What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-03-15 compared with 2021-03-15 · 502 added, 337 removed, 1497 unchanged (36% of the section changed)

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective December 31, 2020, due to the adoption of Accounting Standards Codification Topic 326:

Financial Instruments – Credit Losses (“Topic 326”).

The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

The adoption of the new credit loss standard and it subsequent application is also communicated as a critical audit matter below.

Basis for Opinions

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses - Loans

As discussed in Notes 1 and 3 to the consolidated financial statements, the allowance for credit losses on loans at December 31, 2021 was $23 million on a total loan portfolio of $2.2 billion.

The Company adopted the current expected credit losses standard, and all related amendments as of December 31, 2020, and has an established process to determine the appropriateness of the allowance for credit losses on loans receivable.

The allowance for credit losses provides an estimate of lifetime expected losses in the loan portfolio.

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The primary procedures we performed to address this critical audit matter included:

Test the design, implementation, and operating effectiveness of controls related to management’s calculation of the allowance for credit losses on loans, including controls over the forecasted economic conditions used, probabilities of default, loss given default, prepayments and curtailments, and qualitative internal and external risk factors used.

Testing the design, implementation, and operating effectiveness of controls related to management’s calculation of the allowance for credit losses on loans, including controls over the forecasted economic conditions used, probabilities of default, loss given default, prepayments and curtailments, and qualitative internal and external risk factors used.

Obtaining management’s analysis and supporting documentation related to the forecasted economic conditions, and testing whether the forecasts used in the calculation of the allowance for credit losses on loans are reasonable and supportable based on the analysis provided by management.

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Obtaining management’s analysis and supporting documentation related to prepayments and curtailments, and testing whether factors used in the calculation of the allowance for credit losses on loans are reasonable and supportable based on the analysis provided by management.

Obtaining management’s analysis and supporting documentation related to the qualitative factors, and testing whether the environmental and qualitative factors used in the calculation of the allowance for credit losses on loans are supported by the analysis provided by management.

Obtaining management’s analysis and supporting documentation related to the qualitative internal and external risk factors, and testing whether the qualitative factors used in the calculation of the allowance for credit losses on loans are reasonable and supportable based on the analysis provided by management.

Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses on loans, as well as testing completeness and accuracy of the data used in the calculation, application of the forecasted economic conditions, probabilities of default, loss given default, prepayments and curtailments over the contractual terms of the loan, and factors determined by management and used in the calculation, and verifying calculations in the allowance for credit losses on loans.

Los Angeles, California

Merger of American River Bankshares – Valuation of Acquired Loans

As discussed in Notes 1 and 18 to the consolidated financial statements, on 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.

On August 7, 2021, American River Bank (“ARB”) merged with and into Bank of Marin, with Bank of Marin (the “Bank”) surviving, (collectively the “Merger”).

Total merger consideration, including cash paid for outstanding options and cash paid in lieu of fractional shares was approximately $124.5 million.

The merger was accounted for using the acquisition method of accounting in which assets, liabilities and consideration exchanged were recorded at their respective fair value at the merger date.

We identified the valuation of acquired loans as a critical audit matter.

The principal considerations for our determination of valuation of acquired loans as a critical audit matter are the level of management judgement involved in evaluating management’s identification of loans with evidence of credit deterioration, the need for specialized skill in evaluating the reasonableness of unobservable inputs and assumptions used in management’s estimation of fair value of all acquired loans.

Auditing management’s judgements regarding identification of loans with evidence of credit deterioration and evaluating unobservable inputs and assumptions used in the measurement of allowance for credit loss require a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included:

Testing the design, implementation, and operating effectiveness of internal controls related to the completeness and accuracy of acquired loan level data, management’s estimate of fair value of acquired loans, including the method and assumptions used to estimate fair value, internal controls over the measurement of merger date allowance for credit loss on purchase credit deteriorated loans.

Testing the completeness and accuracy of loans determined to have credit deterioration at merger date and evaluating the reasonableness of the criteria used by management in their identification of purchase credit deteriorated loans.

Testing the completeness and accuracy of acquired loan level data used in the fair value estimate calculation.

Utilizing an internal firm specialist to evaluate the reasonableness of significant assumptions and methods used by management, by preparing an independent fair value calculation, as well as an assessment of the overall reasonableness of the fair value estimates of all acquired loans.

Testing the appropriateness of the methodology and significant assumptions used in the calculation of allowance for credit losses on acquired loans identified as purchase credit deteriorated.

/s/ Moss Adams LLP

Sacramento, California

March 15, 2022

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The Company's independent registered public accounting firm, Moss Adams LLP, has issued an attestation report on our internal control over financial reporting, which appears on the previous page.

/s/ Russell A.

Colombo, President and Chief Executive Officer

/s/ Timothy D.

Myers, President and Chief Executive Officer

/s/ Tani Girton

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Investment securities:

Held-to-maturity, at amortized cost (net of zero allowance for credit losses at December 31, 2020 1 )

Held-to-maturity, at amortized cost (net of zero allowance for credit losses at December 31, 2021 and 2020 1 )

342,222 109,036

Available-for-sale, at fair value (net of zero allowance for credit losses at December 31, 2020 1 )

Available-for-sale, at fair value (net of zero allowance for credit losses at December 31, 2021 and 2020 1 )

1,167,568 392,351

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Loans, at amortized cost 2,255,645 2,088,556

Allowance for credit losses ( 22,874 ) ( 16,677 )

Loans, net of allowance for credit losses 1

Allowance for credit losses on loans 1

( 23,023 ) ( 22,874 )

Bank premises and equipment, net 4,919 6,070

Loans, net of allowance for credit losses on loans 2,232,622 2,065,682

Goodwill 72,754 30,140

Core deposit intangible 3,831 4,684

Bank-owned life insurance 61,473 43,552

Operating lease right-of-use assets 23,604 25,612

Bank premises and equipment, net 7,558 4,919

Core deposit intangible 6,605 3,831

Other real estate owned 800 —

Interest receivable and other assets 51,362 36,483

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Retained earnings 239,868 219,747

Accumulated other comprehensive income, net of taxes 12,601 4,503

Accumulated other comprehensive (loss) income, net of taxes ( 2,024 ) 12,601

Total stockholders' equity 450,368 358,253

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Net interest income 104,951 96,659 95,680

Provision for credit losses on loans 4,594 900 —

Net interest income after provision for credit losses 92,065 94,780 91,544

(Reversal of) provision for credit losses on loans ( 1,449 ) 4,594 900

(Reversal of) provision for credit losses on unfunded loan commitments ( 992 ) 1,570 129

Net interest income after (reversal of) provision for credit losses and unfunded loan commitments 107,392 90,495 94,651

Non-interest income

Service charges on deposit accounts 1,314 1,865 1,891

Wealth Management and Trust Services 2,222 1,851 1,907

Debit card interchange fees 1,438 1,586 1,561

Earnings on bank-owned life Insurance, net 973 1,196 913

Gains on investment securities, net 915 55 876

Earnings from bank-owned life insurance, net 2,194 973 1,196

Debit card interchange fees, net 1,812 1,438 1,586

Service charges on deposit accounts 1,593 1,314 1,865

Dividends on FHLB stock 760 654 799

Merchant interchange fees 239 331 378

Merchant interchange fees, net 422 239 331

(Losses) gains on investment securities, net ( 16 ) 915 55

Other income 1,145 1,166 1,345

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Depreciation and amortization 1,740 2,149 2,228

Provision for credit losses on unfunded loan commitments 1,570 129 —

Information technology 1,550 1,050 1,065

Charitable contributions 1,034 508 463

Amortization of core deposit intangible 1,135 853 887

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Federal Deposit Insurance Corporation insurance 889 474 361

Charitable contributions 587 1,034 508

Other expense 6,426 5,484 5,812

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Net income $ 33,228 $ 30,242 $ 34,241

Other comprehensive income (loss):

Other comprehensive (loss) income:

Change in net unrealized gains or losses on available-for-sale securities ( 21,281 ) 11,891 11,839

Reclassification adjustment for (gains) losses on available-for-sale securities in net income ( 915 ) ( 55 ) 79

Net unrealized losses on securities transferred from available-for-sale to held-to-maturity — — ( 278 )

Reclassification adjustment for losses (gains) on available-for-sale securities in net income 16 ( 915 ) ( 55 )

Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity 493 524 445

Other comprehensive income (loss), before tax 11,500 12,229 ( 1,390 )

Deferred tax expense (benefit) 3,402 3,624 ( 412 )

Other comprehensive income (loss), net of tax 8,098 8,605 ( 978 )

Other comprehensive (loss) income, before tax ( 20,772 ) 11,500 12,229

Deferred tax (benefit) expense ( 6,147 ) 3,402 3,624

Other comprehensive (loss) income, net of tax ( 14,625 ) 8,098 8,605

Comprehensive income $ 18,603 $ 38,340 $ 42,846

1 Share and per share data have been adjusted to reflect the two -for-one stock split effective November 27, 2018.

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

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Net of Taxes Total

Shares Amount

Balance at December 31, 2018 13,844,353 $ 140,565 $ 179,944 $ ( 4,102 ) $ 316,407

Net income — — 34,241 — 34,241

Other comprehensive loss — — — ( 978 ) ( 978 )

Reclassification of stranded tax effects in AOCI — — 638 ( 638 )

Other comprehensive income — — — 8,605 8,605

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 45,553 669 — — 669

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Other comprehensive income — — — 8,098 8,098

Cumulative effect of change in accounting principal ASU 2016-13 1

— — ( 1,216 ) — ( 1,216 )

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 65,407 1,304 — — 1,304

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Net income — — 33,228 — 33,228

Other comprehensive income — — — 8,098 8,098

Cumulative effect of change in accounting principle ASU 2016-13 2

— — ( 1,216 ) — ( 1,216 )

Other comprehensive loss — — — ( 14,625 ) ( 14,625 )

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 36,338 463 — — 463

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Stock issued in payment of director fees 6,443 217 — — 217

Stock issued to American River Bankshares shareholders 3,441,235 124,401 124,401

Stock repurchased, net of commissions ( 1,117,666 ) ( 40,722 ) — — ( 40,722 )

Balance at December 31, 2021 15,929,243 $ 212,524 $ 239,868 $ ( 2,024 ) $ 450,368

1 Share and per share data have been adjusted to reflect the two -for-one stock split effective November 27, 2018.

1 Refer to Note 1, Summary of Accounting Policies, for information on the adoption of ASU 2016-13 in 2020.

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Adjustments to reconcile net income to net cash provided by operating activities:

Provision for credit losses 4,594 900 —

Provision for credit losses on unfunded loan commitments 1,570 129 —

(Reversal of) provision for credit losses on loans ( 1,449 ) 4,594 900

(Reversal of) provision for credit losses on unfunded loan commitments ( 992 ) 1,570 129

Noncash contribution expense to employee stock ownership plan 1,330 1,289 1,245

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Net change in deferred loan origination costs/fees ( 3,155 ) 5,040 ( 348 )

Gain on sale of investment securities ( 915 ) ( 55 ) ( 876 )

Loss (gain) on sale of investment securities 16 ( 915 ) ( 55 )

Depreciation and amortization 1,740 2,149 2,228

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Proceeds from paydowns/maturities of available-for-sale securities 110,059 114,991 86,044

Proceeds from sale of Visa Inc.

