdivisions 102,115 (5,153) 2,243 (361) 104,358 (5,514)
Corporate bonds 29,421 (1,579) 5,440 (549) 34,861 (2,128)
Asset-backed securities 1,761 (34) - - 1,761 (34)
Total available-for-sale 849,125 (38,582) 20,759 (2,477) 869,884 (41,059)
Total securities at loss position $ 1,462,110 $ (81,245) $ 65,387 $ (5,757) $ 1,527,497 $ (87,002)
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December 31, 2021 < 12 continuous months ≥ 12 continuous months Total securities
in a loss position
(in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss
Held-to-maturity:
MBS pass-through securities issued by FHLMC and FNMA $ 76,619 $ (712) $ - $ - 76,619 $ (712)
CMOs issued by FHLMC 54,811 (1,045) - - 54,811 (1,045)
Obligations of state and political subdivisions 19,203 (209) - - 19,203 (209)
Debentures of government-sponsored agencies 50,571 (901) - - 50,571 (901)
Total held-to-maturity 201,204 (2,867) - - 201,204 (2,867)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA 263,474 (2,784) - - 263,474 (2,784)
SBA-backed securities 7,478 (112) 1,209 (43) 8,687 (155)
CMOs issued by FHLMC 226,175 (4,677) 4,415 (152) 230,590 (4,829)
CMOs issued by GNMA $ 44,790 $ (553) $ - $ - $ 44,790 $ (553)
CMOs issued by FNMA 37,348 (611) - - 37,348 (611)
Debentures of government- sponsored agencies 148,979 (2,527) 8,549 (420) 157,528 (2,947)
U.S. Treasury securities 11,629 (256) - - 11,629 (256)
Obligations of state and political subdivisions 17,552 (381) - - 17,552 (381)
Corporate Bonds 38,495 (506) - - 38,495 (506)
Asset-backed securities 1,861 (4) - - 1,861 (4)
Total available-for-sale 797,781 (12,411) 14,173 (615) 811,954 (13,026)
Total securities at loss position $ 998,985 $ (15,278) $ 14,173 $ (615) $ 1,013,158 $ (15,893)

As of March 31, 2022, the investment portfolio included 17 investment securities that had been in a continuous loss position for twelve months or more and 337 investment securities that had been in a loss position for less than twelve months.

Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities.
Our investment in obligations of state and political subdivisions bonds are deemed credit worthy after our comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or credit enhancements.
At March 31, 2022, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost. No allowances for credit losses have been recognized on available-for-sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality at March 31, 2022.

Non-Marketable Securities Included in Other Assets

FHLB Capital Stock

As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $100 per share par value. We held $16.7 million of FHLB stock included in other assets on the consolidated statements of condition at both March 31, 2022 and December 31, 2021. 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 March 31, 2022 and December 31, 2021. On April 28, 2022, FHLB announced a cash dividend for the first quarter of 2022 at an annualized dividend rate of 6.00% to be distributed in mid-May 2022. Cash dividends paid on FHLB capital stock are recorded as non-interest income.

VISA Inc. Class B Common Stock

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

Low Income Housing Tax Credits

We invest in low-income housing tax credit funds as a limited partner, which totaled $2.9 million and $3.0 million recorded in other assets as of March 31, 2022 and December 31, 2021, respectively. In the first three months of 2022, we recognized $159 thousand of low-income housing tax credits and other tax benefits, offset by $134 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of March 31, 2022, our unfunded commitments for these low-income housing tax credit funds totaled $419 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first three months of 2022 or 2021, as the value of the future tax benefits exceeds the carrying value of the investments.

Note 5: Loans and Allowance for Credit Losses on Loans

The following table presents the amortized cost of loans by class as of March 31, 2022 and December 31, 2021.
(in thousands) March 31, 2022 December 31, 2021
Commercial and industrial $ 248,625 $ 301,602
Real estate:
Commercial owner-occupied 391,924 392,345
Commercial investor-owned 1,176,918 1,189,021
Construction 131,015 119,840
Home equity 88,092 88,746
Other residential 114,277 114,558
Installment and other consumer loans 51,003 49,533
Total loans, at amortized cost 1
2,201,854 2,255,645
Allowance for credit losses on loans (22,547) (23,023)
Total loans, net of allowance for credit losses on loans $ 2,179,307 $ 2,232,622
1Amortized cost includes net deferred loan origination costs (fees) of $690 thousand and $(901) thousand at March 31, 2022 and December 31, 2021, respectively. Amounts are also net of unrecognized purchase discounts of $2.6 million and $2.5 million at March 31, 2022 and December 31, 2021, respectively. Amortized cost excludes accrued interest, which totaled $6.2 million and $7.1 million at March 31, 2022 and December 31, 2021, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.

Lending Risks

Commercial and Industrial Loans- Commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows
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of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers, 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 two rounds of the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). Additionally in 2021, Bank of Marin assumed 113 PPP loans totaling $18.6 million from ARB as of the merger date. As of March 31, 2022, there were 191 PPP loans outstanding totaling $40.6 million (net of $993 thousand in unrecognized fees and costs), compared to 368 loans outstanding at December 31, 2021 totaling $111.2 million (net of $2.5 million in unrecognized fees and costs) included in commercial and industrial loan balances. PPP loans have terms of two to five years and earn interest at 1%. In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was netted with loan origination costs and accreted/amortized into interest income using the effective yield method over the contractual life of each loan. The recognition of fees and costs is accelerated when the SBA forgives the loan and/or the loan is paid off prior to maturity. PPP loans are fully guaranteed by the SBA if they meet the requirements of the program. As expected, the vast majority of the PPP loans have been fully forgiven by the SBA and we expect the majority of remaining loans to be forgiven as well.

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

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

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


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Credit Quality Indicators
We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of "Special Mention" risk graded loans, or worse, are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows:
Pass and Watch-Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank's policy regarding debt-service-coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes "Watch" loans, where the primary source of repayment has been delayed. "Watch" is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period.
Special Mention- Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification.
Substandard - Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower's financial condition, managerial weaknesses and/or significant collateral deficiencies.
Doubtful- Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent.

