# Bank of Marin Bancorp (BMRC) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from Bank of Marin Bancorp's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1403475/000140347522000015/bmrc-20211231.htm Accession: 0001403475-22-000015 Filing date: 2022-03-15 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/BMRC/ All MD&A years: /company/BMRC/mda/ Next year: /company/BMRC/mda/fy2022/ (FY 2022) ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of financial condition as of December 31, 2021 and 2020 and results of operations for each of the years in the three-year period ended December 31, 2021 should be read in conjunction with our consolidated financial statements and related notes thereto, included in Part II ITEM 8 of this report. Forward-Looking Statements The disclosures set forth in this item are qualified by important factors detailed in Part I captioned Forward-Looking Statements and ITEM 1A captioned Risk Factors of this report and other cautionary statements set forth elsewhere in the report. 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. Management has determined the following accounting estimates and related policies to be critical: Allowance for Credit Losses on Loans and Unfunded Commitments The allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis at the balance sheet date to present the net amount of loans expected to be collected. The allowance for losses on unfunded loan commitments is based on estimates of probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity and loss rates as determined for pooled funded loans. The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities. Management estimates these allowances quarterly using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Credit loss experience among the Bank and peer groups provides the basis for the estimation of expected credit losses. The allowance for credit losses ("ACL") model utilizes a discounted cash flow ("DCF") method to measure the expected credit losses on loans collectively evaluated that are sub-segmented by loan pools with similar credit risk characteristics, which generally correspond to federal regulatory reporting codes. In addition, the DCF method incorporates assumptions for probability of default ("PD"), loss given default ("LGD"), and prepayments and curtailments over the contractual terms of the loans. Under the DCF method, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows using the loan's effective rate. Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable and supportable forecasts of economic conditions to differ from the conditions that existed during the historical period included in the development of PD and LGD. Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which decreased to 6.5% at December 31, 2021 from 9.3% at December 31, 2020. The ACL model incorporates a one-year forecast. For periods beyond the forecast horizon the economic factors revert to historical averages on a straight-line basis over a one-year period. We performed a sensitivity analysis as of December 31, 2021 and determined that a 1% change (e.g., 5.5% to 6.5%) in the forecasted quarterly unemployment rates over the next four quarters resulted in an 8% change to our allowance for credit losses on loans. This impact does not consider other assumption changes to either the quantitative factors, such as probability of default, loss given 23 default, loan mix or cash flows, prepayment/curtailment rates, and individually analyzed loans, or qualitative factors as discussed in Note 1 - Summary of Significant Accounting Policies. Additionally, because current economic conditions and forecasts can change, as future events are inherently difficult to predict, the estimated credit losses on loans and unfunded commitments could change significantly. While we believe we use the best information available to determine the allowance for credit losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. For information regarding critical estimates related to our allowance for credit losses methodology, the provision for credit losses, and risks to asset quality and lending activity, see ITEM 1A - Risk Factors, the Allowance for Credit Losses section in ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, Income Taxes We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by us and the government taxing authorities. We review our provision for income tax expense monthly and calculate the carrying value of deferred tax assets and liabilities quarterly. In establishing a provision for income tax expense, we make judgments and interpretations about the application of these inherently complex tax laws. In addition, our estimates include making judgements about when future items will affect taxable income. Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. For further information on our tax assets and liabilities, and related provision for income taxes, see Note 1 - Summary of Significant Accounting Policies and Note 11 - Income Taxes in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K. Fair Value Measurements We use fair value measurements to record certain financial instruments and to determine fair value disclosures. Available-for-sale securities and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis. Additionally, we record at fair value other financial assets on a nonrecurring basis such as collateral dependent loans and other real estate owned. These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets. 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. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement. Fair value is discussed further in Note 1 - Summary of Significant Accounting Policies and Note 9 - Fair Value of Assets and Liabilities in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K. Business Combinations Business combinations are accounted for using the acquisition method of accounting where the assets and liabilities of the acquired entities have been recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. The purchase price allocation process requires significant judgment in the estimation of the fair values of the assets acquired and the liabilities assumed. Management may obtain third-party valuations such as appraisals or discounted cash flow analyses, or we may derive fair values internally using techniques as discussed in Fair Value Measurements above. Management assesses qualifications of third-party valuation specialists, reviews assumptions applied and takes responsibility for the results of fair value estimates. Merger-related expenses include costs directly related to 24 merger activity such as legal and professional fees, system consolidation and conversion costs, and compensation costs associated with employee severance and retention incentives. We account for merger-related costs as expenses in the periods in which the costs are incurred and the services received. Accounting policies and estimates are discussed further in Note 1 - Summary of Significant Accounting Policies and Note 18 - Merger in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K. 25 RESULTS OF OPERATIONS Financial Highlights The following are highlights of our financial condition and results of operations. The data was derived from the audited consolidated financial statements of Bank of Marin Bancorp. [[GREPCENT_TABLE]] [["","","At December 31,"],["(dollars in thousands, except per share data)","","2021","2020"],["Selected financial condition data:"],["Total assets","","$","4,314,209","","$","2,911,926"],["Loans, net allowance for credit losses on loans 1","","$","2,232,622","","$","2,065,682"],["Deposits","","$","3,808,550","","$","2,504,249"],["Borrowings and other obligations","","$","419","","$","58"],["Subordinated debenture","","$","\u2014","","$","2,777"],["Stockholders' equity","","$","450,368","","$","358,253"],["Asset quality ratios:"],["Allowance for credit losses to total loans","","1.02","%","1.10","%"],["Allowance for credit losses to total loans, excluding SBA PPP loans 2","","1.07","%","1.27","%"],["Allowance for credit losses to non-accrual loans 3","","2.75x","2.48x"],["Non-accrual loans to total loans 3","","0.37","%","0.44","%"],["Capital ratios:"],["Tangible common equity to tangible assets 4","","8.76","%","11.27","%"],["Total capital (to risk-weighted assets)","","14.58","%","16.03","%"],["Tier 1 capital (to risk-weighted assets)","","13.70","%","14.82","%"],["Tier 1 capital (to average assets)","","8.85","%","10.80","%"],["Common equity Tier 1 capital (to risk-weighted assets)","","13.70","%","14.69","%"],["Other data:"],["Loan-to-deposit ratio","","59.23","%","83.40","%"],["Number of branches","","31","22"],["Full time equivalent employees","","328","289"],["","For the Years Ended December 31,"],["(dollars in thousands, except per share data)","2021","2020","2019"],["Selected operating data:"],["Net interest income","$","104,951","","$","96,659","","$","95,680"],["Provisions for (reversals of) credit losses on loans and unfunded loan commitments, net","(2,441)","","6,164","","1,029"],["Non-interest income","10,132","","8,550","","9,084"],["Non-interest expense 2 5","72,638","","58,458","","57,841"],["Net income 5","33,228","","30,242","","34,241"],["Net income per common share:"],["Basic","$","2.32","","$","2.24","","$","2.51"],["Diluted","$","2.30","","$","2.22","","$","2.48"],["Performance and other financial ratios:"],["Return on average assets","0.94","%","1.04","%","1.34","%"],["Return on average equity","8.43","%","8.60","%","10.49","%"],["Tax-equivalent net interest margin 6","3.17","%","3.55","%","3.98","%"],["Cost of deposits","0.07","%","0.11","%","0.20","%"],["Efficiency ratio","63.12","%","55.56","%","55.21","%"],["Cash dividend payout ratio on common stock 7","40.52","%","41.07","%","31.87","%"],["Cash dividends per common share","$","0.94","","$","0.92","","$","0.80"],["1 Includes SBA PPP loans of $111.2 million at December 31, 2021 and $291.6 million at December 31, 2020.2 The allowance for credit losses 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. Refer to footnote 1 above for SBA PPP totals.3 Non-performing loans include loans on non-accrual status. 