Class B restricted common stock — — 956

Loans originated and principal collected, net ( 249,337 ) ( 77,827 ) ( 84,598 )

Loan principal collected, net of originations 256,856 ( 249,337 ) ( 77,827 )

Purchase of bank-owned life insurance policies ( 1,943 ) ( 941 ) ( 2,997 )

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Purchase of premises and equipment ( 1,044 ) ( 981 ) ( 542 )

Cash and cash equivalents acquired from American River Bankshares 140,577 — —

Purchase of Federal Home Loan Bank stock — ( 176 ) ( 616 )

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Net cash provided by financing activities 442,734 149,530 128,988

Net increase (decrease) in cash, cash equivalents and restricted cash 16,932 149,167 ( 169,324 )

Net increase in cash, cash equivalents and restricted cash 147,321 16,932 149,167

Cash, cash equivalents and restricted cash at beginning of period 200,320 183,388 34,221

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Stock issued in payment of director fees $ 217 $ 217 $ 231

Securities transferred from available-for-sale to held-to-maturity $ — $ — $ 27,422

Subscription in low income housing tax credit investment $ — $ — $ 3,000

Fair value of assets acquired, excluding cash and cash equivalents $ 757,844 $ — $ —

Fair value of liabilities assumed $ 816,558 $ — $ —

Restricted cash 1

$ 4,395 $ 2,700 $ 6,516

1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco.

1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco and other cash pledged.

In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020.

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Summary of Significant Accounting Policies

Nature of Operations - Bank of Marin Bancorp ("Bancorp"), headquartered in Novato, California, conducts business primarily through its wholly-owned subsidiary, Bank of Marin (the "Bank"), a California state-chartered commercial bank that provides a wide range of financial services to customers who are predominantly professionals, small and middle-market businesses, and individuals who work and/or reside in Marin, Sonoma, Napa, San Francisco, Alameda, Contra Costa and San Mateo counties.

Besides its headquarters located in Novato, CA, the Bank operates ten branches in Marin County, two in Napa County, one in San Francisco, five in Sonoma County, three in Alameda County, and one loan production office in both Contra Costa County and San Mateo County.

Basis of Presentation - The consolidated financial statements include the accounts of Bancorp and the Bank.

Nature of Operations - Bank of Marin Bancorp ("Bancorp"), headquartered in Novato, California, conducts business primarily through its wholly-owned subsidiary, Bank of Marin (the "Bank"), a California state-chartered commercial bank that provides a wide range of financial services through 31 retail branches and 8 commercial banking offices across 10 counties, including Alameda, Amador, Contra Costa, Marin, Napa, Placer, Sacramento, San Francisco, San Mateo and Sonoma.

Our customer base is made up of business, not-for-profit and personal banking relationships from the communities within our Northern California footprint.

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 18, Merger, for further detail.

References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes.

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All material intercompany transactions have been eliminated.

We evaluated subsequent events through the date of filing with the Securities and Exchange Commission (“SEC”) and determined that, other than the early redemption of the subordinated debenture mentioned below, there were no subsequent events that require additional recognition or disclosure.

The NorCal Community Bancorp Trusts I and II, respectively (the "Trusts"), were formed for the sole purpose of issuing trust preferred securities.

Bancorp is not considered the primary beneficiary of the Trusts (variable interest entities), therefore the Trusts are not consolidated in our consolidated financial statements.

Bancorp's investments in these Trusts are accounted for under the e quity method and included in interest receivable and other assets and the subordinated debenture and related accrued interest payable are recorded as liabilities in our consolidated statements of condition.

Refer to Note 7, Borrowings and Other Obligations, for detail on the early redemption on October 7, 2018 of the subordinated debenture due to Trust I and early redemption on March 15, 2021 of the subordinated debenture due to Trust II.

We monitor financial performance and evaluate the revenue streams of the various products, services, locations, and operations on a company-wide basis.

Accordingly, all of the community banking and wealth m anagement and trust services are considered by management to be aggregated into one reportable operating segment, community banking.

We evaluated subsequent events through the date of filing with the Securities and Exchange Commission (“SEC”) and determined that there were no subsequent events that require additional recognition or disclosure.

The NorCal Community Bancorp Trust II (the "Trust") was formed for the sole purpose of issuing trust preferred securities.

Bancorp is not considered the primary beneficiary of the Trust (a variable interest entity), therefore the Trust is not consolidated in our consolidated financial statements, but rather the subordinated debenture is shown as a liability on our consolidated statements of condition.

Bancorp's investment in the securities of the Trust is accounted for under the equity method and is included in interest receivable and other assets on the consolidated statements of condition.

Refer to Note 7, Borrowings, for additional information on the subordinated debenture due to NorCal Community Bancorp Trust II and the early redemption that occurred on March 15, 2021.

Accounting Changes and Reclassifications - Certain items in prior financial statements have been reclassified to conform to the current presentation.

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However, in accordance with the accounting relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act passed in March 2020, we postponed the adoption of the CECL standard to the earlier of the end of the national emergency or December 31, 2020.

Therefore, we adopted this standard using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures, effective October 1, 2020 (the beginning of the first reporting period in which the standard was effective due to the postponement of CECL) through a cumulative adjustment to retained earnings.

Results for reporting periods beginning after September 30, 2020 will be presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP.

adoption, we recorded a cumulative adjustment to retained earnings, net of taxes, based on economic forecasts and other assumptions as of December 31, 2019.

which the standard was effective due to the postponement of CECL) through a cumulative adjustment to retained earnings.

Results for reporting periods beginning after September 30, 2020 have been presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP.

Upon adoption, we recorded a cumulative adjustment to retained earnings, net of taxes, based on economic forecasts and other assumptions as of December 31, 2019.

That adjustment resulted in an increase to our allowance for credit losses of $ 1.6 million and an increase to the allowance for unfunded loan commitments of $ 122 thousand.

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Refer to Note 3, Loans and Allowance for Credit Losses, for more information.

The Bank did not record an allowance for credit losses on available-for-sale or held-to-maturity investment securities upon the adoption of CECL as the investment portfolio consisted primarily of debt securities explicitly or implicitly backed by the U.S.

government and high credit quality obligations of state and political subdivisions.

Refer to Note 2, Investment Securities, for more information.

In the second quarter of 2021, we reclassified the provision for credit losses on unfunded commitments from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income.

Use of Estimates - The preparation of financial statements in conformity with U.S.

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Cash, Cash Equivalents and Restricted Cash - include cash, due from banks, federal funds sold and other short-term investments with maturities of less than three months at the time of purchase.

Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco.

Restricted cash includes balances not immediately available for business operations such as Federal Reserve Bank of San Francisco reserve requirements and cash pledged for interest rate swap contracts and local agency deposits.

Investment Securities - are classified as "held-to-maturity," "trading securities" or "available-for-sale." Investments classified as held-to-maturity are those that we have the ability and intent to hold until maturity and are reported at cost, adjusted for the amortization or accretion of premiums or discounts.

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Any impairment due to non-credit-related factors that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

The discount rate used in determining the present value of the expected cash flows is based on the effective interest rate implicit in the security at the date of purchase.

The discount rate used in determining the present

value of the expected cash flows is based on the effective interest rate implicit in the security at the date of purchase.

Accrued interest receivable is excluded from the amortized costs and fair values of both held-to-maturity and available-for-sale securities and included in interest receivable and other assets on the consolidated statements of condition.

Investment securities are placed on non-accrual status when principal or interest is contractually past due more than ninety days, or management does not expect full payment of principal and interest.

We do not record an allowance for credit losses for accrued interest on investment securities, as the amounts are written-off

when the investment is placed on non-accrual status.

We do not record an allowance for credit losses for accrued interest on investment securities, as the amounts are written-off when the investment is placed on non-accrual status.

There were no non-accrual investment securities in any of the years presented in the consolidated financial statements.

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Interest income is accrued daily using the simple interest method.

Fees collected upon loan origination and certain direct costs of originating loans are deferred and recognized over the contractual lives of the related loans as yield adjustments using the interest method or straightline method, as applicable.

Upon prepayment or other disposition of the underlying loans before their contractual maturities, any associated unearned fees or unamortized costs are recognized.

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The Bank elected to apply these temporary accounting provisions to payment relief loans beginning in March 2020.

Accordingly, modifications that met certain criteria of the CARES Act were not categorized as troubled debt restructurings during 2020.

Accordingly, modifications that met certain criteria of the CARES Act were not categorized as troubled debt restructurings during 2021 and 2020.

Collateral Dependent Loans - A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral.

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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.

We elected to report the change in present values from one reporting period to the next due to the

passage of time and changes in the estimate of future expected cash flows through the provision for credit losses, rather than though interest income.

We elected to report the change in present values from one reporting period to the next due to the passage of time and changes in the estimate of future expected cash flows through the provision for credit losses, rather than though interest income.

In determining the PD for each pooled segment, the Bank utilized regression analyses to identify certain economic drivers that were considered highly correlated to historical Bank or peer loan default experience.

As a result, management chose the California unemployment rate as the primary economic forecast driver for all segments, except for municipal loans.

In addition, the annual percentage change in the California gross domestic product was used in the commercial and industrial loan segment and the annual percentage change in California retail sales was used in the owner-occupied and investor-owned commercial real estate segments.

In addition, the annual percentage change in the California gross domestic product was used in the commercial and industrial loan segment.

For municipal loans, the ACL model utilized a constant default rate obtained from a nationally recognized default rate st udy, which is updated annually.

In the third quarter of 2021, we eliminated the use of the annual percentage change in California retail sales in the owner-occupied and investor-owned commercial real estate segments as we determined that it was not highly correlated to peer loan default experience when we performed our annual validation of our peer group and regression analyses.

The change in methodology did not have a material impact on the ACL.

A third party provides LGD estimates for each segment based on a banking industry Frye-Jacobs Risk Index approach.

The ACL model incorporates a one-year reasonable and supportable forecast of economic factors, updated quarterly, which is provided by a well-recognized economics advisory company.

The ACL model incorporates a one-year reasonable and supportable forecast of economic factors, updated quarterly, which is based on Moody's Analytics' Baseline Forecast.

For periods beyond the forecast horizon the economic factors revert to historical averages on a straight-line basis over a one-year period.

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No gain or loss has been recognized by us on the sale of these participation interests in 2021, 2020 and 2019.

Premises and Equipment - Premises and equipment consist of leasehold improvements, furniture, fixtures, software and equipment and are stated at cost, less accumulated depreciation and amortization, which are calculated on a straight-line basis.

Premises and Equipment - Land is carried at cost and not depreciated.

Bank-owned buildings, leasehold improvements, furniture, fixtures, software and equipment and are stated at cost, less accumulated depreciation, and depreciated/amortized on a straight-line basis.

Furniture and fixtures are depreciated over eight years and equipment is generally depreciated over three to twenty years .

Bank-owned buildings are depreciated over twenty-five to thirty years .

Leasehold improvements are amortized over the lesser of their estimated useful lives or the terms of the leases.

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The cost of maintenance and repairs is charged to expense as incurred.

Leases - We acc ount for leases in accordance with ASC 842, Leases.

As a result of the adoption of ASU 2016-02 on January 1, 2019, we recorded operating and finance lease right-of-use assets totaling $ 13.4 million, net of deferred rent and unrecognized lease incentives, operating and finance lease liabilities totaling $ 15.4 million, and no cumulative-effect adjustments to retained earnings.

Under the standard's transition guidance, we elected the package of practical expedients, which allowed us to carry forward existing lease classifications under ASC 840, Leases (previous GAAP), and did not require us to reassess initial direct costs for any existing leases.

We elected the hindsight practical expedient when determining the lease term (i.e., considering whether we are reasonably certain to exercise options to extend or terminate the lease).

In addition, we made accounting policy elections not to separate non-lease components from lease components and to exclude short-term leases (i.e., lease term of 12 months or less at the commencement date) from right-of-use assets and lease liabilities for all lease classifications.

We lease certain premises under long-term non-cancelable operating leases, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses.

Leases - We lease certain premises under long-term non-cancelable operating leases, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses.

Only those renewal and termination options that management determines are reasonably certain of exercising are included in the calculation of the lease liability.

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Lease right-of-use assets represent the right to use the underlying asset while lease liabilities represent the present value of future lease obligations.

We elected not to separate non-lease components from lease components and to exclude short-term leases (i.e., lease term of 12 months or less at the commencement date) from right-of-use assets and lease liabilities for all lease classifications.

