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Item 7. Management’s Discussion and Analysis

2024-03-14 compared with 2023-03-16 · 335 added, 323 removed, 511 unchanged (56% of the section changed)

9 unchanged sentences

The allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis at the balance sheet date to present the net amount of loans expected to be collected.

The allowance for losses on unfunded loan commitments is based on estimates of probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity and loss rates as determined for pooled funded loans.

The allowance for losses on unfunded loan commitments is based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity, and loss rates as determined for pooled funded loans.

The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities.

Management estimates these allowances quarterly using relevant available information, from

internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Management estimates these allowances quarterly using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Credit loss experience among the Bank and peer groups provides the basis for the estimation of expected credit losses.

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Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable and supportable forecasts of economic conditions to differ from the conditions that existed during the historical period included in the development of PD and LGD.

Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which decreased to 4.1% at December 31, 2022 from 5.8% at December 31, 2021.

Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which increased to 5.1% at December 31, 2023, from 4.1% at December 31, 2022.

The ACL model incorporates a one-year forecast.

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

We performed a sensitivity analysis as of December 31, 2022 and determined that a 1% change (e.g., 4.5% to 5.5%) in the forecasted quarterly unemployment rates over the next four quarters resulted in a 6% change to our allowance for credit losses on loans.

This impact does not consider other assumption changes to either the quantitative factors, such as probability of default, loss given default, loan mix or cash flows, prepayment/curtailment rates, and individually analyzed loans, or qualitative factors as discussed in Note 1 - Summary of Significant Accounting Policies.

We performed a sensitivity analysis as of December 31, 2023, and estimated that a 100 basis point change (e.g., 4.5% to 5.5%) in the forecasted unemployment rates over the next four quarters would result in about a 5% change to our allowance for credit losses on loans.

This impact does not consider changes to other assumptions for either the quantitative factors, such as probability of default, loss given default, loan mix or cash flows, prepayment/curtailment rates, and individually analyzed loans, or qualitative factors as discussed in Note 1 - Summary of Significant Accounting Policies.

Additionally, b ecause current economic conditions and forecasts can change, as future events are inherently difficult to predict, the estimated credit losses on loans and unfunded commitments could change significantly.

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For information regarding critical estimates related to our allowance for credit losses methodology, the provision for credit losses, and risks to asset quality and lending activity, see ITEM 1A - Risk Factors, the Allowance for Credit Losses section in ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations,

We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate.

These tax laws are complex and subject to different interpretations by us and the government taxing authorities.

We review our provision for income tax expense monthly and calculate the carrying value of deferred tax assets and liabilities quarterly.

In establishing a provision for income tax expense, we make judgments and interpretations about the application of these inherently complex tax laws.

In addition, our estimates include making judgements about when future items will affect taxable income.

Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.

For further information on our tax assets and liabilities, and related provision for income taxes, see Note 1 - Summary of Significant Accounting Policies and Note 11 - Income Taxes in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.

Fair Value Measurements

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We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

The classification of assets and liabilities

within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable.

The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable.

Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.

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When observable market prices and data are not fully available, management judgment is necessary to estimate fair value.

In addition, changes in the market conditions may reduce the availability of quoted prices or observable data.

In addition, changes in market conditions may reduce the availability of quoted prices or observable data.

Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement.

Fair value is discussed further in Note 1 - Summary of Significant Accounting Policies, and Note 9 - Fair Value of Assets and Liabilities in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.

Business Combinations

Business combinations are accounted for using the acquisition method of accounting where the assets and liabilities of the acquired entities have been recorded at their estimated fair values at the date of acquisition.

Goodwill represents the excess of the purchase price over the fair value of net assets acquired.

The purchase price allocation process requires significant judgment in the estimation of the fair values of the assets acquired and the liabilities assumed.

Management may obtain third-party valuations such as appraisals or discounted cash flow analyses, or we may derive fair values internally using techniques as discussed in Fair Value Measurements above.

Management assesses qualifications of third-party valuation specialists, reviews assumptions applied and takes responsibility for the results of fair value estimates.

Merger-related expenses include costs directly related to merger activity such as legal and professional fees, system consolidation and conversion costs, and compensation costs associated with employee severance and retention incentives.

We account for merger-related costs as expenses in the periods in which the costs are incurred and the services received.

Accounting policies and estimates are discussed further in Note 1 - Summary of Significant Accounting Policies and Note 18 - Merger in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.

Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

Goodwill is tested annually for impairment, or more often if conditions change and indicate a possible impairment.

Significant judgment is used in the assessment of goodwill, both in a qualitative assessment and a quantitative assessment.

Assessments of goodwill often require the use of fair value estimates, which are dependent upon various factors, including estimates concerning the Company’s long-term growth prospects and comparability to industry data.

Uncertainty and imprecision in estimates can affect the estimated fair value of the reporting unit in a goodwill assessment.

Additionally, various events or circumstances could have a negative effect on the estimated fair value of a reporting unit, such as declines in business performance, increases in credit losses, and deterioration in economic or market conditions, which may result in a material impairment charge to earnings in future periods.

In 2023, the Company assessed goodwill for impairment by performing a quantitative assessment, which encompassed an income approach and a market approach.

The income approach considered such factors as the estimated future cash flows of our reporting unit based on internal long-term forecasts, assumptions concerning potential synergies and other economic benefits, and a discount rate used to present value such cash flows to determine the fair value.

The market approach utilized observable market data from comparable public companies, including price-to-tangible book value ratios, to estimate the Company’s fair value.

The market approach also incorporated a control premium to represent the Company’s expectation of a hypothetical acquisition.

Management used judgment in the selection of comparable companies and included those with similar business activities, and related operating environments.

In addition, the selection and weighting of the various fair value techniques may result in higher or lower estimates of fair value.

Judgment is applied in determining the weightings between the income approach and the market approach in determining fair value.

The results of this assessment indicated the value of goodwill was not impaired as of our annual impairment testing date of November 30, 2023, and there were no changes to our assessment through December 31, 2023.

RESULTS OF OPERATIONS

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Stockholders' equity $ 439,062 $ 412,092

Book value per share $ 27.17 $ 25.71

Asset quality ratios:

Allowance for credit losses to total loans 1.21 % 1.10 %

Allowance for credit losses to total loans, excluding SBA PPP loans 2

1.10 % 1.07 %

Allowance for credit losses to non-accrual loans 3.15x 9.45x

Non-accrual loans to total loans 0.39 % 0.12 %

Classified loans (graded substandard and doubtful) as a percentage of total loans 1.56 % 1.34 %

Capital ratios:

Equity to total assets 11.54 % 9.94 %

Tangible common equity to tangible assets 9.73 % 8.21 %

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Net interest income $ 102,761 $ 127,492 $ 104,951

(Reversals of) provision for credit losses on loans and unfunded loan commitments, net (381) (2,441) 6,164

Provision for (reversal of) credit losses on loans 2,575 (63) (1,449)

Reversal of credit losses on unfunded loan commitments (342) (318) (992)

Non-interest income 4,989 10,905 10,132

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Efficiency ratio 73.76 % 54.39 % 63.12 %

Net charge-offs (recoveries) $ 386 $ (23) $ (93)

Net charge-offs (recoveries) to average loans 0.02 % NM NM

Cash dividend payout ratio on common stock 1

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Cash dividends per common share $ 1.00 $ 0.98 $ 0.94

1 Includes SBA PPP loans of $3.5 million at December 31, 2022 and $111.2 million at December 31, 2021.

2 The allowance for credit losses to total loans, excluding SBA-guaranteed PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for credit losses.

Refer to footnote 1 above for SBA PPP totals.

3 2022 and 2021 included $858 thousand (or $604 thousand, net of taxes) and $6.5 million (or $4.9 million, net of taxes), respectively, in merger-related and conversion costs.

4 Calculated as dividends on common shares divided by basic net income per common share.

1 Calculated as cash dividends per common share divided by basic net income per common share.

NM - Not meaningful.

Executive Summary

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Diluted earnings were $1.24 per share in 2023, compared to $2.92 per share in 2022.

Results for 2023 were significantly impacted by industry disruptions and the aftermath of a few regional bank failures in the first half of the year, causing some deposit run-off and a shift to higher cost funding sources, coupled with the FOMC's monetary policy resulting in rapid interest rate increases impacting both our funding costs and lending activity.

However, we took several actions to reposition our balance sheet and improve our net interest margin, and, although there can be no assurance given, believe we laid the foundation for improved earnings in 2024, as discussed below.

The following are highlights of operating and financial performance for the year ended December 31, 2023:

• Merger-related and conversion costs reduced net income by $604 thousand, or 4 cents per share in 2022, compared to $4.9 million, or 34 cents per share in 2021.

As shown in the reconciliation of GAAP to non-GAAP financial measu res on page 28, year- to-date return on average assets of 1.08% and return on average equity of 11.16% excluding these costs would have been 1.10% and 11.31%, respectively, compared to 1.08% and 9.67%, respectively, in 2021.

• Loans decreased by $163.1 million in 2022, or 7%, to $2.093 billion as of December 31, 2022, from $2.256 billion as of December 31, 2021.

Loan originations of $240.2 million in 2022 were the second highest on record, while payoffs were uncharacteristically high.

Payoffs included both Paycheck Protection Program ("P PP") loans and $258.5 million of non-PPP loans, many of which were outside the Bank's control and resulted from activities such as sales of businesses and properties, cash repayments, and project completions.

Shortly after December 31, we originated $45 million in commercial loans that were in process at year-end, $20 million of which was syndicated to a participant bank.

• Credit quality remained strong and improved during 2022, with classified loans decreasing $8.1 million and non-accrual loans representing 0.12% of the total loans as of December 31, 2022, compared to 0.37% as of December 31, 2021.