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

The following tables present the loan portfolio by loan class, origination year and internal risk rating as of March 31, 2022 and December 31, 2021. We early adopted the vintage disclosure requirements of ASU 2022-02 prospectively as described in Note 2 beginning with the first quarter of 2022. Accordingly, the 2022 vintage table reflects gross charge-offs by loan class and year of origination. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination.
(in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost
March 31, 2022 2022 2021 2020 2019 2018 Prior Total
Commercial and industrial:
Pass and Watch $ 2,563 $ 44,716 $ 12,583 $ 24,654 $ 7,862 $ 30,950 $ 112,839 $ 236,167
Special Mention - - - 530 4,330 - 3 4,863
Substandard - - 1,576 - - - 6,019 7,595
Total commercial and industrial $ 2,563 $ 44,716 $ 14,159 $ 25,184 $ 12,192 $ 30,950 $ 118,861 $ 248,625
Commercial real estate, owner-occupied:
Pass and Watch $ 14,542 $ 53,334 $ 43,851 $ 47,384 $ 35,681 $ 151,304 $ - $ 346,096
Special Mention 6,215 16,471 - 1,763 5,419 5,152 - 35,020
Substandard - - 7,162 - - 3,536 - 10,698
Doubtful - - 110 - - - - 110
Total commercial real estate, owner-occupied $ 20,757 $ 69,805 $ 51,123 $ 49,147 $ 41,100 $ 159,992 $ - $ 391,924
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(in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost
March 31, 2022 2022 2021 2020 2019 2018 Prior Total
Commercial real estate, investor-owned:
Pass and Watch $ 42,615 $ 222,832 $ 177,077 $ 177,477 $ 141,444 $ 374,554 $ 78 $ 1,136,077
Special Mention - - 1,213 2,714 9,761 9,621 - 23,309
Substandard - - - - - 17,532 - 17,532
Total commercial real estate, investor-owned $ 42,615 $ 222,832 $ 178,290 $ 180,191 $ 151,205 $ 401,707 $ 78 $ 1,176,918
Construction:
Pass and Watch $ 2,708 $ 30,721 $ 79,544 $ 8,933 $ 9,109 $ - $ - $ 131,015
Total construction $ 2,708 $ 30,721 $ 79,544 $ 8,933 $ 9,109 $ - $ - $ 131,015
Home equity:
Pass and Watch $ - $ 24 $ - $ - $ - $ 320 $ 87,173 $ 87,517
Special Mention - - - - - - 66 66
Substandard - - - - - 370 139 509
Total home equity $ - $ 24 $ - $ - $ - $ 690 $ 87,378 $ 88,092
Other residential:
Pass and Watch $ 5,249 $ 15,690 $ 31,776 $ 24,342 $ 14,848 $ 22,372 $ - $ 114,277
Total other residential $ 5,249 $ 15,690 $ 31,776 $ 24,342 $ 14,848 $ 22,372 $ - $ 114,277
Installment and other consumer:
Pass and Watch $ 6,038 $ 15,852 $ 7,074 $ 8,219 $ 4,873 $ 7,103 $ 1,828 $ 50,987
Substandard - - - - - 16 - 16
Total installment and other consumer $ 6,038 $ 15,852 $ 7,074 $ 8,219 $ 4,873 $ 7,119 $ 1,828 $ 51,003
Gross current period charge-offs $ - $ - $ - $ - $ - $ - $ 2 $ 2
Total loans:
Pass and Watch $ 73,715 $ 383,169 $ 351,905 $ 291,009 $ 213,817 $ 586,603 $ 201,918 $ 2,102,136
Total Special Mention $ 6,215 $ 16,471 $ 1,213 $ 5,007 $ 19,510 $ 14,773 $ 69 $ 63,258
Total Substandard $ - $ - $ 8,738 $ - $ - $ 21,454 $ 6,158 $ 36,350
Total Doubtful $ - $ - $ 110 $ - $ - $ - $ - $ 110
Totals $ 79,930 $ 399,640 $ 361,966 $ 296,016 $ 233,327 $ 622,830 $ 208,145 $ 2,201,854
Total gross current period charge-offs $ - $ - $ - $ - $ - $ - $ 2 $ 2
(in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost
December 31, 2021 2021 2020 2019 2018 2017 Prior Total
Commercial and industrial:
Pass and Watch $ 96,643 $ 35,967 $ 25,754 $ 12,763 $ 2,729 $ 31,280 $ 90,744 $ 295,880
Special Mention - 1,700 584 273 - - 2,088 4,645
Substandard - - - - - - 1,077 1,077
Total commercial and industrial $ 96,643 $ 37,667 $ 26,338 $ 13,036 $ 2,729 $ 31,280 $ 93,909 $ 301,602
Commercial real estate, owner-occupied:
Pass and Watch $ 58,395 $ 43,216 $ 49,485 $ 36,174 $ 42,430 $ 104,898 $ - $ 334,598
Special Mention 16,748 - - 7,846 - 16,996 - 41,590
Substandard - 7,155 285 - - 8,603 - 16,043
Doubtful - 114 - - - - - 114
Total commercial real estate, owner-occupied $ 75,143 $ 50,485 $ 49,770 $ 44,020 $ 42,430 $ 130,497 $ - $ 392,345
Commercial real estate, investor-owned:
Pass and Watch $ 225,722 $ 186,214 $ 187,418 $ 143,028 $ 75,419 $ 325,882 $ 84 $ 1,143,767
Special Mention - 1,214 2,714 11,773 1,787 9,540 - 27,028
Substandard - - - 695 - 17,531 - 18,226
Total commercial real estate, investor-owned $ 225,722 $ 187,428 $ 190,132 $ 155,496 $ 77,206 $ 352,953 $ 84 $ 1,189,021
Construction:
Pass and Watch $ 31,269 $ 70,528 $ 8,935 $ 9,108 $ - $ - $ - $ 119,840
Total construction $ 31,269 $ 70,528 $ 8,935 $ 9,108 $ - $ - $ - $ 119,840
Home equity:
Pass and Watch $ - $ - $ - $ - $ 10 $ 268 $ 87,693 $ 87,971
Substandard - - - - - 377 398 775
Total home equity $ - $ - $ - $ - $ 10 $ 645 $ 88,091 $ 88,746
Other residential:
Pass and Watch $ 15,800 $ 31,981 $ 25,529 $ 15,411 $ 7,964 $ 17,873 $ - $ 114,558
Total other residential $ 15,800 $ 31,981 $ 25,529 $ 15,411 $ 7,964 $ 17,873 $ - $ 114,558
Installment and other consumer:
Pass and Watch $ 17,207 $ 7,748 $ 9,436 $ 5,633 $ 1,123 $ 6,620 $ 1,766 $ 49,533
Total installment and other consumer $ 17,207 $ 7,748 $ 9,436 $ 5,633 $ 1,123 $ 6,620 $ 1,766 $ 49,533
Total loans:
Pass and Watch $ 445,036 $ 375,654 $ 306,557 $ 222,117 $ 129,675 $ 486,821 $ 180,287 $ 2,146,147
Total Special Mention $ 16,748 $ 2,914 $ 3,298 $ 19,892 $ 1,787 $ 26,536 $ 2,088 $ 73,263
Total Substandard $ - $ 7,155 $ 285 $ 695 $ - $ 26,511 $ 1,475 $ 36,121
Doubtful $ - $ 114 $ - $ - $ - $ - $ - $ 114
Totals $ 461,784 $ 385,837 $ 310,140 $ 242,704 $ 131,462 $ 539,868 $ 183,850 $ 2,255,645

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The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of March 31, 2022 and December 31, 2021.
Loan Aging Analysis by Class
(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
March 31, 2022
30-59 days past due $ 435 $ 324 $ - $ - $ 399 $ 635 $ 337 $ 2,130
60-89 days past due 341 - - - 100 - 2 443
90 days or more past due - - - 54 - 16 70
Total past due 776 324 - - 553 635 355 2,643
Current 247,849 391,600 1,176,918 131,015 87,539 113,642 50,648 2,199,211
Total loans 1
$ 248,625 $ 391,924 $ 1,176,918 $ 131,015 $ 88,092 $ 114,277 $ 51,003 $ 2,201,854
Non-accrual loans2
$ - $ 7,272 $ - $ - $ 390 $ - $ 16 $ 7,678
Non-accrual loans with no allowance $ - $ 7,272 $ - $ - $ 390 $ - $ 16 $ 7,678
December 31, 2021
30-59 days past due $ 2 $ - $ - $ - $ 498 $ - $ 1,036 $ 1,536
60-89 days past due 394 - - - 67 - - 461
90 days or more past due 229 - - - 88 - - 317
Total past due 625 - - - 653 - 1,036 2,314
Current 300,977 392,345 1,189,021 119,840 88,093 114,558 48,497 2,253,331
Total loans 1
$ 301,602 $ 392,345 $ 1,189,021 $ 119,840 $ 88,746 $ 114,558 $ 49,533 $ 2,255,645
Non-accrual loans 2
$ - $ 7,269 $ 694 $ - $ 413 $ - $ - $ 8,376
Non-accrual loans with no allowance $ - $ 7,269 $ 694 $ - $ 413 $ - $ - $ 8,376
1There were no loans past due more than ninety days accruing interest at March 31, 2022. There were two SBA PPP loans past due more than ninety days totaling $229 thousand accruing interest as of December 31, 2021 for which we requested "guarantee" payment from the SBA. The SBA subsequently purchased both loans in January 2022.
2None of the non-accrual loans as of March 31, 2022 or December 31, 2021 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the three months ended March 31, 2022 and 2021. There was one loan with amortized cost of $16 thousand placed on non-accrual status during the three months ended March 31, 2022 for which we reversed less than one thousand in interest income at the time of change in status. There were no loans placed on non-accrual status during the three months ended March 31, 2021.

Collateral Dependent Loans

The following table presents the amortized cost basis of individually analyzed collateral-dependent non-accrual loans by class at March 31, 2022 and December 31, 2021.
Amortized Cost by Collateral Type
(in thousands) Commercial Real Estate Residential Real Estate Other Total Allowance for Credit Losses
March 31, 2022
Commercial real estate, owner-occupied $ 7,272 $ - $ - $ 7,272 $ -
Home equity - 390 - 390 -
Installment and other consumer - - 16 16 $ -
Total $ 7,272 $ 390 $ 16 $ 7,678 $ -
December 31, 2021
Commercial real estate, owner-occupied $ 7,269 $ - $ - $ 7,269 $ -
Commercial real estate, investor-owned 694 - - 694 -
Home equity - 413 - 413 -
Total $ 7,963 $ 413 $ - $ 8,376 $ -

No collateral-dependent loans were in process of foreclosure at March 31, 2022 or December 31, 2021. In addition, the weighted average loan-to-value of collateral dependent loans was approximately 69% at March 31, 2022 and 67% at December 31, 2021.