When calculating the lease liability, because most lease contracts do not contain an implicit interest rate, we discount lease payments over a lease's expected term based on the collateralized Federal Home Loan Bank borrowing rate that was commensurate with lease terms and minimum payments at the lease commencement date.

Right-of-use assets for operating leases are amortized over the lease term by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion on the related liability to make lease payments, whereas finance leases are amortized on a straight-line basis over the term of the lease.

Expense recognition for operating leases is recorded on a straight-line basis while expense recognition for finance leases represents the sum of periodic amortization of the associated right-of-use asset and the interest accretion on the lease liability.

Expense recognition for operating leases is recorded on a straight-line basis while expense recognition for finance leases represents the sum of periodic amortization of the associated

right-of-use asset and the interest accretion on the lease liability.

Refer to Note 12, Commitments and Contingencies, for further information.

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The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Other Real Estate Owned ("OREO") - OREO is comprised of property acquired through a business combination, foreclosure, in substance repossession or acceptance of deeds-in-lieu of foreclosure when the related loan receivable is de-recognized.

OREO is recorded at fair value of the collateral less estimated costs to sell, establishing a new cost basis, and subsequently accounted for at the lower of cost or fair value less estimated costs to sell.

Any shortfall of collateral value from the recorded investment of the related loan is recognized as loss at the time of foreclosure and is charged against the allowance for loan losses.

Fair value of collateral is generally based on an independent appraisal of the property.

Revenues and expenses associated with OREO, and subsequent adjustments to the fair value of the property and to the estimated costs of disposal, are realized and reported as a component of non-interest income and expense when incurred.

Bank Owned Life Insurance ("BOLI") - The Bank owns life insurance policies on certain key current and former officers.

BOLI is recorded in interest receivable and other assets on the consolidated statements of condition at the amount that can be realized under the insurance contract at period-end, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

BOLI is recorded in interest receivable and other assets on the consolidated statements of condition at the

amount that can be realized under the insurance contract at period-end, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

Federal Home Loan Bank of San Francisco ("FHLB") Stock - The Bank is a member of the FHLB.

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Both cash and stock dividends are reported as non-interest income.

Investments in Low Income Housing Tax Credit Funds - We have invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate-income tenants throughout

Our ownership percentage in each limited partnership ranges from 1.0 % to 3.5 %.

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To the extent tax authorities disagree with tax positions taken by us, our effective tax rates could be materially affected in the period of settlement with the taxing authorities.

Revision of our estimate of accrued income taxes also may result from our own income tax planning, which may affect effective tax rates and results of operations for any reporting period.

Revision of our estimate of accrued income taxes also may

result from our own income tax planning, which may affect effective tax rates and results of operations for any reporting period.

We present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss ("NOL") carryforward, or similar tax loss or tax credit carryforward, rather than as a liability, when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) we intend to and are able to use the deferred tax asset for that purpose.

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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 EPS are calculated by dividing net income by the weighted average number of common

shares outstanding during each annual period, excluding unvested restricted stock awards.

Basic EPS are calculated by dividing net income by the weighted average number of common shares outstanding during each annual period, excluding unvested restricted stock awards.

Diluted EPS are calculated using the weighted average number of potentially dilutive common shares.

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Weighted average anti-dilutive common shares not included in the calculation of diluted EPS 97 148 35

1 Share and per share data have been adjusted to reflect the two -for-one stock split effective November 27, 2018.

Share-Based Compensation - All share-based payments, including stock options and restricted stock, are recognized as stock-based compensation expense in the consolidated statements of comprehensive income based on the grant-date fair value of the award with a corresponding increase in common stock.

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The terms of our interest rate swap contracts are closely aligned to the terms of the designated fixed-rate loans.

The hedging relationships are tested for

effectiveness on a quarterly basis using a qualitative approach.

The hedging relationships are tested for effectiveness on a quarterly basis using a qualitative approach.

The qualitative analysis includes verification that there are no changes to the derivative's or hedged item's key terms and conditions and no adverse developments regarding risk of counterparty default, and validation that we continue to have fair value hedge designation.

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Costs associated with WM&T revenue-generating activities, such as payments to sub-advisors, are recorded separately as part of professional service expenses when incurred.

• Deposit account service charges - Service charges on deposit accounts consist of monthly maintenance fees, business account analysis fees, business online banking fees, check order charges, and other deposit account-related fees.

account-related fees.

Performance obligations for monthly maintenance fees and account analysis fees are satisfied, and the related revenue recognized, when we complete our performance obligation each month.

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Other Recently Adopted Accounting Standards

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement (ASC Topic 820):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement .

The amendments in this ASU remove, modify, and add disclosure requirements for the fair value reporting of assets and liabilities.

The modifications and additions relate to Level 3 fair value measurements at the end of the reporting period.

ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Entities should disclose and describe the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements.

We adopted this ASU prospectively effective January 1, 2020.

As the ASU’s requirements only relate to disclosures, the amendments did not impact our financial condition or results of operations.

Refer to Note 9, Fair Value of Assets and Liabilities, for additional disclosures.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles - Goodwill and Other - Internal-Use Software (ASC Subtopic 350-40):

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract .

This standard aligns the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software regardless of whether they convey a license to the hosted software.

The accounting for the service element of a hosting arrangement that is a service contract is not affected by this ASU.

The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

An entity has the option to apply amendments in the ASU either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

We adopted this ASU prospectively on January 1, 2020, which did not impact our financial condition and results of operations.

Accounting Standards Not Yet Effective

In December 2019, the FASB issued ASU No.

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This ASU is intended to reduce the cost and complexity related to accounting for income taxes by removing certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and simplifying aspects of the accounting for franchise taxes and enacted changes in tax laws or rates.

This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

Early adoption is permitted.

As this ASU is narrow in scope and applicability to us will likely be minimal, we do not expect that the ASU will have a material impact on our financial condition or results of operations.

We adopted this ASU prospectively on January 1, 2021, which did not have a material impact on our financial condition or results of operations.

In January 2020, the FASB issued ASU No.

2020-01, Investments - Equity Securities (ASC Topic 321), Investments - Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815) - Clarifying the Interactions between ASC 321, ASC 323, and ASC 815 .

Among other things, this ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under ASC 323, for the purposes of applying the measurement alternative in accordance with ASC 321.

This ASU is effective for fiscal years beginning after December 15, 2020.

Early adoption is permitted.

2020-01 should be applied prospectively at the beginning of the interim period that includes adoption.

We do not expect that the ASU will have a material impact on our financial condition or results of operations.

Among other things, this ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of

accounting under ASC 323, for the purposes of applying the measurement alternative in accordance with ASC 321.

We adopted this ASU prospectively on January 1, 2021, which did not have a material impact on our financial condition or results of operations.

In October 2020, the FASB issued ASU No.

2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs .

This ASU was issued as part of the Board's ongoing project to improve codification or correct unintended application.

This ASU adds clarification to ASU 2017-08, which the Bank early-adopted in 2017, and delineates whether an entity with callable debt securities that have multiple call dates should amortize the amount above that which is repayable, to the next call date.

We adopted this ASU prospectively on January 1, 2021.

Because this ASU was narrow in scope and for clarification purposes, it did not have a material impact on our financial condition and results of operations.

Accounting Standards Not Yet Effective

In March 2020, the FASB issued ASU No.

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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, however, 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 October 2020, the FASB issued ASU No.

2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs .

This ASU was issued as part of the Board's ongoing project to improve codification or correct unintended application.

This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, on a prospective basis.

Early adoption is not permitted.

As this ASU is narrow in scope and for clarification purposes, we do not expect this ASU will have a material impact on our financial condition and results of operations.

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.

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Amendments may be elected through December 31, 2022.

We have not elected to apply amendments at this time, however, will assess the applicability of this ASU (and ASU 2020-04) 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.

We have four interest rate swap contracts with notional values totaling $ 13.0 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.

Investment Securities

Our investment securities portfolio consists of obligations of state and political subdivisions, U.S.

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.

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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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

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8,042 — 8,042 363 — 8,405

CMOs issued by GNMA 3,763 — 3,763 53 — 3,816

SBA-backed securities 6,547 — 6,547 400 — 6,947

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Total held-to-maturity $ 109,036 $ — $ 109,036 $ 6,149 $ — $ 115,185

1 Amortized cost and fair values exclude accrued interest receivable of $ 366 thousand and $ 469 thousand at December 31, 2020 and 2019, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

1 Amortized cost and fair values exclude accrued interest receivable of $ 1.1 million and $ 366 thousand at December 31, 2021 and 2020, 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.

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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.

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 and external credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees and/or insurance, 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 Moody's and/or Standard & Poor's bond ratings for our portfolio of held-to-maturity securities issued by states and political subdivisions as of December 31, 2020.

(in thousands) Obligations of state and political subdivisions

The following table summarizes the amortized cost of our portfolio of held-to-maturity securities issued by states and political subdivisions by Moody's and/or Standard & Poor's bond ratings as of December 31, 2021.

Obligations of state and political subdivisions

Ratings by S&P / Moody's (in thousands) December 31, 2021 December 31, 2020

AAA / Aaa $ 34,229 $ —

AA / Aa 12,873 1,461

Total $ 47,203 $ 1,667

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government-sponsored enterprises:

MBS pass-through securities issued by FHLMC and FNMA $ 50,686 $ 2,530 $ — $ — $ 53,216

MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 316,090 $ 1,224 $ ( 2,784 ) $ — $ 314,530

CMOs issued by FHLMC 343,047 3,209 ( 4,829 ) — 341,427

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Debentures of government- sponsored agencies 191,449 25 ( 2,947 ) — 188,527

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

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Obligations of state and political subdivisions 104,887 5,765 — — 110,652

Corporate bonds 1,497 6 ( 1 ) — 1,502

Total available-for-sale $ 373,038 $ 19,393 $ ( 80 ) $ — $ 392,351

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Total $ 342,222 $ 342,755 $ 1,169,520 $ 1,167,568 $ 109,036 $ 115,185 $ 373,038 $ 392,351

As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies.

During 2018, we transferred $ 27.4 million, 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 $ 278 thousand, remained in accumulated other comprehensive income and is amortized over the remaining life of the securities along with amortization of any prior transfers.

Amortization of the net unrealized pre-tax loss totaled $ 524 thousand, $ 445 thousand and $ 516 thousand in 2020, 2019 and 2018, respectively.

There were no securities transferred from available-for-sale to held-to-maturity at fair value in 2020 or 2019.

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

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Collateral for trust deposits 729 751

Collateral for Wealth Management and Trust Services checking account 614 629

Total investment securities pledged to the State of California $ 215,204 $ 132,431

Collateral for Wealth Management and Trust Services ("WMTS") checking account $ 629 $ 622

Bankruptcy trustee deposits pledged with Federal Reserve Bank

Total pledged investment securities $ 217,849 $ 132,431

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(in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss

Available-for-sale:

SBA-backed securities $ — $ — $ 1,790 $ ( 55 ) $ 1,790 $ ( 55 )

CMOs issued by FHLMC 5,975 ( 1 ) — — 5,975 ( 1 )

Debentures of government-sponsored agencies 3,943 ( 24 ) — — 3,943 ( 24 )

Total $ 9,918 $ ( 25 ) $ 1,790 $ ( 55 ) $ 11,708 $ ( 80 )

December 31, 2019 < 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:

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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 )

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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 )

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 a loss position $ 998,985 $ ( 15,278 ) $ 14,173 $ ( 615 ) $ 1,013,158 $ ( 15,893 )

December 31, 2020 < 12 continuous months > 12 continuous months Total securities

in a loss position

(in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss

Available-for-sale:

SBA-backed securities $ — $ — $ 1,790 $ ( 55 ) $ 1,790 $ ( 55 )

CMOs issued by FHLMC 5,975 ( 1 ) — — 5,975 ( 1 )

Debentures of government- sponsored agencies 3,943 ( 24 ) — — 3,943 ( 24 )

Total available-for-sale 9,918 ( 25 ) 1,790 ( 55 ) 11,708 ( 80 )

Total $ 9,918 $ ( 25 ) $ 1,790 $ ( 55 ) $ 11,708 $ ( 80 )

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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 December 31, 2020, management determined that it did not intend to sell investment securities with unrealized losses, and it is not more than likely than not that w e will have to sell any of the securities with unrealized losses before recovery of their amortized cost.