Non-accrual loans dropped by $5.9 million (or 71%) in 2022, substantially due to the payoff of three commercial real estate loans from two borrowers.

Subsequent to year-end, an additional $1.2 million in non-accrual loans paid off.

In 2022 and 2021, we recorded net reversals of the provision for credit losses on loans of $63 thousand and $1.4 million, respectively.

In addition, in 2022 and 2021, we recorded net reversals of the provision for credit losses on unfunded commitments of $318 thousand and $992 thousand, respectively.

• Deposits decreased by $235.2 million to $3.573 billion as of December 31, 2022, compared to $3.809 billion as of December 31, 2021, as the Bank continued to carefully manage deposit costs.

The decline was a result of anticipated outflows due to planned business activities by a few large clients and some customers moving into alternative investments.

At the end of 2021, the Bank held $347.6 million in cash and cash equivalents, and $173.1 million in off-balance sheet amounts with deposit networks in anticipation of expected and potential unexpected deposit outflows during 2022.

There were no balances held with deposit networks at the end of 2022.

Despite the decrease, non-interest bearing deposits to total deposits increased slightly to 51.5% as of December 31, 2022, compared to 50.2% as of December 31, 2021.

Cost of deposits remained low at 0.06% in 2022, down slightly from 0.07% in 2021.

• Net interest income totaled $127.5 million and $105.0 million in 2022 and 2021, respectively.

The $22.5 million increase from the prior year was primarily due to higher balances in the investment securities and commercial real estate loan portfolios, a full year of net interest income from acquired earning assets of American River Bankshares ("AMRB"), compared to five months in 2021, and the early redemption of subordinated debt that generated $1.4 million of interest expense in 2021.

The tax-equivalent net interest margin decreased by 6 basis points to 3.11% in 2022, compared to 3.17% in 2021, as the proportion of average investment securities to average total interest-earning assets grew from 26% in 2021 to 44% in 2022 and fee income from PPP loans declined.

• The efficiency ratio was 54.39% in 2022, compared to 63.12% in 2021.

As shown in the reconciliation of GAAP to non-GAAP financial measures on page 28, t he efficiency ratios excluding merger-related and conversion costs would have been 53.77% and 57.51% in 2022 and 2021, respectively.

• After careful consideration, the Bank decided to close four brick-and-mortar branch locations in March 2023.

The acquisition of American River Bankshares resulted in an overlap in the Bank’s branch network in Santa Rosa and Healdsburg, prompting branch consolidations within Northern Sonoma County.

In addition, our

Tiburon and Buckhorn branches in Southern Marin and Amador counties are close to other branches that can serve our customers.

These closures fulfill the remaining expense savings anticipated from the acquisition, improve efficiency and optimize our delivery channels while generating savings that will help to fund strategic initiatives going forward.

The expected pre-tax savings in 2023 from the branch closures, net of accelerated costs, is approximately $470 thousand, and future annual pre-tax savings are expected to be approximately $1.4 million.

• All capital ratios were above regulatory requirements for a well-capitalized institution.

The total risk-based capital ratio for Bancorp was 15.9% at December 31, 2022 and 14.6% at December 31, 2021.

Tangible common equity to tangible assets declined to 8.2% at December 31, 2022 from 8.8% at December 31, 2021, primarily due to $71.7 million increase in after-tax unrealized losses on available-for-sale securities associated with interest rate changes since December 31, 2021, partially offset by incremental earnings and the smaller balance sheet in 2022.

The total risk-based capital ratio for the Bank was 15.7% at December 31, 2022 and 14.4% at December 31, 2021.

• The Board of Directors declared a cash dividend of $0.25 per share on January 20, 2023.

This is the 71 st consecutive quarterly dividend paid by Bank of Marin Bancorp.

The cash dividend was paid on February 10, 2023 to shareholders of record at the close of business on February 3, 2023.

• As recent events in the marketplace unfold, including the closures of Silicon Valley Bank on March 10, 2023 followed by Signature Bank on March 12, 2023, the Bank remains focused on our banking relationships.

We believe our deposit franchise is sound, with a focus on core deposits from community-based customers with whom we have strong relationships.

Those relationships are centered around the needs of local corporations, business operators and real estate investors, with very little exposure to technology start-up companies and no exposure to digital assets, two areas of risk that strongly influenced the aforementioned closures.

On March 13, 2023, we initiated an outreach effort to answer our customers' questions or concerns about the recent events, strengths of the Bank, and other matters such as FDIC insurance coverage.

In February 2023, we enhanced our borrowing capacity at the FHLB by pledging certain held-to-maturity securities to the Securities-Backed Credit Program, increasing our total immediate contingent funding sources to approximately $2.0 billion, or 59% of total deposits as of February 28, 2023.

The Bank also has the option to add another $267 million to its borrowing capacity through the Federal Reserve’s new Bank Term Funding Program ("BTFP").

Statement Regarding Use of Non-GAAP Financial Measures

In this Form 10-K, Bancorp's financial results are presented in accordance with GAAP and refer to certain non-GAAP financial measures.

Management believes that presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of Bancorp's operating results and comparison of operating results across reporting periods.

Management also uses non-GAAP financial measures to establish budgets and manage Bancorp's business.

A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below.

Reconciliation of GAAP and Non-GAAP Financial Measures

Year ended December 31,

(in thousands, except share data;

unaudited) 2022 2021 2020

Net income (GAAP) $ 46,586 $ 33,228 $ 30,242

Merger-related and conversion costs:

Personnel and severance 393 3,005 —

Professional services 67 1,976 —

Data processing 77 1,127 —

Other 321 350 —

Total merger costs before tax benefits 858 6,458 —

Income tax benefit of merger-related expenses (254) (1,547) —

Total merger-related and conversion costs, net of tax benefits 604 4,911 —

Comparable net income (non-GAAP) $ 47,190 $ 38,139 $ 30,242

Diluted earnings per share

Weighted average diluted shares 15,969 14,422 13,617

Diluted earnings per share (GAAP) $ 2.92 $ 2.30 $ 2.22

Merger-related and conversion costs, net of tax benefits 0.04 0.34 —

Comparable diluted earnings per share (non-GAAP) $ 2.96 $ 2.64 $ 2.22

Return on average assets

Average assets $ 4,304,511 $ 3,537,163 $ 2,897,165

Return on average assets (GAAP) 1.08 % 0.94 % 1.04 %

Comparable return on average assets (non-GAAP) 1.10 % 1.08 % 1.04 %

Return on average equity

Average stockholders' equity $ 417,344 $ 394,363 $ 351,494

Return on average equity (GAAP) 11.16 % 8.43 % 8.60 %

Comparable return on average equity (non-GAAP) 11.31 % 9.67 % 8.60 %

Efficiency ratio

Non-interest expense (GAAP) $ 75,269 $ 72,638 $ 58,458

Merger-related expenses (858) (6,458) —

Non-interest expense (non-GAAP) $ 74,411 $ 66,180 $ 58,458

Net interest income $ 127,492 $ 104,951 $ 96,659

Non-interest income $ 10,905 $ 10,132 $ 8,550

Efficiency ratio (GAAP) 54.39 % 63.12 % 55.56 %

Comparable efficiency ratio (non-GAAP) 53.77 % 57.51 % 55.56 %

• Over the course of 2023, balance sheet restructuring activities included the sale of $214.5 million in lower yielding available-for-sale securities, offsetting some losses with a gain from the sale of our remaining investment in Visa Inc.

Class B restricted common stock, for a net pretax loss of $5.9 million.

At the time, the sales proceeds were largely directed toward new loan originations and repayment of borrowings, which is expected to accelerate the improvement of the net interest margin over the coming quarters through higher interest earned on cash and loans and lower borrowing costs.

In addition, the Bank entered into various interest rate swap agreements with notional values totaling $101.8 million to hedge balance sheet interest rate sensitivity and protect certain of our fixed-rate available-for-sale securities against changes in fair value related to changes in the benchmark interest rate.

These interest rate swaps were accretive to net interest income in 2023.

• Loan balances of $2.074 billion as of December 31, 2023, were down slightly from $2.093 billion as of December 31, 2022.

Loan originations were $144.1 million in 2023, compared to $240.2 million in 2022.

Excluding paycheck protection loans ("PPP loans"), payoffs were $107.1 million in 2023, compared to $258.5 million in 2022.

PPP loan payoffs during 2023 and 2022 were $2.7 million and $107.7 million, respectively.

In addition, loan amortization from scheduled repayments, partially offset by the net utilization of lines of credit, reduced loans by $53.1 million in 2023.

• Our loan portfolio continues to perform well, with classified loans at 1.56% of total loans as of December 31, 2023, compared to 1.34% as of December 31, 2022.

Non-owner-occupied commercial real estate loans made up $23.7 million, or 73%, of total classified loans as of December 31, 2023.

Non-accrual loans were 0.39% and 0.12% of total loans as of December 31, 2023 and 2022, respectively.

The Bank continues to proactively identify and manage credit risk within the loan portfolio.

• A $2.6 million provision for credit losses on loans in 2023 brought the allowance for credit losses to 1.21% of total loans, compared to 1.10% as of December 31, 2022 .

The increase was due primarily to adjustments to qualitative risk factors and specific allowances on loans with unique credit risk characteristics not indicative of pooled loans, as discussed below.

This compares to a $63 thousand provision reversal in 2022.

• Total deposits decreased by $283.3 million to $3.290 billion as of December 31, 2023, from $3.573 billion as of December 31, 2022.