Troubled Debt Restructuring
Our loan portfolio includes certain loans modified in a troubled debt restructuring ("TDR"), where we have granted economic concessions to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to
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accruing status after management considers the borrower's sustained repayment performance for a reasonable period, generally nine months, and obtains reasonable assurance of repayment and performance.
We may remove a loan from TDR designation if it meets all of the following conditions:
•The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards;
•The borrower is no longer considered to be in financial difficulty;
•Performance on the loan is reasonably assured; and
•Existing loan did not have any forgiveness of principal or interest.

There were no loans removed from TDR designation during the three months ended March 31, 2022 and 2021.

In accordance with section 4013 of the CARES Act, subsequently amended by section 541 of the 2020 Economic Aid Act, we elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated as TDRs under existing GAAP. As of March 31, 2022, two borrowing relationships with three loans totaling $23.6 million were continuing to benefit from payment relief. The weighted average loan-to-value ratio of the remaining payment relief loans was approximately 44%. We accrue and recognize interest income on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued interest is fully paid. We monitor the financial situation of these clients closely and expect them to resume payments as the economy continues to recover.

The following table summarizes the amortized cost of TDR loans by loan class as of March 31, 2022 and December 31, 2021.
(in thousands) March 31, 2022 December 31, 2021
Commercial and industrial $ 1,180 $ 1,183
Commercial real estate, owner-occupied 7,162 7,155
Commercial real estate, investor-owned 175 179
Home equity 379 386
Installment and other consumer 596 607
Total1
$ 9,492 $ 9,510
1TDR loans on non-accrual status totaled $7.4 million at both March 31, 2022 and December 31, 2021. Unfunded commitments for TDR loans totaled $241 thousand and $441 thousand as of March 31, 2022 and December 31, 2021, respectively.
There were no loans modified in a TDR during the three months ended March 31, 2022 and 2021. During the three months ended March 31, 2022 and March 31, 2021, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition of more than ninety days past due.

Allowance for Credit Losses on Loans Rollforward

The following table discloses activity in the allowance for credit losses on loans for the periods presented.
Allowance for Credit Losses on Loans Rollforward
(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Unallocated Total
Three months ended March 31, 2022
Beginning balance $ 1,709 $ 2,776 $ 12,739 $ 1,653 $ 595 $ 644 $ 621 $ 2,286 $ 23,023
Provision (reversal) 72 (154) (438) 56 (46) (16) 22 19 (485)
Charge-offs - - - - - - (2) - (2)
Recoveries 3 - - 8 - - - - 11
Ending balance $ 1,784 $ 2,622 $ 12,301 $ 1,717 $ 549 $ 628 $ 641 $ 2,305 $ 22,547
Three months ended March 31, 2021
Beginning balance $ 2,530 $ 2,778 $ 12,682 $ 1,557 $ 738 $ 998 $ 291 $ 1,300 $ 22,874
Provision (reversal) (880) (474) (1,826) (254) (218) (241) (36) 1,000 (2,929)
Charge-offs - - - - - - - - -
Recoveries 4 - - 9 - - - - 13
Ending balance $ 1,654 $ 2,304 $ 10,856 $ 1,312 $ 520 $ 757 $ 255 $ 2,300 $ 19,958
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Pledged Loans

Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $1.295 billion and $1.330 billion at March 31, 2022 and December 31, 2021, respectively. In addition, we pledge eligible TIC loans, which totaled $102.2 million and $106.2 million at March 31, 2022 and December 31, 2021, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). For additional information, see Note 6, Borrowings.

Related Party Loans
The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These transactions, including loans, are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Related party loans totaled $5.1 million at March 31, 2022 and $7.9 million at December 31, 2021. In addition, undisbursed commitments to related parties totaled $562 thousand at March 31, 2022 and $8.6 million at December 31, 2021. The decreases in both the outstanding amount and undisbursed commitment as of March 31, 2022 were primarily due to a Director retirement in the first quarter.

Note 6: Borrowings and Other Obligations
Federal Funds Purchased - The Bank had unsecured available lines of credit with correspondent banks for overnight borrowings totaling $150.0 million at March 31, 2022 and December 31, 2021. In general, interest rates on these lines approximate the federal funds target rate. We had no overnight borrowings under these credit facilities at March 31, 2022 or December 31, 2021.
Federal Home Loan Bank Borrowings - As of March 31, 2022 and December 31, 2021, the Bank had available lines of credit with the FHLB totaling $799.5 million and $820.5 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at March 31, 2022 or December 31, 2021. As part of our acquisition of ARB, we assumed FHLB advances in the amount of $13.8 million that we paid off on August 25, 2021.

Federal Reserve Line of Credit - The Bank has an available line of credit with the Federal Reserve Bank of San Francisco ("FRBSF") secured by certain residential loans. At March 31, 2022 and December 31, 2021, the Bank had borrowing capacity under this line totaling $57.3 million and $70.8 million, respectively, and had no outstanding borrowings with the FRBSF.

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

Other Obligations - Finance lease liabilities totaling $388 thousand and $419 thousand at March 31, 2022 and December 31, 2021, respectively, are included in borrowings and other obligations in the consolidated statements of condition. See Note 8, Commitments and Contingencies, for additional information.

Note 7: Stockholders' Equity
Dividends

On April 22, 2022, Bancorp declared a $0.24 per share cash dividend, payable on May 13, 2022 to shareholders of record at the close of business on May 6, 2022.


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Share-Based Payments
The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period, which is generally the vesting period, with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards, which equals the grant date price, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate the recording of stock-based compensation when the award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the exercisability of the stock options, which are based on the scheduled vesting period.

Performance-based stock awards (restricted stock) are issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0% to 200% of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.

We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable.
The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense.

Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements. During the three months ended March 31, 2022, we withheld 8,003 shares totaling $278 thousand at a weighted-average price of $34.76 for cashless exercises. During the three months ended March 31, 2021, we withheld 27,547 shares totaling $1.1 million at a weighted-average price of $38.87 for cashless exercises. Shares withheld under net settlement arrangements are available for future grants.

Share Repurchase Program

On April 23, 2018, Bancorp announced that its Board of Directors approved a share repurchase program under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through May 1, 2019. Bancorp's Board of Directors subsequently extended the share repurchase program through February 28, 2020. A new share repurchase program was approved by the Board of Directors on January 24, 2020, which began on March 1, 2020 and allowed Bancorp to repurchase up to $25.0 million of its outstanding common stock and ended May 2021. On July 16, 2021, Bancorp Board of Directors approved a share repurchase program under which Bancorp could repurchase up to $25.0 million of its outstanding common stock through July 31, 2023. On October 22, 2021, Bancorp's Board of Directors approved an amendment to the current share repurchase program, which increased the total authorization from $25.0 million to $57.0 million and left the expiration date unchanged.
Under the share repurchase program, Bancorp may purchase shares of its common stock through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at Bancorp's discretion. Factors include, but are not limited to, stock price, trading volume and general market conditions, along with Bancorp's general business conditions. The program may be suspended or discontinued at any time and does not obligate Bancorp to acquire any specific number of shares of its common stock.

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

Bancorp repurchased 23,275 shares totaling $877 thousand in the first quarter of 2022. Cumulative shares repurchased under the current program totaled 618,991 shares as of March 31, 2022 at an average price of $36.04 per share.

Note 8: Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements.
Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property.
The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:
(in thousands) March 31, 2022 December 31, 2021
Commercial lines of credit $ 294,162 $ 330,234
Revolving home equity lines 212,595 210,938
Undisbursed construction loans 61,554 78,381
Personal and other lines of credit 10,973 11,001
Standby letters of credit 2,141 3,657
Total commitments and standby letters of credit $ 581,425 $ 634,211

We record an allowance for credit losses on unfunded loan commitments at the balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and expected loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments totaled $1.5 million and 1.8 million as of March 31, 2022 and December 31, 2021, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition. We recorded a reversals of the allowance for credit losses on unfunded commitments of $318 thousand and $590 thousand for the three months ended March 31, 2022 and 2021 due to improved economic forecasts.

Leases

We lease premises under long-term non-cancelable operating leases with remaining terms of 7 months to 11 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised.

We lease certain equipment under finance leases with initial terms of 3 years to 5 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees.


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The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities.
(in thousands) March 31, 2022 December 31, 2021
Operating leases:
Operating lease right-of-use assets $ 23,544 $ 23,604
Operating lease liabilities $ 25,351 $ 25,429
Finance leases:
Finance lease right-of-use assets $ 499 $ 499
Accumulated amortization (124) (93)
Finance lease right-of-use assets, net1
$ 375 $ 406
Finance lease liabilities2
$ 388 $ 419
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.