Ther efore, no allowance for credit losses has 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 December 31, 2020.

At December 31, 2021, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that w e 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 December 31, 2021.

Non-Marketable Securities

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.

As a member bank 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.

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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 conversion rate of 1.6228 , as of December 31, 2020 and 2019, 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 and $ 3.2 million at December 31, 2020 and 2019, respectively.

When converting this Class B common stock to Class A common stock based on the conversion rate of 1.6181 and 1.6228 , as of December 31, 2021 and 2020, respectively, 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 December 31, 2021 and 2020.

The conversion rate is subject to further adjustment upon the final settlement of the covered litigation against Visa Inc.

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As such, the fair value of these Class B shares can differ significantly from their converted values.

In October 2018, we sold 6,500 shares of our holdings of Visa Inc.

Class B common stock to a member bank of Visa U.S.A., resulting in a pre-tax gain, net of sales commission, of $ 956 thousand.

For further information, refer to Note 12, Commitments and Contingencies.

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In 2021, we recognized $ 645 thousand of low income housing tax credits and other tax benefits, net of $ 542 thousand of amortization expense of low income housing tax credit investment, as a component of income tax expense.

As of December 31, 2020, our

unfunded commitments for these low income housing tax credit funds totaled $ 821 thousand.

We did not recognize any impairment losses on these low income housing tax credit investments during 2020 or 2019, as the value of the future tax benefits exceeds the carrying value of the investments.

As of December 31, 2021, our unfunded commitments for these low income housing tax credit funds totaled $ 422 thousand.

We did not recognize

any impairment losses on these low income housing tax credit investments during 2021 or 2020, as the value of the future tax benefits exceeds the carrying value of the investments.

Loans and Allowance for Credit Losses

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Allowance for credit losses on loans ( 23,023 ) ( 22,874 )

Total loans, net $ 2,065,682 $ 1,826,609

1 Amortized cost includes net deferred loan origination (fees) costs of $( 4.9 ) million and $ 983 thousand at December 31, 2020 and 2019, respectively.

Amounts are also net of unrecognized purchase discounts of $ 815 thousand and $ 958 thousand at December 31, 2020 and 2019, respectively.

Total loans, net of allowance for credit losses on loans $ 2,232,622 $ 2,065,682

1 Amortized cost includes net deferred loan origination (fees) costs of $( 901 ) thousand and $( 4.1 ) million at December 31, 2021 and 2020, respectively.

Amounts are also net of unrecognized purchase discounts of $ 2.5 million and $ 815 thousand at December 31, 2021 and 2020, respectively.

Amortized cost excludes accrued interest, which totaled $ 7.1 million and $ 8.8 million at December 31, 2021 and 2020, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.

Lending Risks

Concentrations of Credit - Virtually all of our loans are from customers located in California, primarily in Marin, Alameda, Sonoma, San Francisco, Napa, and Contra Costa counties.

Approximate ly 77 % and 88 %, of total loans were secured by real estate at December 31, 2020 and 2019, respectively.

The decrease in the percentage secured by real estate from 2019 to 2020 was due to $ 291.6 million in unsecured loans guaranteed by the SBA under the PPP, which are included in commercial and industrial loans at December 31, 2020.

At December 31, 2020 and 2019, 61 % and 68 %, res pectively, of our loans were for commercial real est ate, 85 % and 84 % of which were secured by real estate located in Marin, Sonoma, Alameda, San Francisco and Napa counties (California).

Concentrations of Credit - Virtually all of our loans are from customers located in Northern California.

Approximately 86 % and 77 %, of total loans were secured by real estate at December 31, 2021 and 2020, respectively.

At December 31, 2021 and 2020, 70 % and 61 %, respectively, of our loans were for commercial real estate, the majority of which were secured by real estate located in Marin, Sonoma, Napa, Alameda, San Francisco, Sacramento, and Contra Costa counties (California).

The increase in the percentages 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 Paycheck Protection Program ("PPP"), which are included in commercial and industrial loans.

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.

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A weakened economy, and resultant decreased consumer and/or business spending, will have an effect on the credit quality of commercial loans.

Pursuant to the CARES Act, the Bank funded over 1,800 loans to eligible small businesses and non-profit organizations who participated in the PPP administered by the SBA.

Pursuant to the 2020 CARES Act, Bank of Marin originated 2,876 SBA-guaranteed loans totaling $ 444.1 million under the PPP to eligible small businesses and non-profit organizations in two rounds of PPP loan financing.

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 amortized into interest income using the effective yield method over the contractual life of each loan.

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 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 loan is forgiven by the SBA and/or paid off prior to maturity.

PPP loans are fully guaranteed by the SBA and are expected to be forgiven by the SBA if they meet the requirements of the program.

At December 31, 2020, PPP loans totaling $ 291.6 million, net of $ 5.4 million in unearned fees, were included in commercial and industrial loan balances.

The Bank ended its origination of new PPP loans under the provisions of the CARES Act on June 30, 2020.

On June 5, 2020, the PPP Flexibility Act was signed into law that modified, among other things, rules governing the PPP payment deferral period.

In October 2020, due to the continued delay in the PPP forgiveness process, the Bank modified the first payment due dates for PPP loans that originated prior to June 5, 2020 and extended the payment deferral period from six to sixteen months .

The extended payment deferral period also extended the time over which the accretion of PPP net loan origination fees are recognized.

In addition, on January 19, 2021, the Bank launched the application process and began accepting loan requests for the second round of PPP loans as revised by the Economic Aid Act.

PPP loans totaling $ 111.2 million (net of $ 2.5 million in unrecognized fees and costs) and $ 291.6 million (net of $ 5.4 million in unrecognized fees and costs) were included in commercial and industrial loan balances at December 31, 2021 and 2020, respectively.

The December 31, 2021 amount includes 13 PPP loans totaling $ 2.8 million assumed in the ARB acquisition.

In 2021 and 2020, respectively, Bank of Marin recognized $ 8.3 million and $ 3.8 million in PPP fees, net of costs.

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 and to be supported by real property collateral.

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.

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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 and floating homes along with a small number of installment loans.

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.

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These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences.

Negative external industry factors are generally

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.

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.

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We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.

The following table presents the loan portfolio by loan class, origination year and internal risk rating as of December 31, 2020.

The following tables present the loan portfolio by loan class, origination year and internal risk rating as of December 31, 2021 and 2020.

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.

Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost

December 31, 2021 Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost

(in thousands) 2021 2020 2019 2018 2017 Prior Total

Commercial and industrial:

Pass $ 308,237 $ 22,589 $ 12,596 $ 4,508 $ 5,915 $ 34,282 $ 85,889 $ 474,016

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

2 unchanged sentences

Commercial real estate, owner-occupied:

Pass $ 31,029 $ 27,581 $ 32,603 $ 43,843 $ 12,768 $ 101,014 $ — $ 248,838

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 $ 162,300 $ 144,751 $ 173,955 $ 100,842 $ 94,862 $ 253,611 $ 117 $ 930,438

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

1 unchanged sentence

Total commercial real estate, investor-owned $ 225,722 $ 187,428 $ 190,132 $ 155,496 $ 77,206 $ 352,953 $ 84 $ 1,189,021

December 31, 2021 Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost

(in thousands) 2021 2020 2019 2018 2017 Prior Total

Construction:

Pass $ 31,654 $ 30,150 $ 11,242 $ — $ — $ — $ — $ 73,046

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

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

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

Total Doubtful $ — $ 114 $ — $ — $ — $ — $ — $ 114

Totals $ 461,784 $ 385,837 $ 310,140 $ 242,704 $ 131,462 $ 539,868 $ 183,850 $ 2,255,645

December 31, 2020 Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost

(in thousands) 2020 2019 2018 2017 2016 Prior Total

Commercial and industrial:

Pass and Watch $ 308,237 $ 22,589 $ 12,596 $ 4,508 $ 5,915 $ 34,282 $ 85,889 $ 474,016

Special Mention — 2,034 1,318 141 11 49 19,092 22,645

Substandard 1,747 — — — — — — 1,747

Total commercial and industrial $ 309,984 $ 24,623 $ 13,914 $ 4,649 $ 5,926 $ 34,331 $ 104,981 $ 498,408

Commercial real estate, owner-occupied:

Pass and Watch $ 31,029 $ 27,581 $ 32,603 $ 43,843 $ 12,768 $ 101,014 $ — $ 248,838

Special Mention — — 11,764 17,062 7,343 6,601 — 42,770

Substandard 7,147 — — — 6,208 — — 13,355

Total commercial real estate, owner-occupied $ 38,176 $ 27,581 $ 44,367 $ 60,905 $ 26,319 $ 107,615 $ — $ 304,963

Commercial real estate, investor-owned:

Pass and Watch $ 162,300 $ 144,751 $ 173,955 $ 100,842 $ 94,862 $ 253,611 $ 117 $ 930,438

Special Mention — 10,695 — 1,819 — 8,124 — 20,638

Substandard — 2,716 4,435 — 1,553 1,428 — 10,132

Total commercial real estate, investor-owned $ 162,300 $ 158,162 $ 178,390 $ 102,661 $ 96,415 $ 263,163 $ 117 $ 961,208

Construction:

Pass and Watch $ 31,654 $ 30,150 $ 11,242 $ — $ — $ — $ — $ 73,046

Total construction $ 31,654 $ 30,150 $ 11,242 $ — $ — $ — $ — $ 73,046

Pass $ — $ — $ — $ — $ 128 $ 694 $ 102,614 $ 103,436

Pass and Watch $ — $ — $ — $ — $ 128 $ 694 $ 102,614 $ 103,436

Special Mention — — — — — — 799 799

2 unchanged sentences

Other residential:

Pass $ 34,447 $ 31,079 $ 23,673 $ 10,574 $ 6,035 $ 17,587 $ — $ 123,395

Special Mention — — — — — — — —

Substandard — — — — — — — —

Pass and Watch $ 34,447 $ 31,079 $ 23,673 $ 10,574 $ 6,035 $ 17,587 $ — $ 123,395

Total other residential $ 34,447 $ 31,079 $ 23,673 $ 10,574 $ 6,035 $ 17,587 $ — $ 123,395

Installment and other consumer:

Pass $ 2,361 $ 4,382 $ 3,483 $ 1,543 $ 3,423 $ 4,921 $ 2,593 $ 22,706

Special Mention — — — — — — — —

Pass and Watch $ 2,361 $ 4,382 $ 3,483 $ 1,543 $ 3,423 $ 4,921 $ 2,593 $ 22,706

Substandard — — — 17 — — — 17

Total installment and other consumer $ 2,361 $ 4,382 $ 3,483 $ 1,560 $ 3,423 $ 4,921 $ 2,593 $ 22,723

Pass $ 570,028 $ 260,532 $ 257,552 $ 161,310 $ 123,131 $ 412,109 $ 191,213 $ 1,975,875

Pass and Watch $ 570,028 $ 260,532 $ 257,552 $ 161,310 $ 123,131 $ 412,109 $ 191,213 $ 1,975,875

Total Special Mention $ — $ 12,729 $ 13,082 $ 19,022 $ 7,354 $ 14,774 $ 19,891 $ 86,852

1 unchanged sentence

Totals $ 578,922 $ 275,977 $ 275,069 $ 180,349 $ 138,246 $ 428,702 $ 211,291 $ 2,088,556

The following table summarizes the amortized cost of loans by internally assigned risk grades and loan class at December 31, 2019.

