What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-16 compared with 2022-03-15 · 400 added, 468 removed, 1531 unchanged (36% of the section changed)

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

To the Shareholders and the Board of Directors

Bank of Marin Bancorp

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of condition of Bank of Marin Bancorp and subsidiary (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated statements of condition of Bank of Marin Bancorp and Subsidiary (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of comprehensive (loss) income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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

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

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

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

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

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

Critical Audit Matters

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

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

Allowance for Credit Losses - Loans

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

Critical Audit Matter

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

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

Allowance for Credit Losses for Loans

As discussed in Notes 1 and 3 to the consolidated financial statements, the allowance for credit losses for loans at December 31, 2022, was $23 million on a total loan portfolio of $2.1 billion.

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

The measurement of expected credit losses is based on relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

We identified the allowance for credit losses on loans as a critical audit matter.

The principal considerations for our determination of allowance for credit losses on loans as a critical audit matter are subjectivity of the estimation and application of forecasted economic conditions, probabilities of default, loss given default, prepayments and curtailments over the contractual terms of the loan, and qualitative internal and external risk factors used in the calculation of the allowance for credit losses.

The economic forecast component of the allowance for credit losses on loans is used to compare the conditions that existed during the historical period to current conditions and future expectations.

The probabilities of default and loss given default are used to establish estimated losses at the loan portfolio segment level.

Prepayments and curtailments over the contractual terms of the loans are used to estimate future cash flows.

The qualitative internal and external risk factors are used to adjust for differences in segment-specific risk characteristics or to reflect the extent to which expected current conditions and reasonable and supportable forecasts of economic conditions differ from conditions that existed during the historical period included in the probability of default and loss given default development.

Auditing management’s judgements regarding forecasted economic conditions, probabilities of default, loss given default, prepayments and curtailments over the contractual terms of the loan, and qualitative internal and external risk factors applied to the allowance for credit losses involved a high degree of subjectivity.

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

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

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

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

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

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

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

Merger of American River Bankshares – Valuation of Acquired Loans

As discussed in Notes 1 and 18 to the consolidated financial statements, on August 6, 2021 (the “merger date”), American River Bankshares (“AMRB”) merged with and into Bank of Marin Bancorp (“Bancorp”), with Bank of Marin Bancorp surviving.

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

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

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

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

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

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

We identified the allowance for credit losses for loans as a critical audit matter.

The principal considerations for our determination of the allowance for credit losses for loans as a critical audit matter are subjectivity of the estimation and application of forecasted economic conditions and qualitative internal and external risk factors used in the calculation of the allowance for credit losses for loans.

The economic forecast component of the allowance for credit losses for loans is used to compare the conditions that existed during the historical period to current conditions and future expectations.

The qualitative internal and external risk factors are used to adjust for differences in segment-specific risk characteristics or conditions that differ from those that existed during the historical period for which the probability of default and loss given default factors were developed.

Auditing management’s judgements regarding forecasted economic conditions and qualitative internal and external risk factors applied to the allowance for credit losses for loans involved a high degree of subjectivity.

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

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

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

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

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

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

• Testing the design, implementation, and operating effectiveness of controls related to management’s calculation of the allowance for credit losses for loans, including controls over qualitative internal and external risk factors and the forecasted economic conditions utilized.

• Testing the appropriateness of the methodology used in the calculation of the allowance for credit losses for loans, as well as testing completeness and accuracy of the data used in the calculation, application of the forecasted economic conditions, and qualitative internal and external risk factors determined by management and used in the calculation, and verifying calculations in the allowance for credit losses for loans.

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

• Obtaining management’s analysis of internal and external qualitative factors, and evaluating the reasonableness of the assumptions used in determining the qualitative factor adjustments.

/s/ Moss Adams LLP

Sacramento, California

Portland, Oregon

March 15, 2023

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Allowance for credit losses on loans ( 22,983 ) ( 23,023 )

( 23,023 ) ( 22,874 )

Loans, net of allowance for credit losses on loans 2,069,563 2,232,622

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Bank premises and equipment, net 8,134 7,558

Core deposit intangible 6,605 3,831

Core deposit intangible, net 5,116 6,605

Other real estate owned 455 800

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Borrowings and other obligations 112,439 419

Subordinated debenture — 2,777

Operating lease liabilities 26,639 25,429

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Total liabilities 3,735,372 3,863,841

Commitments and contingent liabilities (Note 12)

Stockholders' Equity

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Retained earnings 270,781 239,868

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

Accumulated other comprehensive loss, net of tax ( 73,746 ) ( 2,024 )

Total stockholders' equity 412,092 450,368

Total liabilities and stockholders' equity $ 4,147,464 $ 4,314,209

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

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

BANK OF MARIN BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Years ended December 31, 2022, 2021 and 2020

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Interest on borrowings and other obligations 91 9 4

Interest on subordinated debentures 1,361 158 229

Interest on subordinated debenture — 1,361 158

Total interest expense 2,549 3,402 2,979

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(Reversal of) provision for credit losses on unfunded loan commitments ( 318 ) ( 992 ) 1,570

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

Net interest income after (reversal of) provision for credit losses 127,873 107,392 90,495

Non-interest income

Wealth Management and Trust Services 2,227 2,222 1,851

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

Debit card interchange fees, net 2,051 1,812 1,438

Service charges on deposit accounts 2,007 1,593 1,314

Dividends on FHLB stock 760 654 799

Earnings on bank-owned life insurance, net 1,229 2,194 973

Dividends on Federal Home Loan Bank stock 1,056 760 654

Merchant interchange fees, net 549 422 239

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

(Losses) gains on sale of investment securities, net ( 63 ) ( 16 ) 915

Other income 1,849 1,145 1,166

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Charitable contributions 709 587 1,034

Other real estate owned 359 5 —

Other expense 8,572 6,426 5,484

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Diluted 15,969 14,422 13,617

Comprehensive income:

Comprehensive (loss) income:

Net income $ 46,586 $ 33,228 $ 30,242

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Reclassification adjustment for losses (gains) on available-for-sale securities in net income 63 16 ( 915 )

Net unrealized losses on securities transferred from available-for-sale to held-to-maturity ( 14,847 ) — —

Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity 1,580 493 524

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Other comprehensive (loss) income, net of tax ( 71,722 ) ( 14,625 ) 8,098

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

Comprehensive (loss) income $ ( 25,136 ) $ 18,603 $ 38,340

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

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Net income — — 30,242 — 30,242

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

Other comprehensive income, net of tax — — — 8,098 8,098

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

— — ( 1,216 ) — ( 1,216 )

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

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Stock issued in payment of director fees 5,723 217 — — 217

Stock repurchased, net of commissions ( 356,000 ) ( 15,022 ) — — ( 15,022 )

Stock repurchased, including commissions ( 203,709 ) ( 7,208 ) — — ( 7,208 )

Balance at December 31, 2020 13,500,453 $ 125,905 $ 219,747 $ 12,601 $ 358,253

Net income — — 33,228 — 33,228

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

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

— — ( 1,216 ) — ( 1,216 )

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

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

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

Stock repurchased, net of commissions ( 203,709 ) ( 7,208 ) — — ( 7,208 )

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

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

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

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Stock issued in payment of director fees 10,145 355 — — 355

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

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

Stock repurchased, including commissions ( 23,275 ) ( 877 ) — — ( 877 )

Balance at December 31, 2022 16,029,138 $ 215,057 $ 270,781 $ ( 73,746 ) $ 412,092

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Amortization of investment security premiums, net of accretion of discounts 9,056 5,799 1,354

Accretion of discount on acquired loans ( 571 ) ( 165 ) ( 353 )

Accretion of discount on subordinated debentures 1,347 69 68

Amortization of premiums (accretion of discounts) on acquired loans, net 153 ( 571 ) ( 165 )

Accretion of discount on subordinated debenture — 1,347 69

Net change in deferred loan origination costs/fees ( 2,716 ) ( 3,155 ) 5,040

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

Write-down of other real estate owned 345 — —

Losses (gains) on sale of investment securities, net 63 16 ( 915 )

Depreciation and amortization 1,840 1,740 2,149

Earnings on bank-owned life insurance policies ( 1,229 ) ( 2,194 ) ( 973 )

Net changes in:

Interest receivable and other assets 5,554 ( 5,135 ) ( 329 )

Interest payable and other liabilities 2,146 ( 631 ) 70

Net changes in interest receivable and other assets 2,228 5,554 ( 5,135 )

Net changes in interest payable and other liabilities ( 4,708 ) 2,276 ( 547 )

