Bank of Marin Bancorp 10-Q

ITEM 1. Financial Statements BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CONDITION (in thousands, except share data; unaudited) March 31, 2023 December 31, 2022 Assets Cash, cash equivalents and restricted cash $ 37,993 $ 45,424 Investment securities: Held-to-maturity, at amortized cost (net of zero allowance for credit losses at March 31, 2023 and December 31, 2022) 958,560 972,207 Available-for-sale, at fair value (net of zero allowance for credit losses at March 31, 2023 and December 31, 2022) 797,533 802,096 Total investment securities 1,756,093 1,774,303 Loans, at amortized cost 2,112,328 2,092,546 Allowance for credit losses on loans ( 23,330 ) ( 22,983 ) Loans, net of allowance for credit losses on loans 2,088,998 2,069,563 Goodwill 72,754 72,754 Bank-owned life insurance 67,006 67,066 Operating lease right-of-use assets 22,854 24,821 Bank premises and equipment, net 8,690 8,134 Core deposit intangible, net 4,771 5,116 Other real estate owned 455 455 Interest receivable and other assets 75,665 79,828 Total assets $ 4,135,279 $ 4,147,464 Liabilities and Stockholders' Equity Liabilities Deposits: Non-interest bearing $ 1,636,651 $ 1,839,114 Interest bearing Transaction accounts 251,716 287,651 Savings accounts 306,951 338,163 Money market accounts 911,189 989,390 Time accounts 144,067 119,030 Total deposits 3,250,574 3,573,348 Short-term borrowings and other obligations 405,802 112,439 Operating lease liabilities 25,433 26,639 Interest payable and other liabilities 23,296 22,946 Total liabilities 3,705,105 3,735,372 Commitments and contingent liabilities (Note 8) Stockholders' Equity Preferred stock, no par value, Authorized - 5,000,000 shares, none issued — — Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,107,210 and 16,029,138 at March 31, 2023 and December 31, 2022, respectively 215,965 215,057 Retained earnings 276,209 270,781 Accumulated other comprehensive loss, net of taxes ( 62,000 ) ( 73,746 ) Total stockholders' equity 430,174 412,092 Total liabilities and stockholders' equity $ 4,135,279 $ 4,147,464 The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-3 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Three months ended (in thousands, except per share amounts; unaudited) March 31, 2023 December 31, 2022 March 31, 2022 Interest income Interest and fees on loans $ 24,258 $ 23,500 $ 23,677 Interest on investment securities 10,033 10,126 6,693 Interest on federal funds sold and due from banks 56 575 106 Total interest income 34,347 34,201 30,476 Interest expense Interest on interest-bearing transaction accounts 254 191 56 Interest on savings accounts 170 32 29 Interest on money market accounts 1,085 405 478 Interest on time accounts 223 114 14 Interest on borrowings and other obligations 2,716 89 1 Total interest expense 4,448 831 578 Net interest income 29,899 33,370 29,898 Provision for (reversal of) credit losses on loans 350 — ( 485 ) Reversal of credit losses on unfunded loan commitments ( 174 ) — ( 318 ) Net interest income after provision for (reversal of) credit losses 29,723 33,370 30,701 Non-interest income Earnings on bank-owned life insurance, net 705 296 413 Service charges on deposit accounts 533 519 488 Wealth Management and Trust Services 511 490 600 Debit card interchange fees, net 447 513 505 Dividends on Federal Home Loan Bank stock 302 297 259 Merchant interchange fees, net 133 119 140 Other income 304 353 462 Total non-interest income 2,935 2,587 2,867 Non-interest expense Salaries and related benefits 10,930 9,600 11,548 Occupancy and equipment 2,414 2,084 1,907 Professional services 1,123 985 913 Data processing 1,045 1,080 1,277 Depreciation and amortization 882 581 452 Information technology 370 678 478 Amortization of core deposit intangible 345 365 380 Directors' expense 321 269 311 Federal Deposit Insurance Corporation insurance 289 293 290 Charitable contributions 49 104 45 Other real estate owned 4 4 2 Other expense 2,008 2,267 1,772 Total non-interest expense 19,780 18,310 19,375 Income before provision for income taxes 12,878 17,647 14,193 Provision for income taxes 3,438 4,766 3,728 Net income $ 9,440 $ 12,881 $ 10,465 Net income per common share: Basic $ 0.59 $ 0.81 $ 0.66 Diluted $ 0.59 $ 0.81 $ 0.66 Weighted average shares: Basic 15,970 15,948 15,876 Diluted 15,999 16,001 15,946 Comprehensive income (loss): Net income $ 9,440 $ 12,881 $ 10,465 Other comprehensive income (loss): Change in net unrealized gains or losses on available-for-sale securities 16,213 8,474 ( 38,228 ) 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 463 454 144 Other comprehensive income (loss), before tax 16,676 8,928 ( 52,931 ) Deferred tax expense (benefit) 4,930 2,639 ( 15,648 ) Other comprehensive income (loss), net of tax 11,746 6,289 ( 37,283 ) Total comprehensive income (loss) $ 21,186 $ 19,170 $ ( 26,818 ) The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-4 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the three months ended March 31, 2023 and 2022 (in thousands, except share data; unaudited) Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income, Net of Taxes Total Shares Amount Three months ended March 31, 2023 Balance at January 1, 2023 16,029,138 $ 215,057 $ 270,781 $ ( 73,746 ) $ 412,092 Net income — — 9,440 — 9,440 Other comprehensive income, net of tax — — — 11,746 11,746 Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 11,530 230 — — 230 Stock issued under employee stock purchase plan 415 9 — — 9 Stock issued under employee stock ownership plan 14,300 423 — — 423 Restricted stock granted 49,428 — — — — Restricted stock surrendered for tax withholdings upon vesting ( 2,213 ) ( 65 ) — — ( 65 ) Stock-based compensation - stock options — 116 — — 116 Stock-based compensation - restricted stock — 45 — — 45 Cash dividends paid on common stock ($ 0.25 per share) — — ( 4,012 ) — ( 4,012 ) Stock issued in payment of director fees 4,612 150 — — 150 Balance at March 31, 2023 16,107,210 $ 215,965 $ 276,209 $ ( 62,000 ) $ 430,174 Three months ended March 31, 2022 Balance at January 1, 2022 15,929,243 $ 212,524 $ 239,868 $ ( 2,024 ) $ 450,368 Net income — — 10,465 — 10,465 Other comprehensive loss, net of tax — — — ( 37,283 ) ( 37,283 ) Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 35,543 739 — — 739 Stock issued under employee stock ownership plan 12,000 417 — — 417 Restricted stock granted 46,672 — — — — Restricted stock surrendered for tax withholdings upon vesting ( 836 ) ( 29 ) — — ( 29 ) Restricted stock forfeited / cancelled ( 649 ) — — — — Stock-based compensation - stock options — 86 — — 86 Stock-based compensation - restricted stock — 151 — — 151 Cash dividends paid on common stock ($ 0.24 per share) — — ( 3,822 ) — ( 3,822 ) Stock issued in payment of director fees 5,149 193 — — 193 Stock repurchased, including commissions ( 23,275 ) ( 877 ) — — ( 877 ) Balance at March 31, 2022 16,003,847 $ 213,204 $ 246,511 $ ( 39,307 ) $ 420,408 The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-5 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 2023 and 2022 (in thousands; unaudited) 2023 2022 Cash Flows from Operating Activities: Net income $ 9,440 $ 10,465 Adjustments to reconcile net income to net cash provided by operating activities: Provision for (reversal of) credit losses on loans 350 ( 485 ) Reversal of credit losses on unfunded loan commitments ( 174 ) ( 318 ) Noncash contribution expense to employee stock ownership plan 423 417 Noncash director compensation expense 150 193 Stock-based compensation expense 161 237 Amortization of core deposit intangible 345 380 