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 $371million, $324 million and $302 million at December 31, 2021, 2020 and 2019, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets of $79million, $34 million and $35 million at December 31, 2021, 2020, and 2019, respectively. Tangible assets excludes goodwill and core deposit intangible assets.5 2021 included $6.5 million (or $4.9 million, net of taxes) in merger-related one-time and conversion costs. 6 Tax-equivalent net interest margin is computed by dividing taxable equivalent net interest income, which is adjusted for taxable equivalent income on tax-exempt loans and securities based on federal statutory rate of 21% in 2021, 2020 and 2019, by total average interest-earning assets. 7 Calculated as dividends on common shares divided by basic net income per common share."]] [[/GREPCENT_TABLE]] 26 Executive Summary Annual earnings were $33.2 million in 2021 compared to $30.2 million in 2020. Diluted earnings were $2.30 per share in 2021, compared to $2.22 per share in 2020. The following are highlights of operating and financial performance for the year ended December 31, 2021: •Merger-related one-time and conversion costs reduced net income by $4.9 million, net of taxes, or 34 cents per share for the year ended December 31, 2021. Return on average assets ("ROA") and return on average equity ("ROE") were also significantly impacted by provisions for credit losses on acquired loans and shares issued in conjunction with the merger. As shown in the reconciliation of GAAP to non-GAAP financial measures on page 28, year-to-date ROA of 0.94% and ROE 8.43% would have been 1.08% and 9.67%, respectively, compared to 1.04% and 8.60% in the prior year. •Loans increased $167.1 million in 2021, or 8%, to $2.256 billion at December 31, 2021, from $2.089 billion at December 31, 2020. Year-over-year growth was largely attributable to $419.4 million in loans from the American River Bank ("ARB") acquisition on August 6, 2021. Non-PPP loan originations of $181.7 million for the year were concentrated in commercial and real estate loans and compared to $165.5 million in 2020. Payoffs included $218.1 million non-PPP loans compared to $169.2 million in 2020. In 2021, PPP loan originations were $136.2 million and PPP loans forgiven and paid off were $328.5 million. •Credit quality remains strong with non-accrual loans representing 0.37% of the Bank's loan portfolio as of December 31, 2021, compare to 0.44% at December 31, 2020. During 2021, we reversed $1.4 million in credit losses on loans and $992 thousand in credit losses on unfunded commitments. These reversals compared to provisions for credit losses on loans of $4.6 million and provisions for credit losses on unfunded commitments of $1.6 million in the prior year. 2021 activity included the effects of the business combination with ARB, partially offset by ongoing improvements in the underlying economic forecasts. 2020 credit loss provisions included significant qualitative adjustments for uncertainties associated with the COVID-19 pandemic as well as the adoption of the current expected credit loss methodology. •Deposits grew $1.304 billion, or 52%, to $3.809 billion at December 31, 2021, compared to $2.504 billion at December 31, 2020. Growth was comprised of $790.0 million related to the August 6, 2021 ARB acquisition, new accounts and growth in the existing customer base. Non-interest bearing deposits grew by $555.6 million, or 41%, in 2021 and made up 50% of total deposits at year end. Cost of deposits remained low at 0.07% for the full year of 2021, down from 0.11% in 2020. Additionally, as part of our liquidity management, the Bank maintained $173.1 million and $173.4 million in off-balance sheet deposits with deposit networks at December 31, 2021 and 2020, respectively. •Net interest income totaled $105.0 million and $96.7 million in 2021 and 2020, respectively. The $8.3 million increase in 2021 was primarily due to higher average loan and investment securities balances and higher SBA PPP loan fee accretion income. These increases were partially offset by $1.3 million in accelerated discount accretion on the early redemption of a subordinated debenture in the first quarter of 2021, and lower yields on investment securities. The tax-equivalent net interest margin decreased by 38 basis points to 3.17% in 2021, compared to 3.55% in 2020 for the reasons already mentioned. •The efficiency ratio was 63.12% in 2021, up from 55.56% in 2020. As shown in the reconciliation of GAAP to non-GAAP financial measures on page 28, the 2021 efficiency ratio excluding merger-related one-time and conversion costs would have been 57.51%. •All capital ratios were above regulatory requirements for a well-capitalized institution. The total risk-based capital ratio for Bancorp was 14.6% at December 31, 2021 and 16.0% at December 31, 2020. Tangible common equity to tangible assets declined to 8.8% at December 31, 2021 from 11.3% at December 31, 2020 primarily due to share repurchases and growth in excess liquidity from an increase in legacy Bank of Marin deposits (refer to footnote 4 on page 26 for definition of this non-GAAP financial measure). The total risk-based capital ratio for the Bank was 14.4% at December 31, 2021 and 15.8% at December 31, 2020. 27 •The Board of Directors declared a cash dividend of $0.24 per share on January 21, 2022. This is the 67th consecutive quarterly dividend paid by Bank of Marin Bancorp. The cash dividend is payable on February 11, 2022 to shareholders of record at the close of business on February 4, 2022. Statement Regarding Use of Non-GAAP Financial Measures In this Form 10-K, Bancorp's financial results are presented in accordance with GAAP and refer to certain non-GAAP financial measures. Management believes that presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of Bancorp's operating results and comparison of operating results across reporting periods. Management also uses non-GAAP financial measures to establish budgets and manage Bancorp's business. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below. [[GREPCENT_TABLE]] [["Reconciliation of GAAP and Non-GAAP Financial Measures"],["","Year ended December 31,"],["(in thousands, except share data; unaudited)","2021","2020","2019"],["Net income"],["Net income (GAAP)","$","33,228","","$","30,242","","$","34,241"],["Merger-related one-time and conversion costs:"],["Personnel and severance","3,005","","\u2014","","\u2014"],["Professional services","1,976","","\u2014","","\u2014"],["Data processing","1,127","","\u2014","","\u2014"],["Other","350","","\u2014","","\u2014"],["Total merger costs before tax benefits","6,458","","\u2014","","\u2014"],["Income tax benefit of merger-related expenses","(1,547)","","\u2014","","\u2014"],["Total merger-related one-time and conversion costs, net of tax benefits","4,911","","\u2014","","\u2014"],["Comparable net income (non-GAAP)","$","38,139","","$","30,242","","$","34,241"],["Diluted earnings per share"],["Weighted average diluted shares","14,422","","13,617","","13,794"],["Diluted earnings per share (GAAP)","$","2.30","","$","2.22","","$","2.48"],["Merger-related one-time and conversion costs, net of tax benefits","0.34","","\u2014","","\u2014"],["Comparable diluted earnings per share (non-GAAP)","$","2.64","","$","2.22","","$","2.48"],["Return on average assets"],["Average assets","$","3,537,163","","$","2,897,165","","$","2,550,707"],["Return on average assets (GAAP)","0.94","%","1.04","%","1.34","%"],["Comparable return on average assets (non-GAAP)","1.08","%","1.04","%","1.34","%"],["Return on average equity"],["Average stockholders' equity","$","394,363","","$","351,494","","$","326,441"],["Return on average equity (GAAP)","8.43","%","8.60","%","10.49","%"],["Comparable return on average equity (non-GAAP)","9.67","%","8.60","%","10.49","%"],["Efficiency ratio"],["Non-interest expense (GAAP)","$","72,638","","$","58,458","","$","57,841"],["Merger-related expenses","(6,458)","","\u2014","","\u2014"],["Non-interest expense (non-GAAP)","$","66,180","","$","58,458","","$","57,841"],["Net interest income","$","104,951","","$","96,659","","$","95,680"],["Non-interest income","$","10,132","","$","8,550","","$","9,084"],["Efficiency ratio (GAAP)","63.12","%","55.56","%","55.21","%"],["Comparable efficiency ratio (non-GAAP)","57.51","%","55.56","%","55.21","%"]] [[/GREPCENT_TABLE]] 28 Net Interest Income Net interest income is the interest earned on loans, investment securities and other interest-earning assets minus the interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is affected by changes in general market interest rates and by changes in the amounts and composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in net interest income and/or margin due to an imbalance in the timing of repricing or maturity of assets or liabilities. We manage interest rate risk exposure with the goal of optimizing the effect of interest rate volatility on net interest income. 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. 