As discussed further below, the decline was primarily due to a combination of outflows related to planned business acti vities, some balance declines associated with loan relationships exited during the year, and a number of customers moving cash into alternative investments to capture higher returns, a portion of which was directed to our own wealth management group.

In addition, we had s ome deposit run-off as a result of regional bank failures and industry disruptions in the first half of the year.

Non-interest bearing deposits c ontinue to remain strong compared to our peers and made up 43.8% of total deposits as of December 31, 2023, compared to 51.5% as of December 31, 2022.

We believe we are appropriately competitive in regard to deposit pricin g, given our relationship banking model, which differentiates Bank of Marin through exceptional service.

Estimated uninsured and/or uncollateralized deposits comprised 28% of total deposits as of December 31, 2023.

• Total borrowings decreased by $86.0 million to $26.0 million, compared to $112.0 million at December 31, 2022, as part of the strategic balance sheet restructuring in 2023.

Net available funding sources of $2.0 billion provided 213% coverage of uninsured deposits as of December 31, 2023.

• The tax-equivalent net interest margin was 2.63% for 2023, compared to 3.11% for 2022.

The decrease was primarily attributed to higher deposit and borrowing costs, partially offset by higher yields on loans and investment securities.

• All capital ratios were above well-capitalized regulatory requirements.

Bancorp's total risk-based capital ratio was 16.89% as of December 31, 2023, compared to 15.90% as of December 31, 2022.

Tangible common equity to tangible assets ("TCE ratio") increased to 9.73% as of December 31, 2023, from 8.21% as of December 31, 2022.

While we do not intend to sell our held-to-maturity securities, the TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.80% as of December 31, 2023, compared to 6.15% as of December 31, 2022 (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures ).

• The Board of Directors declared a cash dividend of $0.25 per share on January 25, 2024, which was the 75 th consecutive quarterly dividend paid by Bancorp.

The dividend was paid on February 15, 2024 to shareholders of record at the close of business on February 8, 2024.

Net Interest Income

Net interest income is the interest earned on loans, investment securities and other interest-earning assets minus interest expense incurred on deposits and other interest-bearing liabilities.

Net interest income is affected by changes in general market interest rates and by changes in the amounts and composition of interest-earning assets and interest-bearing liabilities.

Interest rate changes can create fluctuations in net interest income and/or margin due to an imbalance in the timing of repricing or maturity of assets or liabilities.

We manage interest rate risk exposure with the goal of optimizing the effect of interest rate volatility on net interest income.

Net interest income is the interest earned on loans, investments and other interest-earning assets minus interest expense incurred on deposits and other interest-bearing liabilities.

Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities.

Interest rate changes can create fluctuations in net interest income and/or margin due to an imbalance in the timing of repricing or maturity of assets and liabilities.

We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income.

Net interest margin is expressed as net interest income divided by average interest-earning assets.

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6 Average balances and rate consider $13.9 million in FHLB borrowings acquired from AMRB that were redeemed on August 25, 2021.

7 Net loan origination (costs) fees included in interest income totaled $(1.3) million, $1.1 million, and $7.0 million in 2023, 2022, and 2021, respectively.

Analysis of Changes in Net Interest Income

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Mix variances are attributable to the change in yields or rates multiplied by the change in average balances.

2022 compared to 2021 2021 compared to 2020

2023 compared to 2022

2022 compared to 2021

(in thousands, unaudited) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total

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Net interest income totaled $102.8 million in 2023, compared to $127.5 million in 2022.

The $24.7 million decrease from the prior year was primarily due to higher funding costs of $34.2 million, partially offset by higher average yields on earning assets.

The tax-equivalent net interest margin was 2.63% for 2023, compared to 3.11% for 2022.

The decrease was primarily attributed to higher deposit and borrowing costs, partially offset by higher yields on loans and investment securities.

Average interest-bearing deposit balances decreased by $115.2 million, while the average rate increased by 133 basis points, decreasing the margin by 58 basis points.

Average borrowings and other obligations increased by $219.3 million, while the average cost increased by 125 basis points, decreasing the net interest margin by 29 basis points.

Average loan balances decreased by $75.5 million, while the average yield increased by 36 basis points, increasing the margin by 23 basis points.

Average investment securities decreased $42.9 million, while their average yield increased 25 basis points, improving the margin by 14 basis points.

2022 Compared to 2021

Net interest income totaled $127.5 million in 2022, compared to $105.0 million in 2021.

The $22.5 million increase from the prior year was primarily due to higher balances in the investment and commercial real estate loan portfolios, which added $18.4 million and $6.1 million, respectively, to net interest income.

Additionally, 2022 incorporated a full year of net interest income from acquired earning assets of AMRB, compared to five months in 2021.

Additionally, 2022 incorporated a full year of net interest income from the acquired earning assets of AMRB, compared to five months in 2021.

Average interest-bearing liabilities increased $376.6 million, while the average cost dropped nine basis points, largely due to the extinguishment of subordinated debt that generated $1.4 million of interest expense in 2021.

The tax-equivalent net interest margin decreased six basis points to 3.11% in 2022, from 3.17% in 2021, as the proportion of average investment securities to average total interest-earning assets grew from 26% in 2021 to 44% in 2022, and fee income from PPP loans declined.

2021 Compared to 2020

Net interest income totaled $105.0 million and $96.7 million in 2021 and 2020, respectively.

The $8.3 million increase in 2021 was primarily due to higher average loan and investment securities balances.

In addition, we recognized $8.3 million in SBA PPP fees, net of cost in 2021, compared to $3.8 million in 2020.

These increases were partially offset by $1.4 million in interest and accelerated discount accretion on the early redemption of a subordinated debenture in the first quarter of 2021, and lower yields on investment securities.

The tax-equivalent net interest margin decreased 38 basis points to 3.17% in 2021, from 3.55% in 2020 for the reasons already mentioned and as shown in the above table.

T he SBA PPP loans improved the 2021 net interest margin by 10 basis points, and the early redemption of the subordinated debenture reduced it by 4 basis points.

Market Interest Rates

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In response to the evolving risks to economic activity caused by the COVID-19 pandemic, the FOMC made two emergency federal funds rate cuts totaling 150 basis points in March 2020.

The federal funds rate range remained

between 0.0% to 0.25% through the beginning of 2022, putting downward pressure on our asset yields and net interest margin.

Beginning in March 2022, the FOMC began successive increases to the federal funds rate due to the evolving inflation risks, international political unrest and oil and other supply chain disruptions.

As a result of five rate adjustments during 2022, the federal funds target rate range increased to 4.25% to 4.50% at year-end.

Subsequently, on February 1, 2023, the FOMC increased the rate by another 25 basis points to a range of 4.50% to 4.75%.

As shown in the table above, higher interest rates contributed an additional $5.9 million to net interest income in 2022 compared to 2021.

Additional rate increases are anticipated in 2023, as Federal Reserve policymakers continue to monitor inflation and economic developments.

The federal funds rate range remained between 0.0% and 0.25% through the beginning of 2022, putting downward pressure on our asset yields and net interest margin.

Beginning in March 2022, the FOMC began successive increases to the federal funds rate due to evolving inflation risks, international political unrest, and oil and other supply chain disruptions.

As a result of seven rate adjustments during 2022, the federal funds target rate range increased to between 4.25% and 4.50% at year-end 2022 and our net interest margin increased gradually over the course of the year.

In 2023, on each of February 1 st , March 22 nd , May 3 rd , and July 26 th , the FOMC increased the target rate by 25 basis points to a range of 5.25% to 5.50%.

Rising interest rates and first quarter disruptions in the banking industry resulted in rapid increases in the cost of funds through rising deposit costs and increased borrowings, putting pressure on the net interest margin.

Additional rate increases are not widely anticipated in 2024, as Federal Reserve policymakers continue to monitor inflation and economic developments throughout the year.

Quantitative and Qualitative Disclosure about Market Risk for further information.

Provision for Credit Losses on Loans

We recorded a net $63 thousand reversal of the provision for credit losses on loans in 2022, compared to a $1.4 million reversal of the provision for credit losses in 2021 and $4.6 million provision for credit losses in 2020.

The net reversal of the provision in 2022 was largely due to a $55.4 million decrease in applicable loan balances (excludes the $107.7 million decrease in PPP loans for which there was no allowance) and improvements in the Moody's Analytics' Baseline Forecast of California unemployment rates since December 31, 2021, which decreased the quantitative "modeled" allowance for credit losses.

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

The net provision reversal in 2021 was primarily due to continued improvements in Moody's Analytics' Baseline Forecast of California unemployment rates and adjustments to qualitative risk factors due to a decline in the volume of loans downgraded to substandard classification, fewer delinquencies, and the elimination of an allowance related to a commercial real estate loan that had been individually analyzed for potential credit losses in the previous periods and paid off in 2021.

These reversals were partially offset by an increase in the allowance for credit losses related to qualitative risk factor adjustments for recent changes in executive leadership and senior lending positions, and integration of AMRB.

The provision for credit losses in 2020 calculated under the incurred loss method (prior to the adoption of the excepted credit loss method on December 31, 2020) was largely due to the uncertainty about the impact of the COVID-19 pandemic on the local and regional economies and our customers at that time.

In addition, under the CECL method, we increased our allowance for credit losses by approximately $925 thousand for previously acquired loans (i.e., non-purchased credit deteriorated or "non-PCD" loans);

whereas, under previous GAAP (incurred loss method) we did not record an allowance on our unimpaired previously acquired non-PCD loans.

The pandemic also negatively affected the financial condition of many of our borrowers, which was partially alleviated by our payment relief program under the 2020 CARES Act and the SBA PPP.

Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors, including growth or contraction of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans.

The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off.

The following table shows the activity for the periods presented.