(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

December 31, 2019

Pass $ 209,213 $ 264,766 $ 945,757 $ 61,095 $ 114,935 $ 136,657 $ 27,538 $ 1,759,961

Special Mention 37,065 35,016 560 — 750 — — 73,391

Substandard 409 9,042 — — 339 — 144 9,934

Total loans $ 246,687 $ 308,824 $ 946,317 $ 61,095 $ 116,024 $ 136,657 $ 27,682 $ 1,843,286

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

23 unchanged sentences

Non-accrual loans with no allowance $ — $ 7,147 $ 1,610 $ — $ 459 $ — $ 17 $ 9,233

1 There were no loans past due more than ninety days accruing interest at December 31, 2020 or 2019.

1 There were two SBA-PPP loans past due more than ninety days totaling $ 229 thousand accruing interest at December 31, 2021 for which we requested "guarantee" payment from the SBA.

The SBA subsequently purchased both loans in January 2022.

There were no loans past due more than ninety days accruing interest at December 31, 2020.

2 None of the non-accrual loans as of December 31, 2021 or 2020 were earning interest on a cash basis.

We recognized no interest income on non-accrual loans for the years ended December 31, 2021, 2020 or 2019.

There was no accrued interest reversed from interest income for the single loan that was placed on non-accrual status in 2021, as interest due was paid current.

Accrued interest of $ 36 thousand was reversed from interest income for loans that were placed on non-accrual status during the year ended December 31, 2020.

Collateral Dependent Loans

The following table presents the amortized cost basis of individually analyzed collateral-dependent non-accrual loans by class at December 31, 2020.

The following table presents the amortized cost basis of individually analyzed collateral-dependent non-accrual loans by class at December 31, 2021 and 2020.

Amortized Cost by Collateral Type

(in thousands) Commercial Real Estate Residential Real Estate Other Total Allowance for Credit Losses

December 31, 2021

Commercial real estate, owner-occupied $ 7,269 $ — $ — $ 7,269 $ —

1 unchanged sentence

Home equity — 413 — 413 —

Total $ 7,963 $ 413 $ — $ 8,376 $ —

December 31, 2020

Commercial real estate, owner-occupied $ 7,147 $ — $ — $ 7,147 $ —

Commercial real estate, investor-owned 1,610 — — 1,610 —

Home equity — 459 — 459 —

Installment and other consumer — — 17 17 —

Total $ 16,720 $ 872 $ 17 $ 17,609 $ —

No collateral-dependent loans were in process of foreclosure at December 31, 2020.

In addition, the weighted average loan-to-value of collateral dependent loans was approximately 56 %.

No collateral-dependent loans were in process of foreclosure at December 31, 2021 and 2020.

In addition, the weighted average loan-to-value of collateral dependent loans was approximately 67 % and 56 % at December 31, 2021 and 2020, respectively .

Troubled Debt Restructuring

5 unchanged sentences

Home equity 386 281

Other residential — 452

Installment and other consumer 607 752

$ 9,510 $ 12,506

1 TDR loans on non-accrual status totaled $ 7.4 million at December 31, 2020 and $ 58 thousand at December 31, 2019.

Unfunded commitments for TDR loans totaled $ 704 thousand as of December 31, 2020.

There were no loans removed from TDR designation during 2020.

After meeting all of the conditions specified in Note 1, there was one commercial loan with an amortized cost of $ 3 thousand removed from TDR designation during 2019, and one TIC loan and one home equity loan with amortized costs totaling $ 247 thousand removed from TDR designation during 2018.

1 TDR loans on non-accrual status totaled $ 7.4 million at both December 31, 2021 and 2020.

Unfunded commitments for TDR loans totaled $ 441 thousand and $ 704 thousand as of December 31, 2021 and 2020, respectively.

After meeting all of the conditions specified in Note 1, we removed one commercial loan with a remaining amortized cost of $ 2 thousand and an unfunded commitment of $ 600 thousand from TDR designation during 2021.

There were no loans removed from TDR designation during 2020 and one commercial loan with an amortized cost of $ 3 thousand removed from TDR designation in 2019.

In accordance with section 4013 of the 2020 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 a TDR under existing GAAP.

Since the onset of the pandemic, the Bank granted payment relief for 269 loans that included full payment deferral or interest-only payments on loan balances exceeding $ 402.9 million.

Of these loans, 222 or $ 324.2 million have resumed normal payments and 18 loans or $ 7.7 million paid off.

As of December 31, 2020, 21 borrowing relationships with 29 loans totaling $ 71.0 million had requested additional payment relief.

As of December 31, 2020, there were 21 borrowing relationships with 29 loans totaling $ 71.0 million on payment relief.

As of December 31, 2021, 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 presents information for loans modified in a TDR during the presented periods, including the number of modified contracts, the amortized cost of the loans prior to modification, and the amortized cost of the loans at period end after being restructured.

3 unchanged sentences

Commercial and industrial 1 $ 1,101 $ 1,101 $ 901

Commercial real estate, investor-owned 1 1,553 1,553 1,553

Home equity 1 120 120 120

Installment and other consumer 2 204 204 201

Total 2 $ 1,221 $ 1,221 $ 1,021

1 unchanged sentence

Commercial and industrial 1 $ 170 $ 162 $ 96

Commercial real estate, investor-owned 1 1,553 1,553 1,553

Home equity 1 276 276 271

Installment and other consumer 2 204 204 201

Total 5 $ 2,203 $ 2,195 $ 2,121

TDRs modified during 2019:

Commercial and industrial 1 $ 298 $ 298 $ 150

The loans modified during 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications that did not meet the criteria specified by the CARES Act for temporary relief from TDR accounting.

The loans modified during 2021 and 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications that did not meet the criteria specified by the 2020 CARES Act for temporary relief from TDR accounting.

The loan modified during 2019 reflected a maturity extension and interest rate concession.

The loans modified during 2018 were to the same borrower and included maturity extensions and other changes to loan terms.

One consumer loan for $ 7 thousand, which was designated as a TDR during 2020, was subsequently charged-off in the fourth quarter.

During 2020, 2019 and 2018, there were no other defaults on loans that had been modified in a TDR within the prior twelve-month period.

During 2021, 2020 and 2019, there were no other defaults on loans that had been modified in a TDR within the prior

twelve-month period.

We report defaulted TDRs based on a payment default definition of more than ninety days past due.

Purchased Loans with Credit Deterioration

For purchased loans with a more-than-insignificant amount of credit deterioration since origination ("PCD loans") the initial allowance for credit losses at the date of acquisition was added to the purchase price (or fair value) to determine the initial amortized cost basis.

Subsequent changes in expected credit losses (favorable or unfavorable) are recognized through net income as adjustments to the allowance for credit losses on loans.

Refer to Note 1, Summary of Significant Accounting Policies, for additional information regarding the accounting for PCD and non-PCD loans.

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

(in thousands)

Unpaid principal balance (par value) $ 92,029

Non-credit discount ( 1,662 )

Amortized cost basis 90,367

Initial allowance for credit losses on PCD loans ( 1,505 )

Purchase price (PCD loans at fair value) $ 88,862

Allowance for Credit Losses on Loans Rollforward

The following tables disclose activity in the allowance for credit losses.

Allowance for Credit Losses Rollforward

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

1 unchanged sentence

Beginning balance $ 2,530 $ 2,778 $ 12,682 $ 1,557 $ 738 $ 998 $ 291 $ 1,300 $ 22,874

Provision (reversal) - CECL method ( 1,240 ) ( 561 ) ( 476 ) 62 ( 193 ) ( 360 ) 333 986 ( 1,449 )

Initial allowance for PCD loans 405 559 533 — — 6 2 — 1,505

(Charge-offs) — — — — — — ( 5 ) — ( 5 )

Recoveries 14 — — 34 50 — — — 98

Ending balance $ 1,709 $ 2,776 $ 12,739 $ 1,653 $ 595 $ 644 $ 621 $ 2,286 $ 23,023

Year ended December 31, 2020

Beginning balance $ 2,334 $ 2,462 $ 8,483 $ 638 $ 850 $ 973 $ 284 $ 653 $ 16,677

Provision - incurred loss method 208 673 3,141 219 188 287 122 612 5,450

14 unchanged sentences

Ending balance $ 2,334 $ 2,462 $ 8,483 $ 638 $ 850 $ 973 $ 284 $ 653 $ 16,677

Year ended December 31, 2018

Beginning balance $ 3,654 $ 2,294 $ 6,475 $ 681 $ 1,031 $ 536 $ 378 $ 718 $ 15,767

Provision (reversal) - incurred loss method ( 1,232 ) 113 1,228 75 ( 116 ) 264 ( 108 ) ( 224 ) —

(Charge-offs) ( 3 ) — — — — — ( 2 ) — ( 5 )

Recoveries 17 — — — — — 42 — 59

Ending balance $ 2,436 $ 2,407 $ 7,703 $ 756 $ 915 $ 800 $ 310 $ 494 $ 15,821

We adopted the CECL accounting standard on December 31, 2020, which was previously postponed under the optional accounting relief provisions of the CARES Act passed in March 2020 to the earlier of the end of the national emergency or December 31, 2020.

During the first nine months of 2020, we applied the incurred loss method in determining the allowance for credit losses on loans ("ACL") and recorded a $ 5.5 million provision for credit losses.

Upon adoption of the CECL standard, we increased the ACL by $ 748 thousand, which represented the difference between allowances calculated under the CECL method as of December 31, 2020 and the incurred loss method as of September 30, 2020.

We adopted the CECL accounting standard on December 31, 2020, which we had previously postponed under the optional accounting relief provisions of the CARES Act passed in March 2020 to the earlier of the end of the national emergency or December 31, 2020.

During the first nine months of 2020, we applied the incurred loss method under previous GAAP in determining the allowance for credit losses on loans.

Refer to Note 1, Summary of Significant Accounting Policies, for additional information on the adoption of CECL.

10 unchanged sentences

Balance at beginning of year $ 6,423 $ 8,333 $ 10,635

Additions — — 863

Assumed in the ARB acquisition 4,037 — —

Repayments ( 2,518 ) ( 1,910 ) ( 2,320 )

7 unchanged sentences

Furniture and equipment 11,384 10,959

Finance lease right-of-use assets 2

Subtotal 29,530 25,750

1 unchanged sentence

Bank premises and equipment, net $ 7,558 $ 4,919

1 Buildings and land were acquired in the merger with American River Bankshares.

See Note 18, Merger, for more information.

2 See Note 12, Commitments and Contingencies, for more information.

The amount of depreciation and amortization totaled $ 1.7 million, $ 2.1 million and $ 2.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.

3 unchanged sentences

The benefits to employees' beneficiaries are limited to each employee's active service period.

The investment in bank owned life insurance policies are reported in interest receivable and other assets at their cash surrender value, net of surrender charges, of $ 43.6 million and $ 41.6 million at December 31, 2020 and 2019, respectively.

The investment in BOLI policies are reported at their cash surrender value, net of surrender charges, of $ 61.5 million and $ 43.6 million at December 31, 2021 and 2020, respectively.

The cash surrender value includes both the original premiums paid for the life insurance policies and the accumulated accretion of policy income since inception of the policies, net of mortality costs and other fees.

Income of $ 973 thousand, $ 1.2 million and $ 913 thousand was recognized on these life insurance policies in 2020, 2019 and 2018, respectively.

Earnings on BOLI totaled $ 2.2 million, $ 973 thousand and $ 1.2 million in 2021, 2020 and 2019, respectively.

These earnings included death benefit proceeds in excess of the cash surrender values of the BOLI policies of $ 1.1 million in 2021 and $ 562 thousand in 2019.

There were no death benefits on BOLI in 2020.

We regularly monitor the financial information and credit ratings of our insurance carriers to ensure that they are credit worthy and comply with our policy.