The following table shows supplemental disclosures of noncash investing and financing activities for the period presented.
Three months ended
(in thousands) March 31, 2022 March 31, 2021
Right-of-use assets obtained in exchange for operating lease liabilities $ 1,120 $ -

The following table shows components of operating and finance lease cost.
Three months ended
(in thousands) March 31, 2022 March 31, 2021
Operating lease cost $ 1,284 $ 1,164
Variable lease cost - -
Total operating lease cost1
$ 1,284 $ 1,164
Finance lease cost:
Amortization of right-of-use assets2
$ 31 $ 27
Interest on finance lease liabilities3
1 -
Total finance lease cost 32 27
Total lease cost $ 1,316 $ 1,191
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.
3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.
The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of March 31, 2022. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standards or lease commencement date.
(in thousands) March 31, 2022
Year Operating Leases Finance Leases
2022 $ 4,035 $ 95
2023 4,745 117
2024 3,837 113
2025 3,328 66
2026 2,535 -
Thereafter 8,468 -
Total minimum lease payments 26,948 391
Amounts representing interest (present value discount) (1,597) (3)
Present value of net minimum lease payments (lease liability) $ 25,351 $ 388
Weighted average remaining term (in years) 6.8 3.3
Weighted average discount rate 1.67 % 0.62 %

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Litigation Matters

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

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

In 2012, Visa had reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. The escrow balance of $882 million as of March 31, 2022, combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.

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

Note 9: Derivative Financial Instruments and Hedging Activities

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

Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.

As of March 31, 2022, we had four interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, and October 2037. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled $10 thousand at March 31, 2022 and $11 thousand at December 31, 2021. Information on our derivatives follows:
Asset Derivatives Liability Derivatives
(in thousands) March 31,
2022 		December 31, 2021 March 31,
2022 		December 31, 2021
Fair value hedges:
Interest rate contracts notional amount $ 3,082 $ - $ 9,709 $ 13,037
Interest rate contracts fair value1
$ 42 $ - $ 370 $ 1,085
1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology.
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The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of March 31, 2022 and December 31, 2021.
Carrying Amounts of Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands) March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021
Loans $ 12,979 $ 13,976 $ 187 $ 939

The following table presents the net losses recognized in interest income on loans on the consolidated statements of comprehensive income related to our derivatives designated as fair value hedges.
Three months ended
(in thousands) March 31, 2022 March 31, 2021
Interest and fees on loans 1
$ 23,677 $ 20,661
Increase in fair value of designated interest rate swaps due to LIBOR interest rate movements $ 757 $ 719
Payment on interest rate swaps (85) (93)
Decrease in fair value hedging adjustment of hedged loans (752) (714)
Decrease in value of yield maintenance agreement (3) (3)
Net losses on fair value hedging relationships recognized in interest income $ (83) $ (91)
1Represents 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
March 31, 2022
Derivatives by Counterparty:
Counterparty A $ 42 $ - $ 42 $ (42) $ - $ -
December 31, 2021
Derivatives by Counterparty:
Counterparty A $ - $ - $ - $ - $ - $ -
Offsetting of Financial Liabilities and Derivative Liabilities
Gross Amounts Net Amounts of Gross Amounts Not Offset in
Gross Amounts Offset in the Liabilities Presented the Statements of Condition
of Recognized Statements of in the Statements Financial Cash Collateral
(in thousands)
Liabilities1
Condition
of Condition1
Instruments Pledged Net Amount
March 31, 2022
Derivatives by Counterparty:
Counterparty A $ 370 $ - $ 370 $ (42) $ (328) $ -
December 31, 2021
Derivatives by Counterparty:
Counterparty A $ 1,085 $ - $ 1,085 $ - $ (1,085) $ -
1 Amounts exclude accrued interest on swaps.
For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 2021 Form 10-K filed with the SEC on March 15, 2022.


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Note 10: Merger

As described in Note 1, Basis of Presentation, Bancorp completed its merger with American River Bankshares in August 2021. The Merger expanded Bank of Marin's presence throughout the Greater Sacramento, Amador and Sonoma County Regions where ARB had ten branches. The Merger added $297.8 million in investment securities, $419.4 million in loans and $790.0 million in deposits to Bank of Marin as of the merger date. Bancorp accounted for the Merger as a business combination under the acquisition method of accounting. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the merger date in accordance with ASC 805, Business Combinations.

AMRB shareholders received 0.575 shares of Bancorp's common stock for each share of AMRB common stock outstanding immediately prior to the Merger resulting in the issuance of 3,441,235 shares of Bancorp common stock. In addition, merger consideration included cash paid for outstanding stock options and cash paid in lieu of fractional shares, as summarized in the following table.
(in thousands) Merger Consideration
Value of common stock consideration paid to shareholders (0.575 fixed exchange ratio, stock price $36.15)
$ 124,401
Cash consideration for stock 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 which $184 thousand was amortized in the first quarter of 2022 and no amortization was recognized in the comparable quarter of 2021. The CDI is amortized on an accelerated basis over an estimated ten-year life and is evaluated periodically for impairment. No impairment loss was recognized as of March 31, 2022.

Merger-related one time and conversion costs are recognized as incurred and continue until all systems have been converted and operational functions are fully integrated. Bancorp's merger-related costs reflected in the consolidated statements of comprehensive income are summarized in the following table.
Three months ended
(in thousands, unaudited) March 31, 2022 March 31, 2021
Personnel and severance $ 335 $ -
Professional services 67 -
Data processing 48 -
Other expense 97 -
Total merger-related one-time and conversion costs $ 547 $ -
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our 2021 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

In November 2020, the SEC issued Final Rule 33-10890, Management's Discussion and Analysis, Selected Financial Data and Supplementary Financial Information, which modernized and simplified certain disclosure requirements of Regulation S-K. The update to Item 303 of Regulation S-K related to interim period disclosures beginning with the first quarter of 2022 allows registrants to compare the results of the most recently completed quarter to the results of either the immediately preceding quarter or the corresponding quarter of the preceding year. Management believes that comparing current quarter results to those of the immediately preceding quarter is more useful in identifying current business trends and provides a more meaningful comparison. Accordingly, we have compared the results for the three months ended March 31, 2022 and December 31, 2021 throughout the Management's Discussion and Analysis sections, where applicable.

Forward-Looking Statements

This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "1934 Act"). Those sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.
Our forward-looking statements include descriptions of plans or objectives of management for future operations, products or services, and forecasts of revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs preceded by "will," "would," "should," "could" or "may."
Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues that may affect our earnings in future periods. A number of factors, many of which are beyond management's control, could cause future results to vary materially from current management expectations. Such factors include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including economic or other disruptions to financial markets caused by acts of terrorism, war or other conflicts such as Russia's military action in Ukraine, impacts from inflation, supply change disruptions, changes in interest rates, California's unemployment rate, deposit flows, real estate values, and expected future cash flows on loans and securities; costs or effects of acquisitions; competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; our borrowers' actual payment performance as loan deferrals related to the COVID-19 pandemic expire, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance; natural disasters (such as wildfires and earthquakes in our area); adverse weather conditions; interruptions of utility service in our markets for sustained periods; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting our operations, pricing, products and services; and successful integration of acquisitions.

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


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Critical Accounting Estimates

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

Executive Summary
Net income for the first quarter of 2022 totaled $10.5 million, compared to $9.7 million in the fourth quarter of 2021 and $8.9 million in the first quarter of 2021. Diluted earnings per share were $0.66 in the first quarter of 2022, $0.61 in the prior quarter and $0.66 in the same quarter a year ago. First quarter 2022 and fourth quarter 2021 earnings were impacted by the costs associated with our recent acquisition.