Years ended December 31,

(dollars in thousands) 2023 2022 2021

Provision for (reversal of) credit losses on loans $ 2,575 $ (63) $ (1,449)

The provision in 2023 was due primarily to adjustments to qualitative risk factors from continued uncertainty about inflation and recession risks, the potential impact of rapidly increasing interest rates and other external factors on both our non-owner-occupied commercial real estate and construction portfolios, loan and collateral concentration risks in our construction and commercial real estate portfolios, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values for our non-owner occupied commercial real estate office and multi-family real estate portfolios.

The allowance for individually evaluated loans increased for a small number of loans that exhibited credit risk characteristics over time that were not indicative of pooled loans in the CECL calculation, including collateral valuation issues caused by persistently higher than average vacancy rates and estimated credit losses from other adjustments to discounted expected cash flows or estimated loss rates.

Other elements of the provision included a $406 thousand loss on the note sale of an owner-occupied agricultural commercial real estate loan to an unrelated third party that was charged to the allowance concurrent with the sale and a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rate , partially offset by the impact of a $45.0 million overall decrease in loans.

The provision reversal in 2022 was largely due to a $55.4 million decrease in applicable loan balances (excludes the $107.7 million decrease in PPP loans for which there was no allowance) and improvements in Moody's Analytics' Baseline Forecast of California unemployment rates since December 31, 2021, which decreased the quantitative "modeled" allowance for credit losses.

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

The provision reversal in 2021 was primarily due to continued improvements in Moody's Analytics' Baseline Forecast of California unemployment rates at the time, and adjustments to qualitative risk factors due to a decline in the volume of loans downgraded to substandard classification, fewer delinquencies, and the elimination of an allowance related to a commercial real estate loan that had been individually analyzed for potential credit losses in the previous periods and paid off in 2021.

Non-interest Income

The table below details the components of non-interest income.

2022 compared to 2021 2021 compared to 2020

2023 compared to 2022

2022 compared to 2021

Years ended December 31, Amount Increase (Decrease) Percent Increase (Decrease) Amount Increase (Decrease) Percent Increase (Decrease)

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Wealth management and trust services $ 2,145 $ 2,227 $ 2,222 $ (82) (3.7) % $ 5 0.2 %

Earnings on bank-owned life insurance, net 1,229 2,194 973 (965) (44.0) % 1,221 125.5 %

Debit card interchange fees, net 2,051 1,812 1,438 239 13.2 % 374 26.0 %

Service charges on deposit accounts 2,083 2,007 1,593 76 3.8 % 414 26.0 %

Debit card interchange fees, net 1,831 2,051 1,812 (220) (10.7) % 239 13.2 %

Earnings on bank-owned life insurance, net 1,802 1,229 2,194 573 46.6 % (965) (44.0) %

Dividends on Federal Home Loan Bank stock 1,265 1,056 760 209 19.8 % 296 38.9 %

Merchant interchange fees, net 496 549 422 (53) (9.7) % 127 30.1 %

(Losses) gains on investment securities, net (63) (16) 915 (47) 293.8 % (931) (101.7) %

Losses on sale of investment securities, net

(5,893) (63) (16) (5,830) 9,254.0 % (47) 293.8 %

Other income 1,260 1,849 1,145 (589) (31.9) % 704 61.5 %

1 unchanged sentence

2023 Compared to 2022

Non-interest income totaled $5.0 million in 2023, a $5.9 million decrease from $10.9 million in 2022.

The decrease in 2023 was primarily due to the $5.9 million net loss on the sale of investment securities mentioned above.

Excluding this loss, non-interest income decreased by $86 thousand, which included a $504 thousand decline in deposit network fees earned when deposit balances were brought back on the balance sheet, and a $220 thousand decrease in debit card interchange income.

Decreases were partially offset by $573 thousand higher benefit payments from and earnings on bank-owned life insurance, and $209 thousand from increases in dividends on Federal Home Loan Bank stock.

2022 Compared to 2021

Non-interest income totaled $10.9 million in 2022, a $773 thousand increase from $10.1 million in 2021.

The increase was primarily due to higher fees on deposit balances held in off-balance sheet deposit networks contributing $504 thousand in additional income, $414 thousand more service charges on deposit accounts, $296 thousand higher FHLB dividends, and a combination of smaller increases.

The increase was primarily due to higher fees on deposit balances held in off-balance sheet deposit networks, contributing $504 thousand in additional income, $414 thousand more service charges on deposit accounts, a $366 thousand increase in debit card and merchant interchange fees, $296 thousand higher FHLB dividends, and a combination of smaller increases.

Increases were partially offset by a $965 thousand reduction in bank-owned life insurance, as the prior year included $1.1 million in benefits collected on insurance policies.

Additionally, 2022 incorporated a full year of non-interest income from the AMRB acquisition, compared to five months in 2021.

2021 Compared to 2020

Non-interest income totaled $10.1 million and $8.6 million in 2021 and 2020, respectively.

The $1.5 million increase was primarily due to the collection of $1.1 million in benefits on bank-owned life insurance policies and an increase in service charges and interchange fees related to the expanded deposit base.

In March 2020, we implemented temporary waivers for all ATM fees, overdraft fees and early withdrawal penalties for time deposits to help ease the financial burden customers began experiencing due to the pandemic.

We reinstituted the fees in May 2021.

Additionally, Wealth Management and Trust income increased due to the addition of new accounts and favorable market performance in 2021.

Increases were partially offset by the $931 thousand reduction in gains on sales of investment securities.

Non-interest Expense

The table below details the components of non-interest expense.

2022 compared to 2021 2021 compared to 2020

2023 compared to 2022

2022 compared to 2021

Years ended December 31, Amount Increase (Decrease) Percent Increase (Decrease) Amount Increase (Decrease) Percent Increase (Decrease)

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Professional services 3,598 3,299 4,974 299 9.1 % (1,675) (33.7) %

Deposit network fees 2,783 258 26 2,525 978.7 % 232 892.3 %

Depreciation and amortization 2,098 1,840 1,740 258 14.0 % 100 5.7 %

Federal Deposit Insurance Corporation insurance 1,878 1,179 889 699 59.3 % 290 32.6 %

Information technology 1,569 2,197 1,550 (628) (28.6) % 647 41.7 %

1 unchanged sentence

Directors' expense 1,212 1,107 957 105 9.5 % 150 15.7 %

Federal Deposit Insurance Corporation insurance 1,179 889 474 290 32.6 % 415 87.6 %

Charitable contributions 717 709 587 8 1.1 % 122 20.8 %

Other real estate owned 359 5 — 354 7,080.0 % 5 N/A

Other real estate owned 48 359 5 (311) (86.6) % 354 NM

Other non-interest expense:

3 unchanged sentences

Total non-interest expense $ 79,481 $ 75,269 $ 72,638 $ 4,212 5.6 % $ 2,631 3.6 %

NM - not meaningful

2023 Compared to 2022

Non-interest expense increased $2.6 million to $75.3 million in 2022 from $72.6 million in 2021.

Information technology expenses increased $647 thousand due to investments in software and equipment during 2022.

Non-interest expenses increased $4.2 million to $79.5 million in 2023 from $75.3 million in 2022.

Significant fluctuations were as follows:

• Deposit network fees increased by $2.5 million as customers sought additional FDIC insurance protection through reciprocal deposit networks.

• Salaries and employee benefits increased by $1.4 million primarily due to the filling of open positions and the hiring of several key employees and officers, an increase in SERP-related expenses largely due to new and retired participant adjustments lowering costs for 2022, an increase in deferred officer compensation expense from increased participation and interest rates, higher insurance costs, and lower deferred loan origination costs.

Increases to salaries and employee benefits were partially offset by a decrease in profit sharing expense mainly from accrual adjustments and because some contributions in 2023 were made from forfeitures rather than paid in cash, a decrease in accrued incentive bonuses, and a decrease in stock-based compensation from changes in award structure and estimated performance award payout estimates.

• FDIC insurance costs increased by $699 thousand due to an increase in the FDIC statutory assessment rate to s trengthen the Deposit Insurance Fund.

• Occupancy and equipment and depreciation and amortization expenses rose by $483 thousand and $258 thousand , respectively, mainly from the acceleration of lease-related costs for branch closures in the first quarter of 2 0 23 and higher maintenance costs.

• Professional services expenses increased by $299 thousand, mainly from consulting fees associated with core systems contract negotiations, systems transformation projects, and internal and external audit costs.

• Information technology and data processing expenses decreased by $628 thousand and $592 thousand , respectively, due to our core system contract renegotiation for the current period and because the prior year included data processing expenses largely eliminated after the systems conversion associated with the American River Bankshares merger.

• Other real estate owned expenses decreased by $311 thousand due to the write-down in 2022 of the property that was then sold in the third quarter of 2023.

2022 Compared to 2021

Non-interest expenses increased $2.6 million to $75.3 million in 2022 from $72.6 million in 2021.

Significant fluctuations were as follows:

• Information technology expenses increased by $647 thousand due to investments in software and equipment during 2022.

• Total o ccupancy expenses, including depreciation and amortization, increased $626 thousand resulting primarily from merger growth and $212 thousand in accelerated costs related to planned branch closures.

• Other increases in 2022 included core deposit intangible amortization and FDIC insurance, largely attributable to the 2021 AMRB acquisition, a $345 thousand valuation adjustment in other real estate owned expense, and a $490 thousand increase in employment recruiting costs included in other expense.

Salaries and employee benefits expense was relatively flat year-over-year.

In 2022, increases in staffing and profit sharing expenses, a reduction in deferred loan origination costs, a nd a combination of smaller items were largely offset by a decrease in supplemental executive retirement plan expense from an adjustment to the discount rate, and a decline in merger-related expenses, as shown in the table on page 28.