Total adjustments 8,691 12,025 10,603

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Cash Flows from Financing Activities:

Net increase in deposits 514,279 167,760 161,649

Proceeds from stock options exercised 463 1,304 669

Payment of tax withholdings for vesting of restricted stock ( 166 ) ( 73 ) ( 220 )

Federal Home Loan Bank (repayment) borrowings ( 13,885 ) — ( 7,000 )

Repayment of subordinated debenture including execution costs ( 4,126 ) — —

Net (decrease) increase in deposits ( 235,202 ) 514,279 167,760

Federal Home Loan Bank borrowings (repayment) 112,000 ( 13,885 ) —

Repayment of finance lease obligations ( 131 ) ( 86 ) ( 172 )

Repayment of subordinated debenture including execution costs — ( 4,126 ) —

Proceeds from stock options exercised 821 463 1,304

Restricted stock surrendered for tax withholdings upon vesting ( 40 ) ( 166 ) ( 73 )

Cash dividends paid on common stock ( 15,673 ) ( 13,107 ) ( 12,506 )

Stock repurchased, net of commissions ( 40,762 ) ( 6,898 ) ( 15,062 )

Stock repurchased, including commissions ( 1,250 ) ( 40,762 ) ( 6,898 )

Proceeds from stock issued under employee and director stock purchase plans 78 124 115

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

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

Net cash (used in) provided by financing activities ( 139,397 ) 442,734 149,530

Net (decrease) increase in cash, cash equivalents and restricted cash ( 302,217 ) 147,321 16,932

Cash, cash equivalents and restricted cash at beginning of period 347,641 200,320 183,388

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Change in net unrealized gain or loss on available-for-sale securities $ ( 88,620 ) $ ( 21,281 ) $ 11,891

Stock issued to employee stock ownership plan $ 1,330 $ 1,289 $ 1,245

Cumulative effect of change in accounting principle ASU 2016-13 $ — $ — $ ( 1,216 )

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Repurchase of stock not yet settled $ — $ 373 $ 413

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

Securities transferred from available-for-sale to held-to-maturity $ 357,482 $ — $ —

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

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Basis of Presentation - The consolidated financial statements include the accounts of Bancorp, a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin, a California state-chartered commercial bank.

Effective August 6, 2021 (the "merger date"), American River Bankshares ("AMRB") merged with and into Bank of Marin Bancorp ("Bancorp"), with Bank of Marin Bancorp surviving, followed thereafter at 12:05 AM on August 7, 2021, by the merger of American River Bank ("ARB") with and into Bank of Marin, with Bank of Marin (the "Bank") surviving, (collectively the "Merger").

The Merger was accounted for under ASC 805, Business Combinations .

See Note 18, Merger, for further detail.

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

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

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

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

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

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

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

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

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

Accounting Changes and Reclassifications - Certain items in prior financial statements have been reclassified to conform to the current presentation, including the reclassification of the provision for credit losses on unfunded commitments in the second quarter of 2021 from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive (loss) income.

In addition, on December 31, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326):

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ASC 326 also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards.

In addition, ASC 326 includes certain changes to the accounting for available-for-sale investment securities including the requirement to recognize an allowance wh en management intends to sell or believes that it is more likely than not they will be required to sell the security before recovery of its amortized cost.

In addition, ASC 326 include certain changes to the accounting for available-for-sale investment securities including the requirement to recognize an allowance wh en management intends to sell or believes that it is more likely than not they will be required to sell the security before recovery of its amortized cost.

ASC 326 was effective January 1, 2020.

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

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

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

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

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

Upon adoption, we recorded a cumulative adjustment to retained earnings, net of taxes, based on economic forecasts and other assumptions as of January 1, 2020.

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

In addition, we recognized the remaining difference between the allowance for credit losses calculated under the CECL model as of December 31, 2020 and the allowance for credit losses calculated under the incurred loss model as of September 30, 2020 as a reversal of the provision for credit losses and a provision for credit losses on unfunded loan commitments, as showed in the tables below.

The following tables show the impact to our financial statement line items due to adoption of ASC 326 as of and during the quarter ended December 31, 2020.

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Allowance for credit losses on unfunded commitments $ 1,697 $ 122 $ 1,819

1 The cumulative transition adjustment resulted from applying the CECL method, which was based on economic forecasts and other assumptions as of December 31, 2019.

1 The cumulative transition adjustment resulted from applying the CECL method, which was based on economic forecasts and other assumptions as of January 1, 2020.

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

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

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

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

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Investments that are neither held-to-maturity nor trading are classified as available-for-sale and are reported at fair value.

Unrealized gains and losses for available-for-sale securities, net of related taxes, are reported as a separate component of comprehensive income and included in stockholders' equity until realized.

Unrealized gains and losses for available-for-sale securities, net of related taxes, are reported as a separate component of comprehensive (loss) income and included in stockholders' equity until realized.

For discussion of our methodology in determining fair value, see Note 9, Fair Value of Assets and Liabilities.

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Securities transferred from the available-for-sale category to the held-to-maturity category are recorded at fair value at the date of transfer.

Unrealized holding gains or losses on the dates of the transfer of securities from available-for-sale to held-to-maturity are included in the balance of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets.

Unrealized holding gains or losses on the dates of the transfer of securities from available-for-sale to held-to-maturity are included in the balance of accumulated other comprehensive (loss) income, net of tax, in the consolidated balance sheets.

These unrealized holding gains or losses on the dates of transfer are amortized over the remaining life of the securities as yield adjustments in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security.

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If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss component.

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

The discount rate used in determining the present

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

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

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

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

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Originated Loans - are reported at amortized cost, which is the principal amount outstanding net of deferred fees (costs), purchase premiums (discounts) and net charge-offs (recoveries).

Amortized cost excludes accrued interest, which is reflected in interest receivable and other assets in the consolidated statements of condition.

Amortized cost excludes accrued interest,

which is reflected in interest receivable and other assets in the consolidated statements of condition.

We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed below.

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

There were no loans remaining under this payment relief program as of December 31, 2022.

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

For collateral dependent loans, including those for which management determines foreclosure is probable, the allowance for credit losses is based on the fair value of the collateral, adjusted for estimated selling costs when repayment is expected from the sale of the collateral, less the loan's amortized c ost.

For collateral dependent loans, including those for which management determines foreclosure is probable, each loan is individually evaluated and the allowance for credit losses is based on the fair value of the collateral, adjusted for estimated selling costs when repayment is expected from the sale of the collateral, less the loan's amortized c ost.

In determining the fair value, management consi ders such information as the appraised value of the c ollateral, observed and potential future changes in collateral value, and historical loss experience for loans that were secured by similar collateral.

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

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

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

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

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• The presence of specialized lending segments in the portfolio

There were no material changes to the ACL methodology during 2022.

However, changes in assumptions that influenced management's current estimate of the expected credit losses were primarily related to a decrease in applicable loan portfolio balances and improvements in the Moody's Analytics' Baseline Forecast of California unemployment rates since December 31, 2021, which decreased the quantitative "modeled" allowance for credit losses.

These decreas es were partially offset by adjustments to the qualitative economic risk factor to account for the ongoing deterioration in the economic outlook that management believes is not captured in the quantitative portion of the allowance.

While we believe we use the best information available to determine the allowance for credit losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance.

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Control over transferred assets is deemed to be surrendered when 1) the assets and liabilities have been isolated from us, 2) the transferee has the right to pledge or exchange the assets (or beneficial interests) it received, free of conditions that constrain it from taking advantage of that right, beyond a trivial benefit and 3) we do not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred assets.

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

Transfers of a portion of a loan must meet the criteria of a participating interest.

If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing.

In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, and the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.

We recognized no gains or losses on the sale of these participation interests in 2022, 2021 and 2020.

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

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

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

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

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

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

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

When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized in income for the period.

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

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

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

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

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

Business Combinations - Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations .

A business is defined as a set of activities and assets that is both self-sustaining and managed to provide a return to investors and generally has three elements:

A business is defined as a set of activities and assets that is

both self-sustaining and managed to provide a return to investors and generally has three elements:

inputs, processes and outputs.

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To the extent the fair value of net assets acquired, including other identifiable assets, exceed the purchase price, a bargain purchase gain is recognized.

Assets acquired and liabilities assumed from a business combination are recognized at fair value, if the fair value can be determined during the measurement period.

Assets acquired and liabilities assumed from a business combination are recognized at fair value.