The following are highlights of our operating and financial performance for the periods presented:
•Conversion of our core systems occurred in March of 2022, bringing acquired ARB accounts and key systems under the umbrella of Bank of Marin. For a smooth end-user experience in line with standards of legendary service, extra resources were deployed to assist our customers with the transition.
•Merger-related one-time and conversion costs reduced net income by $385 thousand, net of taxes, or $0.02 per share in the quarter. As shown in the reconciliation of GAAP to non-GAAP financial measures on page 31, without those acquisition related components, return on average assets ("ROA") of 0.98% and return on average equity ("ROE") of 9.61% would have been 1.01% and 9.96%, respectively, compared to 0.97% and 9.19% for the quarter ended December 31, 2021. ROA and ROE were 1.21% and 10.22% for the first three months of 2021.
•A good indicator of the merger's positive impact on operating earnings is the efficiency ratio, as it neither includes provisions for losses on loans and unfunded commitments, nor is it impacted by changes in share counts. As shown in the reconciliation of GAAP to non-GAAP financial measures on page31, the efficiency ratios excluding merger-related one-time and conversion costs were 57.46% and 53.63% for the quarters ended March 31, 2022 and December 31, 2021, respectively, as compared to 59.13% and 56.92%. The change over the prior quarter was primarily due to typical first quarter increases in salaries, related benefits and professional services expenses as discussed in the Non-Interest Expense section below. The significant improvement in operating leverage generated by the acquisition is evident in the decline in efficiency ratio from 64.60% in first quarter of 2021, which was not impacted by merger costs.
•Loan balances of $2.202 billion at March 31, 2022 included an increase of $16.6 million in traditional commercial loans and a decrease of $70.6 million in PPP loans forgiven and paid off, resulting in a net decrease in loans of $53.8 million from December 31, 2021. First quarter loan originations of $49.8 million represented a six year peak for first quarter originations, and commercial line utilization increased to 38% of total commitments as of March 31, 2022, from 34% at December 31, 2021.
•Credit quality remains strong, with non-accrual loans representing 0.35% of total loans as of March 31, 2022, compared to 0.37% at December 31, 2021. While classified loans did not change significantly from the prior quarter end, special mention loans decreased by $10.0 million, the majority of which was due to payoffs and upgrades to pass risk ratings.
•Reversals of $485 thousand to the allowance for credit losses on loans and $318 thousand to the allowance for credit losses on unfunded loan commitments in the first quarter of 2022 resulted from improved economic forecasts.
•Deposits grew by $52.8 million to $3.861 billion at March 31, 2022 compared to $3.809 billion at December 31, 2021, with most of the growth coming from non-interest bearing balances. Non-interest bearing deposits made up 51% of total deposits as of March 31, 2022 versus 50% as of December 31, 2021. The cost of average deposits was 0.06% in the first quarter, consistent with the fourth quarter of 2021 at 0.06%, compared to 0.07% in the first quarter of 2021. Additionally, as part of our liquidity management, the Bank maintained $180.0 million in deposits off-balance sheet with deposit networks at March 31, 2022.
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•All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 14.4% at March 31, 2022, compared to 14.6% at December 31, 2021. Bancorp's tangible common equity to tangible assets was 8.0% at March 31, 2022, compared to 8.8% at December 31, 2021 (see Results of Operations for a definition of this non-GAAP financial measure). The decline in tangible equity from December 31, 2021 was primarily due to the $37.3 million other comprehensive loss, net of taxes, related to significant increases in interest rates during the quarter. The Bank's total risk-based capital ratio was 14.3% at March 31, 2022, compared to 14.4% at December 31, 2021.
•The Board of Directors declared a cash dividend of $0.24 per share on April 22, 2022, which represents the 68thconsecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on May 13, 2022 to shareholders of record at the close of business on May 6, 2022.
Statement Regarding use of Non-GAAP Financial Measures
In this Form 10-Q, Bancorp's financial results are presented in accordance with GAAP and refer to certain non-GAAP financial measures. Management believes that presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of Bancorp's core operating results and comparison of operating results across reporting periods. 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
(in thousands, unaudited) March 31, 2022 December 31, 2021 March 31, 2021
Net income
Net income (GAAP) $ 10,465 $ 9,714 $ 8,947
Merger-related one-time and conversion costs:
Personnel and severance 335 336 -
Professional services 67 - -
Data processing 48 695 -
Other 97 67 -
Total merger costs before tax benefits 547 1,098 -
Income tax benefit of merger-related expenses (162) (307) -
Total merger-related one-time and conversion costs, net of tax benefits 385 791 -
Comparable net income (non-GAAP) $ 10,850 $ 10,505 $ 8,947
Diluted earnings per share
Weighted average diluted shares 15,946 16,027 13,469
Diluted earnings per share (GAAP) $ 0.66 $ 0.61 $ 0.66
Merger-related one-time and conversion costs, net of tax benefits 0.02 0.05 -
Comparable diluted earnings per share (non-GAAP) $ 0.68 $ 0.66 $ 0.66
Return on average assets
Average assets $ 4,345,258 $ 4,298,766 $ 2,966,006
Return on average assets (GAAP) 0.98 % 0.90 % 1.21 %
Comparable return on average assets (non-GAAP) 1.01 % 0.97 % 1.21 %
Return on average equity
Average stockholders' equity $ 441,626 $ 453,468 $ 355,022
Return on average equity (GAAP) 9.61 % 8.50 % 10.22 %
Comparable return on average equity (non-GAAP) 9.96 % 9.19 % 10.22 %
Efficiency ratio
Non-interest expense (GAAP) $ 19,375 $ 18,984 $ 15,412
Merger-related expenses (547) (1,098) -
Non-interest expense (non-GAAP) $ 18,828 $ 17,886 $ 15,412
Net interest income $ 29,898 $ 30,633 $ 22,031
Non-interest income $ 2,867 $ 2,719 $ 1,826
Efficiency ratio (GAAP) 59.13 % 56.92 % 64.60 %
Comparable efficiency ratio (non-GAAP) 57.46 % 53.63 % 64.60 %
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RESULTS OF OPERATIONS
Highlights of the financial results are presented in the following tables:
Three months ended
(dollars in thousands, except per share data) March 31, 2022 December 31, 2021 March 31, 2021
Selected operating data:
Net interest income $ 29,898 $ 30,633 $ 22,031
(Reversal of) provision for credit losses on loans (485) 600 (2,929)
(Reversal of) provision for credit losses on unfunded loan commitments
(318) 210 (590)
Non-interest income 2,867 2,719 1,826
Non-interest expense 19,375 18,984 15,412
Net income 10,465 9,714 8,947
Net income per common share:
Basic $ 0.66 $ 0.61 $ 0.67
Diluted $ 0.66 $ 0.61 $ 0.66
Performance and other financial ratios:
Return on average assets 0.98 % 0.90 % 1.21 %
Return on average equity 9.61 % 8.50 % 10.22 %
Tax-equivalent net interest margin1
2.96 % 3.03 % 3.19 %
Cost of deposits 0.06 % 0.06 % 0.07 %
Efficiency ratio 59.13 % 56.92 % 64.60 %
Cash dividend payout ratio on common stock2
36.36 % 39.34 % 34.33 %
(dollars in thousands, except per share data) March 31, 2022 December 31, 2021
Selected financial condition data:
Total assets $ 4,330,424 $ 4,314,209
Loans, net 2,179,307 2,232,622
Deposits 3,861,342 3,808,550
Borrowings and other obligations 388 419
Stockholders' equity 420,408 450,368
Book value per share 26.27 28.27
Asset quality ratios:
Allowance for credit losses on loans to total loans 1.02 % 1.02 %
Allowance for credit losses on loans to total loans, excluding SBA PPP loans3
1.04 % 1.07 %
Allowance for credit losses on loans to non-accrual loans 2.94x 2.75x
Non-accrual loans to total loans 0.35 % 0.37 %
Capital ratios:
Equity to total assets ratio 9.71 % 10.44 %
Tangible common equity to tangible assets4
8.03 % 8.76 %
Total capital (to risk-weighted assets) 14.35 % 14.58 %
Tier 1 capital (to risk-weighted assets) 13.52 % 13.70 %
Tier 1 capital (to average assets) 8.90 % 8.85 %
Common equity Tier 1 capital (to risk weighted assets) 13.52 % 13.70 %
1Tax-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 March 31, 2022 and December 31, 2021 totaled $40.6 million and $111.2 million, respectively.
4 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses. Tangible common equity of $341 million and $371 million at March 31, 2022 and December 31, 2021, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets. Tangible assets exclude goodwill and intangible assets of $79.0 million and $79.4 million at March 31, 2022 and December 31, 2021, respectively.

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Net Interest Income
Net interest income is the interest earned on loans, investment and other interest-earning assets minus the interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in the net interest income and/or margin due to an imbalance in the timing of repricing and maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income. For more information, refer to Item 3. Quantitative and Qualitative Disclosure about Market Risk in this Form 10-Q.
Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders' equity.