Professional services decreased $1.7 million from the prior year, primarily due to higher merger-related costs and additional consulting expenses associated with PPP loan forgiveness application processing in 2021, partially offset by higher audit and accounting fees in 2022.

Data processing expenses decreased by $490 thousand primarily due to merger-related expenses in 2021, as shown in the table on page 28, partially offset by an increase in processing costs in 2022 associated with higher volumes for the larger bank.

2021 Compared to 2020

Non-interest expense increased $14.1 million to $72.6 million in 2021 from $58.5 million in 2020.

The largest increase of $6.5 million came from merger-related and conversion costs.

In addition to $3.0 million in merger costs, salaries and related benefits rose another $4.5 million due to increased numbers of employees, regularly scheduled annual merit and related increases, and lower deferred loan origination costs.

Professional services included $817 thousand more in consulting expenses for PPP loan forgiveness application processing, investment advisory services, and legal costs.

Data processing increased by an additional $828 thousand primarily due to increases core processing and mobile banking systems charges, and other categories increased due to the larger size of the bank.

FDIC insurance increased by $415 thousand due to an increase in our deposit base.

Charitable contributions decreased due to supplemental contributions in 2020 related to the pandemic.

• Salaries and employee benefits expense remained relatively flat year-over-year.

• Professional services expense decreased by $1.7 million from the prior year, primarily due to higher merger-related costs and additional consulting expenses associated with PPP loan forgiveness application processing in 2021, partially offset by higher audit and accounting fees in 2022.

• Data processing expenses decreased by $490 thousand primarily due to merger-related expenses in 2021, partially offset by an increase in processing costs in 2022 associated with higher volumes for the larger bank.

Provision for Income Taxes

Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income.

Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).

Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, bank-owned life insurance ("BOLI"), low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).

The provision for income taxes totaled $6.1 million at an effective tax rate of 23.6% in 2023, compared to $16.9 million at an effective tax rate of 26.6% in 2022 and $11.7 million at an effective tax rate of 26.0% in 2021.

The increase in the provision in 2022 compared to 2021 reflected higher pre-tax income.

The decrease in the provision for income taxes in 2023, as compared to 2022, reflected lower pre-tax income.

The 300 basis point decrease in the effective tax rate in 2023, as compared to 2022, was primarily due to a larger proportional effect of permanent tax differences on lower pretax income and higher tax-exempt BOLI income.

This decrease was partially offset by a reduction in the tax-exempt interest exclusion (due to a larger IRC Section 291(e) interest expense disallowance), compared to 2022.

The 60 basis point increase in the effective tax rate in 2022 as compared to 2021 was primarily due to lower BOLI income and the smaller proportion of tax-exempt loan and investment securities interest income to pre-tax income in 2022, partially offset by the non-deductible merger expenses and executive compensation in 2021.

The 50 basis point increase in the effective tax rate in 2021 compared to 2020 was due to non-deductible merger expenses and executive compensation, partially offset by higher BOLI income and tax-exempt loan and investment securities interest income.

We file a consolidated return in the U.S.

federal tax jurisdiction and a combined return in the state of California tax jurisdiction.

There were no ongoing federal or state income tax examinations at the issuance of this report.

At December 31, 2022 and 2021, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits.

There were no ongoing federal or state income tax examinations at the time of the issuance of this report.

As of December 31, 2023 and 2022, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits.

FINANCIAL CONDITION

Investment Securities

We maintain an investment securities portfolio to provide liquidity and to generate earnings on funds that have not been loaned to customers.

We maintain an investment securities portfolio to provide liquidity and generate earnings on funds that have not been loaned to customers.

Management determines the maturities and types of securities to be purchased based on liquidity and interest rate risk position, and the desire to attain a reasonable investment yield balanced with risk exposure.

The tables below show the composition of the debt securities portfolio by expected maturity at December 31, 2022 and 2021.

Expected maturities differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

We estimate and update expected maturity dates regularly based on current and historical prepayment speeds.

average life of the investment portfolio at December 31, 2022 and 2021 was approximately seven and six years, respectively.

The tables below show the composition of the debt securities portfolio by weighted average life at December 31, 2023 and 2022.

Weighted average life takes into account the issuer's right to call or prepay obligations, with or without call or prepayment penalties.

The weighted average life of the investment portfolio at December 31, 2023 and 2022 was approximately 6.6 and 6.8 years, respectively.

The effective duration of the investment portfolio was 5.2 and 5.0 at December 31, 2023 and 2022, respectively.

December 31, 2023 Within 1 Year 1-5 Years 5-10 Years After 10 Years Total

53 unchanged sentences

Obligations of state and political subdivisions - taxable — — — — 4,708 1.84 25,677 2.28 30,385 22,913 2.21

Corporate bonds — — 30,000 3.63 — — — — 30,000 28,448 3.63

Total held-to-maturity 463 0.63 210,182 3.50 477,062 2.20 284,500 2.22 972,207 845,239 2.49

14 unchanged sentences

2 Weighted average calculation is based on amortized cost of securities.

3 Yields on tax-exempt municipal bonds are presented on a taxable equivalent basis, using federal tax rate of 21%.

The amortized cost of our investment securities portfolio increased $353.1 thousand or 23.4% during 2022.

We purchased $243.5 million in securities in 2022 designated as available-for-sale to provide flexibility for liquidity and interest rate risk management.

We also purchased $319.9 million in securities in 2022 designated as held-to-maturity.

These purchases were offset by $177.3 million of paydowns, calls and maturities, and $10.7 million of sales during 2022.

The weighted average yield on the purchases of securities was 3.22% for the 2022 year and 6.08% for the fourth quarter of 2022.

We transferred $357.5 million of available-for-sale securities to held-to-maturity in March 2022.

R efer to Note 2, Investment Securities, to the Consolidated Financial Statements in ITEM 8 of this report for further information.

During 2022, we purchased $364.6 million in agency collateralized mortgage obligations ("CMOs"), $60.9 million in agency mortgage-backed securities ("MBSs"), $61.2 million in debentures of government sponsored agencies, $30.0 million in corporate bonds, $29.9 million in SBA-backed securities and $16.8 million in obligations of state and political subdivisions.

3 Yields on tax-exempt municipal bonds are presented on a taxable equivalent basis, using a federal tax rate of 21%.

The amortized cost of our investment securities portfolio decreased by $326.1 million, or 17.5%, in 2023.

In 2023, we sold $214.5 million in available-for-sale securities with an average yield of 2.35%, as part of a balance sheet restructuring, including $75.2 million in debentures of government sponsored agencies, $69.6 million in agency collateralized mortgage obligations ("CMOs"), $25.0 million in corporate bonds, $15.4 million in SBA-backed securities, $14.6 million in agency mortgage-backed securities ("MBSs"), $13.2 million in obligations of state and political subdivisions, and $1.4 million in asset-backed securities.

Offset by a $2.8 million pre-tax gain from the sale of our remaining holdings of Visa Inc.

Class B restricted common stock, these sales of available-for-sale securities generated a net pre-tax loss of $5.9 million.

In 2022, we transferred $357.5 million of available-for-sale securities to held-to-maturity.

Refer to Note 2, Investment Securities, to the Consolidated Financial Statements in ITEM 8 of this report for further information.

We consider agency debentures and CMOs issued by U.S.

3 unchanged sentences

government sponsored agencies, SBA-backed securities and U.S.

Treasury securities made up 86.7% of the portfolio at December 31, 2022, compared to 85.6% at December 31, 2021.

Treasury securities made up 86.6% of the portfolio as of December 31, 2023, compared to 86.7% at December 31, 2022.

See the discussion in the section captioned “Securities May Lose Value Due to Credit Quality of the Issuers” in ITEM 1A Risk Factors above.

18 unchanged sentences

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside California are in Texas (37.1%), Washington (15.4%), and Wisconsin (9.0%).

Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation).

Our investments in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF"), rated AAA without enhancement, or backed by revenue sources from essential services (such as utilities and transportation).

Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring.

Key considerations include:

• The soundness of a municipality’s budgetary position and stability of its tax revenues

• The soundness of a municipality’s budgetary position and the stability of its tax revenues

• Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer

• Local demographics/economics including unemployment data, largest local taxpayers and employers, income indices and home values

• For revenue bonds, the source and strength of revenue for municipal authorities including obligors' financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer’s strength)

• Local demographics and economics including unemployment data, the largest local taxpayers and employers, income indices, and home values

• For revenue bonds, the source and strength of revenue for municipal authorities, including obligors' financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurers' strength)

• Credit ratings by major credit rating agencies

5 unchanged sentences

Commercial owner-occupied 333,181 16.1 354,877 17.0

Commercial investor-owned 1,191,889 56.9 1,189,021 52.7

Commercial non-owner occupied 1,219,385 58.8 1,191,889 56.9

Construction 99,164 4.8 114,373 5.5

6 unchanged sentences

Loans decreased by $18.8 million in 2023, or 1%, to $2.074 billion as of December 31, 2023, from $2.093 billion as of December 31, 2022.

Year-over-year changes were largely attributable to a $107.7 million decrease in PPP loans and a decrease in investor-owned commercial real estate loans, partially offset by growth in owner-occupied commercial real estate loans.

Loan originations were $240.2 million in 2022 compared to $181.7 million in 2021, an increase of 32%.

Loan originations were $144.1 million in 2023, compared to $240.2 million in 2022.

Non-PPP payoffs were $107.3 million in 2023, compared to $258.5 million in 2022.

Much of the payoffs in 2022 were outside the Bank's control and resulted from activities such as sales of businesses and properties, cash repayments, and project completions.