1 unchanged sentence

(in thousands) 2021 2020

Time deposits of less than $100 thousand $ 28,016 $ 29,931

Time deposits of $100 thousand to $250 thousand 38,773 39,377

Time deposits of less than or equal to $250 thousand $ 96,214 $ 66,789

Time deposits of more than $250 thousand 54,021 30,644

21 unchanged sentences

Borrowings and Other Obligations

Federal Funds Purchased – The Bank had unsecured lines of credit with correspondent banks for overnight borrowings totaling $ 135.0 million and $ 92.0 million at December 31, 2020 and 2019, respectively.

Federal Funds Purchased – The Bank had unsecured available lines of credit with correspondent banks for overnight borrowings totaling $ 150.0 million and $ 135.0 million at December 31, 2021 and 2020, respectively.

In general, interest rates on these lines approximate the federal funds target rate.

We had no overnight borrowings under these credit facilities at December 31, 2021 and 2020.

Federal Home Loan Bank Borrowings – As of December 31, 2020 and 2019, the Bank had lines of credit with the FHLB totaling $ 642.5 million and $ 648.0 million, respectively, based on eligible collateral of certain loans.

Federal Home Loan Bank Borrowings – As of December 31, 2021 and 2020, the Bank had available lines of credit with the FHLB totaling $ 820.5 million and $ 642.5 million, respectively, based on eligible collateral of certain loans.

There were no FHLB overnight borrowings at December 31, 2021 and 2020.

Federal Reserve Line of Credit – The Bank has a line of credit with the FRBSF secured by certain residential loans.

As part of our acquisition of ARB, we assumed FHLB advances in the amount of $ 13.9 million that we early redeemed on August 25, 2021.

Federal Reserve Line of Credit – The Bank has an available line of credit with the FRBSF secured by certain residential loans.

At December 31, 2021 and 2020, the Bank had borrowing capacity under this line totaling $ 70.8 million and $ 78.7 million, respectively, and had no outstanding borrowings with the FRBSF.

Subordinated Debentures - As part of an acquisition, Bancorp assumed two subordinated debentures due to NorCal Community Bancorp Trusts I and II, established for the sole purpose of issuing trust preferred securities.

The trust preferred securities were sold and issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended.

On October 7, 2018, Bancorp redeemed in full the

subordinated debenture due to NorCal Community Bancorp Trust I, resulting in $ 916 thousand of accelerated accretion.

The Trust II subordinated debenture was recorded at fair value totaling $ 2.14 million at acquisition date with a contractual balance of $ 4.12 million.

The difference between the contractual balance and the fair value at acquisition date is accreted into interest expense over the life of the debenture.

Accretion on the subordinated debentures totaled $ 69 thousand, $ 68 thousand (Trust II) and $ 1.0 million (Trusts I and II) for the years ended December 31, 2020, 2019 and 2018, respectively.

Bancorp has guaranteed, on a subordinated basis, distributions and other payments due on trust preferred securities totaling $ 4.0 million issued by Trust II, which have identical maturity, repricing and payment terms as the subordinated debenture.

The subordinated debenture due to Trust II on March 15, 2036 with interest payable quarterly (repricing quarterly, based on 3-month LIBOR plus 1.40 %, or 1.62 % as of December 31, 2020) is redeemable in whole or in part on any interest payment date.

On March 15, 2021, we early redeemed the $ 2.8 million subordinated debenture due to Trust II, which carried an average interest rate of 5.68 % in 2020.

The redemption consisted of $ 4.1 million principal balance, accrued interest, and $ 1.3 million in accelerated purchase discount accretion.

Subordinated Debentures - As part of an acquisition in 2013, Bancorp assumed a subordinated debenture with a contractual balance of $ 4.1 million due to NorCal Community Bancorp Trust II (the "Trust"), established for the sole purpose of issuing trust preferred securities.

On March 15, 2021, Bancorp redeemed in full the $ 2.8 million (book value) subordinated debenture due to the Trust, which had an effective rate of 5.7 % for the twelve months ended December 31, 2020.

The 251.5 % effective rate for the twelve months ended December 31, 2021 included accelerated accretion of the $ 1.3 million remaining purchase discount due to the early redemption.

Accretion on the subordinated debenture totaled $ 69 thousand and $ 68 thousand for the years ended December 31, 2020 and 2019, respectively.

Other Obligations - The Bank leases certain equipment under finance leases, which are included in borrowings and other obligations in the consolidated statements of condition.

5 unchanged sentences

Other obligations (finance leases) $ 419 $ 250 0.71 % $ 58 $ 132 2.62 % $ 212 $ 279 2.85 %

Subordinated debentures 1

FHLB fixed-rate advances 1

$ — $ 642 1.18 % $ — $ — — % $ — $ — — %

Subordinated debenture $ — $ 534 251.54 % $ 2,777 $ 2,741 5.68 %

$ 2,708 $ 2,673 8.44 %

1 Subordinated debentures average rate in 2018 included the impact of the $ 916 thousand accelerated accretion due to early redemption of the subordinated debenture due to NorCal Community Bancorp Trust I.

1 Average balance and rate consider $ 13.9 million in FHLB borrowings acquired from ARB on August 6, 2021 and redeemed on August 25, 2021.

Stockholders' Equity and Stock Plans

On October 22, 2018, Bancorp announced a two -for-one stock split, which occurred on November 27, 2018.

All share and per share data have been adjusted to reflect the stock split effective November 27, 2018.

Share-Based Awards

On May 12, 2020, our shareholders approved the 2020 Director Stock Plan, replacing and superseding the 2010 Director Stock Plan (collectively "the Plan").

The Plan provides for the payment of director fees in common shares of Bancorp's common stock and a way for directors to purchase shares at fair market value.

Common shares issued under the Plan shall not exceed an aggregate of 250,000 shares, which includes 205,253 shares rolled over from the 2010 Plan.

The Plan provides for the payment of director fees in common shares of Bancorp's common stock not to exceed 250,000 shares and a way for directors to purchase shares at fair market

During 2021, 2020 and 2019 we issued 6,443 , 5,723 and 5,544 shares of common stock, respectively, for director fees.

3 unchanged sentences

As of December 31, 2021 , 377,475 shares were available for future purchases under the ESPP.

Under the 2017 Equity Plan, the Compensation Committee of the Board of Directors has the discretion to determine, among other things, which employees, advisors and non-employee directors will receive share-based awards, the number and timing of awards, the vesting schedule for each award, and the type of award to be

As of December 31, 2020, there were 940,918 shares available for future grants to employees, advisors and non-employee directors.

As of December 31, 2021, there were 868,222 sh ares available for future grants to employees, advisors and non-employee directors.

Options are issued at an exercise price equal to the fair value of the stock at the date of grant.

36 unchanged sentences

Exercisable (vested) at December 31, 2021 315,744 30.85 2,264 5.15

A summary of the options outstanding and exercisable by price range as of December 31, 2021 is presented in the following table:

Stock Options Outstanding as of December 31, 2021 Stock Options Exercisable as of December 31, 2021

Range of Exercise Prices Stock Options Outstanding Remaining Contractual Life (in years) Weighted Average Exercise Price Stock Options Exercisable Weighted Average Exercise Price

$ 10.00 - $ 20.00

32,852 0.7 $ 19.34 32,852 $ 19.34

$ 20.01 - $ 30.00

102,374 3.4 $ 24.47 102,374 $ 24.47

$ 30.01 - $ 40.00

156,415 7.1 $ 34.67 133,131 $ 34.18

$ 40.01 - $ 50.00

73,740 7.5 $ 42.29 47,387 $ 42.62

365,381 315,744

The following table summarizes non-vested restricted stock awards and changes during the years ended December 31, 2021, 2020, and 2019.

13 unchanged sentences

Non-vested awards at December 31, 2021 61,830 40.25

A summary of the options outstanding and exercisable by price range as of December 31, 2020 is presented in the following table:

Stock Options Outstanding as of December 31, 2020 Stock Options Exercisable as of December 31, 2020

Range of Exercise Prices Stock Options Outstanding Remaining Contractual Life (in years) Weighted Average Exercise Price Stock Options Exercisable Weighted Average Exercise Price

$ 10.01 - $ 20.00

48,962 1.3 $ 19.24 48,962 $ 19.24

$ 20.01 - $ 30.00

138,394 3.6 $ 23.92 138,394 $ 23.92

$ 30.01 - $ 40.00

108,818 6.5 $ 33.75 97,960 $ 33.77

$ 40.01 - $ 50.00

75,410 8.4 $ 42.33 30,061 $ 42.84

371,584 315,377

We determine the fair value of stock options at the grant date using the Black-Scholes pricing model that takes into account the stock price at the grant date, exercise price, and the following assumptions (weighted-average shown).

11 unchanged sentences

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.

Total compensation expense for stock options and restricted stock awards was $ 1.2 million, $ 1.5 million, and $ 1.7 million during 2020, 2019, and 2018, respectively, and the total recognized deferred tax benefits related thereto were $ 341 thousand, $ 389 thousand, and $ 404 thousand, respectively.

Total compensation expense for stock options and restricted stock awards was $ 972 thousand, $ 1.2 million, and $ 1.5 million during 2021, 2020, and 2019, respectively, and the total recognized deferred tax benefits related thereto were $ 213 thousand, $ 341 thousand, and $ 389 thousand, respectively.

As of December 31, 2021, there was $ 652 thousand of total unrecognized compensation expense related to non-vested stock options and restricted stock awards, which is expected to be recognized over a weighted-average period of approximately 2.3 years.

The total grant-date fair value of stock options vested during the years ended December 31, 2021, 2020, and 2019 was $ 514 thousand, $ 484 thousand, and $ 473 thousand, respectively.

The total grant-date fair value of restricted stock awards vested was $ 1.2 million during both 2020 and 2019, and $ 967 thousand during 2018.

The total grant-date fair value of restricted stock awards vested was $ 1.0 million during 2021, and $ 1.2 million during both 2020 and 2019.

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.

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Bancorp held $ 6.7 million in cash at December 31, 2021.

This cash, combined with the $ 30.6 million dividends available to be distributed from the Bank, is considered adequate to cover Bancorp's estimated operational needs, cash dividends to shareholders in 2021, and the Share Repurchase Program discussed below.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

We adopted ASU No.

2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the first quarter of 2018 and reclassified $ 638 thousand from AOCI to retained earnings.

This amount represented the stranded income tax effects related to the unrealized loss on available-for-sale securities in AOCI on the date of the enactment of the Tax Cuts and Jobs Act of 2017.

Preferred Stock and Shareholder Rights Plan

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The Rights Agreement, which expires on July 23, 2022, is designed to discourage takeovers that involve abusive tactics or do not provide fair value to shareholders.

Rights Agreement defines the percentage of share ownership of an "acquiring person" as 10 % of the outstanding common shares.

The Rights Agreement defines the percentage of share ownership of an "acquiring person" as 10 % of the outstanding common shares.

Currently, each right entitles the registered holder to purchase from Bancorp one two-hundredth of a share of Series A Junior Participating Preferred Stock, no par value, of Bancorp at an initial price of $90 per one one-hundredth of a preferred share, subject to adjustment upon the occurrence of certain events.

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Bancorp's Board of Directors subsequently extended the Share Repurchase Program through February 28, 2020.

After expiration of this Share Repurchase Program, our new Share Repurchase Program began on March 1, 2020.

The new program was approved on January 24, 2020 by Bancorp Board of Directors, allowing Bancorp to repurchase up to $ 25.0 million of its outstanding common stock through February 28, 2022.

The new share repurchase program, which began on March 1, 2020, was suspended by the Board of Directors on March 20, 2020 in response to the COVID-19 pandemic.

The program was reactivated by the Board of Directors on October 23, 2020.

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.

Bancorp repurchased 1,117,666 shares totaling $ 40.7 million in 2021.

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.

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The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions.

Shares repurchased pursuant to our common stock share repurchase programs during 2020, 2019, and 2018, were as follows.