Average Statements of Condition and Analysis of Net Interest Income

The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for each period reported.
Three months ended Three months ended Three months ended
March 31, 2022 December 31, 2021 March 31, 2021
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Interest-earning deposits with banks1
$ 231,555 $ 106 0.18 % $ 330,894 $ 125 0.15 % $ 165,788 $ 42 0.10 %
Investment securities2, 3
1,626,537 6,871 1.69 % 1,410,383 5,801 1.65 % 540,970 3,282 2.43 %
Loans 1, 3, 4
2,227,495 23,881 4.29 % 2,269,785 25,711 4.43 % 2,099,847 20,836 3.97 %
Total interest-earning assets1
4,085,587 30,858 3.02 % 4,011,062 31,637 3.09 % 2,806,605 24,160 3.44 %
Cash and non-interest-bearing due from banks 69,019 85,869 50,931
Bank premises and equipment, net 7,430 7,777 4,777
Interest receivable and other assets, net 183,222 194,058 133,693
Total assets $ 4,345,258 $ 4,298,766 $ 2,996,006
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts $ 295,183 $ 56 0.08 % $ 290,394 $ 53 0.07 % $ 174,135 $ 39 0.09 %
Savings accounts 343,327 29 0.03 % 336,715 28 0.03 % 214,049 19 0.04 %
Money market accounts 1,122,215 478 0.17 % 1,102,943 505 0.18 % 703,577 286 0.16 %
Time accounts including CDARS 147,707 14 0.04 % 144,993 25 0.07 % 96,349 96 0.40 %
Borrowings and other obligations 1
399 1 0.62 % 430 1 0.62 % 36 - 1.99 %
Subordinated debenture 1, 5
- - - % - - - % 2,164 1,361 251.54 %
Total interest-bearing liabilities 1,908,831 578 0.12 % 1,875,475 612 0.13 % 1,190,310 1,801 0.61 %
Demand accounts 1,942,804 1,915,309 1,406,123
Interest payable and other liabilities 51,997 54,514 44,551
Stockholders' equity 441,626 453,468 355,022
Total liabilities & stockholders' equity $ 4,345,258 $ 4,298,766 $ 2,996,006
Tax-equivalent net interest income/margin 1
$ 30,280 2.96 % $ 31,025 3.03 % $ 22,359 3.19 %
Reported net interest income/margin1
$ 29,898 2.93 % $ 30,633 2.99 % $ 22,031 3.14 %
Tax-equivalent net interest rate spread 2.90 % 2.96 % 2.83 %
1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.
2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly.
3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21 percent in 2022 and 2021.
4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.
5 2021 interest on subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.


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Analysis of Changes in Net Interest Income

The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the periods indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including two more days in the three months ended March 31, 2022 compared to December 31, 2021.
Three Months Ended March 31, 2022 Compared to Three Months Ended
December 31, 2021 		Three Months Ended March 31, 2022 Compared to Three Months Ended
March 31, 2021
(in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total
Interest-earning deposits with banks $ (38) $ 30 $ (11) $ (19) $ 17 $ 35 $ 12 $ 64
Investment securities 1
888 158 24 1,070 6,586 (997) (2,000) 3,589
Loans1
(479) (835) (516) (1,830) 1,267 1,676 102 3,045
Total interest-earning assets 371 (647) (503) (779) 7,870 714 (1,886) 6,698
Interest-bearing transaction accounts 1 3 (1) 3 27 (6) (4) 17
Savings accounts 1 - - 1 11 (1) - 10
Money market accounts 9 (24) (12) (27) 170 14 8 192
Time accounts, including CDARS - (10) (1) (11) 51 (87) (46) (82)
Borrowings and other obligations - - - - - - 1 1
Subordinated debenture 2
- - - - (1,361) (1,361) 1,361 (1,361)
Total interest-bearing liabilities 11 (31) (14) (34) (1,102) (1,441) 1,320 (1,223)
Changes in tax-equivalent net interest income $ 360 $ (616) $ (489) $ (745) $ 8,972 $ 2,155 $ (3,206) $ 7,921
1Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.
2 Three months ended March 31, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.
First Quarter of 2022 Compared to the Fourth Quarter of 2021

Net interest income totaled $29.9 million in the first quarter of 2022, compared to $30.6 million in the prior quarter. The $735 thousand decrease from the prior quarter was primarily attributable to changes in amortization and accretion on acquired loans, lower loan prepayment fees, lower PPP fee recognition and fewer days in the quarter, partially offset by higher average balances and yields on investment securities.
The tax-equivalent net interest margin was 2.96% in the first quarter of 2022, compared to 3.03% in the fourth quarter of 2021. The decrease from the prior quarter was primarily due to changes in amortization and accretion on acquired loans, lower loan prepayment fees, lower PPP fee recognition, and a higher proportion of investment securities from balance sheet growth. Average yields on the non-PPP portion of the loan portfolio and the investment portfolio are beginning to reflect recent increases in interest rates, particularly commercial loans.

First Quarter of 2022 Compared to the First Quarter of 2021

Net interest income totaled $29.9 million in the first quarter of 2022, compared to $22.0 million in the first quarter of 2021. The $7.9 million increase from the comparative quarter a year ago was reflective of the ARB merger, a larger allocation of the loan portfolio to higher rate loans, deployment of cash into investment securities, and costs associated with the early redemption of subordinated debt in the first quarter of 2021. Increases were partially offset by a lower average yield on the investment portfolio.

The tax-equivalent net interest margin was 2.96% in the first quarter of 2022 compared to 3.19% in the same quarter last year. The decrease in tax-equivalent net interest margin from the same period a year ago was primarily attributed to a higher proportion of investment securities in the larger balance sheet associated with ARB's lower loan-to-deposit ratio and other deposit growth with average yields 74 basis points lower.

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 activity posed by the COVID-19 pandemic, the FOMC made two emergency cuts totaling 150 basis points to the federal funds rate in March 2020. The federal funds target rate
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range resided between 0.0% and 0.25% after March 15, 2020 through the beginning of 2022, putting downward pressure on our asset yields and net interest margin. In its March 16, 2022 meeting, the FOMC raised the target federal funds by 25 basis points followed by a 50 basis point increase on May 4, 2022 to a range of 75% - 1.00% and anticipates that ongoing increases in the target range will be appropriate in 2022. Our net interest margin should benefit from a rising interest rate environment. See ITEM 3. Quantitative and Qualitative Disclosure about Market Risk for further information.

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

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

The reversals of the allowance for credit losses on loans in the quarters ended March 31, 2022 and 2021 primarily resulted from improved economic conditions. The $600 thousand provision for credit losses on loans in the fourth quarter of 2021 resulted from increases to qualitative risk factors primarily impacted by changes in executive leadership, senior lending positions, and integration of the ARB lending staff and loan portfolio as well as further refinements to the discounted cash flow assumptions applied to acquired loans within the allowance model. These increases were partially offset by reductions in qualitative risk factors due to a decline in the volume of loans downgraded to substandard classification, fewer delinquencies, and the elimination of an allowance related to a commercial real estate loan that had been individually analyzed for potential credit losses in the previous periods and paid off in the fourth quarter. Additionally, there was an overall improvement in the underlying economic forecasts.

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

Classified assets (loans with risk ratings of substandard or doubtful) totaled $36.6 million at March 31, 2022, compared to $36.2 million at December 31, 2021. The $224 thousand increase was primarily related to $6.8 million in commercial loans to one borrowing relationship that were downgraded from special mention to substandard (comprised of $3.6 million as of December 31, 2021 and $3.2 million in additional advances in 2022). The increase was largely offset by $5.2 million in upgrades to pass and $684 thousand in paydowns and payoffs. Classified loans also included one $110 thousand loan acquired from ARB with a doubtful risk rating as of March 31, 2022 and December 31, 2021, which is well-secured by real estate collateral.

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

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


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Non-interest Income
The following table details the components of non-interest income.
Three months ended Quarter over quarter Year over year
(dollars in thousands) March 31, 2022 December 31, 2021 March 31, 2021 Amount Change Percent Change Amount Change Percent Change
Wealth Management and Trust Services $ 600 $ 607 $ 488 $ (7) (1.2) % $ 112 23.0 %
Debit card interchange fees, net 505 544 366 (39) (7.2) % 139 38.0 %
Service charges on deposit accounts 488 531 281 (43) (8.1) % 207 73.7 %
Earnings on bank-owned life insurance, net 413 302 257 111 36.8 % 156 60.7 %
Dividends on Federal Home Loan Bank stock 259 255 149 4 1.6 % 110 73.8 %
Merchant interchange fees, net 140 175 57 (35) (20.0) % 83 145.6 %
Losses on sale of investment securities, net - (17) - 17 NM - NM
Other income 462 322 228 140 43.5 % 234 102.6 %
Total non-interest income $ 2,867 $ 2,719 $ 1,826 $ 148 5.4 % $ 1,041 57.0 %
NM - not meaningful
First Quarter of 2022 Compared to Fourth Quarter of 2021

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

First Quarter of 2022 Compared to the First Quarter of 2021

Non-interest income increased by $1.0 million in the first quarter of 2022 to $2.9 million, compared to $1.8 million in the same quarter a year ago. The increase from the first quarter of 2021 was mostly attributable to increased activity associated with the ARB acquisition in the first quarter of 2022.