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 the years indicated. [[GREPCENT_TABLE]] [["Average Statements of Condition and Analysis of Net Interest Income"],["","","Year ended","","Year ended","","Year ended"],["","","December 31, 2021","","December 31, 2020","","December 31, 2019"],["","","","Interest","","","","Interest","","","","Interest"],["","","Average","Income/","Yield/","","Average","Income/","Yield/","","Average","Income/","Yield/"],["(dollars in thousands; unaudited)","Balance","Expense","Rate","","Balance","Expense","Rate","","Balance","Expense","Rate"],["Assets"],["","Interest-earning deposits with banks 1","$","287,626","","$","399","","0.14","%","","$","153,794","","$","461","","0.29","%","","$","67,192","","$","1,321","","1.94","%"],["","Investment securities 2, 3","866,790","","16,999","","1.96","%","","533,186","","15,025","","2.82","%","","555,618","","15,102","","2.72","%"],["","Loans 1, 3, 4","2,155,982","","92,376","","4.23","%","","2,023,203","","85,398","","4.15","%","","1,775,193","","85,062","","4.73","%"],["","Total interest-earning assets 1","3,310,398","","109,774","","3.27","%","","2,710,183","","100,884","","3.66","%","","2,398,003","","101,485","","4.17","%"],["","Cash and non-interest-bearing due from banks","61,299","","","","","49,676","","","","","35,956"],["","Bank premises and equipment, net","5,964","","","","","5,526","","","","","6,911"],["","Interest receivable and other assets, net","159,502","","","","","131,780","","","","","109,837"],["Total assets","$","3,537,163","","","","","$","2,897,165","","","","","$","2,550,707"],["Liabilities and Stockholders' Equity"],["","Interest-bearing transaction accounts","$","217,924","","$","172","","0.08","%","","$","148,817","","$","186","","0.13","%","","$","133,922","","$","347","","0.26","%"],["","Savings accounts","268,397","","94","","0.04","%","","184,146","","68","","0.04","%","","172,273","","70","","0.04","%"],["","Money market accounts","864,625","","1,520","","0.18","%","","763,689","","2,009","","0.26","%","","680,296","","3,439","","0.51","%"],["","Time accounts, including CDARS","115,393","","246","","0.21","%","","96,558","","554","","0.57","%","","106,783","","595","","0.56","%"],["","Borrowings and other obligations 1, 6","892","","9","","1.08","%","","174","","4","","2.16","%","","2,935","","77","","2.57","%"],["","Subordinated debenture 1, 5","534","","1,361","","251.54","%","","2,741","","158","","5.68","%","","2,673","","229","","8.44","%"],["","Total interest-bearing liabilities","1,467,765","","3,402","","0.23","%","","1,196,125","","2,979","","0.25","%","","1,098,882","","4,757","","0.43","%"],["","Demand accounts","1,628,289","","","","","1,308,199","","","","","1,094,806"],["","Interest payable and other liabilities","46,746","","","","","41,347","","","","","30,578"],["","Stockholders' equity","394,363","","","","","351,494","","","","","326,441"],["Total liabilities & stockholders' equity","$","3,537,163","","","","","$","2,897,165","","","","","$","2,550,707"],["Tax-equivalent net interest income/margin 1","","$","106,372","","3.17","%","","","$","97,905","","3.55","%","","","$","96,728","","3.98","%"],["Reported net interest income/margin 1","","$","104,951","","3.13","%","","","$","96,659","","3.51","%","","","$","95,680","","3.94","%"],["Tax-equivalent net interest rate spread","","","3.04","%","","","","3.41","%","","","","3.74","%"],["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%."],["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 the subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021."],["6 Average balances and rate consider $13.9 million in FHLB borrowings acquired from ARB that were redeemed on August 25, 2021."]] [[/GREPCENT_TABLE]] 29 Analysis of Changes in Net Interest Income The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the years indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances. [[GREPCENT_TABLE]] [["","2021 compared to 2020","2020 compared to 2019"],["(in thousands, unaudited)","Volume","Yield/Rate","Mix","Total","Volume","Yield/Rate","Mix","Total"],["Interest-earning deposits with banks","$","401","","$","(247)","","$","(216)","","$","(62)","","$","1,702","","$","(1,120)","","$","(1,442)","","$","(860)"],["Investment securities 1","9,400","","(4,568)","","(2,858)","","1,974","","(610)","","555","","(22)","","(77)"],["Loans 1","5,605","","1,526","","(153)","","6,978","","11,884","","(10,337)","","(1,211)","","336"],["Total interest-earning assets","15,406","","(3,289)","","(3,227)","","8,890","","12,976","","(10,902)","","(2,675)","","(601)"],["Interest-bearing transaction accounts","90","","(75)","","(29)","","(14)","","39","","(180)","","(20)","","(161)"],["Savings accounts","31","","(3)","","(2)","","26","","5","","(7)","","\u2014","","(2)"],["Money market accounts","266","","(663)","","(92)","","(489)","","422","","(1,655)","","(197)","","(1,430)"],["Time accounts, including CDARS","108","","(348)","","(68)","","(308)","","(56)","","15","","\u2014","","(41)"],["Borrowings and other obligations","16","","(2)","","(9)","","5","","(72)","","(12)","","11","","(73)"],["Subordinated debentures","(127)","","6,851","","(5,521)","","1,203","","6","","(76)","","(1)","","(71)"],["Total interest-bearing liabilities","384","","5,760","","(5,721)","","423","","344","","(1,915)","","(207)","","(1,778)"],["Tax-equivalent net interest income","$","15,022","","$","(9,049)","","$","2,494","","$","8,467","","$","12,632","","$","(8,987)","","$","(2,468)","","$","1,177"],["1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%."]] [[/GREPCENT_TABLE]] 2021 Compared to 2020 Net interest income totaled $105.0 million and $96.7 million in 2021 and 2020, respectively. The $8.3 million increase in 2021 was primarily due to higher average loan and investment securities balances and higher SBA PPP loan income. These increases were partially offset by $1.3 million in accelerated discount accretion on the early redemption of a subordinated debenture in the first quarter of 2021, and lower yields on investment securities. We recognized $8.3 million in SBA PPP fees, net of cost in 2021, compared to $3.8 million in 2020. As of December 31, 2021, $2.5 million SBA PPP fees, net of deferred costs remained outstanding and will be recognized into income in future periods. On March 15, 2021, we redeemed the $2.8 million subordinated debenture. The redemption consisted of $4.1 million principal balance, quarterly interest due, and $1.3 million in accelerated accretion of purchase discount. The subordinated debenture carried an average interest rate of 5.68% in 2020. The tax-equivalent net interest margin decreased 38 basis points to 3.17% in 2021, from 3.55% in 2020 for the reasons already mentioned and as shown in the above table. The SBA PPP loans improved the 2021 net interest margin by 10 basis points, and the early redemption of the subordinated debenture reduced it by 4 basis points. 2020 Compared to 2019 Net interest income totaled $96.7 million and $95.7 million in 2020 and 2019, respectively. The $1.0 million increase in 2020 was primarily due to SBA PPP loans and lower rates on interest-bearing deposits, largely offset by lower yields on earning-assets, except for investment securities where we collected prepayment penalties on called securities in 2020. Notable balance increases occurred in interest-earning deposits with other banks, commercial real estate loans and deposits. The tax-equivalent net interest margin decreased 43 basis points to 3.55% in 2020, from 3.98% in 2019 for the reasons already mentioned and as shown in the above table. Additionally, the SBA PPP loans lowered the 2020 net interest margin by 6 basis points. 30 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 range resided between 0.0% to 0.25% in 2021 and 2020, putting downward pressure on our asset yields and net interest margin. In its January 26, 2022 meeting the FOMC kept the federal funds target rate range between 0.0% to 0.25%, but signaled that it will raise interest rates in 2022 to combat inflation. Our net interest margin should benefit from a rising interest rate environment. See ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk for further information. Provision for Credit Losses on Loans We recorded a $1.4 million reversal of the provision for credit losses on loans in 2021, compared to a $4.6 million provision for credit losses in 2020 and $900 thousand provision for credit losses in 2019. The net provision reversal in 2021 was primarily due to continued improvements in Moody's Analytics' Baseline Forecast of California unemployment rates and adjustments to 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 2021. These reversals were partially offset by an increase in the allowance for credit losses related to qualitative risk factor adjustments for recent changes in executive leadership and senior lending positions, and integration of ARB. The provision for credit losses in 2020 calculated under the incurred loss method (prior to the adoption of the excepted credit loss method on December 31, 2020) was largely due to the uncertainty about the impact of the COVID-19 pandemic on the local and regional economies and our customers at that time. In addition, under the CECL method, we increased our allowance for credit losses by approximately $925 thousand for previously acquired loans (i.e., non-purchased credit deteriorated or "non-PCD" loans); whereas, under previous GAAP (incurred loss method) we did not record an allowance on our unimpaired previously acquired non-PCD loans. The pandemic also negatively affected the financial condition of many of our borrowers, which was partially alleviated by our payment relief program under the 2020 CARES Act and the SBA PPP. The provision for credit losses in 2019 accounted for under the incurred loss methodology was consistent with loan growth. For additional information about the allowance for credit losses and transition from the incurred loss method to the CECL method in 2020, see the Critical Accounting Estimates section above and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report. Non-interest Income The table below details the components of non-interest income. [[GREPCENT_TABLE]] [["","","2021 compared to 2020","2020 compared to 2019"],["","Years ended December 31,","Amount Increase (Decrease)","Percent Increase (Decrease)","Amount Increase (Decrease)","Percent Increase (Decrease)"],["(dollars in thousands; unaudited)","2021","2020","2019"],["Wealth Management and Trust Services","$","2,222","","$","1,851","","$","1,907","","$","371","","20.0","%","$","(56)","","(2.9)","%"],["Earnings