(dollars in millions) 2020 1

2019 2018 Cumulative Totals

Total number of common shares repurchased 203,709 356,000 171,217 730,926

Total purchase price of common shares repurchased 2

$ 7.2 $ 15.0 $ 7.0 $ 29.2

1 On February 28, 2020, the 2018 Share Repurchase Program expired with approximately $ 1.5 million remaining from the $ 25.0 million authorized for repurchases.

2 Total purchase price includes commission costs.

Fair Value of Assets and Liabilities

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Debentures of government sponsored agencies $ 188,527 $ — $ 188,527 $ — OCI

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

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

Corporate bonds $ 1,502 $ — $ 1,502 $ — OCI

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

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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 obligations of state and political subdivisions, U.S.

agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, privately-issued collateralized mortgage obligations and corporate bonds.

As of December 31, 2020 and 2019, there were no Level 1 or Level 3 securities.

agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, privately-issued collateralized mortgage obligations, corporate bonds and asset-backed securities.

As of December 31, 2021 and 2020, 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 2021 or 2020.

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These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent and other real estate owned ("OREO").

As of December 31, 2020 and 2019, we did not carry any assets measured at fair value on a non-recurring basis.

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 December 31, 2021 and December 31, 2020.

(in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

December 31, 2021

Other real estate owned $ 800 $ — $ — $ 800

December 31, 2020

Other real estate owned $ — $ — $ — $ —

Disclosures about Fair Value of Financial Instruments

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Investment securities held-to-maturity 342,222 342,755 Level 2 109,036 115,185 Level 2

Loans, net 2,065,682 2,089,192 Level 3 1,826,609 1,839,666 Level 3

Loans, net of allowance for credit losses 2,232,622 2,234,430 Level 3 2,065,682 2,089,192 Level 3

Interest receivable 11,889 11,889 Level 2 10,922 10,922 Level 2

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Amounts deferred earn interest that is equal to the prime rate as published in the Wall Street Journal, on the first business day of the year, which was 3.25 % on January 1, 2021 and 4.75 % on January 1, 2020.

As part of the acquisition of ARB in August 2021, we assumed $ 2.9 million of deferred compensation plans for former members of ARB's management team and non-employee directors.

Amounts deferred earn interest based on the 5 year U.S.

Government Treasury rate plus 4.0%.

This rate was 4.36% for 2021.

Beginning January 1, 2022, the rate will convert to the prime rate.

Our deferred compensation obligation totaled $ 7.7 million and $ 4.7 million at December 31, 2021 and 2020, respectively, and is included in interest payable and other liabilities.

A similar Deferred Director Fee Plan, which allows members of the Board of Directors to defer the cash portion of their director compensation, went into effect on January 1, 2021, and the first deferral of their fees will be in July 2021.

Our deferred compensation obligation for members of the Board of Directors totaled $ 237 thousand at December 31, 2021.

401(k) Defined Contribution Plan

Our 401(k) Defined Contribution Plan, which includes a Roth 401(k) option (the “401(k) Plan”), is available to all regular employees at least eighteen years of age who complete ninety days of service, and enter the plan during one of the four open enrollment dates (January 1, April 1, July 1, and October 1) of each year.

Under the 401(k) Plan, employees can defer between 1 % and 50 % of their eligible compensation, up to the maximum amount allowed by the Internal Revenue Code.

Under the 401(k) Plan, employees can defer between 1 % and 50 % of their eligible compensation, up to the maximum amount

allowed by the Internal Revenue Code.

The Bank provides employer-match of 70 % of each participant's contribution, with a maximum of $ 5 thousand of matching contribution per participant per year.

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After five years of service, all employer contributions vest immediately.

Bancorp issued shares of common stock, contributed them to the ESOP and recognized expenses of $ 1.3 million in 2020 and $ 1.2 million in both 2019 and 2018, based on the quoted market price on the date of contribution.

Bancorp issued shares of common stock, contributed them to the ESOP and recognized expenses of $ 1.3 million in 2021 and 2020 and $ 1.2 million in 2019, based on the quoted market price on the date of contribution.

Cash dividends paid on Bancorp stock held by the ESOP are used to purchase additional shares in the open market.

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As part of the acquisition of Bank of Napa in November 2017, we assumed the salary continuation agreements for four former executive officers of Bank of Napa, under which, fixed annual retirement benefit payments will be made for ten years beginning the first day of the month following the executive reaching the age of 65 .

As part of the acquisition of ARB in August 2021, we assumed $ 1.7 million of salary continuation agreements for six former executive officers and directors of ARB, under which, fixed annual retirement benefit payments will be made following separation from service with varying payment end dates, the latest being fifteen years .

At December 31, 2021 and 2020, respectively, our liability under the Salary Continuation Plan was $ 5.3 million and $ 3.2 million recorded in interest payable and other liabilities.

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Total current tax provision 11,442 12,003 13,021

Deferred tax benefit

Deferred tax provision (benefit)

Federal 274 ( 964 ) ( 907 )

State ( 58 ) ( 694 ) ( 461 )

Total deferred tax provision ( 1,658 ) ( 1,368 ) ( 1,216 )

Total deferred tax provision (benefit) 216 ( 1,658 ) ( 1,368 )

Total income tax provision $ 11,658 $ 10,345 $ 11,653

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Deferred compensation plan and salary continuation plan 3,911 2,343

Net operating loss carryforwards 1,660 1,914

Accrued but unpaid expenses 1,884 1,103

Net operating loss carryforwards 1,406 1,660

State franchise tax 930 1,017

Fair value adjustment on acquired loans 894 254

Stock-based compensation 599 658

Depreciation and disposals on premises and equipment 188 635

Fair value adjustment on acquired loans 254 299

Interest received on non-accrual loans 24 23

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Operating and finance lease right-of-use assets ( 7,098 ) ( 7,589 )

Net unrealized gains on securities available-for-sale ( 5,237 ) ( 1,738 )

Deferred loan origination costs and fees ( 1,945 ) ( 1,619 )

Core deposit intangible assets ( 1,953 ) ( 1,133 )

Unaccreted discount on subordinated debenture ( 398 ) ( 418 )

Deferred loan origination costs and fees ( 1,526 ) ( 1,945 )

Net unrealized gains on securities available-for-sale ( 745 ) ( 5,237 )

Accretion on investment securities ( 33 ) ( 33 )

Unaccreted discount on subordinated debenture — ( 398 )

Other ( 259 ) ( 132 )

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Net deferred tax assets $ 13,319 $ 6,928

As of December 31, 2020, federal and California net operating loss carryforwards ("NOLs") of $ 1.5 million and $ 15.7 million, respectively, corresponded to the total $ 1.7 million deferred tax asset above.

As of December 31, 2021, federal and California net operating loss carryforwards ("NOLs") of $ 304 thousand and $ 15.7 million, respectively, corresponded to the total $ 1.4 million deferred tax asset above.

If not fully utilized, the federal NOLs will begin to expire in 2031 and the California NOLs will begin to expire in 2030.

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Tax exempt earnings on bank owned life insurance ( 1.0 ) % ( 0.5 ) % ( 0.6 ) %

Non-deductible acquisition related expenses 0.6 % — % — %

Non-deductible executive compensation 0.4 % — % — %

Low income housing and qualified zone academy bond tax credits ( 0.4 ) % ( 0.5 ) % ( 0.4 ) %

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Reclassification of deferred rent and unamortized lease incentives from other liabilities to operating lease right-of-use assets upon adoption of ASC 842 $ — $ — $ 1,967

There were no lease-related noncash investing and financing activities for the year ended December 31, 2018.

The following table shows components of operating and finance lease cost for the years ended December 31, 2021, 2020 and 2019.

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Amortization of right-of-use assets 2

$ 96 $ 169 $ 172

Interest on finance lease liabilities 3

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3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.

Operating lease rent expense totaled $ 4.6 million for the year ended December 31, 2018, as disclosed prior to the adoption of ASC 842 in 2019.

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 December 31, 2021.

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2023 4,377 117

2024 3,667 113

2025 3,152 66

Thereafter 8,330 —

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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.

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.

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In 2012, Visa had reached a $ 4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S.

The escrow balance of $ 894 thousand as of December 31, 2020, combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.

The escrow balance of $ 1.1 billion as of December 31, 2021, 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 2, Investment Securities.

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Concentrations of Credit Risk

Concentration of credit risk is the risk associated with a lack of diversification, such as having substantial investments in a few individual issuers, thereby exposing us to greater risks resulting from adverse economic, political, regulatory, geographic, industrial or credit developments.

political, regulatory, geographic, industrial or credit developments.

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investment securities and loans.

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Concentrations of credit risk with respect to investment securities primarily related to the U.S.

government and GSEs, which accounted for $ 389.1 million, or 78 % of our total investment portfolio at December 31, 2020 and $ 497.4 million, or 87 % at December 31, 2019.

government and GSEs, which accounted for $ 1.277 billion, or 85 % of our total investment portfolio at December 31, 2021 and $ 389.1 million, or 78 % at December 31, 2020.

The increase is due to both the acquired ARB investment security portfolio, including U.S.

government and GSEs totaling $ 261.3 million at the date of acquisition, as well as the deployment of excess liquidity throughout 2021 into securities with purchases of $ 827.9 million in this security type.

Our largest investment security issued by a non-GSE issuer accounted for approximately 2 % of our total investment portfolio at December 31, 2021, and 3 % at December 31, 2020.

We also manage our credit exposure related to our loan portfolio to avoid the risk of undue concentration of credits in a particular industry by reducing significant exposure to highly leveraged transactions or to any individual customer or counterparty, and by obtaining collateral as appropriate.

No individual borrower accounts for more than 3 % of loans held in the portfolio.

The largest loan concentration group by industry of the borrowers is real estate, which accounts for 76 % and 83 % of our loan portfolio at December 31, 2020 and 2019, respectively.

No single borrower relationship accounts for more than 3 % of outstanding loan balances at December 31, 2021 or 2020.

The largest loan concentration group by industry of the borrowers is real estate, which accounted for 84 % and 76 % of our loan portfolio at December 31, 2021 and 2020, respectively.

The increase in the percentage in real estate from 2020 to 2021 was primarily due to a $ 180.4 million reduction in unsecured loans guaranteed by the SBA under the Paycheck Protection Program ("PPP"), which are included in commercial and industrial loans.

Derivative Financial Instruments and Hedging Activities

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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.

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.

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As of December 31, 2021, we had four interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032 and October 2037.

In December 2020, one interest rate swap, scheduled to mature in August 2037, was terminated as the hedged loan was paid off.

All of our derivatives are accounted for as fair value hedges.

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Our interest rate swap payments are settled monthly with counterparties.

Accrued interest on the swaps totaled $ 11 thousand and $ 6 thousand as of December 31, 2020 and 2019, respectively.

Accrued interest on the swaps totaled $ 11 thousand at both December 31, 2021 and 2020.

Information on our derivatives follows:

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Loans $ 13,976 $ 15,745 $ 939 $ 1,753

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

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:

Years ended December 31,

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$ 91,612 $ 84,674 $ 84,331

(Decrease) increase in value of designated interest rate swaps due to LIBOR interest rate movements $ ( 734 ) $ ( 964 ) $ 452

Increase (decrease) in value of designated interest rate swaps due to LIBOR interest rate movements $ 827 $ ( 734 ) $ ( 964 )

Payment on interest rate swaps ( 369 ) ( 360 ) ( 90 )

Increase (decrease) in value of hedged loans 809 938 ( 425 )

(Decrease) increase in value of hedged loans ( 814 ) 809 938

Decrease in value of yield maintenance agreement ( 11 ) ( 12 ) ( 13 )

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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 December 31, 2020.

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.

addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of December 31, 2021.

In August 2018, the Board of Governors of the Federal Reserve System changed the definition of a "Small Bank Holding Company" by increasing the asset threshold from $1.0 billion to $3.0 billion.

As a result, Bancorp was not subject to separate minimum capital requirements as of December 31, 2020 and 2019.

However, we disclosed comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been subject to the same minimum capital requirements in 2020 and 2019.