Results of operations of an acquired business are included in the consolidated statements of operations from the date of acquisition.

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Core deposit intangible ("CDI") represents the estimated future benefit of deposits related to an acquisition and is booked separately from the related deposits and evaluated periodically for impairment.

The CDI asset is amortized on an accelerated method over its estimated useful life of ten years .

The CDI asset is amortized on an accelerated method over its estimated life of ten years .

At December 31, 2022, the future estimated amortization expense for the CDI arising from our past acquisitions is as follows:

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

We recorded no impairment adjustments to either the CDI or goodwill in 2022, 2021 and 2020.

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

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

We recorded a $ 345 thousand valuation adjustment to OREO in 2022.

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

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

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

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

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

Members are required to own a certain amount of stock based on the level of borrowings and other factors.

As of December 31, 2021 and 2020 our investment in FHLB stock was carried 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 December 31,

2022 and 2021 our investment in FHLB stock was carried 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.

We periodically evaluate FHLB stock for impairment based on ultimate recovery of par value.

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

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

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

We account for the investments in qualified affordable housing tax credit funds using the proportional amortization method, where the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received.

Low income housing tax credits and other tax benefits received, net of the amortization of the investment is recognized as part of income tax benefit.

Each of the partnerships must meet the regulatory minimum requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits.

Each of the partnerships must meet the regulatory minimum requirements for affordable housing for a mini mum 15-year compliance period t o fully utilize the tax credits.

If the partnerships cease to qualify during the compliance period, the credit may be denied for any period in which the project is not in compliance and a portion of the credit previously taken is subject to recapture with interest.

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If we contribute stock, the compensation cost is the fair value of the shares when they are committed to be released (i.e., when the number of shares becomes known and formally approved).

In 2021, 2020 and 2019, the Bank only made stock contributions to the ESOP.

In 2022, 2021 and 2020, Bancorp only made stock contributions to the ESOP.

Income Taxes - Income taxes reported in the consolidated financial statements are computed based on an asset and liability approach.

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

Revision of our estimate of accrued income taxes also may

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

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

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

position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) we intend to and are able to use the deferred tax asset for that purpose.

Otherwise, the unrecognized tax benefit is presented as a liability instead of being netted with deferred tax assets.

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(in thousands, except per share data) 2022 2021 2020

2021 2020 2019

Weighted average basic common shares outstanding 15,921 14,340 13,525

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Weighted average anti-dilutive common shares not included in the calculation of diluted EPS 211 97 148

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

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

The grant-date fair value of the award is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.

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The fair value of restricted stock is based on the stock price on the grant date.

We record excess tax benefits resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable.

We record excess tax benefits resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as tax benefits in the consolidated statements of comprehensive (loss) income with a corresponding decrease to current taxes payable.

In addition, we reflect excess tax benefits as an operating activity in the consolidated statements of cash flows.

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Our main revenue streams in scope for ASC 606 include:

• Wealth Management & Trust ("WM&T") fees - WM&T services include, but are not limited to:

• Wealth Management and Trust Services ("WMTS") fees - WMTS services include, but are not limited to:

customized investment advisory and management;

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Revenue is recognized monthly according to a tiered fee schedule based on the client's month-end market value of assets under our management.

WM&T does not earn revenue based on performance or incentives.

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

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

account-related fees.

WMTS does not earn revenue based on performance or incentives.

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

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

Performance obligations related to transaction-based services (such as check orders) are satisfied, and the related revenue recognized, at a point in time typically when the transaction is completed, except for business accounts subject to analysis where the transaction-based fees are part of the monthly account analysis fees.

business accounts subject to analysis where the transaction-based fees are part of the monthly account analysis fees.

• Debit card interchange fees - We issue debit cards to our consumer and small business customers that allow them to purchase goods and services from merchants in person, online, or via mobile devices using funds held in their demand deposit accounts held with us.

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Advertising Costs - are expensed as incurred.

For the years ended December 31, 2021, 2020, and 2019, advertising costs totaled $ 908 thousand, $ 769 thousand, and $ 775 thousand, respectively.

Comprehensive Income (Loss) - includes net income, changes in the unrealized gains or losses on available-for-sale investment securities, and amortization of net unrealized gains or losses on securities transferred from available-for-sale to held-to-maturity, net of related taxes, reported on the consolidated statements of comprehensive income and as components of stockholders' equity.

For the years ended December 31, 2022, 2021, and 2020, advertising costs totaled $ 1.1 million, $ 908 thousand, and $ 769 thousand, respectively.

Comprehensive (Loss) Income - includes net income, changes in the unrealized gains or losses on available-for-sale investment securities, and amortization of net unrealized gains or losses on securities transferred from available-for-sale to held-to-maturity, net of related taxes, reported on the consolidated statements of comprehensive (loss) income and as components of stockholders' equity.

Fair Value Measurements - We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

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Other Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (ASC Topic 740):

Simplifying the Accounting for Income Taxes .

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

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

In January 2020, the FASB issued ASU No.

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

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

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

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

In October 2020, the FASB issued ASU No.

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

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

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

We adopted this ASU prospectively on January 1, 2021.

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

Other than the early adoption of a portion of ASU No.

2022-02, Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures, as discussed below, w e did not adopt any new or amended accounting standards in 2022.

Accounting Standards Not Yet Effective

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The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

The amendments in this ASU may be elected as of March 12, 2020 through December 31, 2022.

An entity may choose to elect the amendments in this update at an interim period subsequent to March 12, 2020 with adoption methods varying based on transaction type.

We have not elected to apply amendments at this time and will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

The amendments in this ASU may be elected through December 31, 2024 (as amended by ASU No.

2022-06 discussed below).

An entity may elect the amendments in this update at an interim period with adoption methods varying based on transaction type.

We have not elected to apply amendments at this time and will assess the applicability of

this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

In January 2021, the FASB issued ASU No.

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The amendments are elective and effective immediately upon issuance of this ASU.

Amendments may be elected through December 31, 2022.

We have four interest rate swap contracts with notional values totaling $ 13.0 million indexed to LIBOR that will either be subject to the fall-back index rate stipulated by the ISDA protocol or modified to other reference rates such as Prime or SOFR as mutually agreed by us and our counterparty .

Amendments may be elected through December 31, 2024 (as amended by ASU No.

2022-06 discussed below).

We have four interest rate swap contracts with notional values totaling $ 12.0 million indexed to LIBOR that will either be subject to the fall-back index rate stipulated by the ISDA protocol or modified to other reference rates such as Prime or SOFR as mutually agreed by our counterparty and 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 December 2022, the FASB issued ASU No.

2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848.

The objective of the guidance in Topic 848 was to provide temporary relief during the transition period, as noted in the discussion of ASU 2020-04 above, under which the sunset provision was based on an expectation that LIBOR would cease being published after December 31, 2021.

In March 2021, the UK Financial Conduct Authority ("FCA") announced that the intended cessation date of certain tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848.

Therefore, this amendment deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024.

In October 2021, the FASB issued ASU No.

2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805).

The amendments address diversity in accounting practices and requires acquiring companies to apply ASC 606, Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination, as opposed to other methods such as fair value.

The amendments 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.

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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.

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.

Investment Securities

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government-sponsored enterprises:

MBS pass-through securities issued by FHLMC and FNMA $ 126,990 $ — $ 126,990 $ 2,110 $ ( 712 ) $ 128,388

MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 331,281 $ — $ 331,281 $ — $ ( 50,147 ) $ 281,134

CMOs issued by FHLMC 235,971 — 235,971 59 ( 29,503 ) 206,527

CMOs issued by FNMA 111,904 — 111,904 — ( 5,419 ) 106,485

CMOs issued by GNMA 52,356 — 52,356 11 ( 3,076 ) 49,291

SBA-backed securities 2,372 — 2,372 — ( 133 ) 2,239

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Obligations of state and political subdivisions 62,500 — 62,500 — ( 10,741 ) 51,759

Corporate bonds 30,000 — 30,000 — ( 1,552 ) 28,448

Total held-to-maturity $ 972,207 $ — $ 972,207 $ 70 $ ( 127,038 ) $ 845,239

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SBA-backed securities 4,840 — 4,840 198 — 5,038

Debentures of government-sponsored agencies 51,472 51,472 — ( 901 ) 50,571

Obligations of state and political subdivisions 47,203 — 47,203 296 ( 209 ) 47,290

Total held-to-maturity $ 342,222 $ — $ 342,222 $ 3,400 $ ( 2,867 ) $ 342,755

1 Amortized cost and fair values exclude accrued interest receivable of $ 1.1 million and $ 366 thousand at December 31, 2021 and 2020, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

1 Amortized cost and fair values exclude accrued interest receivable of $ 3.7 million and $ 1.1 million at December 31, 2022 and 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.