from bank-owned life insurance, net","2,194","","973","","1,196","","1,221","","125.5","%","(223)","","(18.6)","%"],["Debit card interchange fees, net","1,812","","1,438","","1,586","","374","","26.0","%","(148)","","(9.3)","%"],["Service charges on deposit accounts","1,593","","1,314","","1,865","","279","","21.2","%","(551)","","(29.5)","%"],["Dividends on FHLB stock","760","","654","","799","","106","","16.2","%","(145)","","(18.1)","%"],["Merchant interchange fees, net","422","","239","","331","","183","","76.6","%","(92)","","(27.8)","%"],["(Losses) gains on investment securities, net","(16)","","915","","55","","(931)","","(101.7)","%","860","","1,563.6","%"],["Other income","1,145","","1,166","","1,345","","(21)","","(1.8)","%","(179)","","(13.3)","%"],["Total non-interest income","$","10,132","","$","8,550","","$","9,084","","$","1,582","","18.5","%","$","(534)","","(5.9)","%"]] [[/GREPCENT_TABLE]] 31 2021 Compared to 2020 Non-interest income totaled $10.1 million and $8.6 million in 2021 and 2020, respectively. The $1.5 million increase was primarily due to the collection of $1.1 million in benefits on bank-owned life insurance policies and an increase in service charges and interchange fees related to the expanded deposit base. In March 2020, we implemented temporary waivers for all ATM fees, overdraft fees and early withdrawal penalties for time deposits to help ease the financial burden customers began experiencing due to the pandemic. We reinstituted the fees in May 2021. Additionally, Wealth Management and Trust income increased due to the addition of new accounts and favorable market performance in 2021. Increases were partially offset by the $931 thousand reduction in gains on sales of investment securities. 2020 Compared to 2019 Non-interest income totaled $8.6 million and $9.1 million in 2020 and 2019, respectively. The $534 thousand decline was primarily due to $551 thousand lower service charges on deposit accounts and ATM fees, as these fees were waived during the pandemic, lower income from bank-owned life insurance ("BOLI") policies due to a $562 thousand benefit collected on BOLI policies in the third quarter of 2019 (partially offset by $283 thousand underwriting expenses for two new BOLI policies in the first quarter of 2019), $182 thousand lower fee income from one-way deposit sales to third-party deposit networks and $145 thousand lower dividends on FHLB stock, partially offset by $860 thousand net gains on the sale of investment securities. Non-interest Expense The table below details the components of non-interest expense. [[GREPCENT_TABLE]] [["","","2021 compared to 2020","2020 compared to 2019"],["","Years ended December 31,","Amount Increase (Decrease)","Percent Increase (Decrease)","Amount Increase (Decrease)","Percent Increase (Decrease)"],["(dollars in thousands; unaudited)","2021","2020","2019"],["Salaries and employee benefits","$","41,939","","$","34,393","","$","34,253","","$","7,546","","21.9","%","$","140","","0.4","%"],["Occupancy and equipment","7,302","","6,943","","6,143","","359","","5.2","%","800","","13.0","%"],["Data processing","5,139","","3,184","","3,717","","1,955","","61.4","%","(533)","","(14.3)","%"],["Professional services","4,974","","2,181","","2,132","","2,793","","128.1","%","49","","2.3","%"],["Depreciation and amortization","1,740","","2,149","","2,228","","(409)","","(19.0)","%","(79)","","(3.5)","%"],["Information technology","1,550","","1,050","","1,065","","500","","47.6","%","(15)","","(1.4)","%"],["Amortization of core deposit intangible","1,135","","853","","887","","282","","33.1","%","(34)","","(3.8)","%"],["Directors' expense","957","","713","","735","","244","","34.2","%","(22)","","(3.0)","%"],["Federal Deposit Insurance Corporation insurance","889","","474","","361","","415","","87.6","%","113","","31.3","%"],["Charitable contributions","587","","1,034","","508","","(447)","","(43.2)","%","526","","103.5","%"],["Other non-interest expense:"],["Advertising","908","","769","","775","","139","","18.1","%","(6)","","(0.8)","%"],["Other expense","5,518","","4,715","","5,037","","803","","17.0","%","(322)","","(6.4)","%"],["Total other non-interest expense","6,426","","5,484","","5,812","","942","","17.2","%","(328)","","(5.6)","%"],["Total non-interest expense","$","72,638","","$","58,458","","$","57,841","","$","14,180","","24.3","%","$","617","","1.1","%"]] [[/GREPCENT_TABLE]] 2021 Compared to 2020 Non-interest expense increased $14.1 million to $72.6 million in 2021 from $58.5 million in 2020. The largest increase of $6.5 million came from acquisition related one-time and conversion costs. In addition to $3.0 million in one-time merger cost, salaries and related benefits rose another $4.5 million due to increased numbers of employees, regularly scheduled annual merit and related increases, and lower deferred loan origination costs. Professional services included $817 thousand more in consulting expenses for PPP loan forgiveness application processing, investment advisory services, and legal costs. Data processing increased by an additional $828 thousand primarily due to increases core processing and mobile banking systems charges, and other categories increased due to the larger size of the bank. FDIC insurance increased by $415 thousand due to an increase in our deposit base. Charitable contributions decreased due to supplemental contributions in 2020 related to the pandemic. 32 2020 Compared to 2019 In 2020, non-interest expense increased by $617 thousand to $58.5 million from $57.8 million. The largest increases came from the occupancy expenses (primarily due to lease renewals for our existing headquarters offices and new lease for a loan production office in San Mateo, common area maintenance and janitorial expenses), and charitable contributions due to our outreach to nonprofit organizations in our community during the pandemic. The decrease in data processing costs was due to our digital platform conversion in 2019. While salaries and related benefits were relatively unchanged year-over-year, annual merit and related increases were mostly offset by $915 thousand in SBA PPP-related deferred loan origination costs. 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 totaled $11.7 million at an effective tax rate of 26.0% in 2021, compared to $10.3 million at an effective tax rate of 25.5% in 2020 and $11.7 million at an effective tax rate of 25.4% in 2019. The increase in the provision in 2021 compared to 2020 reflected higher pre-tax income. The 50 basis point increase in the effective tax rate in 2021 as compared to 2020 was primarily due to non-deductible merger expenses and executive compensation, partially offset by higher BOLI income and tax exempt loan and investment securities interest income. The slight increase in the effective tax rate in 2020 compared to 2019 was due to a favorable deferred tax liability true-up recognized in 2019 and a lower tax benefit from BOLI income in 2020. 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 December 31, 2021 and 2020, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits. FINANCIAL CONDITION Our assets increased $1.4 billion from December 31, 2020 to December 31, 2021. Increases reflected both the acquisition of ARB and organic growth. Investment Securities We maintain an investment securities portfolio to provide liquidity and to generate earnings on funds that have not been loaned to customers. Management determines the maturities and types of securities to be purchased based on liquidity and interest rate risk position, and the desire to attain a reasonable investment yield balanced with risk exposure. The table below shows the composition of the debt securities portfolio by expected maturity at December 31, 2021 and 2020. Expected maturities differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. We estimate and update expected maturity dates regularly based on current and historical prepayment speeds. The weighted average life of the investment portfolio at December 31, 2021 and 2020 was approximately six and five years, respectively. 33 [[GREPCENT_TABLE]] [["December 31, 2021","Within 1 Year","","1-5 Years","","5-10 Years","","After 10 Years","","Total"],["(dollars in thousands; unaudited)","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","Amortized Cost1","Fair Value","Average Yield2"],["Held-to-maturity:"],["MBS/CMOs issued by U.S. government agencies","$","1,550","","1.05","%","","$","99,062","","2.03","%","","$","116,665","","1.79","%","","$","21,430","","1.97","%","","$","238,707","","$","239,856","","1.90","%"],["SBA-backed securities","\u2014","","\u2014","","","4,840","","3.17","","","\u2014","","\u2014","","","\u2014","","\u2014","","","4,840","","5,038","","3.17"],["Debentures of government-sponsored agencies","\u2014","","\u2014","","","\u2014","","\u2014","","","19,973","","1.67","","","31,499","","1.89","","","$","51,472","","50,571","","1.80"],["Obligations of state and political subdivisions - tax-exempt3","\u2014","","\u2014","","","\u2014","","\u2014","","","16,686","","1.92","","","\u2014","","\u2014","","","16,686","","16,794","","1.92"],["Obligations of state and political subdivisions - taxable","101","","4.58","","","\u2014","","\u2014","","","25,327","","2.17","","","5,089","","2.39","","","$","30,517","","30,496","","2.22"],["Total held-to-maturity","1,651","","1.27","","","103,902","","2.08","","","178,651","","1.84","","","58,018","","1.96","","","342,222","","342,755","","1.93"],["Available-for-sale:"],["MBS/CMOs issued by U.S. government agencies","13,262","","1.24","","","202,848","","1.67","","","459,936","","1.79","","","87,623","","1.26","","","763,669","","759,576","","1.69"],["SBA-backed securities","7","","2.21","","","30,502","","2.45","","","2,131","","0.16","","","\u2014","","\u2014","","","32,640","","33,478","","2.30"],["Debentures of government sponsored