Bank of Marin Bancorp 10-Q

ITEM 1. Financial Statements BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CONDITION (in thousands, except share data; unaudited) June 30, 2022 December 31, 2021 Assets Cash, cash equivalents and restricted cash $ 115,905 $ 347,641 Investment securities Held-to-maturity, at amortized cost (net of zero allowance for credit losses at June 30, 2022 and December 31, 2021) 931,587 342,222 Available-for-sale, at fair value (net of zero allowance for credit losses at June 30, 2022 and December 31, 2021) 893,149 1,167,568 Total investment securities 1,824,736 1,509,790 Loans, at amortized cost 2,162,632 2,255,645 Allowance for credit losses on loans ( 22,539 ) ( 23,023 ) Loans, net of allowance for credit losses on loans 2,140,093 2,232,622 Goodwill 72,754 72,754 Bank-owned life insurance 61,834 61,473 Operating lease right-of-use assets 22,353 23,604 Bank premises and equipment, net 7,067 7,558 Core deposit intangible, net 5,851 6,605 Other real estate owned 800 800 Interest receivable and other assets 75,511 51,362 Total assets $ 4,326,904 $ 4,314,209 Liabilities and Stockholders' Equity Liabilities Deposits Non-interest bearing $ 2,034,717 $ 1,910,240 Interest bearing Transaction accounts 297,871 290,813 Savings accounts 343,585 340,959 Money market accounts 1,012,823 1,116,303 Time accounts 141,674 150,235 Total deposits 3,830,670 3,808,550 Borrowings and other obligations 356 419 Operating lease liabilities 24,117 25,429 Interest payable and other liabilities 62,188 29,443 Total liabilities 3,917,331 3,863,841 Commitments and contingent liabilities (Note 8) Stockholders' Equity Preferred stock, no par value, Authorized - 5,000,000 shares, none issued — — Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,009,600 and 15,929,243 at June 30, 2022 and December 31, 2021, respectively 213,864 212,524 Retained earnings 253,737 239,868 Accumulated other comprehensive loss, net of taxes ( 58,028 ) ( 2,024 ) Total stockholders' equity 409,573 450,368 Total liabilities and stockholders' equity $ 4,326,904 $ 4,314,209 The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-3 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME Three months ended Six months ended (in thousands, except per share amounts; unaudited) June 30, 2022 March 31, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Interest income Interest and fees on loans $ 23,334 $ 23,677 $ 21,429 $ 47,011 $ 42,090 Interest on investment securities 8,273 6,693 3,504 14,966 6,633 Interest on federal funds sold and due from banks 180 106 54 286 96 Total interest income 31,787 30,476 24,987 62,263 48,819 Interest expense Interest on interest-bearing transaction accounts 53 56 39 109 78 Interest on savings accounts 32 29 21 61 40 Interest on money market accounts 438 478 312 916 598 Interest on time accounts 67 14 81 81 177 Interest on borrowings and other obligations — 1 — 1 — Interest on subordinated debenture — — — — 1,361 Total interest expense 590 578 453 1,168 2,254 Net interest income 31,197 29,898 24,534 61,095 46,565 Reversal of credit losses on loans — ( 485 ) ( 920 ) ( 485 ) ( 3,849 ) Reversal of credit losses on unfunded loan commitments — ( 318 ) ( 612 ) ( 318 ) ( 1,202 ) Net interest income after reversal of credit losses 31,197 30,701 26,066 61,898 51,616 Non-interest income Wealth Management and Trust Services 630 600 530 1,230 1,018 Debit card interchange fees, net 531 505 419 1,036 785 Service charges on deposit accounts 465 488 317 953 598 Earnings on bank-owned life insurance, net 298 413 233 711 490 Dividends on Federal Home Loan Bank stock 249 259 177 508 326 Merchant interchange fees, net 149 140 61 289 118 Other income 406 462 285 868 513 Total non-interest income 2,728 2,867 2,022 5,595 3,848 Non-interest expense Salaries and related benefits 10,341 11,548 8,888 21,889 18,096 Occupancy and equipment 1,894 1,909 1,751 3,803 3,502 Data processing 1,199 1,277 820 2,476 1,639 Professional services 665 913 986 1,578 1,849 Information technology 468 478 296 946 609 Depreciation and amortization 393 452 389 845 848 Amortization of core deposit intangible 374 380 204 754 408 Directors' expense 294 311 230 605 405 Federal Deposit Insurance Corporation insurance 296 290 182 586 361 Charitable contributions 511 45 462 556 493 Other expense 2,471 1,772 1,348 4,243 2,758 Total non-interest expense 18,906 19,375 15,556 38,281 30,968 Income before provision for income taxes 15,019 14,193 12,532 29,212 24,496 Provision for income taxes 3,953 3,728 3,247 7,681 6,264 Net income $ 11,066 $ 10,465 $ 9,285 $ 21,531 $ 18,232 Net income per common share: Basic $ 0.70 $ 0.66 $ 0.71 $ 1.35 $ 1.38 Diluted $ 0.69 $ 0.66 $ 0.71 $ 1.35 $ 1.37 Weighted average shares: Basic 15,921 15,876 13,092 15,898 13,227 Diluted 15,955 15,946 13,164 15,950 13,316 Comprehensive (loss) income: Net income $ 11,066 $ 10,465 $ 9,285 $ 21,531 $ 18,232 Other comprehensive (loss) income: Change in net unrealized (losses) gains on available-for-sale securities ( 27,050 ) ( 38,228 ) 2,798 ( 65,278 ) ( 6,284 ) Net unrealized losses on securities transferred from available-for-sale to held-to-maturity — ( 14,847 ) — ( 14,847 ) — Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity 472 144 138 616 281 Other comprehensive (loss) income, before tax ( 26,578 ) ( 52,931 ) 2,936 ( 79,509 ) ( 6,003 ) Deferred tax (benefit) expense ( 7,857 ) ( 15,648 ) 864 ( 23,505 ) ( 1,780 ) Other comprehensive (loss) income, net of tax ( 18,721 ) ( 37,283 ) 2,072 ( 56,004 ) ( 4,223 ) Total comprehensive (loss) income $ ( 7,655 ) $ ( 26,818 ) $ 11,357 $ ( 34,473 ) $ 14,009 The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-4 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the three months ended June 30, 2022 and 2021 (in thousands, except share data; unaudited) Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income, Net of Taxes Total Shares Amount Three months ended June 30, 2022 Balance at April 1, 2022 16,003,847 $ 213,204 $ 246,511 $ ( 39,307 ) $ 420,408 Net income — — 11,066 — 11,066 Other comprehensive loss, net of tax — — — ( 18,721 ) ( 18,721 ) Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 4,768 81 — — 81 Stock issued under employee stock purchase plan 936 30 — — 30 Stock issued under employee stock ownership plan 13,000 412 — — 412 Restricted stock surrendered for tax withholdings upon vesting ( 333 ) ( 11 ) — — ( 11 ) Restricted stock forfeited / cancelled ( 12,618 ) — — — — Stock-based compensation - stock options — 29 — — 29 Stock-based compensation - restricted stock — 119 — — 119 Cash dividends paid on common stock ($ 0.24 per share) — — ( 3,840 ) — ( 3,840 ) Balance at June 30, 2022 16,009,600 $ 213,864 $ 253,737 $ ( 58,028 ) $ 409,573 Three months ended June 30, 2021 Balance at April 1, 2021 13,326,509 $ 118,386 $ 225,600 $ 6,306 $ 350,292 Net income — — 9,285 — 9,285 Other comprehensive income, net of tax — — — 2,072 2,072 Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 14,000 314 — — 314 Stock issued under employee stock purchase plan 831 25 — — 25 Stock issued under employee stock ownership plan 9,300 336 — — 336 Restricted stock granted 2,400 — — — — Stock-based compensation - stock options — 28 — — 28 Stock-based compensation - restricted stock — 95 — — 95 Cash dividends paid on common stock ($ 0.23 per share) — — ( 3,044 ) — ( 3,044 ) Stock repurchased, including commissions ( 297,935 ) ( 10,754 ) — — ( 10,754 ) Balance at June 30, 2021 13,055,105 $ 108,430 $ 231,841 $ 8,378 $ 348,649 The accompanying notes are an integral part of these consolidated financial statements (unaudited). BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the six months ended June 30, 2022 and 2021 (in thousands, except share data; unaudited) Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income, Net of Taxes Total Shares Amount Six months ended June 30, 2022 Balance at January 1, 2022 15,929,243 $ 212,524 $ 239,868 $ ( 2,024 ) $ 450,368 Net income — — 21,531 — 21,531 Other comprehensive loss, net of tax — — — ( 56,004 ) ( 56,004 ) Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 40,311 820 — — 820 Stock issued under employee stock purchase plan 936 30 — — 30 Stock issued under employee stock ownership plan 25,000 829 — — 829 Restricted stock granted 46,672 — — — — Restricted stock surrendered for tax withholdings upon vesting ( 1,169 ) ( 40 ) — — ( 40 ) Restricted stock forfeited / cancelled ( 13,267 ) — — — — Stock-based compensation - stock options — 115 — — 115 Stock-based compensation - restricted stock — 270 — — 270 Cash dividends paid on common stock ($ 0.48 per share) — — ( 7,662 ) — ( 7,662 ) Stock issued in payment of director fees 5,149 193 — — 193 Stock repurchased, net of commissions ( 23,275 ) ( 877 ) — — ( 877 ) Balance at June 30, 2022 16,009,600 $ 213,864 $ 253,737 $ ( 58,028 ) $ 409,573 Six months ended June 30, 2021 Balance at January 1, 2021 13,500,453 $ 125,905 $ 219,747 $ 12,601 $ 358,253 Net income — — 18,232 — 18,232 Other comprehensive loss, net of tax — — — ( 4,223 ) ( 4,223 ) Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 31,180 