Amortization of investment security premiums, net of accretion of discounts 1,964 2,497 (Accretion of discounts) amortization of premiums on acquired loans, net ( 168 ) 115 Net change in deferred loan origination costs/fees ( 324 ) ( 1,591 ) Depreciation and amortization 882 452 Earnings on bank-owned life insurance policies ( 705 ) ( 413 ) Net changes in interest receivable and other assets ( 203 ) 4,648 Net changes in interest payable and other liabilities 1,303 ( 5,118 ) Total adjustments 4,004 1,014 Net cash provided by operating activities 13,444 11,479 Cash Flows from Investing Activities: Purchase of held-to-maturity securities — ( 95,932 ) Purchase of available-for-sale securities — ( 243,459 ) Proceeds from paydowns/maturities of held-to-maturity securities 13,634 5,067 Proceeds from paydowns/maturities of available-for-sale securities 19,288 42,966 (Increase) decrease in loans receivable, net ( 19,072 ) 54,524 Proceeds from bank-owned life insurance policies — 350 Purchase of premises and equipment ( 1,438 ) ( 130 ) Cash paid for low income housing tax credit investment ( 38 ) ( 4 ) Net cash provided by (used in) investing activities 12,374 ( 236,618 ) Cash Flows from Financing Activities: Net (decrease) increase in deposits ( 322,774 ) 52,792 Proceeds from short-term Federal Home Loan Bank borrowings, net 293,400 — Repayment of finance lease obligations ( 37 ) ( 31 ) Proceeds from stock options exercised 230 739 Restricted stock surrendered for tax withholdings upon vesting ( 65 ) ( 29 ) Cash dividends paid on common stock ( 4,012 ) ( 3,822 ) Stock repurchased, including commissions — ( 1,250 ) Proceeds from stock issued under employee and director stock purchase plans 9 — Net cash (used in) provided by financing activities ( 33,249 ) 48,399 Net decrease in cash, cash equivalents and restricted cash ( 7,431 ) ( 176,740 ) Cash, cash equivalents and restricted cash at beginning of period 45,424 347,641 Cash, cash equivalents and restricted cash at end of period $ 37,993 $ 170,901 Supplemental disclosure of cash flow information: Cash paid in interest $ 4,290 $ 588 Cash paid in income taxes $ — $ — Supplemental disclosure of noncash investing and financing activities: Change in net unrealized gains or losses on available-for-sale securities $ 16,213 $ ( 38,228 ) Securities transferred from available-for-sale to held-to-maturity, at fair value $ — $ 357,482 Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity $ 463 $ 144 Bank-owned life insurance benefit receivable $ 765 $ — Stock issued to employee stock ownership plan $ 423 $ 417 Restricted cash 1 $ — $ 930 1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco and other cash pledged. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020. The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Basis of Presentation The consolidated financial statements include the accounts of Bancorp, a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin, a California state-chartered commercial bank. References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes. The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations. Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our 2022 Annual Report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in stockholders’ equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period. The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in the quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period under the treasury stock method. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, the difference in EPS is nominal for these participating securities. Three months ended (in thousands, except per share data) March 31, 2023 March 31, 2022 Weighted average basic common shares outstanding 15,970 15,876 Potentially dilutive common shares related to: Stock options 14 52 Unvested restricted stock awards 15 18 Weighted average diluted common shares outstanding 15,999 15,946 Net income $ 9,440 $ 10,465 Basic EPS $ 0.59 $ 0.66 Diluted EPS $ 0.59 $ 0.66 Weighted average anti-dilutive common shares not included in the calculation of diluted EPS 250 125 Note 2: Recently Adopted and Issued Accounting Standards Accounting Standards Adopted in 2023 In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . The amendment eliminated the recognition measurement guidance for troubled debt restructured ("TDR") loans and instead enhanced disclosure requirements for certain loan modifications when a borrower is experiencing financial difficulty. In addition, the amendment required that an entity include in its vintage disclosures the current period gross loan charge-offs by year of origination. We early adopted the current period charge-off disclosures in the first quarter of 2022. We adopted the loan modification provisions as of January 1, 2023 using a modified retrospective method. The cumulative-effect adjustment to retained earnings was considered immaterial. Refer to Note 5, Loans and Allowance for Credit Losses on Loans, for additional information. Page-7 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 renamed the "last-of-layer" method to the "portfolio layer" method and made 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. We adopted the amendments on January 1, 2023, which had no effect on our existing hedge accounting, disclosures, financial condition or results of operations. Accounting Standards Not Yet Effective In March 2020, the FASB issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848) . The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden of accounting for, or recognizing the effects of reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU may be elected 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. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU intend to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. As of March 31, 2023, we had four interest rate swap contracts with notional values totaling $ 11.8 million indexed to LIBOR that will either be subject to the fall-back index rate stipulated by the ISDA protocol or modified to other reference rates such as Prime or SOFR as mutually agreed by 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 June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . The amendment reduces diversity in practice by clarifying that a separate contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. In addition, this ASU provided amended examples to illustrate that a restriction that is a characteristic of the equity security, which market participants would take into account when pricing them, would be considered in measuring fair value. This ASU also introduces new disclosure requirements. The amendments are effective prospectively for years beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements. As discussed in Note 4, Investment Securities, we hold Visa Inc. Class B common stock that is legally restricted from resale to non-member banks of Visa U.S.A. until the covered litigation against Visa Inc. is settled. While the adoption of the amendments may require additional disclosures, we do not anticipate that it will impact our financial condition or results of operations. In March 2023, the FASB issued ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements . For public companies, the amendment requires entities to amortize leasehold improvements associated with common control lease arrangements over the useful life of the improvements to the common control group, as opposed to the shorter of the remaining lease term and the useful life of the improvements for all other operating leases. The