Accordingly, no allowance for credit losses has been recorded for these securities.

With regard to securities issued by states and political subdivisions, management considers (i) issuer and/or guarantor credit ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity,(iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal and external credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees and/or insurance, contain a defeasance clause, or are pre-refunded by the issuers.

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 by Moody's and/or Standard & Poor's bond ratings as of December 31, 2021.

Obligations of state and political subdivisions

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

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 December 31, 2022.

Obligations of state and political subdivisions Corporate bonds

(in thousands) December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021

AAA / Aaa $ 42,986 $ 34,229 $ — $ —

AA / Aa 19,514 12,873 — —

A — 101 30,000 —

Total $ 62,500 $ 47,203 $ 30,000 $ —

A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of December 31, 2021 and December 31, 2020 is presented below.

A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of December 31, 2022 and 2021 is presented below.

Available-for-sale:

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government-sponsored enterprises:

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

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

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

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

Treasury securities 11,886 — ( 256 ) — 11,630

Obligations of state and political subdivisions 129,009 5,372 ( 381 ) — 134,000

Corporate bonds 39,001 — ( 506 ) — 38,495

Asset-backed securities 1,866 — ( 4 ) — 1,862

Total available-for-sale $ 1,169,520 $ 11,074 $ ( 13,026 ) $ — $ 1,167,568

1 Amortized cost and fair value exclude accrued interest receivable of $ 3.2 million and $ 3.7 million at December 31, 2022 and 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 and the related accumulated other comprehensive loss are accreted to interest income over the remaining lives of the securities.

Because these entries offset each other, there is no impact to net income.

The amortized cost and fair value of investment debt securities by contractual maturity at December 31, 2022 and 2021 are shown below.

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Held-to-maturity:

MBS pass-through securities issued by FHLMC and FNMA $ 76,619 $ ( 712 ) $ — $ — $ 76,619 $ ( 712 )

MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 62,627 $ ( 5,960 ) $ 218,507 $ ( 44,187 ) $ 281,134 $ ( 50,147 )

CMOs issued by FHLMC 78,144 ( 5,874 ) 113,796 ( 23,629 ) 191,940 ( 29,503 )

Obligations of state and political subdivisions 19,203 ( 209 ) — — 19,203 ( 209 )

CMOs issued by FNMA 106,485 ( 5,419 ) — — 106,485 ( 5,419 )

CMOs issued by GNMA 27,570 ( 1,676 ) 10,331 ( 1,400 ) 37,901 ( 3,076 )

SBA-backed securities 2,239 ( 133 ) — — 2,239 ( 133 )

Debentures of government-sponsored agencies 38,645 ( 2,530 ) 80,711 ( 23,937 ) 119,356 ( 26,467 )

Obligations of state and political subdivisions 15,155 ( 589 ) 36,603 ( 10,152 ) 51,758 ( 10,741 )

Corporate bonds 28,448 ( 1,552 ) — — 28,448 ( 1,552 )

Total held-to-maturity $ 359,313 $ ( 23,733 ) $ 459,948 $ ( 103,305 ) $ 819,261 $ ( 127,038 )

Available-for-sale:

MBS pass-through securities issued by FHLMC and FNMA $ 263,474 $ ( 2,784 ) $ — $ — $ 263,474 $ ( 2,784 )

SBA-backed securities 7,478 ( 112 ) 1,209 $ ( 43 ) 8,687 ( 155 )

MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 44,630 $ ( 4,501 ) $ 52,235 $ ( 7,632 ) $ 96,865 $ ( 12,133 )

CMOs issued by FHLMC 169,760 ( 15,144 ) 143,995 ( 18,538 ) 313,755 ( 33,682 )

CMOs issued by GNMA 44,790 ( 553 ) — — 44,790 ( 553 )

CMOs issued by FNMA 4,790 ( 235 ) 27,529 ( 3,617 ) 32,319 ( 3,852 )

CMOs issued by GNMA 8,214 ( 374 ) 23,612 ( 2,922 ) 31,826 ( 3,296 )

SBA-backed securities 37,845 ( 3,228 ) 6,133 ( 143 ) 43,978 ( 3,371 )

Debentures of government-sponsored agencies 19,054 ( 946 ) 116,052 ( 13,062 ) 135,106 ( 14,008 )

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(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 )

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 )

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FHLB Capital Stock

As a member bank of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB.

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 and $ 11.9 million of FHLB stock included in other assets on the consolidated statements of condition at December 31, 2021 and 2020, respectively.

The carrying amounts of 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.

We held $ 16.7 million of FHLB stock included in other assets on the consolidated statements of condition at both December 31, 2022 and 2021.

The carrying amounts of 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 December 31, 2022 and 2021.

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Because of the restriction and the uncertainty on the conversion rate to Class A shares, these shares lack a readily determinable fair value.

When converting this Class B common stock to Class A common stock based on the conversion rate of 1.6181 and 1.6228 , as of December 31, 2021 and 2020, respectively, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $ 3.7 million at both December 31, 2021 and 2020.

When converting this Class B common stock to Class A common stock based on the estimated conversion rate of 1.5991 and 1.6181 , as of December 31, 2022 and 2021, respectively, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $ 3.5 million and $ 3.7 million at December 31, 2022 and 2021, respectively.

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

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We invest in low-income housing tax credit funds as a limited partner, which totaled $ 2.5 million and $ 3.0 million recorded in other assets as of December 31, 2022 and 2021, respectively.

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

In 2022, we recognized $ 634 thousand of low income housing tax credits and other tax benefits, offset by $ 533 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense.

As of December 31, 2022, our unfunded commitments for these low-income housing tax credit funds totaled $ 386 thousand.

We did not recognize

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

We did not recognize any impairment losses on these low-income housing tax credit investments during 2022 or 2021, as the value of the future tax benefits exceeds the carrying value of the investments.

Loans and Allowance for Credit Losses

We adopted the new current expected credit loss accounting guidance, CECL, and all related amendments as of December 31, 2020.

Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the current guidance and have not been included below.

Refer to Note 3, Loans and Allowance for Loan Losses, under Part II, Item 8 of our 2019 Form 10-K for additional prior period information.

Also refer to Note 1, Summary of Significant Accounting Policies, for additional information regarding the adoption of CECL.

The following table presents the amortized cost of loans by class as of December 31, 2022 and 2021.

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Total loans, net of allowance for credit losses on loans $ 2,069,563 $ 2,232,622

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

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

1 A mortized cost includes net deferred loan origination costs (fees) of $ 1.8 million and $( 901 ) thousand at December 31, 2022 and 2021, respectively.

Amounts are also net of unrecognized purchase discounts of $ 2.6 million and $ 2.5 million at December 31, 2022 and 2021, respectively.

Amortized cost excludes accrued interest, which totaled $ 6.1 million and $ 7.1 million at December 31, 2022 and 2021, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.

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Approximately 90 % and 86 % of total loans were secured by real estate at December 31, 2022 and 2021, respectively.

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

At December 31, 2022 and 2021, 74 % and 70 %, respectively, of our loans were for commercial real estate, the majority of which were secured by real estate located in Marin, Sonoma, Napa, Alameda, San Francisco,

Sacramento, and Contra Costa counties (California).

The increase in the percentages secured by real estate from 2021 to 2022 was primarily due to a $ 107.7 million reduction in unsecured loans guaranteed by the SBA under the Paycheck Protection Program ("PPP"), which are included in commercial and industrial loans.

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

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

Pursuant to the 2020 CARES Act, Bank of Marin originated 2,876 SBA-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 AMRB as of the merger date.

As of December 31, 2022, there were 18 PP loans outstanding totaling $ 3.5 million (net of $ 99 thousand in unrecognized fees and costs), compared to 368 loans 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 amortized into interest income

using the effective yield method over the contractual life of each loan.

In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was netted with loan origination costs and amortized into interest income using the effective yield method over the contractual life of each loan.

The recognition of fees and costs is accelerated when the loan is forgiven by the SBA and/or paid off prior to maturity.

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

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

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

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

Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, are subject to underwriting standards and processes similar to commercial loans discussed above.

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The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain.

This category also includes “Watch” loans, where

the primary source of repayment has been delayed.

This category also includes “Watch” loans, where the primary source of repayment has been delayed.

“Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period.

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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.