351 — — 351 Stock issued under employee stock purchase plan 1,609 53 — — 53 Stock issued under employee stock ownership plan 18,300 668 — — 668 Restricted stock granted 29,454 — — — — Restricted stock surrendered for tax withholdings upon vesting ( 3,961 ) ( 156 ) — — ( 156 ) Restricted stock forfeited / cancelled ( 3,848 ) — — — — Stock-based compensation - stock options — 200 — — 200 Stock-based compensation - restricted stock — 538 — — 538 Cash dividends paid on common stock ($ 0.46 per share) — — ( 6,138 ) — ( 6,138 ) Stock purchased by directors under director stock plan 519 18 — — 18 Stock issued in payment of director fees 3,347 117 — — 117 Stock repurchased, net of commissions ( 521,948 ) ( 19,264 ) — — ( 19,264 ) Balance at June 30, 2021 13,055,105 $ 108,430 $ 231,841 $ 8,378 $ 348,649 The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-5 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 2022 and 2021 (in thousands; unaudited) June 30, 2022 June 30, 2021 Cash Flows from Operating Activities: Net income $ 21,531 $ 18,232 Adjustments to reconcile net income to net cash provided by operating activities: Reversal of credit losses on loans ( 485 ) ( 3,849 ) Reversal of credit losses on unfunded loan commitments ( 318 ) ( 1,202 ) Noncash contribution expense to employee stock ownership plan 829 668 Noncash director compensation expense 193 117 Stock-based compensation expense 385 738 Amortization of core deposit intangible 754 408 Amortization of investment security premiums, net of accretion of discounts 4,963 1,753 Accretion of premiums (discounts) on acquired loans 281 ( 78 ) Accretion of discount on subordinated debenture — 1,347 Net change in deferred loan origination costs/fees ( 2,322 ) 1,146 Depreciation and amortization 845 848 Earnings on bank-owned life insurance policies ( 711 ) ( 490 ) Net changes in interest receivable and other assets ( 443 ) 952 Net changes in interest payable and other liabilities ( 5,894 ) ( 821 ) Total adjustments ( 1,923 ) 1,537 Net cash provided by operating activities 19,608 19,769 Cash Flows from Investing Activities: Purchase of held-to-maturity securities ( 208,784 ) ( 74,521 ) Purchase of available-for-sale securities ( 243,459 ) ( 170,161 ) Proceeds from paydowns/maturities of held-to-maturity securities 16,827 14,376 Proceeds from paydowns/maturities of available-for-sale securities 76,276 36,936 Loan principal collected, net of originations 93,875 84,259 Purchase of bank-owned life insurance policies — ( 1,943 ) Cash receipts from bank-owned life insurance policies 350 — Purchase of premises and equipment ( 354 ) ( 765 ) Cash paid for low income housing tax credit investment ( 30 ) ( 346 ) Net cash used in investing activities ( 265,299 ) ( 112,165 ) Cash Flows from Financing Activities: Net increase in deposits 22,120 179,326 Proceeds from stock options exercised 820 351 Restricted stock surrendered for tax withholdings upon vesting ( 40 ) ( 156 ) Proceeds from stock issued under employee and director stock purchase plans 30 71 Stock repurchased, including commissions ( 1,250 ) ( 19,677 ) Repayment of subordinated debenture including execution costs — ( 4,126 ) Repayment of finance lease obligations ( 63 ) ( 32 ) Cash dividends paid on common stock ( 7,662 ) ( 6,138 ) Net cash provided by financing activities 13,955 149,619 Net (decrease) increase in cash, cash equivalents and restricted cash ( 231,736 ) 57,223 Cash, cash equivalents and restricted cash at beginning of period 347,641 200,320 Cash, cash equivalents and restricted cash at end of period $ 115,905 $ 257,543 Supplemental disclosure of cash flow information: Cash paid in interest $ 1,175 $ 951 Cash paid in income taxes $ 8,450 $ 6,000 Supplemental disclosure of noncash investing and financing activities: Change in net unrealized gain or (loss) on available-for-sale securities $ ( 65,278 ) $ ( 6,284 ) Securities transferred from available-for-sale to held-to-maturity, at fair value $ 357,482 $ — Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity $ 616 $ 281 Purchase of investment securities not yet settled $ 40,278 $ — Stock issued to employee stock ownership plan $ 829 $ 668 Stock issued in payment of director fees $ 193 $ 117 Restricted cash 1 $ 930 $ 1,930 1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco and other cash pledged. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020. The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Basis of Presentation The consolidated financial statements include the accounts of Bancorp, a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin, a California state-chartered commercial bank. References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes. The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations. Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our 2021 Annual Report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in stockholders’ equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period. The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in the quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period under the treasury stock method. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, the difference in EPS is nominal for these participating securities. Three months ended Six months ended (in thousands, except per share data) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Weighted average basic common shares outstanding 15,921 13,092 15,898 13,227 Potentially dilutive common shares related to: Stock options 24 54 38 67 Unvested restricted stock awards 10 18 14 22 Weighted average diluted shares outstanding 15,955 13,164 15,950 13,316 Net income $ 11,066 $ 9,285 $ 21,531 $ 18,232 Basic EPS $ 0.70 $ 0.71 $ 1.35 $ 1.38 Diluted EPS $ 0.69 $ 0.71 $ 1.35 $ 1.37 Weighted average anti-dilutive common shares not included in the calculation of diluted EPS 230 111 167 88 Note 2: Recently Adopted and Issued Accounting Standards Accounting Standards Not Yet Effective In March 2020, the FASB issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848) . The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden of accounting for, or recognizing the effects of reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of Page-7 reference rate reform. The amendments in this ASU may be elected as of March 12, 2020 through December 31, 2022. An entity may choose to elect the amendments in this update at an interim period subsequent to March 12, 2020 with adoption methods varying based on transaction type. We have elected not to apply amendments at this time and to assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU intend to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. As of June 30, 2022, we had four interest rate swap contracts with notional values totaling $ 12.5 million indexed to LIBOR that will either be subject to the fall-back index rate stipulated by the ISDA protocol or modified to other reference rates such as Prime or SOFR as mutually agreed by our counterparty an us . We have not elected to apply the amendments at this time and will continue to assess the applicability of this ASU to us as we monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations. In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities From Contracts With Customers (Topic 805). The amendments address diversity in accounting practices and require acquiring companies to apply ASC 606, Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination, as opposed to other methods such as fair value. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination. The amendments are to be applied prospectively to business combinations occurring on or after December 15, 2022 and early adoption is permitted. In the event of a future business combination, we will assess the impact of the ASU on our financial condition and results of operations. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . The amendment eliminates the recognition measurement guidance for troubled debt restructured ("TDR") loans, and instead requires an entity to evaluate whether a modification represents a new loan or a continuation of an existing loan in accordance with ASC Topic 310-20, Receivables - Nonrefundable Fees and Other Costs . In addition, the amendment requires that an entity include in its vintage disclosures the current period-gross loan charge-offs by year of origination. The amendments are effective for years beginning after December 15, 2022, and should be applied prospectively, except that an entity has the option to apply a modified retrospective method for TDR loans, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. An entity may elect to early adopt each of the amendments separately. As such, we early adopted the current period charge-off disclosures in the first quarter of 2022 and intend to adopt the loan modification amendments when effective in the first quarter of 2023. Neither the early adoption of the amendments related to gross charge-off disclosures nor the future adoption of the TDR amendments had or will have a material impact on our financial condition or results of operations. In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method . Among other things, the ASU renames the "last-of-layer" method to the "portfolio layer" method and makes fair value hedging more accessible for hedge accounting of interest rate risk for portfolios and financial assets. For example, the guidance permits an entity to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby providing for consistency between accounting for similar hedges. The amendments are effective for years beginning after December 15, 2022. The adoption of the amendments will not affect our existing hedge accounting, disclosures, financial condition or results of operations. In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . The amendment reduces diversity in practice by clarifying that a separate contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. In addition, this ASU provided amended examples to illustrate that a restriction that is a characteristic of the equity security, which market participants would take into account when pricing them, would be considered in measuring fair value. This ASU also introduces new disclosure requirements. The amendments are effective prospectively for years beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements. As discussed in Note 4, Investment Securities, we hold Visa Inc. Class B common stock that is legally restricted from resale to non-member banks of Visa U.S.A. until the covered litigation against Visa Inc. is settled. While the adoption of the amendments may require additional disclosures, we do not anticipate that it will impact our financial condition or results of operations. Page-8 Note 3: Fair Value of Assets and Liabilities Fair Value Hierarchy and Fair Value Measurement We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data. Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant management judgment and estimation. Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation process in the reporting period during which the event or circumstances that caused the transfer occurred. No such transfers occurred in the years presented. The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis. (in thousands) Description of Financial Instruments Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Measurement Categories: Changes in Fair Value Recorded In 1 June 30, 2022 Securities available-for-sale: Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 539,991 $ — $ 539,991 $ — OCI SBA-backed securities $ 53,168 $ — $ 53,168 $ — OCI Debentures of government sponsored agencies $ 139,340 $ — $ 139,340 $ — OCI U.S. Treasury securities $ 10,644 $ 10,644 $ — $ — OCI Obligations of state and political subdivisions $ 114,263 $ — $ 114,263 $ — OCI Corporate bonds $ 34,092 $ — $ 34,092 $ — OCI Asset-backed securities $ 1,651 $ — $ 1,651 $ — OCI Derivative financial assets (interest rate contracts) $ 206 $ — $ 206 $ — NI Derivative financial liabilities (interest rate contracts) $ 104 $ — $ 104 $ — NI December 31, 2021 Securities available-for-sale: Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 759,576 $ — $ 759,576 $ — OCI SBA-backed securities $ 33,478 $ — $ 33,478 $ — OCI Debentures of government sponsored agencies $ 188,527 $ — $ 188,527 $ — OCI U.S. Treasury securities $ 11,630 $ 11,630 $ — $ — OCI Obligations of state and political subdivisions $ 134,000 $ — $ 134,000 $ — OCI Corporate bonds $ 38,495 $ — $ 38,495 $ — OCI Asset-backed securities $ 1,862 $ — $ 1,862 $ — OCI Derivative financial liabilities (interest rate contracts) $ 1,085 $ — $ 1,085 $ — NI 1 Other comprehensive income ("OCI") or net income ("NI"). Page-9 Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2). Level 2 securities include asset-backed securities, obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, and corporate bonds. As of June 30, 2022 and December 31, 2021, there were no Level 3 securities. Held-to-maturity securities may be written down to fair value as a result of an other-than-temporary impairment , and we did no t record any write-downs during the six months ended June 30, 2022 or June 30, 2021. Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities. On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as of the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties. We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities. Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as individually analyzed loans that are collateral dependent and other real estate owned ("OREO"). OREO represents collateral acquired through foreclosure and is initially recorded at fair value as established by a current appraisal of the collateral. Subsequent to foreclosure, OREO is carried at the lower of cost or fair value, less estimated costs to sell. OREO values are reviewed on an ongoing basis and any subsequent decline in fair value is recorded as a foreclosed asset expense in the current period. The value of OREO is classified as Level 3. Our current OREO resulted from the American River Bankshares ("ARB") merger in 2021. The following table presents the carrying value of assets measured at fair value on a non-recurring basis and that were held in the consolidated statements of condition at each respective period end, by level within the fair value hierarchy as of June 30, 2022 and December 31, 2021. (in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 30, 2022 Other real estate owned $ 800 $ — $ — $ 800 December 31, 2021 Other real estate owned $ 800 $ — $ — $ 800 Page-10 Disclosures about Fair Value of Financial Instruments The table below is a summary of fair value estimates for financial instruments as of June 30, 2022 and December 31, 2021, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI"), lease obligations and non-maturity deposit liabilities. Additionally, we held shares of Federal Home Loan Bank ("FHLB") of San Francisco stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of June 30, 2022 or December 31, 2021. The values are discussed in Note 4, Investment Securities. June 30, 2022 December 31, 2021 (in thousands) Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy Financial assets (recorded at amortized cost): Cash and cash equivalents $ 115,905 $ 115,905 Level 1 $ 347,641 $ 347,641 Level 1 Investment securities held-to-maturity 931,587 847,386 Level 2 342,222 342,755 Level 2 Loans, net 2,140,093 2,123,254 Level 3 2,232,622 2,234,430 Level 3 Interest receivable 12,248 12,248 Level 2 11,889 11,889 Level 2 Financial liabilities (recorded at amortized cost): Time deposits 141,674 141,857 Level 2 150,235 150,475 Level 2 Interest payable 74 74 Level 2 81 81 Level 2 Fair value of loans is based on exit price techniques and obtained from an independent third-party that uses its proprietary valuation model and methodology and may differ from actual price from a prospective buyer. The discounted cash flow valuation approach reflects key inputs and assumptions that are unobservable, such as loan probability of default, loss given default, prepayment speed, and market discount rates. Fair value of fixed-rate time deposits is estimated by discounting future contractual cash flows using discount rates that reflect the current observable market rates offered for time deposits of similar remaining maturities. The value of off-balance-sheet financial instruments is estimated based on the fee income associated with the commitments, which in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material as of June 30, 2022 or December 31, 2021. Note 4: Investment Securities Our investment securities portfolio consists of U.S. Treasury securities, obligations of state and political subdivisions, U.S. federal government agencies such as Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), U.S. government-sponsored enterprises ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB, U.S. Corporations and one asset-backed security collateralized by student loan pools. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, as reflected in the following table. A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of June 30, 2022 and December 31, 2021 is presented below. Page-11 Held-to-maturity: Amortized Cost 1 Allowance for Credit Losses Net Carrying Amount Gross Unrealized Fair Value (in thousands) Gains (Losses) June 30, 2022 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 337,998 $ — $ 337,998 $ 4 $ ( 34,731 ) $ 303,271 CMOs issued by FHLMC 230,553 — 230,553 172 ( 20,766 ) 209,959 CMOs issued by FNMA 118,956 — 118,956 853 ( 2,574 ) 117,235 CMOs issued by GNMA 12,329 — 12,329 — ( 982 ) 11,347 SBA-backed securities 3,244 — 3,244 — ( 66 ) 3,178 Debentures of government-sponsored agencies 135,678 — 135,678 — ( 17,457 ) 118,221 Obligations of state and political subdivisions 62,829 — 62,829 19 ( 8,304 ) 54,544 Corporate bonds 30,000 — 30,000 — ( 369 ) 29,631 Total held-to-maturity $ 931,587 $ — $ 931,587 $ 1,048 $ ( 85,249 ) $ 847,386 December 31, 2021 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 126,990 $ — $ 126,990 $ 2,110 $ ( 712 ) $ 128,388 CMOs issued by FHLMC 106,851 — 106,851 668 ( 1,045 ) 106,474 CMOs issued by FNMA 4,866 — 4,866 128 — 4,994 SBA-backed securities 4,840 — 4,840 198 — 5,038 Debentures of government-sponsored agencies 51,472 — 51,472 — ( 901 ) 50,571 Obligations of state and political subdivisions 47,203 — 47,203 296 ( 209 ) 47,290 Total held-to-maturity $ 342,222 $ — $ 342,222 $ 3,400 $ ( 2,867 ) $ 342,755 1 Amortized cost and fair values exclude accrued interest receivable of $ 3.1 million and $ 1.1 million at June 30, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. Management measures expected credit losses on held-to-maturity securities collectively by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued or guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions and corporate bonds, management considers: (i) issuer and/or guarantor credit ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. Based on the comprehensive analysis, no credit losses are expected. The following table summarizes the amortized cost of our portfolio of held-to-maturity securities issued by states and political subdivisions and corporate bonds by Moody's and/or Standard & Poor's bond ratings as of June 30, 2022. Obligations of state and political subdivisions Corporate bonds (in thousands) June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021 AAA / Aaa $ 43,188 $ 34,229 $ — $ — AA / Aa 19,541 12,873 — — A2 / A 100 101 30,000 — Total $ 62,829 $ 47,203 $ 30,000 $ — Page-12 A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of June 30, 2022 and December 31, 2021 is presented below. Available-for-sale: Amortized Cost 1 Gross Unrealized Allowance for Credit Losses Fair Value (in thousands) Gains (Losses) June 30, 2022 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 127,526 $ 23 $ ( 8,784 ) $ — $ 118,765 CMOs issued by FHLMC 370,610 1 ( 23,017 ) — 347,594 CMOs issued by FNMA 40,375 1 ( 2,960 ) — 37,416 CMOs issued by GNMA 38,629 1 ( 2,414 ) — 36,216 SBA-backed securities 55,297 4 ( 2,133 ) — 53,168 Debentures of government- sponsored agencies 149,099 — ( 9,759 ) — 139,340 U.S. Treasury securities 11,895 — ( 1,251 ) — 10,644 Obligations of state and political subdivisions 128,238 50 ( 14,025 ) — 114,263 Corporate bonds 36,989 — ( 2,897 ) — 34,092 Asset-backed securities 1,721 — ( 70 ) — 1,651 Total available-for-sale $ 960,379 $ 80 $ ( 67,310 ) $ — $ 893,149 December 31, 2021 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 316,090 $ 1,224 $ ( 2,784 ) $ — $ 314,530 CMOs issued by FHLMC 343,047 3,209 ( 4,829 ) — 341,427 CMOs issued by FNMA 48,187 152 ( 611 ) — 47,728 CMOs issued by GNMA 56,345 99 ( 553 ) — 55,891 SBA-backed securities 32,640 993 ( 155 ) — 33,478 Debentures of government- sponsored agencies 191,449 25 ( 2,947 ) — 188,527 U.S. Treasury securities 11,886 — ( 256 ) 11,630 Obligations of state and political subdivisions 129,009 5,372 ( 381 ) — 134,000 Corporate bonds 39,001 — ( 506 ) — 38,495 Asset-backed securities 1,866 — ( 4 ) — 1,862 Total available-for-sale $ 1,169,520 $ 11,074 $ ( 13,026 ) $ — $ 1,167,568 1 Amortized cost and fair value exclude accrued interest receivable of $ 3.4 million and $ 3.7 million at June 30, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies. In March 2022, we transferred $ 357.5 million of these securities from available-for-sale to held-to-maturity at fair value. We intend and have the ability to hold these securities to maturity. The net unrealized pre-tax loss of $ 14.8 million that remained in accumulated other comprehensive loss is accreted over the remaining lives of the securities. The amortized cost a nd fair value of investment debt securities by contractual maturity at June 30, 2022 and December 31, 2021 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties. June 30, 2022 December 31, 2021 Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 100 $ 100 $ 3,369 $ 3,366 $ 101 $ 103 $ 10,785 $ 10,841 After one but within five years 83,024 81,968 260,444 247,749 25,666 26,559 219,474 219,957 After five years through ten years 255,978 228,380 300,994 280,179 182,604 182,303 299,937 300,187 After ten years 592,485 536,938 395,572 361,855 133,851 133,790 639,324 636,583 Total $ 931,587 $ 847,386 $ 960,379 $ 893,149 $ 342,222 $ 342,755 $ 1,169,520 $ 1,167,568 There were no sales of investment securities in the first half of 2022 or 2021. Page-13 Three months ended Pledged investment securities are shown in the following table: (in thousands) June 30, 2022 December 31, 2021 Pledged to the State of California: Secure public deposits in compliance with the Local Agency Security Program $ 217,143 $ 213,861 Collateral for trust deposits 676 729 Collateral for Wealth Management and Trust Services checking account 568 614 Total investment securities pledged to the State of California 218,387 215,204 Bankruptcy trustee deposits pledged with Federal Reserve Bank 1,905 2,645 Total pledged investment securities $ 220,292 $ 217,849 There were 409 and 217 securities in unrealized loss positions at June 30, 2022 and December 31, 2021, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below: June 30, 2022 < 12 continuous months ≥ 12 continuous months Total securities in a loss position (in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Held-to-maturity: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 302,998 $ ( 34,731 ) $ — $ — $ 302,998 $ ( 34,731 ) CMOs issued by FHLMC 194,163 ( 20,136 ) 4,018 ( 630 ) 198,181 ( 20,766 ) CMOs issued by FNMA 67,069 ( 2,574 ) — — 67,069 ( 2,574 ) CMOs issued by GNMA 11,347 ( 982 ) — — 11,347 ( 982 ) SBA-backed securities 3,178 ( 66 ) — — 3,178 ( 66 ) Debentures of government-sponsored agencies 61,339 ( 11,007 ) 36,881 ( 6,450 ) 98,220 ( 17,457 ) Obligations of state and political subdivisions 51,313 ( 8,304 ) — — 51,313 ( 8,304 ) Corporate bonds 29,631 ( 369 ) — — 29,631 ( 369 ) Total held-to-maturity 721,038 ( 78,169 ) 40,899 ( 7,080 ) 761,937 ( 85,249 ) Available-for-sale: MBS pass-through securities issued by FHLMC, FNMA and GNMA 113,127 ( 8,784 ) — — 113,127 ( 8,784 ) CMOs issued by FHLMC 343,897 ( 22,540 ) 3,538 ( 477 ) 347,435 ( 23,017 ) CMOs issued by FNMA 33,201 ( 2,674 ) 4,156 ( 286 ) 37,357 ( 2,960 ) CMOs issued by GNMA 34,696 ( 2,414 ) — — 34,696 ( 2,414 ) SBA-backed securities 51,556 ( 2,091 ) 1,059 ( 42 ) 52,615 ( 2,133 ) Debentures of government- sponsored agencies 132,004 ( 8,126 ) 7,336 ( 1,633 ) 139,340 ( 9,759 ) U.S. Treasury securities 10,644 ( 1,251 ) — — 10,644 ( 1,251 ) Obligations of state and political subdivisions 101,078 ( 13,425 ) 2,001 ( 600 ) 103,079 ( 14,025 ) Corporate bonds 28,833 ( 2,167 ) 5,259 ( 730 ) 34,092 ( 2,897 ) Asset-backed securities 1,651 ( 70 ) — — 1,651 ( 70 ) Total available-for-sale 850,687 ( 63,542 ) 23,349 ( 3,768 ) 874,036 ( 67,310 ) Total securities at loss position $ 1,571,725 $ ( 141,711 ) $ 64,248 $ ( 10,848 ) $ 1,635,973 $ ( 152,559 ) Page-14 December 31, 2021 < 12 continuous months ≥ 12 continuous months Total securities in a loss position (in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Held-to-maturity: MBS pass-through securities issued by FHLMC and FNMA $ 76,619 $ ( 712 ) $ — $ — $ 76,619 $ ( 712 ) CMOs issued by FHLMC 54,811 ( 1,045 ) — — 54,811 ( 1,045 ) Obligations of state and political subdivisions 19,203 ( 209 ) — — 19,203 ( 209 ) Debentures of government-sponsored agencies 50,571 ( 901 ) — — 50,571 ( 901 ) Total held-to-maturity 201,204 ( 2,867 ) — — 201,204 ( 2,867 ) Available-for-sale: MBS pass-through securities issued by FHLMC and FNMA 263,474 ( 2,784 ) — — 263,474 ( 2,784 ) SBA-backed securities 7,478 ( 112 ) 1,209 ( 43 ) 8,687 ( 155 ) CMOs issued by FHLMC 226,175 ( 4,677 ) 4,415 ( 152 ) 230,590 ( 4,829 ) CMOs issued by GNMA 44,790 ( 553 ) — — 44,790 ( 553 ) CMOs issued by FNMA 37,348 ( 611 ) — — 37,348 ( 611 ) Debentures of government- sponsored agencies 148,979 ( 2,527 ) 8,549 ( 420 ) 157,528 ( 2,947 ) U.S. Treasury securities 11,629 ( 256 ) — — 11,629 ( 256 ) Obligations of state and political subdivisions 17,552 ( 381 ) — — 17,552 ( 381 ) Corporate Bonds 38,495 ( 506 ) — — 38,495 ( 506 ) Asset-backed securities 1,861 ( 4 ) — — 1,861 ( 4 ) Total available-for-sale 797,781 ( 12,411 ) 14,173 ( 615 ) 811,954 ( 13,026 ) Total securities at loss position $ 998,985 $ ( 15,278 ) $ 14,173 $ ( 615 ) $ 1,013,158 $ ( 15,893 ) As of June 30, 2022, the investment portfolio included 18 investment securities that had been in a continuous loss position for twelve months or more and 391 investment securities that had been in a loss position for less than twelve months. Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities. Our investment in obligations of state and political subdivisions bonds are deemed credit worthy after our comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or credit enhancements. At June 30, 2022, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost. No allowances for credit losses have been recognized on available-for-sale securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality at June 30, 2022. Non-Marketable Securities Included in Other Assets FHLB Capital Stock As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $ 100 per share par value. We held $ 16.7 million of FHLB stock included in other assets on the consolidated statements of condition at both June 30, 2022 and December 31, 2021. The carrying amounts of Page-15 these investments are reasonable estimates of fair value because the securities are restricted to member banks and they do not have a readily determinable market value. Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at June 30, 2022 and December 31, 2021. On July 28, 2022, FHLB announced a cash dividend for the first quarter of 2022 at an annualized dividend rate of 6.00 % to be distributed in mid-August 2022. Cash dividends paid on FHLB capital stock are recorded as non-interest income. VISA Inc. Class B Common Stock As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at June 30, 2022 and December 31, 2021. These shares have a carrying value of zero and are restricted from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction and the uncertainty on the conversion rate to Class A shares, these shares lack a readily determinable fair value. When converting this Class B common stock to Class A common stock based on the estimated conversion rate of 1.6059 and 1.6181 at June 30, 2022 and December 31, 2021, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $ 3.3 million and $ 3.7 million at June 30, 2022 and December 31, 2021, respectively. The conversion rate is subject to further adjustment upon the final settlement of the covered litigation against Visa Inc. and its member banks. As such, the fair value of these Class B shares can differ significantly from their converted values. For further information, refer to Note 8, Commitments and Contingencies. Low Income Housing Tax Credits We invest in low-income housing tax credit funds as a limited partner, which totaled $ 2.7 million and $ 3.0 million recorded in other assets as of June 30, 2022 and December 31, 2021, respectively. In the first six months of 2022, we recognized $ 317 thousand of low-income housing tax credits and other tax benefits, offset by $ 267 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of June 30, 2022, our unfunded commitments for these low-income housing tax credit funds totaled $ 392 thousand. We did no t recognize any impairment losses on these low-income housing tax credit investments during the first six months of 2022 or 2021, as the value of the future tax benefits exceeds the carrying value of the investments. Note 5: Loans and Allowance for Credit Losses on Loans The following table presents the amortized cost of loans by class as of June 30, 2022 and December 31, 2021. (in thousands) June 30, 2022 December 31, 2021 Commercial and industrial $ 213,122 $ 301,602 Real estate: Commercial owner-occupied 382,897 392,345 Commercial investor-owned 1,190,419 1,189,021 Construction 118,147 119,840 Home equity 90,629 88,746 Other residential 113,361 114,558 Installment and other consumer loans 54,057 49,533 Total loans, at amortized cost 1 2,162,632 2,255,645 Allowance for credit losses on loans ( 22,539 ) ( 23,023 ) Total loans, net of allowance for credit losses on loans $ 2,140,093 $ 2,232,622 1 Amortized cost includes net deferred loan origination costs (fees) of $ 1.4 million and $( 901 ) thousand at June 30, 2022 and December 31, 2021, respectively. Amounts are also net of unrecognized purchase discounts of $ 2.7 million and $ 2.5 million at June 30, 2022 and December 31, 2021, respectively. Amortized cost excludes accrued interest, which totaled $ 5.8 million and $ 7.1 million at June 30, 2022 and December 31, 2021, respectively, and is included in interest receivable and other assets in the consolidated statements of condition. Lending Risks Commercial and Industrial Loans - Commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers, Page-16 however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable and inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress. A weakened economy, and resultant decreased consumer and/or business spending, may have an effect on the credit quality of commercial loans. Pursuant to the 2020 CARES Act, Bank of Marin originated 2,876 guaranteed loans totaling $ 444.1 million in two rounds of the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). Additionally in 2021, Bank of Marin assumed 113 PPP loans totaling $ 18.6 million from ARB as of the merger date. As of June 30, 2022, there were 112 PPP loans outstanding totaling $ 17.0 million (net of $ 420 thousand in unrecognized fees and costs), compared to 368 loans outstanding at December 31, 2021 totaling $ 111.2 million (net of $ 2.5 million in unrecognized fees and costs) included in commercial and industrial loan balances. PPP loans have terms of two to five years and earn interest at 1%. In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was netted with loan origination costs and accreted/amortized into interest income using the effective yield method over the contractual life of each loan. The recognition of fees and costs is accelerated when the SBA forgives the loan and/or the loan is paid off prior to maturity. PPP loans are fully guaranteed by the SBA if they meet the requirements of the program. As expected, the vast majority of the PPP loans have been fully forgiven by the SBA and we expect the majority of remaining loans to be forgiven as well. Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow from either the business or investment property and supported by real property collateral. Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios. Furthermore, a large majority of our loans are guaranteed by the owners of the properties. Conditions in the real estate markets or downturn in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio. Construction Loans - Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loans include interest reserves that are used for the payment of interest during the development and marketing periods and are capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project. Consumer Loans - Consumer loans primarily consist of home equity lines of credit, other residential loans, floating homes, and indirect luxury auto loans, along with a small number of installment loans. Our other residential loans include tenancy-in-common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores or collateral with high loan-to-value ratios. Credit Quality Indicators We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of “Special Mention” risk graded loans, or worse, are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows: Page-17 Pass and Watch - Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt-service-coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period. Special Mention - Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification. Substandard - Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies. Doubtful - Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent. We regularly review our credits for accuracy of risk grades whenever we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly. The following tables present the loan portfolio by loan class, origination year and internal risk rating as of June 30, 2022 and December 31, 2021. We early adopted the vintage disclosure requirements of ASU 2022-02 prospectively as described in Note 2 beginning with the first quarter of 2022. Accordingly, the 2022 vintage table reflects gross charge-offs by loan class and year of origination. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination. (in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost June 30, 2022 2022 2021 2020 2019 2018 Prior Total Commercial and industrial: Pass and Watch $ 9,586 $ 21,160 $ 9,230 $ 24,730 $ 6,988 $ 28,168 $ 102,567 $ 202,429 Special Mention — — — 503 4,248 — 123 4,874 Substandard — — 1,469 — — — 4,350 5,819 Total commercial and industrial $ 9,586 $ 21,160 $ 10,699 $ 25,233 $ 11,236 $ 28,168 $ 107,040 $ 213,122 Commercial real estate, owner-occupied: Pass and Watch $ 55,263 $ 53,245 $ 41,565 $ 45,948 $ 30,419 $ 116,659 $ — $ 343,099 Special Mention — 16,471 — 317 5,386 4,567 — 26,741 Substandard — — 7,142 1,754 — 4,055 — 12,951 Doubtful — — 106 — — — — 106 Total commercial real estate, owner-occupied $ 55,263 $ 69,716 $ 48,813 $ 48,019 $ 35,805 $ 125,281 $ — $ 382,897 Commercial real estate, investor-owned: Pass and Watch $ 118,868 $ 221,908 $ 164,765 $ 171,674 $ 125,646 $ 343,000 $ 73 $ 1,145,934 Special Mention — — 4,531 2,714 9,729 9,980 — 26,954 Substandard — — — — — 17,531 — 17,531 Total commercial real estate, investor-owned $ 118,868 $ 221,908 $ 169,296 $ 174,388 $ 135,375 $ 370,511 $ 73 $ 1,190,419 Page-18 (in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost June 30, 2022 2022 2021 2020 2019 2018 Prior Total Construction: Pass and Watch $ 33,184 $ 24,274 $ 42,658 $ 8,921 $ 9,110 $ — $ — $ 118,147 Total construction $ 33,184 $ 24,274 $ 42,658 $ 8,921 $ 9,110 $ — $ — $ 118,147 Home equity: Pass and Watch $ — $ 24 $ — $ — $ — $ 600 $ 89,369 $ 89,993 Substandard — — — — — 