The originations and payoffs noted above, combined with utilization on lines of credit and amortization on existing loans, resulted in the net decreases for these periods.

Non-PPP payoffs as a percentage of beginning of the year loan balances were 11.5% in 2022 and 10.4% in 2021.

Approxim ately 90% and 86%, of total loans were secured by real estate as of December 31, 2022 and 2021, respectively.

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

PPP loan payoffs during 2023 and 2022 were $2.5 million and $107.7 million, respectively.

The majority of the payoffs were a result of asset sales, cash payoffs, project completions, and purposeful relationship exits, all of which showcased the Bank's focus on credit quality and proactive engagement with customers.

It should be noted that only a minimal amount was refinanced.

In additio n, $53.1 million of loan amortization from scheduled repayments, net of credit line utilization, contributed to the decline in loan balances for 2023.

The originations and payoffs noted above, combined with utilization on lines of credit and amortization on existing loans, resulted in a net decrease for this period.

Non-PPP payoffs as a percentage of beginning-of-year loan balances were 5.1% in 2023 and 11.5% in 2022.

Approxim ately 90%, of total loans were secured by real estate as of both December 31, 2023 and 2022.

For additional information on loan concentration risk, see ITEM 1A, Risk Factors.

6 unchanged sentences

Sonoma 256,516 16.5 245,883 15.9

Napa 186,477 12.1 188,643 11.9

San Francisco 186,803 12.0 173,511 11.2

Napa 178,685 11.5 186,477 12.1

Alameda 156,934 10.1 163,381 10.6

1 unchanged sentence

Contra Costa 72,580 4.7 67,356 4.4

San Mateo 37,681 2.4 28,119 1.8

Solano 32,235 2.1 40,837 2.6

Placer 40,733 2.6 28,928 1.9

Solano 39,247 2.5 32,235 2.1

San Mateo 35,420 2.3 37,681 2.4

Santa Clara 24,086 1.6 21,091 1.4

3 unchanged sentences

Total $ 1,552,566 100.0 % $ 1,546,766 100.0 %

Commercial real estate loans decreased $34.6 million in 2022, compared to a $315.2 million increase in 2021.

The decrease in 2022 wa s primarily due to cash paydowns as part of ongoing deleveraging, refinancings and asset sales.

Th e increase in 2021 was primarily due to the AMRB acquisition and expanded footprint in Northern California.

Of the commercial real estate loans at December 31, 2022, 77% were investor-owned and 23% were owner-occupied.

Commercial real estate loans increased by $5.8 million in 2023, compared to a $34.6 million decrease in 2022.

The increase in 2023 was comprised of the $27.5 million increase within the non-owner occupied loan portfolio, partially offset by the $21.7 million decrease within the owner-occupied loan portfolio.

The decrease in 2022 wa s primarily due to cash paydowns as part of ongoing deleveraging, refinancing, and asset sales.

Of the commercial real estate loans as of December 31, 2023, 79% were non-owner occupied and 21% were owner-occupied.

Almost the entire commercial real estate loan portfolio is comprised of term loans for which the primary source of repayment is either the cash flow from leasing activities of the real estate collateral or the operating cash flow of the owner occupant.

With the heightened market concern about non-owner-occupied commercial real estate, and in particular the office sector, we are providing the following additional information:

We continue to maintain diversity among property types and within our geographic footprint.

In particular, our office commercial real estate portfolio in the City of San Francisco represents just 3% of our total loan portfolio and 6% of our total non-owner-occupied commercial real estate portfolio.

As of the last measurement period, the weighted average loan-to-value and weighted average debt-service coverage ratios for the entire non-owner-occupied office portfolio were 59% and 1.60x, respectively.

For the thirteen non-owner-occupied office loans in the City of San Francisco, the weighted average loan-to-value and debt-service coverage ratios were 67% and 1.00x, respectively.

As of December 31, 2023, we conducted a review of the refinance risk in our non-owner-occupied commercial real estate portfolio and evaluated 70 loans with commitments of $1.0 million or more, totaling $184.1 million, that mature or reprice in 2024 and 2025.

As a result of our assessment, we determined that the refinance risk on these loans is manageable, with weighted average debt

service coverage ratios ranging from 1.52 to 1.69 times for maturities and from 1.20 to 1.59 times for repricings based on current market interest rates.

As such, we believe the non-owner-occupied commercial real estate portfolio is well-positioned to absorb a higher rate environment at the loans' repricing or maturity dates.

The following table shows an analysis of construction loans by type and county as of December 31, 2023 and 2022.

7 unchanged sentences

Land - unimproved 1,066 1.0 1,109 1.0

Land - improved — — 3,966 3.3

Total $ 99,164 100.0 % $ 114,373 100.0 %

5 unchanged sentences

Solano 11,372 11.5 18,873 16.5

Sonoma 17,843 15.6 13,640 11.4

San Mateo 4,851 4.9 4,409 3.9

Marin 4,542 4.6 7,784 6.8

1 unchanged sentence

Total $ 99,164 100.0 % $ 114,373 100.0 %

Cons truction loans decreased by $5.5 million in 2022, compared to an increase of $46.8 million in 2021.

Cons truction loans decreased by $15.2 million in 2023, compared to a decrease of $5.5 million in 2022.

T he decrease in 2023 was primarily du e to $22.2 million in payoffs and $16.9 million in conversions to commercial real estate financing.

These decreases were partially offset by $24.5 million in advances on existing construction loans.

The decrease in 2022 was primarily due to $46.6 million in payoffs and $3.6 million in conversions to commercial real estate financing.

These decreases were partially offset by $37.5 million advanced on existing construction loans and $7.2 million in new financing.

T he increase in 2021 was primarily due to $48.8 million advanced on existing construction loans, $13.2 million in loans assumed in the AMRB acquisition and $7.2 million in new financing.

These increases were partially offset by $19.5 million in payoffs and $2.9 million in conversions to commercial real estate financing.

Undisbursed construction loan commitments at December 31, 2022 and 2021 were $43.2 million and $77.8 million, respectively.

The following table presents the amortized costs and maturity distribution of our loans by class as of December 31, 2022 based on their contractual maturity dates.

Undisbursed construction loan commitments at December 31, 2023 and 2022 we re $13.9 million an d $43.2 million, respectively.

The following table presents the amortized costs and maturity distribution of our loans by portfolio class as of December 31, 2023 based on their contractual maturity dates.

Maturities do not include scheduled payments or potential prepayments.

5 unchanged sentences

Commercial owner-occupied 12,224 92,743 221,009 7,205 333,181

Commercial investor-owned 42,643 329,876 792,173 27,197 1,191,889

Commercial non-owner occupied 65,360 437,117 699,118 17,790 1,219,385

Construction 1

4 unchanged sentences

Total $ 221,825 $ 596,563 $ 1,110,488 $ 144,844 $ 2,073,720

1 Commercial and industrial due within 1 year includes SBA PPP loans totaling $3.5 million (net of $99 thousand in unrecognized fees and costs), which are expected to be forgiven by the SBA in 2023.

1 Construction loans that mature after 5 years are structured to convert to permanent financing after the initial construction period.

The following table shows the mix of variable-rate loans to fixed-rate loans due after one year by class as of December 31, 2022.

The large majority of the variable-rate loans are tied to independent indices (such as the Prime Rate or a Treasury Constant Maturity Rate).

The following table shows the mix of variable-rate loans and fixed-rate loans due after one year by portfolio class as of December 31, 2023.

The large majority of variable-rate loans are tied to independent indices, such as the Prime Rate or a Treasury Constant Maturity Rate.

Most loans with original terms of more than five years have provisions for the fixed rates to reset, or convert to variable rates, after three, five or seven years.

These loans are included in variable-rate balances below.

These loans are included in the variable-rate balances below.

Loan Interest Rate Sensitivity - Due After One Year

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Commercial owner-occupied 183,633 137,324 320,957

Commercial investor-owned 724,647 424,599 1,149,246

Commercial non-owner occupied 727,415 426,610 1,154,025

Construction 29,512 — 29,512

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The allowance for credit losses on loans is calculated in accordance with ASC 326 based on management's best estimate of current expected credit losses over the loans' contractual terms, adjusted for estimated prepayments where applicable.

The contractual terms exclude anticipated extensions, renewals and modifications, except for reasonably expected extensions of certain troubled debt restructure loans.

The contractual terms exclude anticipated extensions, renewals and modifications.

Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts.

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For additional information on our allowance for credit losses methodology, refer to Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

The allowance for credit losses to loans was 1.10% at December 31, 2022 and 1.02% at December 31, 2021.

The allowance for credit losses to loans, excluding SBA PPP loans was 1.10% an d 1.07% at year-end 2022 and 2021, respectively (for a discussion of this non-GAAP financial measure, refer to ITEM 7, Financial Highlights section of this report).

The $40 thousand decrease in the allowance for credit losses on loans in 2022 was largely due to a $55.4 million decrease in applicable loan balances (excludes the $107.7 million decrease in PPP loans for which there was no allowance) and improvements in the Moody's Analytics' Baseline Forecast of California unemployment rates since December 31, 2021, which decreased the quantitative "modeled" allowance for credit losses.

The ratio of the allowance for credit losses to total loans was 1.21% at December 31, 2023 and 1.10% at December 31, 2022.

The $2.2 million increase in the allowance for credit losses on loans in 2023 was largely due to adj ustments to qualitative risk factors from continued uncertainty about inflation and recession risks, the potential impact of rapidly increasing interest rates and other external factors, loan and collateral concentration risk, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values.