agencies","6,000","","2.62","","","120,115","","1.11","","","16,411","","1.39","","","48,923","","1.88","","","191,449","","188,527","","1.38"],["U.S. Treasury securities","\u2014","","\u2014","","","\u2014","","\u2014","","","11,886","","1.00","","","\u2014","","\u2014","","","11,886","","11,630","","1.00"],["Obligations of state and political subdivisions - tax-exempt3","1,322","","3.73","","","21,026","","2.69","","","92,375","","2.60","","","\u2014","","\u2014","","","114,723","","119,970","","2.63"],["Obligations of state and political subdivisions - taxable","1,128","","2.86","","","1,011","","3.24","","","12,147","","1.56","","","\u2014","","\u2014","","","14,286","","14,030","","1.78"],["Corporate bonds","2,013","","2.73","","","31,000","","1.03","","","5,988","","1.23","","","\u2014","","\u2014","","","39,001","","38,495","","1.15"],["Asset-backed securities","\u2014","","\u2014","","","\u2014","","\u2014","","","1,866","","0.72","","","\u2014","","\u2014","","","1,866","","1,862","","0.72"],["Total available-for-sale","23,732","","1.93","","","406,502","","1.57","","","602,740","","1.87","","","136,546","","1.48","","","1,169,520","","1,167,568","","1.72"],["Total","$","25,383","","1.89","%","","$","510,404","","1.68","%","","$","781,391","","1.86","%","","$","194,564","","1.62","%","","$","1,511,742","","$","1,510,323","","1.77","%"],["December 31, 2020","Within 1 Year","","1-5 Years","","5-10 Years","","After 10 Years","","Total"],["(dollars in thousands; unaudited)","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Fair Value","Average Yield2"],["Held-to-maturity:"],["MBS/CMOs issued by U.S. government agencies","$","\u2014","","\u2014","%","","$","76,378","","1.89","%","","$","24,444","","2.51","%","","$","\u2014","","\u2014","%","","$","100,822","","$","106,550","","2.04","%"],["SBA-backed securities","\u2014","","\u2014","","","\u2014","","\u2014","","","6,547","","3.17","","","\u2014","","\u2014","","","6,547","","6,947","","3.17"],["Obligations of state and political subdivisions - tax-exempt3","247","","3.73","","","\u2014","","\u2014","","","\u2014","","\u2014","","","\u2014","","\u2014","","","247","","251","","3.73"],["Obligations of state and political subdivisions - taxable","1,214","","5.82","","","206","","4.58","","","\u2014","","\u2014","","","\u2014","","\u2014","","","1,420","","1,437","","5.64"],["Total held-to-maturity","1,461","","5.46","","","76,584","","1.89","","","30,991","","2.65","","","\u2014","","\u2014","","","109,036","","115,185","","2.16"]] [[/GREPCENT_TABLE]] 34 [[GREPCENT_TABLE]] [["December 31, 2020","Within 1 Year","","1-5 Years","","5-10 Years","","After 10 Years","","Total"],["(dollars in thousands; unaudited)","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Fair Value","Average Yield2"],["Available-for-sale:"],["MBS/CMOs issued by U.S. government agencies","4,765","","1.60","","","94,844","","2.36","","","117,657","","2.72","","","\u2014","","\u2014","","","217,266","","228,651","","2.54"],["SBA-backed securities","\u2014","","\u2014","","","16,994","","2.40","","","13,947","","3.43","","","\u2014","","\u2014","","","30,941","","32,862","","2.86"],["Debentures of government sponsored agencies","9,993","","2.18","","","5,984","","2.62","","","1,976","","1.42","","","1,991","","1.39","","","19,944","","20,186","","2.16"],["Obligations of state and political subdivisions - tax-exempt3","1,011","","2.28","","","16,437","","3.00","","","82,618","","2.73","","","\u2014","","\u2014","","","100,066","","105,681","","2.77"],["Obligations of state and political subdivisions - taxable","2,642","","2.83","","","2,179","","3.06","","","\u2014","","\u2014","","","\u2014","","\u2014","","","4,821","","4,971","","2.93"],["Total available-for-sale","18,411","","2.13","","","136,438","","2.46","","","216,198","","2.76","","","1,991","","1.39","","","373,038","","392,351","","2.61"],["Total","$","19,872","","2.37","%","","$","213,022","","2.26","%","","$","247,189","","2.74","%","","$","1,991","","1.39","%","","$","482,074","","$","507,536","","2.51","%"]] [[/GREPCENT_TABLE]] 1 Book value reflects cost, adjusted for accumulated amortization and accretion. 2 Weighted average calculation is based on amortized cost of securities. 3 Yields on tax-exempt municipal bonds are presented on a taxable equivalent basis, using federal tax rate of 21%. The amortized cost of our investment securities portfolio increased $1.03 billion or 214% during 2021. We purchased $620.2 million in securities in 2021 designated as available-for-sale to provide flexibility for liquidity and interest rate risk management. We also purchased $305.3 million in securities in 2021 designated as held-to-maturity. These purchases were offset by $181.7 million of paydowns, calls and maturities, and $6.6 million of sales during 2021. We also acquired $297.8 million in securities from ARB. The weighted average yield on the purchases of securities was 1.68% for the 2021 year and 1.60% for the fourth quarter of 2021. During 2021, we purchased $287.6 million in agency mortgage-backed securities ("MBSs"), $271.7 million in debentures of government sponsored agencies, $268.6 million in agency collateralized mortgage obligations ("CMOs"), $60.7 million in obligations of state and political subdivisions and $37.0 million in corporate bonds. We consider agency debentures and CMOs issued by U.S. government sponsored entities to have low credit risk as they carry the credit support of the U.S. federal government. The debentures, CMOs and MBS issued by U.S. government sponsored agencies, SBA-backed securities and U.S. Treasury securities made up 85.6% of the portfolio at December 31, 2021, compared to 77.9% at December 31, 2020. See the discussion in the section captioned “Securities May Lose Value due to Credit Quality of the Issuers” in ITEM 1A Risk Factors above. At December 31, 2021, distribution of our investment in obligations of state and political subdivisions was as follows: [[GREPCENT_TABLE]] [["","December 31, 2021","December 31, 2020"],["(dollars in thousands; unaudited)","Amortized Cost","Fair Value","Percent of State and Municipal Securities","Amortized Cost","Fair Value","Percent of State and Municipal Securities"],["Within California:"],["General obligation bonds","$","25,036","","$","25,020","","14.2","%","$","3,327","","$","3,565","","3.1","%"],["Revenue bonds","5,249","","5,185","","3.0","","2,352","","2,448","","2.2"],["Tax allocation bonds","503","","510","","0.3","","2,832","","2,876","","2.7"],["Total within California","30,788","","30,715","","17.5","","8,511","","8,889","","8.0"],["Outside California:"],["General obligation bonds","117,278","","121,303","","66.5","","78,299","","82,100","","73.5"],["Revenue bonds","28,146","","29,272","","16.0","","19,744","","21,351","","18.5"],["Total outside California","145,424","","150,575","","82.5","","98,043","","103,451","","92.0"],["Total obligations of state and political subdivisions","$","176,212","","$","181,290","","100.0","%","$","106,554","","$","112,340","","100.0","%"],["Percent of investment portfolio","11.7%","12.0%","","22.1%","22.1%"]] [[/GREPCENT_TABLE]] The portion of the portfolio outside the state of California is distributed among thirteen states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside California are in 35 Texas (38.4%), Washington (16.4%), and Wisconsin (6.7%). Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). We have $6.0 million in obligations of Texas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from the PSF. Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring. Key considerations include: •The soundness of a municipality’s budgetary position and stability of its tax revenues •Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer •Local demographics/economics including unemployment data, largest local taxpayers and employers, income indices and home values •For revenue bonds, the source and strength of revenue for municipal authorities including obligors' financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer’s strength) •Credit ratings by major credit rating agencies Loans Loans Outstanding by Class at December 31 [[GREPCENT_TABLE]] [["(in thousands; unaudited)","2021","2020"],["Commercial and industrial","$","301,602","","$","498,408"],["Real estate"],["Commercial owner-occupied","392,345","","304,963"],["Commercial investor-owned","1,189,021","","961,208"],["Construction","119,840","","73,046"],["Home equity","88,746","","104,813"],["Other residential","114,558","","123,395"],["Installment and other consumer","49,533","","22,723"],["Total loans, at amortized cost","2,255,645","","2,088,556"],["Allowance for credit losses on loans","(23,023)","","(22,874)"],["Total loans, net of allowance for credit losses","$","2,232,622","","$","2,065,682"]] [[/GREPCENT_TABLE]] Loans increased $167.1 million in 2021, or 8%, to $2.256 billion at December 31, 2021, from $2.089 billion at December 31, 2020. Year-over-year growth was largely attributable to $419.4 million in loans from the ARB acquisition on August 6, 2021. Non-PPP loan originations of $181.7 million for the year were concentrated in commercial and real estate loans and compared to $165.5 million in 2020. 2021 payoffs included $218.1 million non-PPP loans, compared to $169.2 million in 2020. In 2021, PPP loan originations were $136.2 million and PPP loans forgiven and paid off were $328.5 million. Non-PPP payoffs as a percentage of beginning of the year loan balances were 10.4% in 2021 and 9.2% in 2020. Approximately 86% and 77%, of total loans were secured by real estate at December 31, 2021 and 2020, respectively. The increase in the percentage secured by real estate from 2020 to 2021 was primarily due to a $180.4 million reduction in unsecured loans guaranteed by the SBA under the PPP, which are included in commercial and industrial loans. For additional information on loan concentration risk, see ITEM 1A, Risk Factors. The following table summarizes our commercial real estate loan concentrations by the county in which the property was located as of December 31, 2021 and 2020. 