433 203 636 Total home equity $ — $ 24 $ — $ — $ — $ 1,033 $ 89,572 $ 90,629 Other residential: Pass and Watch $ 11,504 $ 15,575 $ 30,158 $ 22,869 $ 13,186 $ 20,069 $ — $ 113,361 Total other residential $ 11,504 $ 15,575 $ 30,158 $ 22,869 $ 13,186 $ 20,069 $ — $ 113,361 Installment and other consumer: Pass and Watch $ 10,938 $ 15,523 $ 6,850 $ 7,441 $ 4,696 $ 6,888 $ 1,721 $ 54,057 Total installment and other consumer $ 10,938 $ 15,523 $ 6,850 $ 7,441 $ 4,696 $ 6,888 $ 1,721 $ 54,057 Gross current period charge-offs $ — $ — $ — $ — $ — $ ( 18 ) $ ( 4 ) $ ( 22 ) Total loans: Pass and Watch $ 239,343 $ 351,709 $ 295,226 $ 281,583 $ 190,045 $ 515,384 $ 193,730 $ 2,067,020 Total Special Mention $ — $ 16,471 $ 4,531 $ 3,534 $ 19,363 $ 14,547 $ 123 $ 58,569 Total Substandard $ — $ — $ 8,611 $ 1,754 $ — $ 22,019 $ 4,553 $ 36,937 Total Doubtful $ — $ — $ 106 $ — $ — $ — $ — $ 106 Totals $ 239,343 $ 368,180 $ 308,474 $ 286,871 $ 209,408 $ 551,950 $ 198,406 $ 2,162,632 Total gross current period charge-offs $ — $ — $ — $ — $ — $ ( 18 ) $ ( 4 ) $ ( 22 ) (in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost December 31, 2021 2021 2020 2019 2018 2017 Prior Total Commercial and industrial: Pass and Watch $ 96,643 $ 35,967 $ 25,754 $ 12,763 $ 2,729 $ 31,280 $ 90,744 $ 295,880 Special Mention — 1,700 584 273 — — 2,088 4,645 Substandard — — — — — — 1,077 1,077 Total commercial and industrial $ 96,643 $ 37,667 $ 26,338 $ 13,036 $ 2,729 $ 31,280 $ 93,909 $ 301,602 Commercial real estate, owner-occupied: Pass and Watch $ 58,395 $ 43,216 $ 49,485 $ 36,174 $ 42,430 $ 104,898 $ — $ 334,598 Special Mention 16,748 — — 7,846 — 16,996 — 41,590 Substandard — 7,155 285 — — 8,603 — 16,043 Doubtful — 114 — — — — — 114 Total commercial real estate, owner-occupied $ 75,143 $ 50,485 $ 49,770 $ 44,020 $ 42,430 $ 130,497 $ — $ 392,345 Commercial real estate, investor-owned: Pass and Watch $ 225,722 $ 186,214 $ 187,418 $ 143,028 $ 75,419 $ 325,882 $ 84 $ 1,143,767 Special Mention — 1,214 2,714 11,773 1,787 9,540 — 27,028 Substandard — — — 695 — 17,531 — 18,226 Total commercial real estate, investor-owned $ 225,722 $ 187,428 $ 190,132 $ 155,496 $ 77,206 $ 352,953 $ 84 $ 1,189,021 Construction: Pass and Watch $ 31,269 $ 70,528 $ 8,935 $ 9,108 $ — $ — $ — $ 119,840 Total construction $ 31,269 $ 70,528 $ 8,935 $ 9,108 $ — $ — $ — $ 119,840 Home equity: Pass and Watch $ — $ — $ — $ — $ 10 $ 268 $ 87,693 $ 87,971 Substandard — — — — — 377 398 775 Total home equity $ — $ — $ — $ — $ 10 $ 645 $ 88,091 $ 88,746 Other residential: Pass and Watch $ 15,800 $ 31,981 $ 25,529 $ 15,411 $ 7,964 $ 17,873 $ — $ 114,558 Total other residential $ 15,800 $ 31,981 $ 25,529 $ 15,411 $ 7,964 $ 17,873 $ — $ 114,558 Installment and other consumer: Pass and Watch $ 17,207 $ 7,748 $ 9,436 $ 5,633 $ 1,123 $ 6,620 $ 1,766 $ 49,533 Total installment and other consumer $ 17,207 $ 7,748 $ 9,436 $ 5,633 $ 1,123 $ 6,620 $ 1,766 $ 49,533 Total loans: Pass and Watch $ 445,036 $ 375,654 $ 306,557 $ 222,117 $ 129,675 $ 486,821 $ 180,287 $ 2,146,147 Total Special Mention $ 16,748 $ 2,914 $ 3,298 $ 19,892 $ 1,787 $ 26,536 $ 2,088 $ 73,263 Total Substandard $ — $ 7,155 $ 285 $ 695 $ — $ 26,511 $ 1,475 $ 36,121 Doubtful $ — $ 114 $ — $ — $ — $ — $ — $ 114 Totals $ 461,784 $ 385,837 $ 310,140 $ 242,704 $ 131,462 $ 539,868 $ 183,850 $ 2,255,645 Page-19 The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of June 30, 2022 and December 31, 2021. Loan Aging Analysis by Class (in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Total June 30, 2022 30-59 days past due $ 1,065 $ 660 $ — $ — $ 100 $ — $ 166 $ 1,991 60-89 days past due 589 545 — — — — 28 1,162 90 days or more past due 202 — — — 54 — — 256 Total past due 1,856 1,205 — — 154 — 194 3,409 Current 211,266 381,692 1,190,419 118,147 90,475 113,361 53,863 2,159,223 Total loans 1 $ 213,122 $ 382,897 $ 1,190,419 $ 118,147 $ 90,629 $ 113,361 $ 54,057 $ 2,162,632 Non-accrual loans 2 $ — $ 7,564 $ — $ — $ 454 $ — $ — $ 8,018 Non-accrual loans with no allowance $ — $ 7,564 $ — $ — $ 454 $ — $ — $ 8,018 December 31, 2021 30-59 days past due $ 2 $ — $ — $ — $ 498 $ — $ 1,036 $ 1,536 60-89 days past due 394 — — — 67 — — 461 90 days or more past due 229 — — — 88 — — 317 Total past due 625 — — — 653 — 1,036 2,314 Current 300,977 392,345 1,189,021 119,840 88,093 114,558 48,497 2,253,331 Total loans 1 $ 301,602 $ 392,345 $ 1,189,021 $ 119,840 $ 88,746 $ 114,558 $ 49,533 $ 2,255,645 Non-accrual loans 2 $ — $ 7,269 $ 694 $ — $ 413 $ — $ — $ 8,376 Non-accrual loans with no allowance $ — $ 7,269 $ 694 $ — $ 413 $ — $ — $ 8,376 1 There were no non-performing loans past due more than ninety days and accruing interest as of June 30, 2022 and December 31, 2021. 2 None of the non-accrual loans as of June 30, 2022 or December 31, 2021 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the three and six months ended June 30, 2022 and 2021. There were three loans totaling $ 397 thousand placed on non-accrual status during the six months ended June 30, 2022 for which we reversed $ 8 thousand in interest income at the time of change in status, one of which for $ 16 thousand was subsequently charged off in the second quarter. Collateral Dependent Loans The following table presents the amortized cost basis of individually analyzed collateral-dependent loans, which are all on non-accrual status, by class at June 30, 2022 and December 31, 2021. Amortized Cost by Collateral Type (in thousands) Commercial Real Estate Residential Real Estate Other Total 1 Allowance for Credit Losses June 30, 2022 Commercial real estate, owner-occupied $ 7,564 $ — $ — $ 7,564 $ — Home equity — 454 — 454 — Total $ 7,564 $ 454 $ — $ 8,018 $ — December 31, 2021 Commercial real estate, owner-occupied $ 7,269 $ — $ — $ 7,269 $ — Commercial real estate, investor-owned 694 — — 694 — Home equity — 413 — 413 — Total $ 7,963 $ 413 $ — $ 8,376 $ — 1 There were no collateral-dependent residential real estate mortgage loans in process of foreclosure or in substance repossessed at June 30, 2022 or December 31, 2021. The weighted average loan-to-value of collateral dependent loans was approximately 67 % at both June 30, 2022 and December 31, 2021. Troubled Debt Restructuring Our loan portfolio includes certain loans modified in a troubled debt restructuring (“TDR”), where we have granted economic concessions to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to accruing status after management considers the borrower’s sustained repayment performance for a reasonable period, generally nine months, and obtains reasonable assurance of repayment and performance. We may remove a loan from TDR designation if it meets all of the following conditions: • The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards; Page-20 • The borrower is no longer considered to be in financial difficulty; • Performance on the loan is reasonably assured; and • Existing loan did not have any forgiveness of principal or interest. There were no loans removed from TDR designation during the six months ended June 30, 2022 and 2021. In accordance with section 4013 of the CARES Act, subsequently amended by section 541 of the 2020 Economic Aid Act, we elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated as TDRs under existing GAAP. As of June 30, 2022, two borrowing relationships with three loans totaling $ 23.6 million were continuing to benefit from payment relief. The weighted average loan-to-value ratio of the remaining payment relief loans was approximately 44 %. We accrue and recognize interest income on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued interest is fully paid. We will continue to work closely with both of these clients and monitor their performance. The following table summarizes the amortized cost of TDR loans by loan class as of June 30, 2022 and December 31, 2021. (in thousands) June 30, 2022 December 31, 2021 Commercial and industrial $ 1,178 $ 1,183 Commercial real estate, owner-occupied 7,141 7,155 Commercial real estate, investor-owned 170 179 Home equity 479 386 Installment and other consumer 571 607 Total 1 $ 9,539 $ 9,510 1 TDR loans on non-accrual status totaled $ 7.4 million at both June 30, 2022 and December 31, 2021. Unfunded commitments for TDR loans totaled $ 241 thousand and $ 441 thousand as of June 30, 2022 and December 31, 2021, respectively. There was one loan modified in a TDR during the three and six months ended June 30, 2022 with a pre- and post-modification and end of period amortized cost of $ 100 thousand, and no loans modified in a TDR during the three and six months ended June 30, 2021. The modification in the second quarter of 2022 included a maturity date extension and interest rate concession. During the three and six months ended June 30, 2022 and 2021, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition of more than ninety days past due. Allowance for Credit Losses on Loans Rollforward The following table discloses activity in the allowance for credit losses on loans for the periods presented. Allowance for Credit Losses on Loans Rollforward (in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Unallocated Total Three months ended June 30, 2022 Beginning balance $ 1,784 $ 2,622 $ 12,301 $ 1,717 $ 549 $ 628 $ 641 $ 2,305 $ 22,547 (Reversal) Provision ( 89 ) ( 5 ) 138 12 ( 19 ) ( 43 ) 112 ( 106 ) — Charge-offs — — — — — — ( 20 ) — ( 20 ) Recoveries 4 — — 8 — — — — 12 Ending balance $ 1,699 $ 2,617 $ 12,439 $ 1,737 $ 530 $ 585 $ 733 $ 2,199 $ 22,539 Three months ended June 30, 2021 Beginning balance $ 1,654 $ 2,304 $ 10,856 $ 1,312 $ 520 $ 757 $ 255 $ 2,300 $ 19,958 (Reversal) Provision ( 68 ) ( 267 ) ( 95 ) ( 178 ) ( 158 ) ( 144 ) ( 17 ) 7 ( 920 ) Charge-offs — — — — — — — — — Recoveries 4 — — 8 50 — — — 62 Ending balance $ 1,590 $ 2,037 $ 10,761 $ 1,142 $ 412 $ 613 $ 238 $ 2,307 $ 19,100 Page-21 Allowance for Credit Losses on Loans Rollforward (in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor Construction Home equity Other residential Installment and other consumer Unallocated Total Six months ended June 30, 2022 Beginning balance $ 1,709 $ 2,776 $ 12,739 $ 1,653 $ 595 $ 644 $ 621 $ 2,286 $ 23,023 (Reversal) Provision ( 17 ) ( 159 ) ( 300 ) 68 ( 65 ) ( 59 ) 134 ( 87 ) ( 485 ) Charge-offs — — — — — — ( 22 ) — ( 22 ) Recoveries 7 — — 16 — — — — 23 Ending balance $ 1,699 $ 2,617 $ 12,439 $ 1,737 $ 530 $ 585 $ 733 $ 2,199 $ 22,539 Six months ended June 30, 2021 Beginning balance $ 2,530 $ 2,778 $ 12,682 $ 1,557 $ 738 $ 998 $ 291 $ 1,300 $ 22,874 (Reversal) Provision ( 947 ) ( 741 ) ( 1,921 ) ( 433 ) ( 376 ) ( 385 ) ( 53 ) 1,007 ( 3,849 ) Charge-offs — — — — — — — — — Recoveries 7 — — 18 50 — — — 75 Ending balance $ 1,590 $ 2,037 $ 10,761 $ 1,142 $ 412 $ 613 $ 238 $ 2,307 $ 19,100 Pledged Loans Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $ 1.293 billion and $ 1.330 billion at June 30, 2022 and December 31, 2021, respectively. In addition, we pledge eligible TIC loans, which totaled $ 102.6 million and $ 106.2 million at June 30, 2022 and December 31, 2021, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). For additional information, see Note 6, Borrowings. Related Party Loans The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These transactions, including loans, are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Related party loans totaled $ 6.6 million at June 30, 2022 and $ 7.9 million at December 31, 2021. In addition, undisbursed commitments to related parties totaled $ 562 thousand at June 30, 2022 and $ 8.6 million at December 31, 2021. The decreases in both the outstanding amount and undisbursed commitment as of June 30, 2022 were primarily due to a Director retirement in the first quarter. Note 6: Borrowings and Other Obligations Federal Funds Purchased – The Bank had unsecured available lines of credit with correspondent banks for overnight borrowings totaling $ 150.0 million at June 30, 2022 and December 31, 2021. In general, interest rates on these lines approximate the federal funds target rate. We had no overnight borrowings under these credit facilities at June 30, 2022 or December 31, 2021 . Federal Home Loan Bank Borrowings – As of June 30, 2022 and December 31, 2021, the Bank had available lines of credit with the FHLB totaling $ 762.6 million and $ 820.5 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at June 30, 2022 or December 31, 2021. Federal Reserve Line of Credit – The Bank has an available line of credit with the Federal Reserve Bank of San Francisco ("FRBSF") secured by certain residential loans. At June 30, 2022 and December 31, 2021, the Bank had borrowing capacity under this line totaling $ 57.3 million and $ 70.8 million, respectively, and had no outstanding borrowings with the FRBSF. Subordinated Debenture – As part of an acquisition in 2013, Bancorp assumed a subordinated debenture with a contractual balance of $ 4.1 million due to NorCal Community Bancorp Trust II (the "Trust"), established for the sole purpose of issuing trust preferred securities. On March 15, 2021, Bancorp redeemed in full the $ 2.8 million (book value) subordinated debenture due to the Trust, which had a 251.5 % effective rate for the first six months of 2021, and included accelerated accretion of the $ 1.3 million remaining purchase discount due to the early redemption. Page-22 Other Obligations – Finance lease liabilities totaling $ 356 thousand and $ 419 thousand at June 30, 2022 and December 31, 2021, respectively, are included in borrowings and other obligations in the consolidated statements of condition. See Note 8, Commitments and Contingencies, for additional information. Note 7: Stockholders' Equity Dividends On July 22, 2022, Bancorp declared a $ 0.25 per share cash dividend, payable on August 12, 2022 to shareholders of record at the close of business on August 5, 2022. Share-Based Payments The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period, which is generally the vesting period, with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards, which equals the grant date price, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate the recording of stock-based compensation when the award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the exercisability of the stock options, which are based on the scheduled vesting period. Performance-based stock awards (restricted stock) are issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0 % to 200 % of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period. We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable. The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense. Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements. During the six months ended June 30, 2022, we withheld 10,208 shares totaling $ 351 thousand at a weighted-average price of $ 34.38 for cashless exercises. During the six months ended June 30, 2021, we withheld 27,547 shares totaling $ 1.1 million at a weighted-average price of $ 38.87 for cashless exercises. Shares withheld under net settlement arrangements are available for future grants. Share Repurchase Program Bancorp has an approved share repurchase program with $ 34.7 million outstanding. The last activity under the program was in the first quarter of 2022. Bancorp repurchased 23,275 shares totaling $ 877 thousand in the first half of 2022. Cumulative shares repurchased under the current program totaled 618,991 shares as of June 30, 2022 at an average price of $ 36.04 per share. Bancorp continues to evaluate the resumption of share repurchases in the context of other capital and strategic initiatives. Page-23 Note 8: Commitments and Contingent Liabilities Financial Instruments with Off-Balance Sheet Risk We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements. Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property. The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows: (in thousands) June 30, 2022 December 31, 2021 Commercial lines of credit $ 318,400 $ 330,234 Revolving home equity lines 212,208 210,938 Undisbursed construction loans 48,671 78,381 Personal and other lines of credit 11,044 11,001 Standby letters of credit 2,150 3,657 Total commitments and standby letters of credit $ 592,473 $ 634,211 We record an allowance for credit losses on unfunded loan commitments at the balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and expected loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments totaled $ 1.5 million and $ 1.8 million as of June 30, 2022 and December 31, 2021, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition. There was no adjustment to the allowance for credit losses on unfunded commitments for the second quarter of 2022, compared to a reversal of $ 612 thousand for the second quarter of 2021. This compares to year-to-date reversals of $ 318 thousand and $ 1.2 million in the six months ended June 30, 2022 and 2021 respectively, due to improved economic forecasts at the time. Leases We lease premises under long-term non-cancelable operating leases with remaining terms of 5 months to 10 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised. We lease certain equipment under finance leases with initial terms of 3 years to 5 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees. Page-24 The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities. (in thousands) June 30, 2022 December 31, 2021 Operating leases: Operating lease right-of-use assets $ 22,353 $ 23,604 Operating lease liabilities $ 24,117 $ 25,429 Finance leases: Finance lease right-of-use assets $ 499 $ 499 Accumulated amortization ( 155 ) ( 93 ) Finance lease right-of-use assets, net 1 $ 344 $ 406 Finance lease liabilities 2 $ 356 $ 419 1 Included in premises and equipment in the consolidated statements of condition. 