Other elements of the increased allowance included a $406 thousand loss on the note sale of a loan that was charged to the allowance concurrent with the sale, contributing to the $386 thousand in net charge-offs and the impact of a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rate, partially offset by the effect of a $45.0 million overall decrease in loans.

For further information, refer to the Provision for Credit Losses section above, and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

Due to the high credit quality of our loan portfolio experienced to date, net charge-offs have been minimal for the past several years.

Net recoveries totaled $23 thousand in 2022, compared to net recoveries of $93 thousand in 2021 and net charge-offs of $1 thousand in 2020.

The following table presents the allowance for credit losses on loans by loan class in accordance with the methodology described in Note 1 to the Consolidated Financial Statements in ITEM 8 of this report, as well as the per centage of total loans in each of the same loan classes as of December 31, 2022 and 2021.

The following table presents the allowance for credit losses on loans by loan portfolio class in accordance with the methodology described in Note 1 to the Consolidated Financial Statements in ITEM 8 of this report, as well as the per centage of total loans in each of the same loan portfolio classes as of December 31, 2023 and 2022.

Allocation of the Allowance for Credit Losses

(dollars in thousands;

unaudited) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Unallocated Total

unaudited) 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

December 31, 2023

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The table below shows the activity in the allowance for credit losses for each of the three years presented below.

Allowance for Credit Losses Rollforward

Allowance for Credit Losses on Loans Rollforward

(dollars in thousands;

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Beginning balance $ 22,983 $ 23,023 $ 22,874

Impact of CECL adoption — — 1,604

(Reversal of) provision for credit losses (63) (1,449) 4,594

Provision for (reversal of) credit losses 2,575 (63) (1,449)

Initial allowance for PCD loans — — 1,505

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Commercial and industrial (11) (9) —

Commercial real estate, owner-occupied (406) — —

Installment and other consumer (24) (23) (5)

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Home equity — — 50

Installment and other consumer 1 — —

Total loans recovered 55 55 98

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Ratio of allowance for credit losses to total loans at end of year 1.21 % 1.10 % 1.02 %

Net recoveries (charge-offs) to average loans NM NM NM

Net charge-offs (recoveries) to average loans 0.02 % NM NM

NM - Not meaningful.

Net charge-offs and recoveries for the years ended December 31, 2022, 2021 and 2020 were considered insignificant.

The following shows non-performing loans and loans modified in a TDR as of December 31, 2022 and 2021.

Non-Performing Loans and Troubled Debt Restructurings

The following table shows non-performing assets as of December 31, 2023 and 2022.

Non-Performing Assets

(dollars in thousands;

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Non-accrual loans:

Commercial, owner-occupied $ 1,563 $ 7,269

Commercial, investor-owned — 694

Home equity 778 413

Installment and other consumer 91 —

Total non-accrual loans $ 2,432 $ 8,376

Accruing TDR loans:

Commercial and industrial $ 4,008 $ —

Commercial, owner-occupied 434 1,563

Commercial, investor-owned 160 179

Commercial, non-owner occupied 3,081 —

Home equity 469 778

Installment and other consumer — 91

Total accruing TDR loans $ 1,772 $ 2,099

Total non-accrual and accruing TDR loans $ 4,204 $ 10,475

Total non-accrual loans $ 7,992 $ 2,432

Other real estate owned $ — $ 455

Total non-performing assets $ 7,992 $ 2,887

Criticized and classified loans:

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Non-accrual loans to total loans 0.39 % 0.12 %

1 Excludes TDR loans on non-accrual status that are included above.

Non-Accrual and TDR

Non-performing assets to total assets

0.21 % 0.07 %

Non-Accrual Loans

Non-accrual loans increased by $5.6 million in 2023, primarily due to $7.6 million in loans designated as non-accrual in 2023 comprised mostly of commercial and industrial and non-owner occupied commercial real estate loans.

These increases were partially offset by the payoff of two owner-occupied commercial real estate loans totaling $1.3 million and four home equity loans totaling $421 thousand, the upgrade of a $223 thousand home equity loan and a $91 thousand personal loan to accrual status, as a result of improved financial condition and performance, and $83 thousand in paydowns.

Over 66% of the non-accrual loans as of December 31, 2023 were well-secured by either commercial or residential real estate.

Non-accrual loans decreased by $5.9 million in 2022, primarily due to the payoff of two owner-occupied commercial real estate loans totaling $7.1 million and paydowns and the upgrade of a $695 thousand loan to accrual status as a result of improved financial condition and performance, partially offset by $2.0 million in loans designated as non-accrual in 2022.

Over 96% of the non-accrual loans as of December 31, 2022 were well-secured by either commercial or residential real estate.

Non-accrual loans decreased by $857 thousand in 2021, primarily due to $1.0 million in payoffs and paydowns, partially offset by a $114 thousand well-secured investor-owned commercial real estate loan assumed in the AMRB acquisition and one $67 thousand home equity loan placed on non-accrual status in 2021.

Total accruing TDR loans were $1.8 million and $2.1 million as of December 31, 2022 and 2021, respectively.

The $327 thousand decrease in 2022 was primarily due to $425 thousand in paydowns, partially offset by one loan totaling $98 thousand that was designated as TDR during 2022.

The $3.0 million decrease in 2021 was primarily due to $4.0 million in paydowns and payoffs, partially offset by two loans totaling $1.0 million that were designated as TDRs during 2021.

For information regarding temporary relief from TDR accounting afforded by the CARES Act, refer to the Executive Summary section above and Note 3 to the Consolidated Financial Statements in ITEM 8, under “Troubled Debt Restructuring."

Criticized and Classified Loans

Loans designated as special mention, which are not considered adversely classified, increased by $75.0 million in 2023, primarily due to downgrades from the watch category to special mention.

The majority of the downgrades from watch to special mention were not necessarily due to worsening conditions or deterioration in the borrowers' financial condition but to a lack of meaningful improvement over the most recent quarters.

Of the $92.5 million in downgrades to special mention in 2023, $83.2 million (or 90%) were collateralized by real estate.

These increases were partially offset by $7.7 million in paydowns and payoffs, $6.0 million in downgrades from special mention to substandard, and $3.8 million in upgrades to a pass risk rating.

Loans designated as special mention decreased by $13.1 million in 2022, primarily due to $30.2 million in upgrades to a pass risk rating, $7.7 million in paydowns and payoffs, and $3.6 million in downgrades from special mention to substandard.

These decreases were partially offset by $27.8 million in downgrades from pass to special mention and $695 thousand in upgrades from substandard to special mention during 2022.

Of the $27.8 million in

downgrades to special mention, $22.5 million (or 81%) was well-secured by commercial real estate and the remaining $5.3 million commercial loans had strong support .

Loans designated as special mention decreased by $13.6 million in 2021, primarily due to $33.1 million in upgrades to a pass risk rating, $ 18.9 million in paydowns and payo ffs, and two loans that were downgraded from special mention to substandard totaling $5.4 million.

These decreases were partially offset by $17.2 million in loans that were downgraded from pass/watch, $13.5 million in loans assumed in the AMRB acquisition, and $13.2 million in loans that were upgraded from substandard to special mention during 2021.

Of the $17.2 million in downgrades to special mention, $13.2 million (or 77%) was well-secured by commercial real estate and the remaining $4.0 million in commercial loans had strong support.

Loans designated as special mention exhibit potential weakness that deserve close attention.

Loans classified substandard decreased by $8.1 million in 2022, primarily due to $16.1 million in paydowns and payoffs and $871 thousand in upgrades to special mention or pass, partially offset by downgrades totaling $8.8 million.

Of the $27.8 million in downgrades to special mention, $22.5 million (or 81%) was well-secured by commercial real estate, and the remaining $5.3 million commercial loans had strong support .

Loans classified as substandard increased by $4.2 million in 2023, primarily due to downgrades from special mention totaling $6.0 million and from pass totaling $3.7 million, partially offset by $4.5 million in paydowns and

payoffs and $939 thousand in upgrades to pass.

Of the downgraded loans, $7.0 million (or 72%) was secured by commercial real estate, and the remaining $2.7 million was to commercial borrowers.

Loans classified as substandard decreased by $8.1 million in 2022, primarily due to $16.1 million in paydowns and payoffs and $871 thousand in upgrades to special mention or pass, partially offset by downgrades totaling $8.8 million.

Of the downgraded loans, $4.7 million (or 53%) was secured by commercial real estate, and $3.6 million (or 41%) was to commercial borrowers.

In addition, of the $16.1 million in paydowns and payoffs, $2.7 million was from loans downgraded in 2022.

Loans classified substandard increased by $13.3 million in 2021, prim arily due to downgrades totaling $25.4 million and $2.3 million in substandard loans assumed in the AMRB acquisition.

Of the downgraded loans, $24.2 million were secured by commercial real estate.

The downgrades were partially offset by $13.2 million in upgrades to special mention and $4.2 million in paydowns and payoffs.

Refer to Note 3 to the Consolidated Financial Statements in ITEM 8 of this report for an allocation of criticized and classified loans by loan class.

BOLI totaled $67.1 million at December 31, 2022, compared to $61.5 million at December 31, 2021.

The increase of $5.6 million was primarily due to the purchase of $4.7 million in new policies and an increase in the cash surrender value from net investment earnings.

Refer to Note 3 to the Consolidated Financial Statements in ITEM 8 of this report for an allocation of criticized and classified loans by loan portfolio class.

BOLI totaled $68.1 million as of December 31, 2023, compared to $67.1 million at December 31, 2022.

The $1.0 million increase was primarily due to earnings from the BOLI policies.

Interest receivable and other assets totaled $74.9 million and $79.8 million at December 31, 2023 and 2022, respectively.