36 Commercial Real Estate Loans Outstanding by County [[GREPCENT_TABLE]] [["(dollars in thousands; unaudited)","December 31, 2021","","December 31, 2020"],["County","Amount","Percent of Commercial Real Estate Loans","","Amount","Percent of Commercial Real Estate Loans"],["Marin","$","349,445","","22.1","%","","$","348,106","","27.5","%"],["Sonoma","230,740","","14.6","","","208,745","","16.5"],["Napa","188,643","","11.9","","","181,054","","14.3"],["Alameda","176,871","","11.2","","","164,921","","13.0"],["San Francisco","172,120","","10.9","","","169,902","","13.4"],["Sacramento","113,120","","7.2","","","11,970","","0.9"],["Contra Costa","69,656","","4.4","","","49,155","","3.9"],["Solano","40,837","","2.6","","","21,380","","1.7"],["San Mateo","28,119","","1.8","","","26,306","","2.1"],["Santa Clara","20,070","","1.3","","","10,505","","0.8"],["Other","191,745","","12.0","","","74,127","","5.9"],["Total","$","1,581,366","","100.0","%","","$","1,266,171","","100.0","%"]] [[/GREPCENT_TABLE]] Commercial real estate loans increased $315.2 million in 2021, compared to a $68.5 million increase in 2020. The increase was primarily due to the ARB acquisition and expanded footprint in Northern California. Of the commercial real estate loans at December 31, 2021, 75% were investor-owned and 25% were owner-occupied. Almost the entire commercial real estate loan portfolio is comprised of term loans for which the primary source of repayment is either the cash flow from the leasing activities of the real estate collateral or the operating cash flow of the owner occupant. We occasionally provide interest-only term loans to borrowers who exhibit strong financial capacity and/or for commercial real estate loans during the occupancy stabilization period. After the initial interest-only payment period, these loans will normally require principal and interest payments. In addition, we may make interest-only concessions in a modified troubled debt restructuring ("TDR"). At December 31, 2021 and 2020, approximately 5.0% and 3.4%, respectively, of our commercial real estate loans contained an interest-only feature as part of the loan terms. All of these loans were current with their payments as of December 31, 2021. Except for three substandard classified loans to two borrowing relationships totaling $24.7 million (or 1.6%) as of December 31, 2021, all were considered to have low credit risk (graded "Pass"). The following table shows an analysis of construction loans by type and county as of December 31, 2021 and 2020. Construction Loans Outstanding by Type and County [[GREPCENT_TABLE]] [["(dollars in thousands; unaudited)","December 31, 2021","","December 31, 2020"],["Loan Type","Amount","Percent of Construction Loans","","Amount","Percent of Construction Loans"],["Commercial real estate","$","49,131","","41.0","%","","$","29,788","","40.8","%"],["Apartments and multifamily","45,978","","38.4","","","22,331","","30.6"],["1-4 Single family residential","19,564","","16.3","","","18,308","","25.1"],["Land - improved","3,966","","3.3","","","1,371","","1.9"],["Land - unimproved","1,201","","1.0","","","1,248","","1.6"],["Total","$","119,840","","100.0","%","","$","73,046","","100.0","%"]] [[/GREPCENT_TABLE]] 37 [[GREPCENT_TABLE]] [["(dollars in thousands; unaudited)","December 31, 2021","","December 31, 2020"],["County","Amount","Percent of Construction Loans","","Amount","Percent of Construction Loans"],["San Francisco","$","55,826","","46.6","%","","$","41,707","","57.1","%"],["Solano","16,367","","13.7","","","9,020","","12.3"],["Sonoma","13,640","","11.4","","","10,058","","13.8"],["Alameda","12,908","","10.8","","","1,862","","2.5"],["Marin","6,074","","5.1","","","8,858","","12.1"],["Sacramento","5,897","","4.9","","","\u2014","","\u2014"],["Contra Costa","5,613","","4.7","","","1,541","","2.2"],["Other","3,515","","2.8","","","\u2014","","\u2014"],["Total","$","119,840","","100.0","%","","$","73,046","","100.0","%"]] [[/GREPCENT_TABLE]] Construction loans increased by $46.8 million in 2021, compared to an increase of $12.0 million in 2020. The increase in 2021 was primarily due to $48.8 million advanced on existing construction loans, $13.2 million in loans assumed in the ARB acquisition and $7.2 million in new financing. These increases were partially offset by $19.5 million in payoffs and $2.9 million in conversions to commercial real estate financing. The increase in 2020 primarily resulted from additional borrowings under existing construction loans as well as advances on six new construction loans to well-known, experienced builders. The increase was partially offset by the successful completion of projects, one of which converted to a permanent commercial real estate loan. The following table presents the amortized costs and maturity distribution of our loans by class as of December 31, 2021 based on their contractual maturity dates. Maturities do not include scheduled payments or potential prepayments. Loan Maturity Distribution [[GREPCENT_TABLE]] [["","Due within 1 year","Due after 1 through 5 years","Due after 5 through 15 years","Due after 15 years","Total"],["(in thousands; unaudited)"],["Commercial and industrial 1","$","97,719","","$","161,730","","$","36,111","","$","6,042","","$","301,602"],["Real estate"],["Commercial owner-occupied","26,036","","98,920","","259,867","","7,522","","392,345"],["Commercial investor-owned","33,656","","329,994","","794,920","","30,451","","1,189,021"],["Construction 2","64,319","","15,322","","40,199","","\u2014","","119,840"],["Home equity","1,799","","25,870","","58,498","","2,579","","88,746"],["Other residential","608","","2,161","","1,929","","109,860","","114,558"],["Installment and other consumer loans","1,699","","5,925","","41,640","","269","","49,533"],["Total","$","225,836","","$","639,922","","$","1,233,164","","$","156,723","","$","2,255,645"]] [[/GREPCENT_TABLE]] 1 Commercial and industrial due after 1 but within 5 years includes SBA PPP loans totaling $111.2 million (net of $2.5 million in unrecognized fees and costs), the majority of which are expected to be forgiven by the SBA in 2022. 2 Construction loans that mature after 5 years are structured to convert to permanent financing after the initial construction period. The following table shows the mix of variable-rate loans to fixed-rate loans due after one year by class as of December 31 2021. The large majority of the variable-rate loans are tied to independent indices (such as the Prime Rate or a Treasury Constant Maturity Rate). Most loans with original terms of more than five years have provisions for the fixed rates to reset, or convert to variable rates, after three, five or seven years. These loans are included in variable-rate balances below. 38 Loan Interest Rate Sensitivity - Due After One Year [[GREPCENT_TABLE]] [["(in thousands; unaudited)","Fixed","Variable","Total"],["Commercial and industrial 1","$","175,697","","$","28,186","","$","203,883"],["Real estate","","","\u2014"],["Commercial owner-occupied","184,142","","182,167","","366,309"],["Commercial investor-owned","677,655","","477,710","","1,155,365"],["Construction","33,626","","21,895","","55,521"],["Home equity","\u2014","","86,947","","86,947"],["Other residential","3,465","","110,485","","113,950"],["Installment and other consumer loans","31,041","","16,793","","47,834"],["Total","$","1,105,626","","$","924,183","","$","2,029,809"]] [[/GREPCENT_TABLE]] 1 Commercial and industrial includes SBA PPP 1% fixed rate loans totaling $111.2 million (net of $2.5 million in unrecognized fees and costs), the majority of which are expected to be forgiven by the SBA in 2022. Allowance for Credit Losses on Loans As of December 31, 2021, we calculated the allowance for credit losses using the current expected loss methodology, or CECL, which required us to estimate credit losses over the expected life of a loan and consider future changes in macroeconomic conditions. All specifically identifiable and quantifiable losses are charged off against the allowance. The ultimate adequacy of the allowance depends on a variety of factors beyond our control, including the real estate market, changes in interest rates and economic and political environments. Based on the current conditions of the loan portfolio and reasonable and supportable forecasts, management believes that the $23.0 million allowance for credit losses at December 31, 2021 was adequate to absorb expected credit losses in our loan portfolio, but provides no assurance that adverse changes in economic conditions or other circumstances over the remaining terms of our loans will not result in increased losses in the portfolio. For information on our allowance for credit losses methodology and adoption of FASB ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective December 31, 2020, refer to Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report. The allowance for credit losses to loans was 1.02% at December 31, 2021 and 1.10% at December 31, 2020. The allowance for credit losses to loans, excluding SBA PPP loans and previously acquired loans was 1.07 and 1.27% at year-end 2021 and 2020, respectively (for a discussion of this non-GAAP financial measure, refer to ITEM 7, Reconciliation of GAAP and Non-GAAP Financial Measures section of this report). The $149 thousand increase in the allowance for credit losses on loans in 2021 was largely due to loans acquired from ARB, partially offset by improvements in economic factors that drive the quantitative portion of the allowance. The $6.2 million increase in the allowance for credit losses in 2020 was almost entirely due to the impact of the COVID-19 pandemic and its effect on the local and regional economies and economic outlook coupled with the transition to the CECL method. For further information, refer to the Provision for Credit Losses section above, and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report. Due to the high credit quality of our loan portfolio, net charge-offs have been minimal for the past several years. Net recoveries totaled $93 thousand in 2021, compared to net charge-offs of $1 thousand in 2020 and $44 thousand in 2019. The following table shows the allocation of the allowance by loan class as well as the percentage of total loans in each of the same loan classes. 