We regularly review our credits for accuracy of risk grades whenever we receive new information and at each quarterly and year-end reporting period.

Borrowers are generally required to submit financial information at regular intervals.

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The following tables present the loan portfolio by loan class, origination year and internal risk rating as of December 31, 2022 and 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.

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

(in thousands) 2021 2020 2019 2018 2017 Prior Total

(in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost

December 31, 2022 2022 2021 2020 2019 2018 Prior Total

Commercial and industrial:

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Total commercial and industrial $ 15,624 $ 6,679 $ 8,855 $ 22,254 $ 9,198 $ 25,579 $ 85,358 $ 173,547

Gross current period charge-offs $ — $ — $ ( 9 ) $ — $ — $ — $ — $ ( 9 )

Commercial real estate, owner-occupied:

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Total commercial real estate, investor-owned $ 177,822 $ 214,664 $ 167,375 $ 164,604 $ 129,844 $ 337,523 $ 57 $ 1,191,889

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

(in thousands) 2021 2020 2019 2018 2017 Prior Total

Construction:

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Pass and Watch $ 20,054 $ 13,022 $ 5,727 $ 6,492 $ 4,181 $ 6,478 $ 944 $ 56,898

Substandard — — — — — 91 — 91

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

Gross current period charge-offs $ — $ — $ — $ — $ — $ ( 18 ) $ ( 5 ) $ ( 23 )

Pass and Watch $ 337,829 $ 316,949 $ 266,856 $ 261,577 $ 188,741 $ 459,651 $ 172,627 $ 2,004,230

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Totals $ 338,104 $ 336,584 $ 280,304 $ 269,247 $ 198,510 $ 496,053 $ 173,744 $ 2,092,546

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

(in thousands) 2020 2019 2018 2017 2016 Prior Total

Total gross current period charge-offs $ — $ — $ ( 9 ) $ — $ — $ ( 18 ) $ ( 5 ) $ ( 32 )

(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:

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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

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Pass and Watch $ — $ — $ — $ — $ 10 $ 268 $ 87,693 $ 87,971

Special Mention — — — — — — 799 799

Substandard — — — — — 377 398 775

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Pass and Watch $ 17,207 $ 7,748 $ 9,436 $ 5,633 $ 1,123 $ 6,620 $ 1,766 $ 49,533

Substandard — — — 17 — — — 17

Total installment and other consumer $ 17,207 $ 7,748 $ 9,436 $ 5,633 $ 1,123 $ 6,620 $ 1,766 $ 49,533

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Total Substandard $ — $ 7,155 $ 285 $ 695 $ — $ 26,511 $ 1,475 $ 36,121

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

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

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90 days or more past due 1

264 — — — 414 — — 678

Total past due 267 — — — 977 93 5 1,342

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90 days or more past due 1

229 — — — 88 — — 317

Total past due 625 — — — 653 — 1,036 2,314

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Non-accrual loans with no allowance $ — $ 7,269 $ 694 $ — $ 413 $ — $ — $ 8,376

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

The SBA subsequently purchased both loans in January 2022.

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

1 There were no non-performing loans past due more than ninety days and accruing interest at December 31, 2022 and 2021.

There were $ 264 thousand and $ 229 thousand in SBA PPP loans included in commercial and industrial that were past due ninety days as of December 31, 2022 and 2021, respectively, for which the loan was either in process of SBA forgiveness or purchase.

2 None of the non-accrual loans as of December 31, 2022 or 2021 were earning interest on a cash basis.

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

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

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

We recognized no interest income on non-accrual loans in 2022, 2021 or 2020.

Accrued interest of $ 48 thousand was reversed from interest income for the loans that were placed on non-accrual status in 2022.

No interest income was reversed for the single loan that was placed on non-accrual status in 2021.

Collateral Dependent Loans

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

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

Amortized Cost by Collateral Type

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

(in thousands) Commercial Real Estate Residential Real Estate Other Total 1

Allowance for Credit Losses

December 31, 2022

Commercial real estate, owner-occupied $ 1,563 $ — $ — $ 1,563 $ —

Commercial real estate, investor-owned 694 — — 694 —

Home equity — 778 — 778 —

Installment and other consumer — — 91 91 —

Total $ 1,563 $ 778 $ 91 $ 2,432 $ —

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Home equity — 413 — 413 —

Installment and other consumer — — 17 17 —

Total $ 7,963 $ 413 $ — $ 8,376 $ —

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

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

1 There were no collateral-dependent residential real estate mortgage loans in process of foreclosure or in substance repossessed, at December 31, 2022 and 2021.

The weighted average loan-to-value of collateral-dependent loans was approximately 42 % and 67 % at December 31, 2022 and 2021, respectively .

Troubled Debt Restructuring

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$ 3,388 $ 9,510

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

1 TDR loans on non-accrual status totaled $ 1.6 million and $ 7.4 million at December 31, 2022 and 2021, respectively.

Unfunded commitments for TDR loans totaled $ 209 thousand and $ 441 thousand as of December 31, 2022 and 2021, respectively.

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

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

In accordance with section 4013 of the 2020 CARES Act, subsequently amended by section 541 of the 2020 Economic Aid Act, we elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated as a TDR under existing GAAP.

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

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

As of December 31, 2021, two borrowing relationships with three loans totaling $ 23.6 million were continuing to benefit from payment relief.

The weighted average loan-to-value ratio of the remaining payment relief loans was approximately 44 %.

We accrue and recognize interest income on loans under payment relief based on the original contractual interest rates.

When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued interest is fully paid.

We monitor the financial situation of these clients closely and expect them to resume payments as the economy continues to recover.

There were no loans removed from TDR designation during either 2022 or 2020.

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

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TDRs modified during 2022:

Commercial real estate, owner-occupied 1 $ 1,758 $ 1,758 $ 1,160

Home equity 3 247 247 240

Total 4 $ 2,005 $ 2,005 $ 1,400

TDRs modified during 2021:

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

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

TDRs modified during 2019:

Commercial and industrial 1 $ 298 $ 298 $ 150

The loan modifications in 2022 included one or more of the following:

payment deferment, maturity date extension, interest rate concession, and/or other payment modifications.

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

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

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

twelve-month period.

During 2022, 2021 and 2020, there were no other defaults on loans that had been modified in a TDR within the prior twelve-month period.

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

Purchased Loans with Credit Deterioration

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

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

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

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

(in thousands)

Unpaid principal balance (par value) $ 92,029

Non-credit discount ( 1,662 )

Amortized cost basis 90,367

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

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

Allowance for Credit Losses on Loans Rollforward

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

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

Allowance for Credit Losses on Loans Rollforward

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

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

Provision (reversal) 72 ( 289 ) ( 63 ) 251 ( 37 ) ( 49 ) 270 ( 218 ) ( 63 )

(Charge-offs) ( 9 ) — — — — — ( 23 ) — ( 32 )

Recoveries 22 — — 33 — — — — 55

Ending balance $ 1,794 $ 2,487 $ 12,676 $ 1,937 $ 558 $ 595 $ 868 $ 2,068 $ 22,983

Year ended December 31, 2021

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

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

Initial allowance for PCD loans 1

405 559 533 — — 6 2 — 1,505

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

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

Year ended December 31, 2019

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

Provision (reversal) - incurred loss method ( 49 ) 55 768 ( 118 ) ( 65 ) 173 ( 23 ) 159 900

(Charge-offs) ( 75 ) — — — — — ( 3 ) — ( 78 )

Recoveries 22 — 12 — — — — — 34

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

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

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

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

1 The initial allowance for PCD loans relates to the AMRB merger discussed in Note 18, Merger.

2 Refer to Note 1, Summary of Significant Accounting Policies, for a discussion of our methodology for the adoption of the current expected credit loss ("CECL") accounting standards in 2020.

Pledged Loans

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Balance at beginning of year $ 7,942 $ 6,423 $ 8,333

Assumed in the ARB acquisition 4,037 — —

Additions 1,525 — —

Assumed in the AMRB acquisition — 4,037 —

Repayments ( 364 ) ( 2,518 ) ( 1,910 )

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Balance at end of year $ 6,445 $ 7,942 $ 6,423

Undisbursed commitments to related parties totaled $ 8.6 million and $ 9.1 million as of December 31, 2021 and 2020, respectively.

Undisbursed commitments to related parties totaled $ 562 thousand and $ 8.6 million as of December 31, 2022 and 2021, respectively.

The decreases in both the outstanding amount and undisbursed commitments as of December 31, 2022 were primarily due to a Director retirement in the first quarter.