Bancorp's total assets were $ 4.3 billion and $ 2.9 billion at December 31, 2021 and 2020, respectively.

As a result, Bancorp was only subject to separate minimum capital requirements for year ending December 31, 2021;

however, we disclosed comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been subject to the same minimum capital requirements as of December 31, 2020.

The Bancorp’s and Bank's capital adequacy ratios as of December 31, 2021 and 2020 are presented in the following tables.

Bancorp's Tier 1 capital includes the subordinated debenture, which is not included at the Bank level.

The decrease in capital ratios as of December 31, 2021 from December 31, 2020 was largely attributable to shares repurchased totaling $ 40.7 million during 2021.

Tier 1 Capital to average assets was also reduced by an increase in cash driven by deposit growth over and above that attributable to the Merger.

In addition, as of December 31, 2020, Bancorp's Tier 1 capital included a subordinated debenture, which was not included at the Bank level.

On March 15, 2021, Bancorp redeemed in full our last subordinated debenture due to NorCal Community Bancorp Trust II.

Partially offsetting those factors, the Merger served to increase capital ratios as the proportion of risk-weighted assets to total assets was lower for ARB.

Capital Ratios for Bancorp

(dollars in thousands)

Actual Ratio Adequately Capitalized Threshold 1

Ratio to be a Well Capitalized Bank Holding Company

Actual Ratio Adequately Capitalized Threshold Ratio to be a Well Capitalized Bank Holding Company

December 31, 2021 Amount Ratio Amount Ratio Amount Ratio

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Common Equity Tier 1 (to risk-weighted assets) $ 311,114 14.69 % ≥ $ 148,262 ≥ 7.00 % ≥ $ 137,672 ≥ 6.50 %

1 The adequately capitalized threshold includes the capital conservation buffer that was effective in 2018 and fully phased-in on January 1, 2019.

Capital Ratios for the Bank (dollars in thousands)

Actual Ratio Adequately Capitalized Threshold 1

Ratio to be Well Capitalized under Prompt Corrective Action Provisions

Actual Ratio Adequately Capitalized Threshold Ratio to be Well Capitalized under Prompt Corrective Action Provisions

December 31, 2021 Amount Ratio Amount Ratio Amount Ratio

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Common Equity Tier 1 (to risk-weighted assets) $ 309,033 14.59 % ≥ $ 148,261 ≥ 7.00 % ≥ $ 137,671 ≥ 6.50 %

1 The adequately capitalized threshold includes the capital conservation buffer that was effective in 2018 and fully phased-in on January 1, 2019.

Financial Instruments with Off-Balance Sheet Risk

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As of December 31, 2021, approximately 39 % of the commitments expire in 2022, 49 % expire between 2023 and 2029 and 12 % expire thereafter.

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 $ 1.8 million and $ 2.8 million as of December 31, 2021 and December 31, 2020, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition.

The $ 993 thousand decrease in the allowance for unfunded commitments in 2021 was largely due to ongoing improvements in the underlying economic forecasts under the CECL accounting method.

We adopted the CECL accounting standard on December 31, 2020, which was previously postponed under the optional accounting relief provisions of the CARES Act (refer to Note 1, Summary of Significant Accounting Policies and Note 3, Loans and Allowance for Credit Losses for additional information).

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The remaining increase was due to changes in credit loss assumptions between the CECL and incurred loss methods.

The prior period allowance is reported in accordance with previous GAAP and was $ 1.1 million as of December 31, 2019.

Condensed Bank of Marin Bancorp Parent Only Financial Statements

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59,849 15,157 16,457

Earnings of bank subsidiary greater (less) than dividends received from bank subsidiary

15,085 17,784 ( 2,243 )

Earnings of bank subsidiary (less) greater than dividends received from bank subsidiary ( 26,621 ) 15,085 17,784

Net income $ 33,228 $ 30,242 $ 34,241

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Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Earnings of bank subsidiary (greater) less than dividends received from bank subsidiary ( 15,085 ) ( 17,784 ) 2,243

Earnings of bank subsidiary less (greater) than dividends received from bank subsidiary 26,621 ( 15,085 ) ( 17,784 )

Accretion of discount on subordinated debentures 1,347 69 68

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Net cash used in financing activities ( 57,574 ) ( 18,058 ) ( 25,493 )

Net (decrease) increase in cash and cash equivalents ( 4,210 ) ( 9,605 ) 15,898

Net increase (decrease) in cash and cash equivalents 1,295 ( 4,210 ) ( 9,605 )

Cash and cash equivalents at beginning of year 5,329 9,539 19,144

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Stock issued to ESOP $ 1,330 $ 1,289 $ 1,245

Bancorp completed its merger with American River Bankshares ("AMRB") on August 6, 2021 (the "merger date"), with Bancorp continuing as the surviving entity, followed thereafter at 12:05 a.m.

on August 7, 2021 by the merger of American River Bank with and into Bank of Marin (collectively, the "Merger"), with Bank of Marin surviving.

On August 6, 2021, each share of AMRB's common stock issued and outstanding immediately prior to the Merger was converted into 0.575 shares of Bancorp's common stock resulting in the issuance of 3,441,235 shares of Bancorp common stock.

In addition, merger consideration included cash paid for outstanding stock options and cash paid in lieu of fractional shares, as summarized in the following table.

(in thousands) Merger Consideration

Value of common stock consideration paid to shareholders ( 0.575 fixed exchange ratio, stock price $ 36.15 )

Cash consideration for stock options 63

Cash paid in lieu of fractional shares 13

Total merger consideration $ 124,477

Bancorp accounted for the Merger using the acquisition method of accounting in accordance with ASC 805, Business Combinations .

We recorded the estimated fair values of acquired assets and liabilities based on initial valuations as of August 6, 2021.

Under ASC 805, during the measurement period of up to one year, the acquirer is allowed to adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the merger date that, if known, would have affected the measurement of the amounts recognized as of that date.

Measurement period adjustments are recognized in the reporting period in which they are determined.

As such, the estimated fair values are

considered preliminary and subject to adjustment for up to one year after August 6, 2021 (as of December 31, 2021 we have not needed to make any adjustments).

Fair value amounts subject to change include, but are not limited to, loans, certain deposits, deferred tax assets and liabilities and certain other assets and other liabilities.

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

(in thousands)

Total merger consideration $ 124,477

Assets acquired:

Cash and cash equivalents 140,577

Investment securities 297,797

Loans 419,435

Bank-owned life insurance 16,259

Operating lease right-of-use assets 2,376

Bank premises and equipment, net 2,891

Core deposit intangible 3,909

Other real estate owned 800

Interest receivable and other assets 14,377

Total assets acquired 898,421

Liabilities assumed:

Non-interest bearing 331,459

Interest bearing 458,563

Total deposits 790,022

FHLB borrowings 13,885

Operating lease liabilities 2,798

Interest payable and other liabilities 9,853

Total liabilities assumed 816,558

Fair value of net assets acquired 81,863

Goodwill $ 42,614

We recorded $ 42.6 million in goodwill, which represents the excess of the total merger consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed.

Goodwill mainly reflects expected value created through the combined operations of AMRB and Bancorp.

It is evaluated for impairment annually.

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

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

Investment securities - Fair values for securities are based on quoted market prices, where available.

If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market.

In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies.

Loans - The loan valuation methodology was based on a discounted cash flow approach that considered factors including the type of loan, risk classification status, fixed or variable interest rates, term, amortization status and current discount rates.

Loans were grouped according to similar credit risk characteristics when applying various valuation techniques.

The discount rates applied were based on current market rates for new originations of comparable loans and included adjustments for interest rate risk, equity return, servicing, credit and liquidity risk.

ARB's allowance for credit losses and any existing deferred fees or costs and premiums and discounts were not carried over at the merger date.

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

Operating lease right-of-use assets and lease liabilities - Operating lease right-of-use assets were measured at the present value of the remaining lease payments, as if the acquired leases commenced on the merger date, and adjusted to reflect favorable and unfavorable terms of the leases when compared to current market terms.

Lease liabilities were measured at the present value of the remaining lease payments.

Bank premises and equipment - The value of the land and buildings acquired were based on independent third-party appraisals.

The fair values of other premises and equipment, such as tenant improvements, furniture and fixtures and equipment, approximated their carrying values.

Core deposit Intangible - The core deposit intangible ("CDI") represents the estimated future benefits of acquired deposits and is recorded separately from the related deposits.

The value of the core deposit intangible asset was calculated using a discounted cash flow approach to arrive at the cost differential between the core deposits (non-maturity deposits such as transaction, savings and money market accounts) and alternative funding sources.

It was calculated as the present value of the difference in cash flows between maintaining the core deposits (interest and net maintenance costs) and the cost of an equal amount of funds with a similar term from an alternative source.

The core deposit intangible is amortized on an accelerated basis over an estimated ten-year life, and is evaluated periodically for impairment.

We recorded a core deposit intangible asset of $ 3.9 million at acquisition, of wh ich $ 318 thousand was amortized from the merger date to December 31, 2021.

The future amortization expense for the CDI arising from the Merger is as follows:

(in thousands) 2022 2023 2024 2025 2026 Thereafter Total

Core deposit intangible amortization $ 707 $ 630 $ 552 $ 475 $ 397 $ 830 $ 3,591

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

Deposits - The fair values for the demand and savings deposits equaled the amount payable on demand at the merger date.

The fair values for time deposits were estimated using a discounted cash flow calculation using current offering rates on time deposits with similar remaining maturities.

FHLB borrowings - The estimated fair value of Federal Home Loan Bank borrowings was the contractual repayment amount adjusted for prepayment penalty fees.

Pro Forma Results of Operations (Unaudited)

AMRB's unaudited contributions to net interest income and net income from the August 6, 2021 merger date to December 31, 2021 included in the consolidated statements of comprehensive income are presented in the following table.

(in thousands)

Net interest income 1

1 AMRB's net interest income and net loss include merger-related costs incurred from the merger date to December 31, 2021, accretion of the net purchase discount on acquired loans, premises fair value adjustment depreciation, CDI amortization and time deposit premium amortization, as applicable.

The pro forma net loss does not include allowance for credit losses adjustments related to acquired loans.

The following table presents certain unaudited pro forma net interest income and net income for illustrative purposes only for the years ended December 31, 2021 and 2020 as if AMRB was acquired on January 1, 2020.

This unaudited pro forma information combines Bancorp's and AMRB's historical results and includes adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods.

The pro forma information is not indicative of what would have occurred had the acquisition consummated as of the beginning of the year prior to the acquisition.

The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loans at fair value, cost savings, or business synergies.

result, actual amounts would have differed from the unaudited pro forma information presented, and the differences could be significant.

(in thousands) December 31, 2021 December 31, 2020

Net interest income - Pro forma $ 120,513 $ 122,608

Net interest income - Actual $ 104,951 $ 96,659

Net income - Pro forma 1

$ 42,997 $ 28,445

Net income - Actual $ 33,228 $ 30,242

1 The 2021 pro forma combined net income was adjusted to exclude merger-related costs of $ 4.9 million (net of tax benefits), incurred by Bancorp and $ 3.0 million (net of tax benefits) incurred by AMRB.

These merger-related costs were included in the combined net income for the year ended December 31, 2020 as if the merger occurred on January 1, 2020.

Merger-related one-time and conversion costs are recognized as incurred and continue until all systems have been converted and operational functions are fully integrated.

Bancorp's pretax merger-related costs reflected in the consolidated statements of comprehensive income are summarized in the following table.

(in thousands) December 31, 2021 December 31, 2020

Personnel and severance $ 3,005 $ —

Professional services 1,976 —

Data processing 1,127 —

Other expense 350 —

Total merger-related one-time and conversion costs $ 6,458 $ —

End of 2021 Audited Consolidated Financial Statements

1 unchanged sentence

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What changed 10-K

Item 8. Financial Statements and Supplementary Data