39 Allocation of Allowance for Credit Losses [[GREPCENT_TABLE]] [["","December 31, 2021","","December 31, 2020"],["(dollars in thousands; unaudited)","Allowance balance allocation","Loans as a percent of total loans","","Allowance balance allocation","Loans as a percent of total loans"],["Commercial and industrial","$","1,709","","13.4","%","","$","2,530","","23.9","%"],["Real estate:"],["Commercial, owner-occupied","2,776","","17.4","","","2,778","","14.6"],["Commercial, investor-owned","12,739","","52.7","","","12,682","","46.0"],["Construction","1,653","","5.3","","","1,557","","3.5"],["Home Equity","595","","3.9","","","738","","5.0"],["Other residential","644","","5.1","","","998","","5.9"],["Installment and other consumer","621","","2.2","","","291","","1.1"],["Unallocated allowance","2,286","","N/A","","1,300","","N/A"],["Total allowance for credit losses","$","23,023","","","","$","22,874"],["Total percent","","100.0%","","","100.0%"]] [[/GREPCENT_TABLE]] The table below shows the activity in the allowance for credit losses for each of the five years presented below. Allowance for Credit Losses Rollforward [[GREPCENT_TABLE]] [["(dollars in thousands; unaudited)","2021","2020","2019"],["Beginning balance","$","22,874","","$","16,677","","$","15,821"],["Impact of CECL adoption","\u2014","","1,604","","\u2014"],["Provision for (reversal of) credit losses","(1,449)","","4,594","","900"],["Initial allowance for PCD loans","1,505"],["Loans charged-off:"],["Commercial and industrial","\u2014","","(30)","","(75)"],["Installment and other consumer","(5)","","(1)","","(3)"],["Total loans charged-off","(5)","","(31)","","(78)"],["Loans recovered:"],["Commercial and industrial","14","","27","","22"],["Real estate:"],["Commercial, investor-owned","\u2014","","\u2014","","12"],["Construction","34","","3","","\u2014"],["Home equity","50","","\u2014","","\u2014"],["Total loans recovered","98","","30","","34"],["Net loans (charged-off) recovered","93","","(1)","","(44)"],["Ending balance","$","23,023","","$","22,874","","$","16,677"],["Total loans, at amortized cost","$","2,255,645","","$","2,088,556","","$","1,843,286"],["Average total loans outstanding during year","$","2,155,982","","$","2,023,203","","$","1,775,193"],["Ratio of allowance for credit losses to total loans at end of year","1.02","%","1.10","%","0.90","%"],["Net recoveries (charge-offs) to average loans","NM","NM","NM"]] [[/GREPCENT_TABLE]] NM - Not meaningful. Net charge-offs and recoveries for the years ended December 31, 2021, 2020 and 2019 were considered insignificant. The following shows non-performing assets and loans modified in a troubled debt restructuring ("TDR") for each of the years in the five-year period ended December 31, 2021. 40 Non-Performing and Loans and Troubled Debt Restructurings [[GREPCENT_TABLE]] [["(dollars in thousands; unaudited)","2021","2020"],["Non-accrual loans:"],["Real estate:"],["Commercial, owner-occupied","7,269","","7,147"],["Commercial, investor-owned","694","","1,610"],["Home equity","413","","459"],["Installment and other consumer","\u2014","","17"],["Total non-accrual loans","8,376","","9,233"],["Accruing TDR loans:1"],["Commercial and industrial","$","1,183","","$","1,021"],["Real estate:"],["Commercial, investor-owned","179","","3,305"],["Home equity","130","","10"],["Installment and other consumer","607","","735"],["Total accruing TDR loans","$","2,099","","$","5,071"],["Total non-accrual and accruing TDR loans","$","10,475","","$","14,304"],["Criticized and classified loans:"],["Special mention","$","73,263","","$","86,852"],["Substandard","$","36,121","","$","25,829"],["Doubtful","$","114","","$","\u2014"],["Allowance for credit losses to non-accrual loans","2.75x","2.48x"],["Non-accrual loans to total loans","0.37","%","0.44","%"],["1 Excludes TDR loans on non-accrual status that are included above."]] [[/GREPCENT_TABLE]] Non-Accrual and TDR Non-accrual loans decreased by $857 thousand primarily due to $1.0 million in payoffs and paydowns, partially offset by a $114 thousand well-secured investor-owned commercial real estate loan assumed in the ARB acquisition and one $67 thousand home equity loan placed on non-accrual status in 2021. Non-accrual loans increased $9.0 million in 2020, primarily due to the placement of two existing well-secured owner-occupied commercial real estate TDR loans, secured by one property, totaling $7.1 million on non-accrual, as well as two well-secured investor-owned commercial loans totaling $1.6 million that were placed on non-accrual in 2020. In addition, we designated five loans totaling $2.1 million as TDRs during 2020, resulting in an overall increase of $2.8 million in total non-accrual and accruing TDR loans from 2019 to 2020. These increases were partially offset by approximately $1.0 million in paydowns and payoffs of non-accrual and TDR loans. Total accruing TDR loans were $2.1 million and $5.1 million as of December 31, 2021 and 2020, respectively. The $3.0 million decrease in 2021 was primarily due to $4.0 million in paydowns and payoffs, partially offset by two loans totaling $1.0 million that were designated as TDRs during 2021. The $6.2 million decrease from 2019 to 2020 primarily related to the two existing well-secured commercial real estate TDR loans totaling $7.1 million that were transferred to non-accrual status coupled with payoffs and paydowns, partially offset by the $2.1 million in new TDR loans mentioned above. For information regarding temporary relief from TDR accounting afforded by the CARES Act, refer to the Executive Summary section above and Note 3 to the Consolidated Financial Statements in ITEM 8, under “Troubled Debt Restructuring." Criticized and Classified Loans Loans designated as special mention decreased by $13.6 million in 2021, primarily due to $18.9 million in paydowns and payoffs, $33.1 million in upgrades to a pass risk rating and two loans that were downgraded from special mention to substandard totaling $5.4 million. These decreases were partially offset by $17.2 million in loans that were downgraded from pass/watch, $13.5 million in loans assumed in the ARB acquisition, and $13.2 million in loans that were upgraded from substandard to special mention during 2021. Of the $17.2 million in downgrades, $13.2 million were well-secured by commercial real estate and the remaining $4.0 million in commercial loans had strong support. Loans designated special mention increased by $13.5 million in 2020, driven by loan downgrades 41 totaling $31.0 million. Of these downgrades, approximately $24.5 million were loans to borrowers that were impacted by the pandemic, all of which were well-secured by commercial real estate. These additions to special mention were mostly offset by $15.8 million in upgrades to pass risk ratings, paydowns and payoffs, and $2.2 million in loans downgraded from special mention to substandard in 2020. Loans designated as special mention exhibit potential weakness that deserve close attention. Loans classified substandard increased by $13.3 million in 2021, primarily due to downgrades totaling $25.4 million and $2.3 million in substandard loans assumed in the ARB acquisition. Of the downgraded loans, $24.2 million were secured by commercial real estate. The downgrades were partially offset by $13.2 million in upgrades to special mention and $4.2 million in paydowns and payoffs. Loans classified substandard increased by $15.9 million in 2020, primarily due to downgrades totaling $18.5 million. Of these loans, $13.4 million were to borrowers that requested payment relief due to the pandemic, all of which were well-secured by commercial real estate. These downgrades to substandard were partially offset by approximately $2.8 million in payoffs and risk rating upgrades. Loans classified substandard decreased by $2.7 million during 2019 primarily due to the payoff of a land development loan. Refer to Note 3 to the Consolidated Financial Statements in ITEM 8 of this report for an allocation of criticized and classified loans by loan class. Other Assets BOLI totaled $61.5 million at December 31, 2021, compared to $43.6 million at December 31, 2020, and is recorded in other assets. The increase of $17.9 million was primarily due to the acquisition of $15.7 million in ARB policies and the purchase of $1.9 million in new policies. Interest receivable and other assets totaled $51.4 million and $36.5 million at December 31, 2021 and 2020, respectively. The $14.9 million increase was primarily due to a $6.4 million increase in net deferred tax assets, a $4.9 million increase in FHLB stock and a $2.6 million increase in accrued interest on investment securities as discussed below. Net deferred tax assets totaled $13.3 million and $6.9 million at December 31, 2021 and 2020, respectively. Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to temporary differences such as the allowances for credit losses and unfunded loan commitments, net operating loss carryforwards, and deferred compensation and salary continuation plans. The $6.4 million increase in net deferred tax assets in 2021 was primarily due to a $4.5 million decrease in deferred tax liabilities related to changes in unrealized gains on available-for-sale investment securities, a $1.6 million increase in deferred tax assets related to the change in deferred compensation plan and salary continuation plan, a $781 thousand increase in deferred tax assets related to accrued but unpaid expenses and a $640 thousand increase in deferred tax assets related to fair value adjustments on acquired loans. These increases were partially offset by a $820 thousand increase in deferred tax liabilities related to the increase in core deposit intangibles. Management believes deferred tax assets will be realizable due to our consistent record of earnings and the expectation that earnings will continue at a level adequate to realize such benefits. Therefore, no valuation allowance was established as of December 31, 2021 or 2020. For additional information, refer to Note 11 to the Consolidated Financial Statements in ITEM 8 of this report. We held $16.7 million and $11.9 million of FHLB stock recorded at cost in other assets at December 31, 2021 and 2020, respectively. The increase in 2021 resulted from the acquisition of $4.9 million of ARB's FHLB stock. The FHLB paid $760 thousand, $654 thousand and $799 thousand in cash dividends in 2021, 2020 and 2019, respectively. For additional information, refer to Note 2 to the Consolidated Financial Statements in ITEM 8 of this report. Accrued interest on investment securities totaled $4.8 million and $2.2 million at December 31, 2021 and 2020, respectively. The increase was primarily due to purchases of $925.6 million in securities and acquisition of $297.8 million in securities from ARB. Deposits Deposits grew by $1.304 billion, to $3.809 billion at December 31, 2021, compared to $2.504 billion at December 31, 2020. Non-interest bearing deposits grew by $555.6 million in 2021 and made up 50% of total 42 deposits at year-end. See ITEM 1A, Risk Factors, for a discussion of potential risks associated with concentrations and volatility due to activity of our large deposit customers and impact of the SBA PPP loans. Our relationship banking model is the foundation for the strong deposit base and allows us to proactively and strategically address changes in the interest rate environment and technology adoption by our customers. Distribution of Average Deposits     The table below shows the relative composition of our average deposits for 2021 and 2020. For average rates paid on deposits, refer to Average Statements of Condition and Analysis of Net Interest Income table in ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations. [[GREPCENT_TABLE]] [["","As of December 31,"],["","2021","","2020"],["(in thousands; unaudited)","Average Amount","Percent of Total","","Average Amount","Percent of Total"],["Non-interest bearing","$","1,628,289","","52.7","%","","$","1,308,199","","52.3","%"],["Interest-bearing transaction","217,924","","7.0","","","148,817","","5.9"],["Savings","268,397","","8.7","","","184,146","","7.4"],["Money market 1","864,625","","27.9","","","763,689","","30.5"],["Time deposits, including CDARS:","115,393","","3.7","","","96,558","","3.9"],["Total average deposits","$","3,094,628","","100.0","%","","$","2,501,409","","100.0","%"]] [[/GREPCENT_TABLE]] 1 Money market balances include Insured Cash Sweep® ("ICS") in both 2021 and 2020. Demand Deposit Marketplace SM ("DDM") and ICS balances are discussed in Note 6 to the Consolidated Financial Statements in ITEM 8 of this report. Total estimated uninsured deposits as of December 31, 2021 and December 31, 2020 were $1.830 billion and $1.116 billion, respectively. Maturities of Uninsured Time Deposits The following table shows time deposits by account that are in excess of $250,000 by time remaining to maturity at December 31, 2021. [[GREPCENT_TABLE]] [["","December 31, 2021"],["(in thousands; unaudited)","Total","Uninsured Portion"],["Three months or less","$","17,568","","$","10,568"],["Over three months through six months","5,155","","1,405"],["Over six months through twelve months","10,991","","5,491"],["Over twelve months","20,307","","10,557"],["Total","$","54,021","","$","28,021"]] [[/GREPCENT_TABLE]] Borrowings As of December 31, 2021 and 2020, respectively, our available borrowing capacity included $820.5 million and $642.5 million in secured lines of credit with FHLB and $70.8 million and $78.7 million with the Federal Reserve Bank of San Francisco (“FRBSF”). We also had $150.0 million and $135.0 million in unsecured lines with correspondent banks to cover any short or long-term borrowing needs at December 31, 2021 and 2020, respectively. There were no FHLB overnight borrowings at December 31, 2021 or 2020. The FRBSF and correspondent bank lines were not utilized at December 31, 2021 or 2020. As part of a bank acquisition in 2013, we assumed a subordinated debenture due to the NorCal Community Bancorp Trust II with a contractual balance of $4.1 million. On March 15, 2021, we redeemed the $2.8 million subordinated debenture (accreted value), which carried an average interest rate of 5.68% in 2020. For additional information, see Note 7, Borrowings and Other Obligations, in ITEM 8 of this report. Deferred Compensation Obligations We maintain a non-qualified, unfunded deferred compensation plan for certain key management personnel. Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for 43 up to fifteen years commencing upon retirement, death, disability or termination of employment. The participating employee may elect to receive payments over periods not to exceed fifteen years. A similar Deferred Director Fee Plan entitles participating members of the Board of Directors to receive payments as elected by the participant upon separation from service, death, disability or termination of service. At December 31, 2021 and 2020, our aggregate payment obligations under both plans totaled $7.9 million and $4.7 million, respectively. Our Salary Continuation Plan ("SERP") provides a percentage of salary continuation benefits to a select group of executive management upon retirement at age sixty-five and reduced benefits upon early retirement.  At December 31, 2021 and 2020, our liability under the SERP was $5.3 million and $3.2 million, respectively, and is recorded in interest payable and other liabilities in the Consolidated Statements of Condition. The Plan is unfunded and non-qualified for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974. Increases in obligations under both the deferred compensation plan and SERP in 2021 were due to the assumption of the liabilities from the ARB acquisition. For additional information, see Note 10 to the Consolidated Financial Statements in ITEM 8 of this report. Capital Adequacy As discussed in Note 15 to the Consolidated Financial Statements in ITEM 8 of this report, the Bank's capital ratios were above regulatory guidelines to be considered "well capitalized" and Bancorp's ratios exceeded the required minimum ratios for capital adequacy purposes. For further discussion of bank capital requirements refer to the SUPERVISION AND REGULATION section in ITEM 1 of this report. The Bank's total risk-based capital ratio decreased from 15.8% at December 31, 2020 to 14.4% at December 31, 2021, primarily due to $64.0 million in dividends paid to Bancorp to cover share repurchases, quarterly common stock dividends, and operating costs, partially offset by the Bank's $37.4 million net income in 2021. Bancorp's total risk-based capital ratio was 16.0% at December 31, 2020 and 14.6% at December 31, 2021. Bancorp's 2020 Tier 1 capital included a subordinated debenture due to NorCal Community Bancorp Trust II, which was recorded only at the parent company level and accounted for approximately 18 basis points of the total risk-based capital ratio as of December 31, 2020. This subordinated debenture was early redeemed on March 15, 2021. Bancorp's share repurchase program and activity are discussed in detail in ITEM 5 and in Note 8 to the Consolidated Financial Statements in ITEM 8 of this report. We expect to maintain strong capital levels and do not expect that we will be required to raise additional capital in 2022. Our anticipated sources of capital in 2022 include future earnings and shares issued under the stock-based compensation program. 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 7 to the Consolidated Financial Statement in ITEM 8 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. 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, as discussed in Note 6 to the consolidated financial statements in ITEM 8 of this report. 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. 44 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 has 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 increased $147.3 million from December 31, 2020. The most significant source of liquidity during 2021 was deposit growth of $514.3 million (exclusive of deposits added through the ARB acquisition). Proceeds from loans collected net of origination was $256.9 million, mainly due to SBA PPP loan forgiveness. Proceeds from principal paydowns, maturities and sales of investment securities totaled $188.4 million. In addition, $140.6 million of cash was acquired from ARB, and $45.3 million in net cash was provided by operating activities. Significant uses of liquidity during 2021 were $925.6 million in investment securities purchased, $40.8 million in common stock repurchases, 13.9 million for a repayment of an FHLB loan acquired from ARB, $13.1 million in cash dividends paid on common stock to our shareholders, and $4.1 million in repayment of a subordinated debenture. Refer to the Consolidated Statement of Cash Flows in this Form 10-K 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. Undrawn credit commitments, as discussed in Note 16 to the Consolidated Financial Statements in ITEM 8 of this report, totaled $634.2 million at December 31, 2021. 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, 109.8 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 stock repurchases, shareholder dividends and ordinary operating expenses.  Bancorp held $6.6 million of cash at December 31, 2021. 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.