Bank Premises and Equipment

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Furniture and equipment 12,762 11,384

Buildings 1,217 1,195

Finance lease right-of-use assets 1

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Bank premises and equipment, net $ 8,134 $ 7,558

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

See Note 18, Merger, for more information.

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

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

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

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

Earnings on BOLI totaled $ 1.2 million, $ 2.2 million and $ 973 thousand in 2022, 2021 and 2020, respectively.

These earnings included death benefit proceeds in excess of the cash surrender values of the BOLI policies of $ 86 thousand in 2022 and $ 1.1 million in 2021.

There were no death benefits on BOLI in 2020.

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Interest on time deposits was $ 323 thousand, $ 246 thousand and $ 554 thousand in 2022, 2021 and 2020, respectively.

Scheduled maturities of time deposits at December 31, 2021 are presented as follows:

Scheduled maturities of time deposits at December 31, 2022 are as follows:

(in thousands) 2023 2024 2025 2026 2027 Thereafter Total

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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 and $ 135.0 million at December 31, 2021 and 2020, respectively.

Federal Funds Purchased – The Bank had unsecured available lines of credit with correspondent banks for overnight borrowings totaling $ 150.0 million at both December 31, 2022 and 2021.

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

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

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

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

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

There were no overnight borrowings under these credit facilities at December 31, 2022 and 2021.

Federal Home Loan Bank Borrowings – As of December 31, 2022 and 2021, the Bank had total lines of credit with the FHLB of $ 711.6 million and $ 820.5 million, respectively , based on the eligible collateral of certain loans.

F HLB overnight borrowings at December 31, 2022 were $ 112.0 million at a rate of 4.65 %, for a net available line of $ 599.6 million.

There were no overnight borrowings at December 31, 2021.

As part of our acquisition of AMRB, we assumed FHLB fixed-rate advances totaling $ 13.9 million that we early redeemed on August 25, 2021.

In February 2023, we increased our borrowing capacity at the FHLB by pledging certain held-to-maturity securities to Securities-Backed Credit Program, which increased our total FHLB borrowing capacity to $ 1.0372 billion as of February 28, 2023 from $ 711.6 million as of December 31, 2022.

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

At December 31, 2022 and 2021, the Bank had borrowing capacity under this line totaling $ 58.7 million and $ 70.8 million, respectively, and had no outstanding borrowings with the FRBSF.

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

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

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

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

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

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

Other Obligations - Equipment finance lease liabilities totaling $ 439 thousand and $ 419 thousand at December 31, 2022 and 2021, respectively, are included in borrowings and other obligations in the consolidated statements of condition.

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

Borrowings and other obligations at and for the years ended December 31, 2021, 2020 and 2019 are summarized as follows:

The carrying values, and average balances and rates of borrowings and other obligations as of and for the years ended December 31, 2022, 2021 and 2020 are summarized in the following table.

2022 2021 2020

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FHLB fixed-rate advances $ — $ — — % $ — $ 642 1.18 % $ — $ — — %

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

Subordinated debenture $ — $ — — % $ — $ 534 251.54 %

$ 2,777 $ 2,741 5.68 %

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

Stockholders' Equity and Stock Plans

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

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

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

During 2022, 2021 and 2020 we issued 10,145 , 6,443 and 5,723 shares of common stock, respectively, for director fees.

As of December 31, 2022, 228,004 shares were available for future director fees and purchases.

The 2017 Employee Stock Purchase Plan ("ESPP") gives our employees an opportunity to purchase Bancorp's common shares through payroll deductions of between one percent and fifteen percent of their pay in each pay period.

The 2017 Employee Stock Purchase Plan ("ESPP") gives our employees an opportunity to purchase Bancorp's common shares through payroll deductions of between one and fifteen percent of their pay.

Shares are purchased quarterly at a five percent discount from the closing market price on the last day of the quarter.

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

Options granted to officers and employees generally vest by one-third on each anniversary of the grant for three years and expire ten years from the grant date.

Options granted to officers and employees generally vest by one-third on each anniversary of the grant for

three years and expire ten years from the grant date.

Options granted to non-employee directors vest immediately and expire ten years from the grant date.

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The table below depicts the total number of shares, amount, and weighted average price withheld for cashless exercises in each of the respective years.

2021 2020 2019

December 31, 2022 December 31, 2021 December 31, 2020

Number of shares withheld 11,505 27,929 10,001

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Expected price volatility 33.44 % 33.12 % 24.43 %

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.

The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive (loss) 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.

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.

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

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

Total compensation expense for stock options and restricted stock awards was $ 962 thousand, $ 972 thousand, and $ 1.2 million during 2022, 2021, and 2020, respectively, and the total recognized deferred tax benefits related thereto were $ 257 thousand, $ 213 thousand, and $ 341 thousand, respectively.

As of December 31, 2022, there was $ 1.4 million of total unrecognized compensation expense related to non-vested stock options and restricted stock awards, which is expected to be recognized over a weighted-average

period of approximately 2.1 years.

The total grant-date fair value of stock options vested during the years ended December 31, 2022, 2021, and 2020 was $ 356 thousand, $ 514 thousand, and $ 484 thousand, respectively.

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

We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable.

The total grant-date fair value of restricted stock awards vested during 2022, 2021, and 2020 was $ 431 thousand, $ 1.0 million, and $ 1.2 million, respectively.

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 (loss) income with a corresponding decrease (increase) to current taxes payable.

In 2022, 2021, and 2020 we recognized $ 3 thousand, $ 87 thousand, and $ 120 thousand, respectively, in excess tax benefits recorded as a reduction to income tax expense related to these types of transactions.

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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.

Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive (loss) income with a corresponding decrease to current taxes payable.

Dividends on forfeited awards are included in stock-based compensation expense.

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Bancorp held $ 4.5 million in cash at December 31, 2022.

Preferred Stock and Shareholder Rights Plan

On July 6, 2017, Bancorp adopted a new shareholder rights agreement (“Rights Agreement”), which replaced the existing Rights Agreement that expired on July 23, 2017.

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

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

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

As of December 31, 2021, Bancorp was authorized to issue five million shares of preferred stock with no par value, one million shares of which have been designated as Series A Junior Participating Preferred Stock, with no par value under the Rights Agreement.

In the event of a proposed merger, tender offer or other attempt to gain control of Bancorp that the Board of Directors does not approve, the Board of Directors may authorize the issuance of shares of common or preferred stock that would impede the completion of such a transaction.

An effect of the possible issuance of common or preferred stock, therefore, may be to deter a future takeover attempt.

The Board of Directors has no present plans or understandings for the issuance of any common or preferred stock in connection with the Rights Agreement.

Share Repurchase Program

On April 23, 2018, Bancorp announced that its Board of Directors approved a Share Repurchase Program under which Bancorp may repurchase up to $ 25.0 million of its outstanding common stock through May 1, 2019.

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

A new Share Repurchase Program was approved by the Board of Directors on January 24, 2020, which began on March 1, 2020 and allowed Bancorp to repurchase up to $ 25.0 million of its outstanding common stock and ended May 2021.

On July 16, 2021, Bancorp Board of Directors approved a share repurchase program under which Bancorp could repurchase up to $ 25.0 million of its outstanding common stock through July 31, 2023.

On October 22, 2021, Bancorp's Board of Directors approved an amendment to the current share repurchase program, which increased the total authorization from $ 25.0 million to $ 57.0 million and left the expiration date unchanged.

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

The last activity under the program was in the first quarter of 2022 when the Bancorp repurchased 23,273 shares totaling $ 877 thousand.

A total of $ 34.7 million remained available to repurchase under the program as of December 31, 2022.

Under the Share Repurchase Program, Bancorp may purchase shares of its common stock through various means such as open market transactions, including block purchases, and privately negotiated transactions.

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Asset-backed securities $ 1,462 $ — $ 1,462 $ — OCI

Derivative financial liabilities (interest rate contracts) $ 1,085 $ — $ 1,085 $ — NI

Derivative financial assets (interest rate contracts) $ 602 $ — $ 602 $ — NI

December 31, 2021

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

Treasury securities $ 11,630 $ 11,630 $ — $ — OCI

Obligations of state and political subdivisions $ 134,000 $ — $ 134,000 $ — OCI

Corporate bonds $ 38,495 $ — $ 38,495 $ — OCI

Asset-backed securities $ 1,862 $ — $ 1,862 $ — OCI

Derivative financial liabilities (interest rate contracts) $ 1,085 $ — $ 1,085 $ — NI

1 Other comprehensive income ("OCI") or net income ("NI").

1 Other comprehensive (loss) income ("OCI") or net income ("NI").

Available-for-sale securities are recorded at fair value on a recurring basis.