amendments are effective for years beginning after December 15, 2023, and may be adopted either prospectively or retrospectively. Early adoption is permitted for both interim and annual financial statements. We currently do not Page-8 have common control lease arrangements, and therefore do not anticipate that the amendments will impact our financial condition and results of operations. In March 2023, the FASB issued ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method . Under current GAAP, an entity can only elect to apply the proportional amortization method to investments in low-income housing tax credit ("LIHTC") structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the consolidated statements of income as a component of income tax expense (benefit). The amendments will allow entities to elect to account for all other equity investments made primarily for the purpose of receiving income tax credits to using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, when certain conditions are met. The amendments are effective for fiscal years beginning after December 15, 2023, and may be adopted either on a modified retrospective basis or retrospectively. Other than investments in LIHTC funds, as disclosed in Note 4, Investment Securities, we currently have no other equity investments made primarily for the purpose of receiving income tax credits, and therefore do not anticipate that the amendments will impact our financial condition and results of operations. Note 3: Fair Value of Assets and Liabilities Fair Value Hierarchy and Fair Value Measurement We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data. Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant management judgment and estimation. Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation process in the reporting period during which the event or circumstances that caused the transfer occurred. No such transfers occurred in the years presented. The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis. Page-9 (in thousands) Description of Financial Instruments Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Measurement Categories: Changes in Fair Value Recorded In 1 March 31, 2023 Securities available-for-sale: Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 471,458 $ — $ 471,458 $ — OCI SBA-backed securities $ 37,971 $ — $ 37,971 $ — OCI Debentures of government sponsored agencies $ 137,121 $ — $ 137,121 $ — OCI U.S. Treasury securities $ 10,524 $ 10,524 $ — $ — OCI Obligations of state and political subdivisions $ 105,136 $ — $ 105,136 $ — OCI Corporate bonds $ 33,961 $ — $ 33,961 $ — OCI Asset-backed securities $ 1,362 $ — $ 1,362 $ — OCI Derivative financial assets (interest rate contracts) $ 404 $ — $ 404 $ — NI Derivative financial liabilities (interest rate contracts) $ 23 $ — $ 23 $ — NI December 31, 2022 Securities available-for-sale: Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 475,505 $ — $ 475,505 $ — OCI SBA-backed securities $ 44,355 $ — $ 44,355 $ — OCI Debentures of government sponsored agencies $ 135,106 $ — $ 135,106 $ — OCI U.S. Treasury securities $ 10,269 $ 10,269 $ — $ — OCI Obligations of state and political subdivisions $ 102,123 $ — $ 102,123 $ — OCI Corporate bonds $ 33,276 $ — $ 33,276 $ — OCI Asset-backed securities $ 1,462 $ — $ 1,462 $ — OCI Derivative financial assets (interest rate contracts) $ 602 $ — $ 602 $ — NI 1 Other comprehensive income ("OCI") or net income ("NI"). Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2). Level 2 securities include asset-backed securities, obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, and corporate bonds. As of March 31, 2023 and December 31, 2022, there were no Level 3 securities. Held-to-maturity securities may be written down to fair value as a result of credit losses or other factors , and we did not record any write-downs during the three months ended March 31, 2023 or March 31, 2022. Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities. On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. These unobservable inputs are not considered significant inputs to the fair value measurement overall. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as Page-10 of the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties. We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities. Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as individually analyzed loans that are collateral dependent and other real estate owned ("OREO"). OREO represents collateral acquired through foreclosure and is initially recorded at fair value as established by a current appraisal of the collateral. Subsequent to foreclosure, OREO is carried at the lower of cost or fair value, less estimated costs to sell. OREO values are reviewed on an ongoing basis and any subsequent decline in fair value is recorded as a foreclosed asset expense in the current period. The value of OREO is classified as Level 3. Our current OREO resulted from the American River Bankshares ("AMRB") merger in 2021. The following table presents the carrying value of assets measured at fair value on a non-recurring basis and that were held in the consolidated statements of condition at each respective period end, by level within the fair value hierarchy as of March 31, 2023 and December 31, 2022. (in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2023 Other real estate owned $ 455 $ — $ — $ 455 December 31, 2022 Other real estate owned $ 455 $ — $ — $ 455 Disclosures about Fair Value of Financial Instruments The table below is a summary of fair value estimates for financial instruments as of March 31, 2023 and December 31, 2022, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI"), lease obligations and non-maturity deposit liabilities. Additionally, we held shares of Federal Home Loan Bank ("FHLB") of San Francisco stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of March 31, 2023 or December 31, 2022. The values are discussed in Note 4, Investment Securities. March 31, 2023 December 31, 2022 (in thousands) Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy Financial assets (recorded at amortized cost): Cash and cash equivalents $ 37,993 $ 37,993 Level 1 $ 45,424 $ 45,424 Level 1 Investment securities held-to-maturity 958,560 850,125 Level 2 972,207 845,239 Level 2 Loans, net 2,088,998 1,999,187 Level 3 2,069,563 1,993,866 Level 3 Interest receivable 11,791 11,791 Level 2 13,069 13,069 Level 2 Financial liabilities (recorded at amortized cost): Time deposits 144,067 144,071 Level 2 119,030 118,333 Level 2 Federal Home Loan Bank short-term borrowings 405,400 405,400 Level 2 112,000 112,000 Level 2 Interest payable 234 234 Level 2 75 75 Level 2 Page-11 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. Due to the short-term nature of the FHLB borrowings, the carrying value approximates fair value. The value of off-balance-sheet financial instruments is estimated based on the fee income associated with the commitments, which in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material as of March 31, 2023 or December 31, 2022. Note 4: Investment Securities Our investment securities portfolio consists of U.S. Treasury securities, obligations of state and political subdivisions, U.S. federal government agencies such as Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), U.S. government-sponsored enterprises ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB, U.S. Corporations and one asset-backed security collateralized by student loan pools. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, as reflected in the following table. A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of March 31, 2023 and December 31, 2022 is presented below. Held-to-maturity: Amortized Cost 1 Allowance for Credit Losses Net Carrying Amount Gross Unrealized Fair Value (in thousands) Gains (Losses) March 31, 2023 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 322,691 $ — $ 322,691 $ — $ ( 45,007 ) $ 277,684 CMOs issued by FHLMC 233,796 — 233,796 139 ( 24,973 ) 208,962 CMOs issued by FNMA 109,694 — 109,694 176 ( 3,729 ) 106,141 CMOs issued by GNMA 52,120 — 52,120 164 ( 3,020 ) 49,264 SBA-backed securities 1,977 — 1,977 — ( 99 ) 1,878 Debentures of government-sponsored agencies 145,898 — 145,898 — ( 22,149 ) 123,749 Obligations of state and political subdivisions 62,384 — 62,384 24 ( 8,728 ) 53,680 Corporate bonds 30,000 — 30,000 — ( 1,233 ) 28,767 Total held-to-maturity $ 958,560 $ — $ 958,560 $ 503 $ ( 108,938 ) $ 850,125 December 31, 2022 Securities of U.S. government-sponsored enterprises: 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 Debentures of government-sponsored agencies 145,823 — 145,823 — ( 26,467 ) 119,356 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 1 Amortized cost and fair values exclude accrued interest receivable of $ 2.6 million and $ 3.7 million at March 31, 2023 and December 31, 2022, 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 Page-12 guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions and corporate bonds, management considers: (i) issuer and/or guarantor credit ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. Based on the comprehensive analysis, no credit losses are expected. The following table summarizes the amortized cost of our portfolio of held-to-maturity securities issued by states and political subdivisions and corporate bonds by Moody's and/or Standard & Poor's bond ratings as of March 31, 2023. Obligations of state and political subdivisions Corporate bonds (in thousands) March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 AAA / Aaa $ 42,884 $ 42,986 $ — $ — AA / Aa 19,500 19,514 — — A2 / A — — 30,000 30,000 Total $ 62,384 $ 62,500 $ 30,000 $ 30,000 A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of March 31, 2023 and December 31, 2022 is presented below. Available-for-sale: Amortized Cost 1 Gross Unrealized Allowance for Credit Losses Fair Value (in thousands) Gains (Losses) March 31, 2023 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 106,151 $ 4 $ ( 10,423 ) $ — $ 95,732 CMOs issued by FHLMC 340,647 — ( 27,514 ) — 313,133 CMOs issued by FNMA 34,782 — ( 3,182 ) — 31,600 CMOs issued by GNMA 33,714 22 ( 2,743 ) — 30,993 SBA-backed securities 40,547 2 ( 2,578 ) — 37,971 Debentures of government- sponsored agencies 149,121 — ( 12,000 ) — 137,121 U.S. Treasury securities 11,909 — ( 1,385 ) — 10,524 Obligations of state and political subdivisions 116,549 84 ( 11,497 ) — 105,136 Corporate bonds 36,990 — ( 3,029 ) — 33,961 Asset-backed securities 1,419 — ( 57 ) — 1,362 Total available-for-sale $ 871,829 $ 112 $ ( 74,408 ) $ — $ 797,533 December 31, 2022 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 109,736 $ 3 $ ( 12,133 ) $ — $ 97,606 CMOs issued by FHLMC 347,437 — ( 33,682 ) — 313,755 CMOs issued by FNMA 36,172 — ( 3,852 ) — 32,320 CMOs issued by GNMA 35,120 — ( 3,296 ) — 31,824 SBA-backed securities 47,724 2 ( 3,371 ) — 44,355 Debentures of government- sponsored agencies 149,114 — ( 14,008 ) — 135,106 U.S. Treasury securities 11,904 — ( 1,635 ) 10,269 Obligations of state and political subdivisions 116,855 29 ( 14,761 ) — 102,123 Corporate bonds 36,990 — ( 3,714 ) — 33,276 Asset-backed securities 1,553 — ( 91 ) — 1,462 Total available-for-sale $ 892,605 $ 34 $ ( 90,543 ) $ — $ 802,096 1 Amortized cost and fair value exclude accrued interest receivable of $ 3.1 million and $ 3.2 million at March 31, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. Page-13 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 a nd fair value of investment debt securities by contractual maturity at March 31, 2023 and December 31, 2022 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties. March 31, 2023 December 31, 2022 Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 52 $ 51 $ 1,132 $ 1,124 $ 450 $ 446 $ 1,254 $ 1,239 After one but within five years 85,323 82,266 362,588 336,054 87,418 83,663 335,813 307,843 After five years through ten years 268,433 232,936 154,572 141,260 262,072 222,280 185,997 166,273 After ten years 604,752 534,872 353,537 319,095 622,267 538,850 369,541 326,741 Total $ 958,560 $ 850,125 $ 871,829 $ 797,533 $ 972,207 $ 845,239 $ 892,605 $ 802,096 There were no sales of investment securities in the first quarter of 2023 or 2022. Three months ended The carrying values of pledged investment securities are shown in the following table: (in thousands) March 31, 2023 December 31, 2022 Pledged to the State of California: Secure public deposits in compliance with the Local Agency Security Program $ 228,970 $ 235,587 Collateral for trust deposits 674 677 Collateral for Wealth Management and Trust Services checking account 567 569 Total investment securities pledged to the State of California 230,211 236,833 Bankruptcy trustee deposits pledged with Federal Reserve Bank 1,700 1,737 Pledged to FHLB Securities-Backed Credit Program 395,780 — Pledged to the Federal Reserve Bank Term Funding Program ("BTFP") 278,638 — Total pledged investment securities $ 906,329 $ 238,570 There were 397 and 407 securities in unrealized loss positions at March 31, 2023 and December 31, 2022, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below: Page-14 March 31, 2023 < 12 continuous months ≥ 12 continuous months Total securities in a loss position (in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Held-to-maturity: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 9,107 $ ( 316 ) $ 268,577 $ ( 44,691 ) $ 277,684 $ ( 45,007 ) CMOs issued by FHLMC 44,217 ( 1,091 ) 150,466 ( 23,882 ) 194,683 ( 24,973 ) CMOs issued by FNMA 37,106 ( 353 ) 41,538 ( 3,376 ) 78,644 ( 3,729 ) CMOs issued by GNMA 27,285 ( 1,802 ) 10,467 ( 1,218 ) 37,752 ( 3,020 ) SBA-backed securities — — 1,878 ( 99 ) 1,878 ( 99 ) Debentures of government-sponsored agencies 29,433 ( 561 ) 94,316 ( 21,588 ) 123,749 ( 22,149 ) Obligations of state and political subdivisions 9,000 ( 74 ) 41,565 ( 8,654 ) 50,565 ( 8,728 ) Corporate bonds — — 28,767 ( 1,233 ) 28,767 ( 1,233 ) Total held-to-maturity 156,148 ( 4,197 ) 637,574 ( 104,741 ) 793,722 ( 108,938 ) Available-for-sale: MBS pass-through securities issued by FHLMC, FNMA and GNMA 7,729 ( 233 ) 87,173 ( 10,190 ) 94,902 ( 10,423 ) CMOs issued by FHLMC 13,194 ( 263 ) 299,939 ( 27,251 ) 313,133 ( 27,514 ) CMOs issued by FNMA 279 ( 4 ) 31,321 ( 3,178 ) 31,600 ( 3,182 ) CMOs issued by GNMA 71 ( 1 ) 27,014 ( 2,742 ) 27,085 ( 2,743 ) SBA-backed securities 30 — 37,580 ( 2,578 ) 37,610 ( 2,578 ) Debentures of government- sponsored agencies — — 137,121 ( 12,000 ) 137,121 ( 12,000 ) U.S. Treasury securities — — 10,523 ( 1,385 ) 10,523 ( 1,385 ) Obligations of state and political subdivisions 4,486 ( 11 ) 92,776 ( 11,486 ) 97,262 ( 11,497 ) Corporate bonds — — 33,962 ( 3,029 ) 33,962 ( 3,029 ) Asset-backed securities — — 1,361 ( 57 ) 1,361 ( 57 ) Total available-for-sale 25,789 ( 512 ) 758,770 ( 73,896 ) 784,559 ( 74,408 ) Total securities at loss position $ 181,937 $ ( 4,709 ) $ 1,396,344 $ ( 178,637 ) $ 1,578,281 $ ( 183,346 ) Page-15 December 31, 2022 < 12 continuous months ≥ 12 continuous months Total securities in a loss position (in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Held-to-maturity: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 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 ) 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, 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 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 ) U.S. Treasury securities — — 10,269 ( 1,635 ) 10,269 ( 1,635 ) Obligations of state and political subdivisions 70,402 ( 9,459 ) 28,711 ( 5,302 ) 99,113 ( 14,761 ) Corporate Bonds — — 33,276 ( 3,714 ) 33,276 ( 3,714 ) Asset-backed securities — — 1,462 ( 91 ) 1,462 ( 91 ) Total available-for-sale 354,695 ( 33,887 ) 443,274 ( 56,656 ) 797,969 ( 90,543 ) Total securities at loss position $ 714,008 $ ( 57,620 ) $ 903,222 $ ( 159,961 ) $ 1,617,230 $ ( 217,581 ) As of March 31, 2023, the investment portfolio included 353 investment securities that had been in a continuous loss position for twelve months or more and 44 investment securities that had been in a loss position for less than twelve months. Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities. Our investment in obligations of state and political subdivisions bonds are deemed credit worthy after our comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or credit enhancements. At March 31, 2023, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost. No allowances for credit losses have been recognized on available-for-sale securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality at March 31, 2023. Page-16 Non-Marketable Securities Included in Other Assets FHLB Capital Stock As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $ 100 per share par value. We held $ 16.7 million of FHLB stock included in other assets on the consolidated statements of condition at both March 31, 2023 and December 31, 2022. 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 March 31, 2023 and December 31, 2022. On April 27, 2023, FHLB announced a cash dividend for the first quarter of 2023 at an annualized dividend rate of 7.00 % to be distributed on May 11, 2023. Cash dividends paid on FHLB capital stock are recorded as non-interest income. VISA Inc. Class B Common Stock As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at March 31, 2023 and December 31, 2022. These shares have a carrying value of zero and are restricted from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction and the uncertainty on the conversion rate to Class A shares, these shares lack a readily determinable fair value. When converting this Class B common stock to Class A common stock based on the estimated conversion rate of 1.5991 at March 31, 2023 and December 31, 2022, 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 $ 3.8 million and $ 3.5 million at March 31, 2023 and December 31, 2022, respectively. The conversion rate is subject to further adjustment upon the final settlement of the covered litigation against Visa Inc. and its member banks. As such, the fair value of these Class B shares can differ significantly from their converted values. For further information, refer to Note 8, Commitments and Contingencies. Low Income Housing Tax Credits We invest in low-income housing tax credit funds as a limited partner, which totaled $ 2.4 million and $ 2.5 million recorded in other assets as of March 31, 2023 and December 31, 2022, respectively. In the first three months of 2023, we recognized $ 151 thousand of low-income housing tax credits and other tax benefits, offset by $ 127 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of March 31, 2023, our unfunded commitments for these low-income housing tax credit funds totaled $ 347 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first three months of 2023 or 2022, as the value of the future tax benefits exceeds the carrying value of the investments. Page-17 Note 5: Loans and Allowance for Credit Losses on Loans The following table presents the amortized cost of loans by class as of March 31, 2023 and December 31, 2022. (in thousands) March 31, 2023 December 31, 2022 Commercial and industrial $ 195,964 $ 173,547 Real estate: Commercial owner-occupied 352,529 354,877 Commercial non-owner occupied 1,189,962 1,191,889 Construction 110,386 114,373 Home equity 86,572 88,748 Other residential 116,447 112,123 Installment and other consumer loans 60,468 56,989 Total loans, at amortized cost 1 2,112,328 2,092,546 Allowance for credit losses on loans ( 23,330 ) ( 22,983 ) Total loans, net of allowance for credit losses on loans $ 2,088,998 $ 2,069,563 1 Amortized cost includes net deferred loan origination costs of $ 2.1 million and $ 1.8 million at March 31, 2023 and December 31, 2022, respectively. Amounts are also net of unrecognized purchase discounts of $ 2.4 million and $ 2.6 million at March 31, 2023 and December 31, 2022, respectively. Amortized cost excludes accrued interest, which totaled $ 6.1 million at both March 31, 2023 and December 31, 2022, and is included in interest receivable and other assets in the consolidated statements of condition. Lending Risks Commercial and Industrial Loans - Commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable and inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress. A weakened economy, and resultant decreased consumer and/or business spending, may have an effect on the credit quality of commercial loans. Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow from either the business or investment property and supported by real property collateral. Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios. Furthermore, a large majority of our loans are guaranteed by the owners of the properties. Conditions in the real estate markets or downturn in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio. Construction Loans - Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loans include interest reserves that are used for the payment of interest during the development and marketing periods and are capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Page-18 Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project. Consumer Loans - Consumer loans primarily consist of home equity lines of credit, other residential loans, floating homes, and indirect luxury auto loans, along with a small number of installment loans. Our other residential loans include tenancy-in-common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores or collateral with high loan-to-value ratios. Credit Quality Indicators We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of “Special Mention” risk graded loans, or worse, are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows: Pass and Watch - Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt-service-coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period. Special Mention - Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification. Substandard - Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies. Doubtful - Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent. We regularly review our credits for accuracy of risk grades whenever we receive new information and at each quarterly and year-end reporting period. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly. The following tables present the loan portfolio by loan class, origination year and internal risk rating as of March 31, 2023 and December 31, 2022. The current year 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. Page-19 (in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost March 31, 2023 2023 2022 2021 2020 2019 Prior Total Commercial and industrial: Pass and Watch $ 25,074 $ 13,349 $ 5,414 $ 6,732 $ 17,105 $ 27,065 $ 87,069 $ 181,808 Special Mention 3 275 — — 2,743 4,395 1,089 8,505 Substandard — — — 1,141 — 585 3,925 5,651 Total commercial and industrial $ 25,077 $ 13,624 $ 5,414 $ 7,873 $ 19,848 $ 32,045 $ 92,083 $ 195,964 Gross current period charge-offs $ — $ — $ — $ — $ ( 3 ) $ — $ — $ ( 3 ) Commercial real estate, owner-occupied: Pass and Watch $ 371 $ 55,727 $ 51,067 $ 39,903 $ 47,400 $ 130,314 $ — $ 324,782 Special Mention — — 16,058 — 298 9,680 — 26,036 Substandard — — — — — 1,711 — 1,711 Total commercial real estate, owner-occupied $ 371 $ 55,727 $ 67,125 $ 39,903 $ 47,698 $ 141,705 $ — $ 352,529 Commercial real estate, non-owner occupied: Pass and Watch $ 5,456 $ 179,181 $ 210,546 $ 154,342 $ 162,111 $ 426,972 $ 48 $ 1,138,656 Special Mention — — 1,166 11,998 3,907 11,466 — 28,537 Substandard — — 2,246 — — 20,523 — 22,769 Total commercial real estate, non-owner occupied $ 5,456 $ 179,181 $ 213,958 $ 166,340 $ 166,018 $ 458,961 $ 48 $ 1,189,962 Construction: Pass and Watch $ 4,578 $ 44,693 $ 24,804 $ 27,198 $ — $ 9,113 $ — $ 110,386 Total construction $ 4,578 $ 44,693 $ 24,804 $ 27,198 $ — $ 9,113 $ — $ 110,386 Home equity: Pass and Watch $ — $ — $ — $ — $ — $ 966 $ 84,723 $ 85,689 Substandard — — — — — 228 655 883 Total home equity $ — $ — $ — $ — $ — $ 1,194 $ 85,378 $ 86,572 Other residential: Pass and Watch $ 6,223 $ 21,047 $ 14,386 $ 28,542 $ 21,750 $ 24,499 $ — $ 116,447 Total other residential $ 6,223 $ 21,047 $ 14,386 $ 28,542 $ 21,750 $ 24,499 $ — $ 116,447 Installment and other consumer: Pass and Watch $ 6,591 $ 18,531 $ 12,501 $ 5,443 $ 5,951 $ 10,501 $ 950 $ 60,468 Total installment and other consumer $ 6,591 $ 18,531 $ 12,501 $ 5,443 $ 5,951 $ 10,501 $ 950 $ 60,468 Gross current period charge-offs $ — $ ( 5 ) $ — $ ( 3 ) $ — $ ( 1 ) $ ( 2 ) $ ( 11 ) Total loans: Pass and Watch $ 48,293 $ 332,528 $ 318,718 $ 262,160 $ 254,317 $ 629,430 $ 172,790 $ 2,018,236 Total Special Mention $ 3 $ 275 $ 17,224 $ 11,998 $ 6,948 $ 25,541 $ 1,089 $ 63,078 Total Substandard $ — $ — $ 2,246 $ 1,141 $ — $ 23,047 $ 4,580 $ 31,014 Total Doubtful $ — $ — $ — $ — $ — $ — $ — $ — Totals $ 48,296 $ 332,803 $ 338,188 $ 275,299 $ 261,265 $ 678,018 $ 178,459 $ 2,112,328 Total gross current period charge-offs $ — $ ( 5 ) $ — $ ( 3 ) $ ( 3 ) $ ( 1 ) $ ( 2 ) $ ( 14 ) (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: Pass and Watch $ 15,349 $ 6,679 $ 7,603 $ 19,982 $ 5,362 $ 24,954 $ 84,655 $ 164,584 Special Mention 275 — — 2,272 3,836 — 402 6,785 Substandard — — 1,252 — — 625 301 2,178 Total commercial and industrial $ 15,624 $ 6,679 $ 8,855 $ 22,254 $ 9,198 $ 25,579 $ 85,358 $ 173,547 Commercial real estate, owner-occupied: Pass and Watch $ 54,188 $ 52,080 $ 40,369 $ 44,798 $ 29,856 $ 104,377 $ — $ 325,668 Special Mention — 16,199 — 304 5,255 4,493 — 26,251 Substandard — — — 1,160 — 1,699 — 2,859 Doubtful — — 99 — — — — 99 Total commercial real estate, owner-occupied $ 54,188 $ 68,279 $ 40,468 $ 46,262 $ 35,111 $ 110,569 $ — $ 354,877 Commercial real estate, non-owner occupied: Pass and Watch $ 177,822 $ 211,228 $ 155,278 $ 160,670 $ 129,166 $ 308,509 $ 57 $ 1,142,730 Special Mention — 1,172 12,097 3,934 678 9,290 — 27,171 Substandard — 2,264 — — — 19,724 — 21,988 Total commercial real estate, non-owner occupied $ 177,822 $ 214,664 $ 167,375 $ 164,604 $ 129,844 $ 337,523 $ 57 $ 1,191,889 Construction: Pass and Watch $ 49,262 $ 19,393 $ 28,861 $ 7,745 $ 9,112 $ — $ — $ 114,373 Total construction $ 49,262 $ 19,393 $ 28,861 $ 7,745 $ 9,112 $ — $ — $ 114,373 Home equity: Pass and Watch $ — $ — $ — $ — $ — $ 883 $ 86,971 $ 87,854 Substandard — — — — — 480 414 894 Total home equity $ — $ — $ — $ — $ — $ 1,363 $ 87,385 $ 88,748 Other residential: Pass and Watch $ 21,154 $ 14,547 $ 29,018 $ 21,890 $ 11,064 $ 14,450 $ — $ 112,123 Page-20 (in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost December 31, 2022 2022 2021 2020 2019 2018 Prior Total Total other residential $ 21,154 $ 14,547 $ 29,018 $ 21,890 $ 11,064 $ 14,450 $ — $ 112,123 Installment and other consumer: 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 Total loans: Pass and Watch $ 337,829 $ 316,949 $ 266,856 $ 261,577 $ 188,741 $ 459,651 $ 172,627 $ 2,004,230 Total Special Mention $ 275 $ 17,371 $ 12,097 $ 6,510 $ 9,769 $ 13,783 $ 402 $ 60,207 Total Substandard $ — $ 2,264 $ 1,252 $ 1,160 $ — $ 22,619 $ 715 $ 28,010 Total Doubtful $ — $ — $ 99 $ — $ — $ — $ — $ 99 Totals $ 338,104 $ 336,584 $ 280,304 $ 269,247 $ 198,510 $ 496,053 $ 173,744 $ 2,092,546 The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of March 31, 2023 and December 31, 2022. Loan Aging Analysis by Class (in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, non-owner occupied Construction Home equity Other residential Installment and other consumer Total March 31, 2023 30-59 days past due $ 822 $ — $ 924 $ — $ 399 $ — $ 1 $ 2,146 60-89 days past due — — — — — — — — 90 days or more past due — 33 — — 598 — 3 634 Total past due 822 33 924 — 997 — 4 2,780 Current 195,142 352,496 1,189,038 110,386 85,575 116,447 60,464 2,109,548 Total loans 1 $ 195,964 $ 352,529 $ 1,189,962 $ 110,386 $ 86,572 $ 116,447 $ 60,468 $ 2,112,328 Non-accrual loans 2 $ — $ 331 $ 924 $ — $ 768 $ — $ 3 $ 2,026 Non-accrual loans with no allowance $ — $ 331 $ 924 $ — $ 768 $ — $ — $ 2,023 December 31, 2022 30-59 days past due $ 3 $ — $ — $ — $ 319 $ 93 $ 5 $ 420 60-89 days past due — — — — 244 — — 244 90 days or more past due 264 — — — 414 — — 678 Total past due 267 — — — 977 93 5 1,342 Current 173,280 354,877 1,191,889 114,373 87,771 112,030 56,984 2,091,204 Total loans 1 $ 173,547 $ 354,877 $ 1,191,889 $ 114,373 $ 88,748 $ 112,123 $ 56,989 $ 2,092,546 Non-accrual loans 2 $ — $ 1,563 $ — $ — $ 778 $ — $ 91 $ 2,432 Non-accrual loans with no allowance $ — $ 1,563 $ — $ — $ 778 $ — $ 91 $ 2,432 1 There were no non-performing loans past due more than ninety days and accruing interest as of March 31, 2023 and December 31, 2022. 2 None of the non-accrual loans as of March 31, 2023 or December 31, 2022 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the three months ended March 31, 2023 and 2022. We reversed interest income totaling $ 16 thousand and less than one thousand for loans placed on non-accrual status during the three months ended March 31, 2023 and March 31, 2022, respectively. Collateral Dependent Loans The following table presents the amortized cost basis of individually analyzed collateral-dependent loans, which are all on non-accrual status, by class at March 31, 2023 and December 31, 2022. Amortized Cost by Collateral Type (in thousands) Commercial Real Estate Residential Real Estate Other Total 1 Allowance for Credit Losses March 31, 2023 Commercial real estate, owner-occupied $ 331 $ — $ — $ 331 $ — Commercial real estate, non-owner occupied 924 — — 924 — Home equity — 768 — 768 — Installment and other consumer — — 3 3 3 Total $ 1,255 $ 768 $ 3 $ 2,026 $ 3 December 31, 2022 Commercial real estate, owner-occupied $ 1,563 $ — $ — $ 1,563 $ — Home equity — 778 — 778 — Installment and other consumer — — 91 91 — Total $ 1,563 $ 778 $ 91 $ 2,432 $ — 1 There were no collateral-dependent residential real estate mortgage loans in process of foreclosure or in substance repossessed at March 31, 2023 or December 31, 2022. The weighted average loan-to-value of collateral dependent loans was approximately 42 % at both March 31, 2023 and December 31, 2022. Page-21 Loan Modifications We adopted ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023, as described in Note 2, Recently Adopted and Issued Accounting Standards. The amendments enhanced disclosures related to certain types of loan modifications for borrowers experiencing financial difficulty, including