Non-interest Expense
The following table details the components of non-interest expense.
Three months ended Quarter over quarter Year over year
(dollars in thousands) March 31, 2022 December 31, 2021 March 31, 2021 Amount Change Percent Change Amount Change Percent Change
Salaries and related benefits $ 11,548 $ 10,716 $ 9,208 $ 832 7.8 % $ 2,340 25.4 %
Occupancy and equipment 1,909 1,929 1,751 (20) (1.0) % 158 9.0 %
Data processing 1,277 1,887 819 (610) (32.3) % 458 55.9 %
Professional services 913 653 863 260 39.8 % 50 5.8 %
Information technology 478 445 313 33 7.4 % 165 52.7 %
Depreciation and amortization 452 461 459 (9) (2.0) % (7) (1.5) %
Amortization of core deposit intangible 380 393 204 (13) (3.3) % 176 86.3 %
Directors' expense 311 297 175 14 4.7 % 136 77.7 %
Federal Deposit Insurance Corporation insurance 290 292 179 (2) (0.7) % 111 62.0 %
Charitable contributions 45 90 31 (45) (50.0) % 14 45.2 %
Other non-interest expense
Advertising 347 305 239 42 13.8 % 108 45.2 %
Other expense 1,425 1,516 1,171 (91) (6.0) % 254 21.7 %
Total other non-interest expense 1,772 1,821 1,410 (49) (2.7) % 362 25.7 %
Total non-interest expense $ 19,375 $ 18,984 $ 15,412 $ 391 2.1 % $ 3,963 25.7 %
First Quarter of 2022 Compared to Fourth Quarter of 2021

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

First Quarter of 2022 Compared to the First Quarter of 2021

Non-interest expense increased by $4.0 million to $19.4 million in the first quarter of 2022, compared to $15.4 million in the same period a year ago. The largest increases over prior year first quarter expense came from salaries and related benefits, which rose $2.3 million due to increased numbers of employees in acquired branch and loan offices, regularly scheduled annual merit and related increases, and lower deferred loan origination costs. Higher expenses across most other categories reflect the ARB acquisition, including one-time and conversion costs of $547 thousand and additional amortization associated with the ARB core deposit intangible asset in the first quarter of 2022.

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 first quarter of 2022 totaled $3.7 million at an effective tax rate of 26.3%, compared to $3.8 million at an effective tax rate of 28.4% in the prior quarter and $3.0 million at an effective tax rate of 25.2% in the same quarter last year. Although pretax income was higher in the first quarter of 2022 compared to the prior quarter, the higher provision in the prior quarter reflects non-deductible merger expenses and executive compensation, which also accounted for the higher effective tax rate. The increase in the provision in the first quarter of 2022 reflected higher pre-tax income as compared to the same quarter a year ago. The 110 basis point increase in the effective tax rate in the first quarter of 2022 as compared to the same quarter a year ago was primarily due to a higher level of tax benefits in 2021 from the disqualifying dispositions of incentive stock options.

We file a consolidated return in the U.S. Federal tax jurisdiction and a combined return in the State of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the issuance of this report. At March 31, 2022, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

FINANCIAL CONDITION SUMMARY

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

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

Investment Securities

The investment securities portfolio totaled $1.746 billion at March 31, 2022, an increase of $235.9 million from December 31, 2021. The increase was primarily due to purchases of $339.4 million to deploy excess cash into interest earning assets in a more favorable interest rate environment in 2022, partially offset by paydowns, calls and maturities of $48.0 million. Additionally, the fair value of available-for-sale securities decreased $53.0 million as a result of higher interest rates in the first three months of 2022. As part of our ongoing review of the investment securities portfolio and because of our strong liquidity position, we reassessed the classification of certain securities issued by government sponsored agencies in the context of recent changes in market expectations for future interest rates. In March 2022, we transferred $357.5 million securities at fair value from available-for-sale to held-to-
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maturity to reduce the effect of future rate increases on the available-for-sale portfolio mark-to-market, other comprehensive income and equity. See Note 4, Investment Securities, for additional information.

The following table summarizes our investment in obligations of state and political subdivisions at March 31, 2022 and December 31, 2021.
March 31, 2022 December 31, 2021
(dollars in thousands) Amortized Cost Fair Value % of Total State and Political Subdivisions Amortized Cost Fair Value % of Total State and Political Subdivisions
Within California:
General obligation bonds $ 26,023 $ 23,757 14.4 % $ 25,036 $ 25,020 14.2 %
Revenue bonds 5,245 4,911 2.9 5,249 5,185 3.0
Tax allocation bonds 502 505 0.3 503 510 0.3
Total within California 31,770 29,173 17.6 30,788 30,715 17.5
Outside California:
General obligation bonds 120,546 114,862 66.8 117,278 121,303 66.5
Revenue bonds 28,091 26,689 15.6 28,146 29,272 16.0
Total outside California 148,637 141,551 82.4 145,424 150,575 82.5
Total obligations of state and political subdivisions $ 180,407 $ 170,724 100.0 % $ 176,212 $ 181,290 100.0 %
Percent of investment portfolio 10.1 % 10.0 % 11.7 % 12.0 %

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (37.4%), Washington (16.0%) and Wisconsin (6.6%). Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). We have $6.0 million in obligations of Texas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from PSF. We have little or no exposure to municipal sectors such as health care that are most vulnerable to credit risks posed by the COVID-19 pandemic.

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

•The soundness of a municipality's budgetary position and stability of its tax revenues
•Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer
•Local demographics/economics including unemployment data, largest taxpayers and local employers, income indices and home values
•For revenue bonds, the source and strength of revenue for municipal authorities including the obligor's financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer's strength and collateral in escrow accounts)
•Credit ratings by major credit rating agencies

Loans

During the first three months of 2022, loans decreased by $53.8 million and totaled $2.202 billion at March 31, 2022, primarily due to $70.6 million in PPP loans being forgiven and paid off. New non-PPP related loan originations totaled $49.8 million in the first three months of 2022, representing a six year peak for first quarter originations. Non-PPP loan payoffs were $49.3 million in the first quarter 2022, which were largely driven by borrower sales of real estate assets and cash payoffs due to excess liquidity, as well as investor commercial real estate loans with structures outside the Bank's risk appetite or in locations beyond our market area. Offsetting the decreases are increases in credit line utilization, net of normal loan amortization, of $16.3 million.

As of March 31, 2022, there were 191 PPP loans outstanding totaling $40.6 million (net of $993 thousand in unrecognized fees and costs) compared to 368 loans outstanding December 31, 2021 for a total of $111.2 million (net of $2.5 million in unrecognized fees and costs). In the first quarter of 2022, Bank of Marin recognized $1.5 million in PPP fees, net of costs, compared to $1.8 million in the prior quarter and $1.7 million in the same quarter of 2021.
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As of March 31, 2022, two borrowing relationships with three loans totaling $23.6 million were continuing to benefit from payment relief under the provisions of the 2020 CARES Act. We will continue to work closely with both of these clients and monitor their performance.

Liabilities

During the first three months of 2022, total liabilities increased by $46.2 million to $3.910 billion. Deposits increased $52.8 million in the first three months of 2022, which is consistent with activity experienced throughout 2021 from larger business clients. Non-interest bearing deposits increased $50.4 million in the first three months of 2022 to $1.961 billion, and represented 50.8% of total deposits at March 31, 2022, compared to 50.2% at December 31, 2021. The average cost of deposits remained consistent in the first quarter at 0.06%.

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 to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank's ratios exceed the regulatory definition of "well capitalized" under the regulatory framework for prompt corrective action and Bancorp's ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company. In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of March 31, 2022. There are no conditions or events since that notification that management believes have changed the Bank's categories and we expect the Bank to remain well capitalized for prompt corrective action purposes.