2 Included in borrowings and other obligations in the consolidated statements of condition. The following table shows supplemental disclosures of noncash investing and financing activities for the periods presented. Six months ended (in thousands) June 30, 2022 June 30, 2021 Right-of-use assets obtained in exchange for operating lease liabilities $ 1,124 $ — Right-of-use assets obtained in exchange for finance lease liabilities $ — $ 412 The following table shows components of operating and finance lease cost. Three months ended Six months ended (in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Operating lease cost $ 1,295 $ 1,164 $ 2,579 $ 2,328 Variable lease cost — — — — Total operating lease cost 1 $ 1,295 $ 1,164 $ 2,579 $ 2,328 Finance lease cost: Amortization of right-of-use assets 2 $ 31 $ 7 $ 62 $ 34 Interest on finance lease liabilities 3 — — 1 — Total finance lease cost $ 31 $ 7 $ 63 $ 34 Total lease cost $ 1,326 $ 1,171 $ 2,642 $ 2,362 1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income. 2 Included in depreciation and amortization in the consolidated statements of comprehensive income. 3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income. The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of June 30, 2022. Total minimum lease payments do not include obligations of approximately $ 1.7 million for an operating lease agreement related to a retail branch location that is expected to commence in the third quarter of 2022. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standards or lease commencement date. (in thousands) June 30, 2022 Year Operating Leases Finance Leases 2022 $ 2,701 $ 62 2023 4,745 117 2024 3,837 113 2025 3,327 67 2026 2,535 — Thereafter 8,467 — Total minimum lease payments 25,612 359 Amounts representing interest (present value discount) ( 1,495 ) ( 3 ) Present value of net minimum lease payments (lease liability) $ 24,117 $ 356 Weighted average remaining term (in years) 6.7 3.0 Weighted average discount rate 1.68 % 0.59 % Page-25 Litigation Matters Bancorp may be party to legal actions that arise from time to time in the normal course of business. Bancorp's management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has recently been a party that will have a material adverse effect on the financial condition or results of operations of Bancorp or the Bank. The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us. In 2012, Visa reached a $ 4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. During the three months ended June 30, 2022, Visa deposited an additional $ 600 million into the litigation escrow account to address claims of certain merchants who opted out of the Amended Settlement Agreement for a balance of $ 1.5 billion. Combined with funds previously deposited with the court, these funds are expected to cover the settlement payment obligations. The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities. The final conversion rate is subject to change depending on the final settlement payments, and the full effect on member banks is still uncertain. Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims as contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote. Note 9: Derivative Financial Instruments and Hedging Activities We entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates. Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. As of June 30, 2022, we had four interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, and October 2037. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled $ 5 thousand at June 30, 2022 and $ 11 thousand at December 31, 2021. Information on our derivatives follows: Page-26 Asset Derivatives Liability Derivatives (in thousands) June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021 Fair value hedges: Interest rate contracts notional amount $ 5,616 $ — $ 6,929 $ 13,037 Interest rate contracts fair value 1 $ 206 $ — $ 104 $ 1,085 1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology. The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of June 30, 2022 and December 31, 2021. Carrying Amounts of Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans (in thousands) June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021 Loans $ 12,305 $ 13,976 $ ( 241 ) $ 939 The following table presents the net losses recognized in interest income on loans on the consolidated statements of comprehensive income related to our derivatives designated as fair value hedges. Three months ended Six months ended (in thousands) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Interest and fees on loans 1 $ 23,334 $ 21,429 $ 47,011 $ 42,090 Increase (decrease) in fair value of designated interest rate swaps due to LIBOR interest rate movements $ 430 $ ( 170 ) $ 1,187 $ 549 Payment on interest rate swaps ( 65 ) ( 93 ) ( 150 ) ( 185 ) Decrease (increase) in fair value hedging adjustment of hedged loans ( 428 ) 177 ( 1,180 ) ( 537 ) Decrease in value of yield maintenance agreement ( 2 ) ( 2 ) ( 5 ) ( 6 ) Net losses on fair value hedging relationships recognized in interest income $ ( 65 ) $ ( 88 ) $ ( 148 ) $ ( 179 ) 1 Represents the income line item in the statement of comprehensive income in which the effects of fair value hedges are recorded. Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes. Information on financial instruments that are eligible for offset in the consolidated statements of condition follows: Offsetting of Financial Assets and Derivative Assets Gross Amounts Net Amounts of Gross Amounts Not Offset in Gross Amounts Offset in the Assets Presented the Statements of Condition of Recognized Statements of in the Statements Financial Cash Collateral ( in thousands) Assets Condition of Condition Instruments Received Net Amount June 30, 2022 Derivatives by Counterparty: Counterparty A $ 206 $ — $ 206 $ ( 206 ) $ — $ — December 31, 2021 Derivatives by Counterparty: Counterparty A $ — $ — $ — $ — $ — $ — Page-27 Offsetting of Financial Liabilities and Derivative Liabilities Gross Amounts Net Amounts of Gross Amounts Not Offset in Gross Amounts Offset in the Liabilities Presented the Statements of Condition of Recognized Statements of in the Statements Financial Cash Collateral (in thousands) Liabilities 1 Condition of Condition 1 Instruments Pledged Net Amount June 30, 2022 Derivatives by Counterparty: Counterparty A $ 104 $ — $ 104 $ ( 206 ) $ 102 $ — December 31, 2021 Derivatives by Counterparty: Counterparty A $ 1,085 $ — $ 1,085 $ — $ ( 1,085 ) $ — 1 Amounts exclude accrued interest on swaps. For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 2021 Form 10-K filed with the SEC on March 15, 2022. Note 10: Merger Bancorp completed its merger and acquired all assets and assumed all liabilities of American River Bankshares on August 6, 2021. The Merger expanded Bank of Marin's presence throughout the Greater Sacramento, Amador and Sonoma County Regions where ARB had ten branches. T he Merger added $ 297.8 million in investment securities, $ 419.4 million in loans and $ 790.0 million in deposits to Bank of Marin as of the merger date. Bancorp accounted for the Merger as a business combination under the acquisition method of accounting. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the merger date in accordance with ASC 805, Business Combinations . AMRB shareholders received 0.575 shares of Bancorp's common stock for each share of AMRB common stock outstanding immediately prior to the Merger resulting in the issuance of 3,441,235 shares of Bancorp common stock. In addition, merger consideration included cash paid for outstanding stock options and cash paid in lieu of fractional shares, as summarized in the following table. (in thousands) Merger Consideration Value of common stock consideration paid to shareholders ( 0.575 fixed exchange ratio, stock price $ 36.15 ) $ 124,401 Cash consideration for stock options 63 Cash paid in lieu of fractional shares 13 Total merger consideration $ 124,477 We recorded $ 42.6 million in goodwill, which represents the excess of the total merger consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. Goodwill mainly reflects expected value created through the combined operations of AMRB and Bancorp and is evaluated for impairment annually. The core deposit intangible ("CDI") represents the estimated future benefits of acquired deposits and is recorded separately from the related deposits. We recorded a core deposit intangible asset of $ 3.9 million related to the ARB merger, of w hich $ 179 thousand and $ 363 thousand, respectively, were amort ized in the three and six month periods ended June 30, 2022. No amortization was recognized in the comparable periods of 2021. The CDI is amortized on an accelerated basis over an estimated ten-year life and is evaluated periodically for impairment. No impairment loss was recognized as of June 30, 2022. Merger-related one time and conversion costs are recognized as incurred and continue until all systems have been converted and operational functions are fully integrated. Bancorp's merger-related costs reflected in the consolidated statements of comprehensive income are summarized in the following table. Three months ended Six months ended (in thousands, unaudited) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Personnel and severance $ 58 $ — $ 393 $ — Professional services — 201 67 201 Data processing 29 — 77 — Other expense 224 16 321 16 Total merger-related one-time and conversion costs $ 311 $ 217 $ 858 $ 217 Page-28