principal forgiveness, interest rate reductions, other-than-insignificant payment delays, and/or term extensions. There were no such modifications during the three months ended March 31, 2023 requiring disclosure. Allocation of the Allowance for Credit Losses on Loans The following table presents the details of the allowance for credit losses on loans segregated by loan portfolio segments as of March 31, 2023 and December 31, 2022. Allocation of the Allowance for Credit Losses on Loans (in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, non-owner occupied Construction Home equity Other residential Installment and other consumer Unallocated Total March 31, 2023 Modeled expected credit losses $ 1,137 $ 1,349 $ 7,409 $ 239 $ 459 $ 535 $ 574 $ — $ 11,702 Qualitative adjustments 784 1,291 5,292 1,780 79 42 305 2,032 11,605 Specific allocations 20 — — — — — 3 — 23 Total $ 1,941 $ 2,640 $ 12,701 $ 2,019 $ 538 $ 577 $ 882 $ 2,032 $ 23,330 December 31, 2022 Modeled expected credit losses $ 1,079 $ 1,497 $ 7,937 $ 453 $ 504 $ 571 $ 610 $ — $ 12,651 Qualitative adjustments 706 990 4,739 1,484 54 24 258 2,068 10,323 Specific allocations 9 — — — — — — — 9 Total $ 1,794 $ 2,487 $ 12,676 $ 1,937 $ 558 $ 595 $ 868 $ 2,068 $ 22,983 Allowance for Credit Losses on Loans Rollforward The following table discloses activity in the allowance for credit losses on loans for the periods presented. Allowance for Credit Losses on Loans Rollforward (in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, non-owner occupied Construction Home equity Other residential Installment and other consumer Unallocated Total Three months ended March 31, 2023 Beginning balance $ 1,794 $ 2,487 $ 12,676 $ 1,937 $ 558 $ 595 $ 868 $ 2,068 $ 22,983 Provision (reversal) 147 153 25 74 ( 20 ) ( 18 ) 25 ( 36 ) 350 (Charge-offs) ( 3 ) — — — — — ( 11 ) — ( 14 ) Recoveries 3 — — 8 — — — — 11 Ending balance $ 1,941 $ 2,640 $ 12,701 $ 2,019 $ 538 $ 577 $ 882 $ 2,032 $ 23,330 Three months ended March 31, 2022 Beginning balance $ 1,709 $ 2,776 $ 12,739 $ 1,653 $ 595 $ 644 $ 621 $ 2,286 $ 23,023 Provision (reversal) 72 ( 154 ) ( 438 ) 56 ( 46 ) ( 16 ) 22 19 ( 485 ) (Charge-offs) — — — — — — ( 2 ) — ( 2 ) Recoveries 3 — — 8 — — — — 11 Ending balance $ 1,784 $ 2,622 $ 12,301 $ 1,717 $ 549 $ 628 $ 641 $ 2,305 $ 22,547 Pledged Loans Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $ 1.308 billion and $ 1.298 billion at March 31, 2023 and December 31, 2022, respectively. In addition, we pledge eligible TIC loans, which totaled $ 106.2 million and $ 105.0 million at March 31, 2023 and December 31, 2022, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). For additional information, see Note 6, Borrowings. Page-22 Related Party Loans The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These transactions, including loans, are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Related party loans totaled $ 6.4 million at March 31, 2023 and at December 31, 2022. In addition, undisbursed commitments to related parties totaled $ 562 thousand at both March 31, 2023 and December 31, 2022. Note 6: Short-Term Borrowings and Other Obligations Federal Home Loan Bank – As of March 31, 2023 and December 31, 2022, the Bank had total lines of credit with the FHLB totaling $ 1.037 billion and $ 711.6 million, respectively, based on eligible collateral of certain loans and investment securities. Federal Funds Lines of Credit – The Bank had unsecured lines of credit with correspondent banks for overnight borrowings totaling $ 150.0 million at March 31, 2023 and December 31, 2022. In general, interest rates on these lines approximate the federal funds target rate. Federal Reserve Bank – The Bank has a line of credit with the Federal Reserve Bank of San Francisco ("FRBSF") secured by certain residential loans. At March 31, 2023 and December 31, 2022, the Bank had total borrowing capacity under this line of $ 60.6 million and $ 58.7 million, respectively. In addition, under the Federal Reserve’s new BTFP facility, the Bank could borrow up to an additional $ 283.6 million based on the par value of pledged investment securities as of March 31, 2023. Other Obligations – Finance lease liabilities totaling $ 402 thousand and $ 439 thousand at March 31, 2023 and December 31, 2022, respectively, are included in short-term borrowings and other obligations in the consolidated statements of condition. See Note 8, Commitments and Contingencies, for additional information. Outstanding balances and weighted average interest rates on short-term borrowings and other obligations as of March 31, 2023 and December 31, 2022 are summarized in the following table. March 31, 2023 December 31, 2022 (dollars in thousands) Outstanding Balance Weighted Average Rate Outstanding Balance Weighted Average Rate FHLB - short-term borrowings $ 405,400 5.17 % $ 112,000 4.65 % Federal funds lines of credit — — % — — % FRBSF - federal funds purchased — — % — — % FRBSF - short-term borrowings under the BTFP — — % — — % Other obligations (finance leases) 402 1.89 % 439 1.86 % Total short-term borrowings and other obligations $ 405,802 5.17 % $ 112,439 4.64 % Note 7: Stockholders' Equity Dividends On January 20, 2023, Bancorp declared a $ 0.25 per share cash dividend, paid February 10, 2023 to shareholders of record at the close of business on February 3, 2023. Subsequent to quarter end on April 21, 2023, Bancorp declared a $ 0.25 per share cash dividend, payable on May 12, 2023 to shareholders of record at the close of business on May 5, 2023. Share-Based Payments The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period, which is generally the vesting period, with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards, Page-23 which equals the grant date price, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate the recording of stock-based compensation when the award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the exercisability of the stock options, which are based on the scheduled vesting period. Performance-based stock awards (restricted stock) are issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0 % to 200 % of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period. We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable. The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense. Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements. During the three months ended March 31, 2023, we withheld 2,847 shares totaling $ 82 thousand at a weighted-average price of $ 28.74 for cashless exercises. During the three months ended March 31, 2022, we withheld 8,003 shares totaling $ 278 thousand at a weighted-average price of $ 34.76 for cashless exercises. Shares withheld under net settlement arrangements are available for future grants. Share Repurchase Program Bancorp has an approved share repurchase program with $ 34.7 million outstanding at March 31, 2023. There have been no repurchases in 2023. Cumulative shares repurchased under the current program totaled 618,991 shares as of March 31, 2023 at an average price of $ 36.04 per share. Note 8: Commitments and Contingent Liabilities Financial Instruments with Off-Balance Sheet Risk We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements. Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property. Page-24 The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows: (in thousands) March 31, 2023 December 31, 2022 Commercial lines of credit $ 266,082 $ 292,204 Revolving home equity lines 218,353 218,907 Undisbursed construction loans 32,471 43,179 Personal and other lines of credit 10,851 10,842 Standby letters of credit 1,720 1,738 Total unfunded loan commitments and standby letters of credit $ 529,477 $ 566,870 We record an allowance for credit losses on unfunded loan commitments at the balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and expected loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments totaled $ 1.3 million and $ 1.5 million as of March 31, 2023 and December 31, 2022, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition. The $ 174 thousand reversal of the provision for credit losses on unfunded loan commitments in the first quarter of 2023 was due primarily to a $ 37.4 million decrease in total unfunded commitments, compared to a $ 318 thousand provision reversal in the first quarter of 2022, due mainly to an improvement in the underlying economic forecasts at the time. Leases We lease premises under long-term non-cancelable operating leases with remaining terms of 4 months to 19 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised. We lease certain equipment under finance leases with initial terms of 3 years to 5 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees. The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities. (in thousands) March 31, 2023 December 31, 2022 Operating leases: Operating lease right-of-use assets $ 22,854 $ 24,821 Operating lease liabilities $ 25,433 $ 26,639 Finance leases: Finance lease right-of-use assets $ 606 $ 616 Accumulated amortization ( 214 ) ( 187 ) Finance lease right-of-use assets, net 1 $ 392 $ 429 Finance lease liabilities 2 $ 402 $ 439 1 Included in premises and equipment in the consolidated statements of condition. 2 Included in borrowings and other obligations in the consolidated statements of condition. The following table shows supplemental disclosures of noncash investing and financing activities for the periods presented. Three months ended (in thousands) March 31, 2023 March 31, 2022 Right-of-use assets obtained in exchange for operating lease liabilities $ — $ 1,120 Page-25 The following table shows components of operating and finance lease cost. Three months ended (in thousands) March 31, 2023 March 31, 2022 Operating lease cost $ 1,610 $ 1,284 Variable lease cost — — Total operating lease cost 1 $ 1,610 $ 1,284 Finance lease cost: Amortization of right-of-use assets 2 $ 37 $ 31 Interest on finance lease liabilities 3 2 1 Total finance lease cost $ 39 $ 32 Total lease cost $ 1,649 $ 1,316 1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income. 2 Included in depreciation and amortization in the consolidated statements of comprehensive income. 3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income. The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of March 31, 2023. 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) March 31, 2023 Year Operating Leases Finance Leases 2023 $ 3,997 $ 115 2024 4,585 153 2025 3,875 106 2026 3,129 36 2027 2,845 5 Thereafter 9,693 — Total minimum lease payments 28,124 415 Amounts representing interest (present value discount) ( 2,691 ) ( 13 ) Present value of net minimum lease payments (lease liability) $ 25,433 $ 402 Weighted average remaining term (in years) 7.6 2.9 Weighted average discount rate 2.27 % 1.89 % Litigation Matters Bancorp may be party to legal actions that arise from time to time in the normal course of business. Bancorp's management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has recently been a party that will have a material adverse effect on the financial condition or results of operations of Bancorp or the Bank. The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us. In 2012, Visa reached a $ 4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. During its six month fiscal reporting period ended March 31, 2023, Visa deposited an additional $ 350 million into the litigation escrow account to address claims of certain merchants who opted out of the Amended Settlement Agreement for a balance of $ 1.6 billion. Combined with funds previously deposited with the court, these funds are expected to cover the settlement payment obligations. Page-26 The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities. The final conversion rate is subject to change depending on the final settlement payments, and the full effect on member banks is still uncertain. Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims as contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote. Note 9: Derivative Financial Instruments and Hedging Activities We entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates. Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. As of March 31, 2023, 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. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest receivable on the swaps totaled $ 6 thousand at March 31, 2023 and $ 5 thousand at December 31, 2022. Information on our derivatives follows: Asset Derivatives Liability Derivatives (in thousands) March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 Fair value hedges: Interest rate contracts notional amount $ 9,450 $ 12,046 $ 2,340 $ — Interest rate contracts fair value 1 $ 404 $ 602 $ 23 $ — 1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology. The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of March 31, 2023 and December 31, 2022. Carrying Amounts of Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans (in thousands) March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 Loans $ 11,284 $ 11,319 $ ( 506 ) $ ( 726 ) Page-27 The following table presents the net losses recognized in interest income on loans on the consolidated statements of comprehensive income related to our derivatives designated as fair value hedges. Three months ended (in thousands) March 31, 2023 March 31, 2022 Interest and fees on loans 1 $ 24,258 $ 23,677 (Decrease) increase in fair value of designated interest rate swaps due to LIBOR interest rate movements $ ( 221 ) $ 757 Receivable (payment) on interest rate swaps 51 ( 85 ) Increase (decrease) in fair value hedging adjustment of hedged loans 221 ( 752 ) Decrease in value of yield maintenance agreement ( 2 ) ( 3 ) Net gain (losses) on fair value hedging relationships recognized in interest income $ 49 $ ( 83 ) 1 Represents the income line item in the statement of comprehensive income in which the effects of fair value hedges are recorded. Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes. Information on financial instruments that are eligible for offset in the consolidated statements of condition follows: Offsetting of Financial Assets and Derivative Assets Gross Amounts Net Amounts of Gross Amounts Not Offset in Gross Amounts Offset in the Assets Presented the Statements of Condition of Recognized Statements of in the Statements Financial Cash Collateral ( in thousands) Assets Condition of Condition Instruments Received Net Amount March 31, 2023 Counterparty $ 404 $ — $ 404 $ ( 23 ) $ — $ 381 December 31, 2022 Counterparty $ 602 $ — $ 602 $ — $ — $ 602 Offsetting of Financial Liabilities and Derivative Liabilities Gross Amounts Net Amounts of Gross Amounts Not Offset in Gross Amounts Offset in the Liabilities Presented the Statements of Condition of Recognized Statements of in the Statements Financial Cash Collateral (in thousands) Liabilities 1 Condition of Condition 1 Instruments Pledged Net Amount March 31, 2023 Counterparty $ 23 $ — $ 23 $ ( 23 ) $ — $ — December 31, 2022 Counterparty $ — $ — $ — $ — $ — $ — 1 Amounts exclude accrued interest on swaps. For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 2022 Form 10-K filed with the SEC on March 16, 2023. Page-28