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

(dollars in thousands)
Actual Ratio Adequately Capitalized Threshold Ratio to be a Well Capitalized Bank Holding Company
March 31, 2022 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 404,039 14.35 % ≥ $ 295,720 ≥ 10.50 % ≥ $ 281,638 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 380,876 13.52 % ≥ $ 239,392 ≥ 8.50 % ≥ $ 225,310 ≥ 8.00 %
Tier 1 Capital (to average assets) $ 380,876 8.90 % ≥ $ 171,200 ≥ 4.00 % ≥ $ 214,000 ≥ 5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 380,876 13.52 % ≥ $ 197,147 ≥ 7.00 % ≥ $ 183,065 ≥ 6.50 %
December 31, 2021
Total Capital (to risk-weighted assets) $ 397,101 14.58 % ≥ $ 286,035 ≥ 10.50 % ≥ $ 272,414 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 373,286 13.70 % ≥ $ 231,552 ≥ 8.50 % ≥ $ 217,931 ≥ 8.00 %
Tier 1 Capital (to average assets) $ 373,286 8.85 % ≥ $ 168,750 ≥ 4.00 % ≥ $ 210,937 ≥ 5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 373,286 13.70 % ≥ $ 190,690 ≥ 7.00 % ≥ $ 177,069 ≥ 6.50 %
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Capital Ratios for the Bank


(dollars in thousands)
Actual Ratio Adequately Capitalized Threshold Ratio to be Well Capitalized under Prompt Corrective Action Provisions
March 31, 2022 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 402,918 14.31 % ≥ $ 295,688 ≥ 10.50 % ≥ $ 281,607 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 379,755 13.49 % ≥ $ 239,366 ≥ 8.50 % ≥ $ 225,286 ≥ 8.00 %
Tier 1 Capital (to average assets) $ 379,755 8.87 % ≥ $ 171,192 ≥ 4.00 % ≥ $ 213,989 ≥ 5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 379,755 13.49 % ≥ $ 197,125 ≥ 7.00 % ≥ $ 183,045 ≥ 6.50 %
December 31, 2021
Total Capital (to risk-weighted assets) $ 390,924 14.35 % ≥ $ 286,009 ≥ 10.50 % ≥ $ 272,390 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 367,109 13.48 % ≥ $ 231,531 ≥ 8.50 % ≥ $ 217,912 ≥ 8.00 %
Tier 1 Capital (to average assets) $ 367,109 8.70 % ≥ $ 168,724 ≥ 4.00 % ≥ $ 210,905 ≥ 5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 367,109 13.48 % ≥ $ 190,673 ≥ 7.00 % ≥ $ 177,053 ≥ 6.50 %

Liquidity and Capital Resources

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

We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations. Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, and dividends to common stockholders.
The most significant component of our daily liquidity position is customer deposits. The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength. The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us. Since 2020, the banking industry experienced abundant liquidity driven by pandemic-related government programs such as PPP and stimulus checks as well as an elevated savings rate system-wide.

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

The most significant source of liquidity during 2022 was proceeds from loans collected net of loan originations of $54.5 million, and a net increase in deposits totaling $52.8 million. Proceeds from principal paydowns and maturities of securities totaled $48.0 million, and $11.5 million in net cash was provided by operating activities.

Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $581.4 million at March 31, 2022. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth and liquid assets. Over the next twelve months, $106.5
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million of time deposits will mature. We expect to replace these funds with new deposits. Our emphasis on local deposits, combined with our liquid investment portfolio, provides a very stable funding base.
Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank's retained earnings or the amount of the Bank's net profits from the previous three fiscal years less the amount of dividends paid during that period. The primary uses of funds for Bancorp are shareholder dividends and ordinary operating expenses. Bancorp held $1.1 million of cash at March 31, 2022, and is in the process of obtaining regulatory approval to distribute a dividend from the Bank to the Bancorp to cover Bancorp's operational needs and cash dividends to shareholders through 2022. Management anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

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

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

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

ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly. We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability. A simplified static statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs. If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions. At March 31, 2022, interest rate risk was within policy guidelines established by ALCO and the Board. One set of interest rates modeled and evaluated against flat interest rates is a series of immediate parallel shifts in the yield curve. Our most recent analysis of our interest rate sensitivity is provided in the following table as an example rather than an expectation of likely interest rate movements.
Immediate and Parallel Shift in Interest Rates (in basis points) 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 (6.7) % 4.9 %
up 300 (4.8) % 4.2 %
up 200 (3.0) % 3.1 %
up 100 (1.4) % 1.8 %
down 100 (2.2) % (5.2) %

Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. The Bank runs a combination of scenarios and sensitivities in its attempt to capture the range of interest rate risk including the simulations mentioned above. As with any simulation model or other method of measuring interest rate risk, limitations are inherent in the process and dependent on assumptions. For example, if we choose to pay interest on certain business deposits that are currently non-interest bearing, causing those deposits to become rate sensitive in the future, we would become less asset sensitive than the model currently indicates. Assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate
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movements. Important deposit modeling assumptions are the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates change, otherwise known as the deposit beta. We applied an average deposit beta of 58% to rates paid on interest-bearing deposits in rising rate scenarios, reflected in the table above. However, our historical beta in the prior rising rate cycle was less than half of the modeled beta and will be reflected in the next quarterly simulation model. Further, 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 U.S. Treasury rates in different tenors that result in a change in the shape of the yield curve, such as what happened in the first quarter of 2022, could produce different results from those presented in the table. Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates.

ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2022, we completed the conversion of core systems in relation to the merger with American River Bankshares in the third quarter of 2021 and we have integrated their business processes and systems into our internal control over financial reporting. Other than the interim effects of the Merger, there were no significant changes that materially affected, or are reasonably likely to affect, our internal control over financial reporting. The term internal control over financial reporting, as defined by Rule 15d-15(f) of the Act, is a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

PART II OTHER INFORMATION
ITEM 1 Legal Proceedings

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

ITEM 1A Risk Factors
There have been no material changes from the risk factors previously disclosed in our 2021 Form 10-K. Refer to "Risk Factors" in Item 1A of our 2021 Form 10-K, pages 12 through 20.

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

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

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Issuer Purchases of Equity Securities

On July 16, 2021, Bancorp Board of Directors approved a share repurchase program under which Bancorp could repurchase up to $25.0 million of its outstanding common stock through July 31, 2023. On October 22, 2021, Bancorp's Board of Directors approved an amendment to the current share repurchase program, which increased the total authorization from $25.0 million to $57.0 million and left the expiration date unchanged. During the three months ended March 31, 2022, Bancorp repurchased 23,275 shares at an average price of $37.64 per share for a total cost of $877 thousand. From the start of this program, the Bancorp has repurchased 618,991 shares at an average price of $36.04 per share totaling $22.3 million as of March 31, 2022. The remaining $34.7 million in the program will be executed in the context of our overall capital planning and stress testing, as well as other potential capital investments. The following table reflects repurchases under this share repurchase program for the periods presented.
(in thousands, except per share data) Total Number of Shares Purchased
Average Price Paid per Share 1
Total Number of Shares Purchased as Part of Publicly Announced Programs Approximate Dollar Value That May yet Be Purchased Under the Program
Period
January 1-31, 2022 23,275 $ 37.64 23,275 $ 34,664
February 1-28, 2022 - - - $ 34,664
March 1-31, 2022 - - - $ 34,664
Total 23,275 $ 37.64 23,275
1 Average price paid per share excludes commission.

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

ITEM 5 Other Information
None.
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ITEM 6 Exhibits

The following exhibits are filed as part of this report or hereby incorporated by references to filings previously made with the SEC.
Incorporated by Reference
Exhibit Number Exhibit Description Form File No. Exhibit Filing Date Herewith
2.01 8-K 001-33572 2.1 April 19, 2021
3.01 S-4 333-257025 3.01 June 11, 2021
3.02 S-4 333-257025 3.02 June 11, 2021
4.01 8-A12B 001-33572 4.1 July 7, 2017
4.02 10-K 001-33572 4.02 March 13, 2020
10.01 S-8 333-218274 4.1 May 26, 2017
10.02 S-8 333-221219 4.1 October 30, 2017
10.03 S-8 333-227840 4.1 October 15, 2018
10.04 S-8 333-239555 4.1 June 30, 2020
10.05 10-Q 001-33572 10.06 November 7, 2007
10.06 10-K 001-33572 10.07 March 15, 2021
10.07 8-K 001-33572 10.2 November 4, 2014
10.08 8-K 001-33572 10.3 November 4, 2014
10.09 8-K 001-33572 10.1 October 31, 2007
10.10 10-Q 001-33572 10.12 November 6, 2020
10.11 10-K 001-33572 10.13 March 15, 2021
10.12 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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Bank of Marin Bancorp
(registrant)
May 9, 2022 /s/ Timothy D. Myers
Date Timothy D. Myers
President and Chief Executive Officer
(Principal Executive Officer)
May 9, 2022 /s/ Tani Girton
Date
Tani Girton
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
May 9, 2022 /s/ David A. Merck
Date David A. Merck
First Vice President & Controller
(Principal Accounting Officer)

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