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If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2).

Level 2 securities include obligations of state and political subdivisions, U.S.

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

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 December 31, 2022 and 2021, there were no Level 3 securities.

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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.

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.

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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 the Bank.

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 14, 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 impaired loans that are collateral dependent and other real estate owned ("OREO").

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 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.

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The value of OREO is classified as Level 3.

Our current OREO resulted from the ARB Merger.

The following table presents the carrying value of assets measured at fair value on a non-recurring basis and that were held in the consolidated statements of condition at each respective period end, by level within the fair value hierarchy as of December 31, 2021 and December 31, 2020.

Our current OREO resulted from the American River Bankshares ("AMRB") merger in 2021.

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

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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 BOLI and non-maturity deposit liabilities.

Additionally, we held shares of FHLB stock and Visa Inc.

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 December 31, 2022 and 2021.

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Time deposits 119,030 118,333 Level 2 150,235 150,475 Level 2

Subordinated debenture — — Level 3 2,777 3,115 Level 3

Federal Home Loan Bank overnight borrowings 112,000 112,000 Level 1 — — Level 1

Interest payable 75 75 Level 2 81 81 Level 2

Commitments - The value of unrecognized 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.

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 December 31, 2022 and 2021.

Benefit Plans

Deferred Compensation Plan

Deferred Compensation Plans

We established a Deferred Compensation Plan, which allows certain key management personnel designated by the Board of Directors of the Bank to defer up to 80 % of their salary and 100 % of their annual bonus.

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

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

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

Amounts deferred earn interest that is equal to the prime rate as published in the Wall Street Journal, on the first business day of the year, which was 3.25 % on January 1, 2022 and January 1, 2021.

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

Prior to January 1, 2022, amounts deferred earned interest based on the 5-year U.S.

Government Treasury rate plus 4.0%.

This rate was 4.36% for 2021.

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

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

Beginning January 1, 2022, the rate converted to the prime rate.

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

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

Our deferred compensation obligation under these plans totaled $ 7.1 million and $ 7.9 million at December 31, 2022 and 2021, respectively, and is included in interest payable and other liabilities.

401(k) Defined Contribution Plan

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

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

allowed by the Internal Revenue Code.

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

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

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Employee Stock Ownership Plan

Our Employee Stock Ownership Plan (the “Plan”) is also available to all employees under the same eligibility criteria of the 401(k) Plan, while employee contribution is not permitted.

Our Employee Stock Ownership Plan (the “Plan”) is also available to all employees under the same eligibility criteria of the 401(k) Plan;

however, employee contributions are not permitted.

The Board of Directors determines a specific portion of the Bank's profits to be contributed to the employee stock ownership each year either in common stock or in cash for the purchase of Bancorp stock to be allocated to all eligible employees based on a percentage of their salaries, regardless of whether an employee is participating in the 401(k) plan or not.

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

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

Bancorp issued shares of common stock, contributed them to the ESOP and recognized expenses of $ 1.6 million in 2022 and $ 1.3 million in 2021 and 2020, based on the quoted market price on the date of contribution.

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

All shares of Bancorp stock held by the ESOP are included in the calculations of basic and diluted earnings per share.

shares of Bancorp stock held by the ESOP are included in the calculations of basic and diluted earnings per share.

The employer contributions to the ESOP are included in salaries and benefits expense.

Salary Continuation Plan

A Salary Continuation Plan was established for a select group of executive management, who, upon retirement, will receive twenty-five percent of their estimated salary at retirement as salary continuation benefit payments that are fixed and will be made between seven to fifteen years , depending on the executives' service period at the Bank.

A Salary Continuation Plan was established for a select group of executive management, who, upon retirement, will receive twenty-five percent of their estimated salary at retirement as salary continuation benefit payments that are fixed and will be made between five to fifteen years , depending on the executives' service period at the Bank.

Each participant will need to participate in this plan for five years before vesting begins.

After five years , the participant will vest ratably in the benefit over the remaining period until age 65 .

This Plan is unfunded and nonqualified for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974.

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

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

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

As part of previous acquisitions, we assumed the salary continuation agreements for former executive officers and directors.

These plans are unfunded and nonqualified for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974.

At December 31, 2022 and 2021, respectively, our total liability under the salary continuation plans was $ 4.7 million and $ 5.3 million recorded in interest payable and other liabilities.

The current and deferred components of the income tax provision for each of the three years ended December 31 are as follows:

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Total current tax provision 17,357 11,442 12,003

Deferred tax provision (benefit)

Deferred tax (benefit) provision

Federal ( 441 ) 274 ( 964 )

State 7 ( 58 ) ( 694 )

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

Total deferred tax (benefit) provision ( 434 ) 216 ( 1,658 )

Total income tax provision $ 16,923 $ 11,658 $ 10,345

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Deferred tax assets:

Net unrealized losses on securities available-for-sale $ 29,458 $ —

Operating and finance lease liabilities 8,002 7,642

Allowance for credit losses on loans and unfunded loan commitments 7,229 7,335

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

Deferred compensation and salary continuation plans 3,481 3,911

Accrued but unpaid expenses 1,751 1,884

Net operating loss carryforwards 1,406 1,660

State franchise tax 1,396 930

Net operating loss carryforwards 1,239 1,406

Fair value adjustment on acquired loans 905 894

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Depreciation and disposals on premises and equipment 236 188

Interest received on non-accrual loans 24 23

Other 194 144

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Net unrealized gains on securities available-for-sale — ( 745 )

Accretion on investment securities ( 33 ) ( 33 )

Unaccreted discount on subordinated debenture — ( 398 )

Other ( 279 ) ( 292 )

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Net deferred tax assets $ 43,856 $ 13,319

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

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

As of December 31, 2022, California net operating loss carryforwards ("NOLs") of $ 14.5 million corresponded to the total $ 1.2 million deferred tax asset above.

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

Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are expected to be deductible, management believes it is more likely than not we will realize the benefit of the remaining deferred tax assets.

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Commitments and Contingencies

We lease premises under long-term non-cancelable operating leases with remaining terms of approximately 6 months to 11 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses.

We lease premises under long-term non-cancelable operating leases with remaining terms of approximately 2 months to 19 years, 4 months , 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.

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Right-of-use assets obtained in exchange for finance lease liabilities $ 151 $ 444 $ 18

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

The following table shows components of operating and finance lease cost for the years ended December 31, 2022, 2021 and 2020.

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Total lease cost $ 5,486 $ 4,921 $ 4,675

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.

1 Included in occupancy and equipment expense in the consolidated statements of comprehensive (loss) income.

2 Included in depreciation and amortization in the consolidated statements of comprehensive (loss) income.

3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive (loss) 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 December 31, 2022.

The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the lease commencement date.

(in thousands) December 31, 2022

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

The escrow balance of $ 1.1 billion as of December 31, 2021, combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.

For the fiscal year ended September 30, 2022 and fiscal quarter ended December 31, 2022, Visa deposited an additional $ 600 million and $ 350 million, respectively, into the litigation escrow account to address claims of certain merchants who opted out of the Amended Settlement Agreement for a balance of $ 1.7 billion as of December 31, 2022.

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 2, Investment Securities.

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Concentrations of Credit Risk

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

political, regulatory, geographic, industrial or credit developments.

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

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

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

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

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

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

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

government and GSEs, which accounted for $ 1.535 billion, or 87 % of our total investment portfolio at December 31, 2022 and $ 1.277 billion, or 85 % at December 31, 2021.

The increase is from the deployment of excess liquidity throughout 2022 into securities with purchases of $ 516.6 million of this security type.

The largest security not issued by the U.S.

Government or a GSE accounted for approximately 1 % of our total investment portfolio at December 31, 2022, and 2 % at December 31, 2021.

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

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

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

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

No single borrower relationship accounted for more than 3 % of outstanding loan balances at December 31, 2022 or 2021.

The largest loan concentration is real estate, which accounted for 89 % and 84 % of our loan portfolio at December 31, 2022 and 2021, respectively.

The increase in the percentage in real estate from 2021 to 2022 was primarily due to a $ 107.7 million reduction in unsecured loans guaranteed by the SBA under the PPP, which are included in commercial and industrial loans.

Derivative Financial Instruments and Hedging Activities

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Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.

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

As of December 31, 2022, we had four interest rate swap agreements, which are scheduled to mature at various dates ranging from June 2031 to October 2037.

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

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Our interest rate swap payments are settled monthly with counterparties.

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

Accrued interest receivable on the swaps totaled $ 5 thousand at December 31, 2022, and accrued interest payable on the swaps totaled $ 11 thousand at December 31, 2021.

Information on our derivatives follows:

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1 Refer to Note 9, Fair Value of Assets and Liabilities, for valuation methodology.

The following table presents the carrying amount 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 December 31, 2021 and 2020:

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 December 31, 2022 and 2021:

Carrying Amounts of Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans

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Loans $ 11,319 $ 13,976 $ ( 726 ) $ 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:

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

Years ended December 31,

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Net losses on fair value hedging derivatives recognized in interest income $ ( 132 ) $ ( 367 ) $ ( 297 )

1 Represents the income line item in the statements of comprehensive income in which the effects of fair value hedges are recorded.

1 Represents the income line item in the statements of comprehensive (loss) 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.

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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 Gross Amounts Not Offset in the Statements of Condition

Gross Amounts Offset in the of Assets Presented

of Recognized Statements of in the Statements Financial Cash Collateral

(in thousands) Assets Condition of Condition Instruments Received Net Amount

December 31, 2022

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

December 31, 2021

Counterparty $ — $ — $ — $ — $ — $ —

Offsetting of Financial Liabilities and Derivative Liabilities

Gross Amounts of Recognized Liabilities 1

Gross Amounts Offset in the Statements of Condition Net Amounts of Liabilities Presented in the Statements of Condition 1

Gross Amounts Not Offset in the Statements of Condition

Gross Amounts Net Amounts of

Gross Amounts Offset in the Liabilities Presented

of Recognized Statements of in the Statements of Financial Cash Collateral

(in thousands) Liabilities 1

Condition Condition 1

Instruments Pledged Net Amount

Financial Instruments Cash Collateral Pledged

(in thousands) Net Amount

December 31, 2022

Derivatives by Counterparty:

Counterparty A $ 1,085 $ — $ 1,085 $ — ( 1,085 ) $ —

Counterparty $ — $ — $ — $ — — $ —

December 31, 2021

Derivatives by Counterparty:

Counterparty A $ 1,912 $ — $ 1,912 $ — ( 1,912 ) $ —

Counterparty $ 1,085 $ — $ 1,085 $ — ( 1,085 ) $ —

1 Amounts exclude accrued interest on swaps.

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We are subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.

financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and the Bank’s prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.

Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.

Management reviews capital ratios on a regular basis and produces a five-year capital plan semi-annually to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.

For all periods presented, the Bank’s ratios exceed the regulatory definition of “well-capitalized” under the regulatory framework for prompt corrective action and Bancorp’s ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company.

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

In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of December 31, 2022.

There are no conditions or events since that notification that management believes have changed the Bank’s categories and we expect the Bank to remain well c apitalized for prompt corrective action purposes.

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

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

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

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

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

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

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

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

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

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

Capital Ratios for Bancorp

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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.

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.

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The allowance for credit losses on unfunded commitments totaled $ 1.5 million and $ 1.8 million as of December 31, 2022 and December 31, 2021, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition.

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

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

The $ 318 thousand decrease in the allowance for unfunded commitments in 2022 was largely due to the decrease in the balance of unfunded commitments.

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

We adopted the CECL accounting standard on December 31, 2020, (refer to Note 1, Summary of Significant Accounting Policies and Note 3, Loans and Allowance for Credit Losses for additional information).

During the first nine months of 2020, we increased the allowance for credit losses on unfunded loan commitments under the incurred loss method ("previous GAAP") by $ 610 thousand.

Upon adoption of the CECL standard, we increased the allowance for unfunded loan commitments by $ 1.1 million, which represented the difference between the allowance calculated under the CECL method as of December 31, 2020 and the incurred loss method as of September 30, 2020.

The $ 1.1 million increase in the allowance for unfunded loan commitments included approximately $ 550 thousand related to a $ 36.9 million increase in available commitments during the fourth quarter of 2020.

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

Upon adoption of the CECL standard, we increased it by $ 1.1 million, which included approximately $ 550 thousand related to a $ 36.9 million increase in available commitments during the fourth quarter of 2020.

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

Condensed Bank of Marin Bancorp Parent Only Financial Statements

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Liabilities and Stockholders' Equity

Subordinated debenture $ — $ 2,777

Accrued expenses payable $ 188 $ 318

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14,937 59,849 15,157

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

Earnings of bank subsidiary greater (less) than dividends received from bank subsidiary 31,649 ( 26,621 ) 15,085

Net income $ 46,586 $ 33,228 $ 30,242

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

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

Accretion of discount on subordinated debentures 1,347 69 68

Earnings of bank subsidiary (greater) less than dividends received from bank subsidiary ( 31,649 ) 26,621 ( 15,085 )

Accretion of discount on subordinated debenture — 1,347 69

Noncash director compensation expense 36 35 31

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Repayment of subordinated debenture including execution costs — ( 4,126 ) —

Payment of tax withholdings for vesting of restricted stock ( 166 ) ( 73 ) ( 220 )

Dividends paid on common stock ( 13,107 ) ( 12,506 ) ( 10,958 )

Stock repurchased, net of commissions ( 40,762 ) ( 6,898 ) ( 15,062 )

Restricted stock surrendered for tax withholdings upon vesting ( 40 ) ( 166 ) ( 73 )

Cash dividends paid on common stock ( 15,673 ) ( 13,107 ) ( 12,506 )

Stock repurchased, including commissions ( 1,250 ) ( 40,762 ) ( 6,898 )

Net cash used in financing activities ( 16,064 ) ( 57,574 ) ( 18,058 )

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

Net (decrease) increase in cash and cash equivalents ( 2,131 ) 1,295 ( 4,210 )

Cash and cash equivalents at beginning of year 6,624 5,329 9,539

Cash and cash equivalents at end of year $ 4,493 $ 6,624 $ 5,329

Supplemental schedule of non-cash investing and financing activities:

Supplemental schedule of noncash investing and financing activities:

Stock issued in payment of director fees $ 355 $ 217 $ 217

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Stock issued to ESOP $ 1,233 $ 1,330 $ 1,289

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

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

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

Bancorp completed its merger and acquired all assets and assumed all liabilities of AMRB on August 6, 2021.

The Merger expanded Bank of Marin's presence throughout the Greater Sacramento, Amador and Sonoma County Regions where AMRB had ten branches.

T he Merger added $ 898.4 million in total assets, including $ 297.8 million in investment securities and $ 419.4 million in loans, and $ 816.6 million in total liabilities, including $ 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's shareholders received 0.575 shares of Bancorp's common 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.

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Total merger consideration $ 124,477

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

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

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

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

As such, the estimated fair values are

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

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

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

(in thousands)

Total merger consideration $ 124,477

Assets acquired:

Cash and cash equivalents 140,577

Investment securities 297,797

Loans 419,435

Bank-owned life insurance 16,259

Operating lease right-of-use assets 2,376

Bank premises and equipment, net 2,891

Core deposit intangible 3,909

Other real estate owned 800

Interest receivable and other assets 14,377

Total assets acquired 898,421

Liabilities assumed:

Non-interest bearing 331,459

Interest bearing 458,563

Total deposits 790,022

FHLB borrowings 13,885

Operating lease liabilities 2,798

Interest payable and other liabilities 9,853

Total liabilities assumed 816,558

Fair value of net assets acquired 81,863

Goodwill $ 42,614

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

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

It is evaluated for impairment annually.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(in thousands) 2022 2023 2024 2025 2026 Thereafter Total

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

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

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

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

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

Pro Forma Results of Operations (Unaudited)

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

We recorded $ 42.6 million in goodwill, which represented the excess of the total merger consideration paid of $ 124.5 million over the fair value of the net assets acquired of $ 81.9 million.

Goodwill mainly reflects expected value created through the combined operations of AMRB and Bancorp and is evaluated for impairment annually.

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

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

Years ended December 31,

(in thousands) 2022 2021 2020

Net interest income 1

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

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

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

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

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

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

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

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

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

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

Net income - Pro forma 1

$ 42,997 $ 28,445

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

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

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

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

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

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

Personnel and severance $ 393 $ 3,005 $ —

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Other expense 321 350 —

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

Total merger-related and conversion costs $ 858 $ 6,458 $ —

End of 2022 Audited Consolidated Financial Statements

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What changed 10-K

Item 8. Financial Statements and Supplementary Data