The $28.4 million increase was primarily due to a $30.5 million increase in net deferred tax assets as discussed below.

The $4.9 million decrease was primarily due to an $8.8 million decrease in net deferred tax assets, as discussed below.

Net deferred tax assets totaled $35.1 million and $43.9 million at December 31, 2023 and 2022, respectively.

Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to temporary differences such as the allowances for credit losses and unfunded loan commitments, net operating loss carryforwards, and deferred compensation and salary continuation plans.

The $30.5 million increase in 2022 was primarily due to a $30.2 million increase in deferred tax assets related to changes in unrealized losses on available-for-sale investment securities, a $466 thousand increase in deferred tax assets related to state franchise tax and a $441 thousand decrease in deferred tax liabilities related to core deposit intangibles.

These increases to net deferred tax assets were partially offset by a $430 thousand decrease in deferred tax assets related to the decrease in deferred compensation and salary continuation plans.

Management believes deferred tax assets will be realizable due to our consistent record of earnings and the expectation that earnings will continue at a level adequate to realize such benefits.

Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to temporary differences such as allowances for credit losses and unfunded loan commitments, net operating loss carryforwards, and deferred compensation and salary continuation obligations.

The $8.8 million decrease in 2023 was primarily due to an $8.5 million decrease in deferred tax assets related to changes in unrealized losses on available-for-sale investment securities and an $803 thousand decrease in deferred tax assets related to state franchise tax.

These decreases in net deferred tax assets were partially offset by a $399 thousand decrease in deferred tax liabilities related to core deposit intangibles.

Management believes deferred tax assets will be realizable due to our expectation that earnings will continue to be at a level adequate to realize such tax benefits.

Therefore, no valuation allowance was established as of December 31, 2023 or 2022.

For additional information, refer to Note 11 to the Consolidated Financial Statements in ITEM 8 of this report.

We held $16.7 million of FHLB stock recorded at cost in other assets at December 31, 2022 and 2021.

The FHLB paid $1.0 million, $760 thousand and $654 thousand in cash dividends in 2022, 2021 and 2020, respectively.

We held $16.7 million of FHLB stock recorded at cost in other assets at both December 31, 2023 and 2022.

We received $1.3 million, $1.0 million and $760 thousand in cash dividends in 2023, 2022 and 2021, respectively.

For additional information, refer to Note 2 to the Consolidated Financial Statements in ITEM 8 of this report.

Accrued interest on investment securities totaled $6.9 million and $4.8 million at December 31, 2022 and 2021, respectively.

The increase was due to purchases of $563.4 million in securities.

Deposits decreased by $283.3 million, to $3.290 billion at December 31, 2023, compared to $3.573 billion at December 31, 2022.

Non-interest bearing deposits decreased by $71 million in 2022 and made up 51% of total deposits at year-end.

The decline was a result of anticipated outflows due to planned business activities by a few large clients, some customers moving into alternative investments and normal year-end fluctuations.

See ITEM 1A, Risk Factors, for a discussion of potential risks associated with concentrations and volatility due to activity of our large deposit customers.

Our relationship banking model is the foundation for the strong deposit base and allows us to proactively and strategically address changes in the interest rate environment and technology adoption by our customers.

With our low cost of deposits, the Bank is well-positioned to implement deposit retention strategies.

Non-interest bearing deposits declined to 43.8% of total deposits at December 31, 2023, compared to 51.5% at December 31, 2022.

While we saw a decline in deposits overall in 2023, deposits were up $39.5 million since the events that led to the failure of a few regional banks at the end of the first quarter of 2023, and we continue to execute our business model without the utilization of brokered deposits.

In addition to the deposit run-off we experienced as a result of these bank failures, general market disruptions, and the FOMC's monetary policy of rapid interest rate increases, much of the decline, particularly in the fourth quarter, was due to a combination of outflows related to planned business acti vities.

Additionally, some balance declines were associated with loan relationships exited during the year, and we saw some customers move cash into alternative investments to capture higher returns, a portion of which was directed to our own wealth management group.

Given the nature of our customer base, our customers' daily operating balances can fluctuate significantly, which is a primary reason we maintain high levels of on-balance sheet and contingent liquidity.

Although we experienced growth and movement in both money market accounts and time deposits, all activity was a result of relationship pricing, the current rate environment, and customer behaviors, as opposed to offering CD specials or making blanket rate adjustments.

We continued our disciplined and focused approach to relationship management and customer outreach, adding over 5,000 new accounts in 2023.

As of December 31, 2023, 59% of deposit balances were held in business accounts, with average balances of $120 thousand per account.

The remaining 41% were consumer accounts, with average balances of $41 thousand per account.

The largest depositor represented 1.7% of total deposits, and the combined four largest depositors represented 4.6% of total deposits.

Balances in the reciprocal deposit network program increased by $250.0 million during 2023 to $424.0 million as of December 31, 2023.

Costs associated with network deposits are recorded as non-interest expense and totaled $2.8 million, $258 thousand, and $26 thousand for the years ended December 31, 2023, 2022 and 2021, respectively.

Estimated uninsured and/or uncollateralized deposits decreased to 28% of total deposits as of December 31, 2023, compared to 39% as of December 31, 2022, due primarily to our customers' increased usage of the reciprocal deposit network program, as noted above.

Our liquidity policies require that compensating cash balances be held against concentrations over a certain level.

See ITEM 1A, Risk Factors, for a discussion of potential risks associated with concentrations and volatility due to the activity of our large deposit customers.

Distribution of Average Deposits

The table below shows the relative composition of our average deposits for 2023 and 2022.

For average rates paid on deposits, refer to Average Statements of Condition and Analysis of Net Interest Income table in ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations.

As of December 31,

For average rates paid on deposits, refer to the Average Statements of Condition and Analysis of Net Interest Income table in ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations.

For the year ended December 31,

(in thousands;

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Demand Deposit Marketplace SM ("DDM") and ICS balances are discussed in Note 6 to the Consolidated Financial Statements in ITEM 8 of this report.

Total estimated uninsured deposits as of December 31, 2022 and December 31, 2021 were $1.584 billion and $1.830 billion, respectively.

Maturities of Uninsured Time Deposits

8 unchanged sentences

Total $ 105,620 $ 60,620

As of December 31, 2022 and 2021, respectively, our total borrowing capacity included $711.6 million and $820.5 million in secured lines of credit with FHLB and $58.7 million and $70.8 million with the Federal Reserve Bank of San Francisco (“FRBSF”).

We also had $150.0 million in unsecured lines with correspondent banks to cover any short-term borrowing needs at December 31, 2022 and 2021.

FHLB overnight borrowings at December 31, 2022 were $112.0 million for a net available balance of $599.6 million.

There were no overnight borrowings at December 31, 2021.

The FRBSF and other correspondent bank lines were not utilized at December 31, 2022 or 2021.

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

As part of a bank acquisition, we assumed a subordinated debentur e due to the NorCal Community Bancorp Trust II with a contractual balance of $4.1 million.

On March 15, 2021, we redeemed the $2.8 million subordinated debenture (accreted value), which carried an average interest rate of 5.68% in 2020.

As of December 31, 2023 and 2022, our borrowing capacity with the Federal Home Loan Bank ("FHLB") under secured lines of credit totaled $1.009 billion and $711.6 million, respectively.

The increase in our borrowing capacity at the FHLB resulted from pledging certain held-to-maturity securities to the Securities-Backed Credit Program in February 2023.

Our borrowing capacity with the Federal Reserve Bank of San Francisco ("FRBSF") under a secured line of credit and the Bank Term Funding Program ("BTFP"), which was new in 2023, totaled $334.2 million and $58.7 million as of December 31, 2023 and 2022, respectively.

In addition, as of December 31, 2023 and 2022

we had $135.0 million and $150.0 million, respectively, in unsecured lines of credit with correspondent banks to cover short-term borrowing needs.

As of December 31, 2023, the Bank had $26.0 million outstanding in short-term borrowings under the BTFP facility at an average rate of 4.83%, compared to $112.0 million in FHLB overnight borrowings as of December 31, 2022 at a rate of 4.65%.

Other correspondent bank lines of credit were not utilized as of December 31, 2023 or 2022.

For additional information, see Note 7, Borrowings and Other Obligations, in ITEM 8 of this report.

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We maintain a non-qualified, unfunded deferred compensation plan for certain key management personnel.

Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for up to fifteen years commencing upon retirement, death, disability or termination of employment.

The participating employee may elect to receive payments over periods not to exceed fifteen years.

Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for up to, but not exceeding, fifteen years commencing upon retirement, death, disability or termination of employment.

A similar Deferred Director Fee Plan entitles participating members of the Board of Directors to receive payments as elected by the participant upon separation from service, death, disability or termination of service.

At December 31, 2022 and 2021, our aggregate payment obligations under both plans totaled $7.1 million and $7.9 million, respectively.

Our Salary Continuation Plan ("SERP") provides a percentage of salary continuation benefits to a select group of executive management upon retirement at age sixty-five and reduced benefits upon early retirement.

At December 31, 2022 and 2021, our liability under the SERP was $4.7 million and $5.3 million, respectively, and is recorded in interest payable and other liabilities in the Consolidated Statements of Condition.

The Plan is unfunded and non-qualified for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974.

Decreases in both the deferred compensation plan and SERP liabilities in 2022 mainly resulted from increases in benefit payments to retired employees.

At December 31, 2023 and 2022, our aggregate payment obligations under both plans totaled $6.6 million and $7.1 million, respectively, and was recorded in interest payable and other liabilities in the consolidated statements of condition.

We have entered into supplemental executive retirement plans ("SERPs") with a select group of executive officers, providing for certain retirement benefits at age 65 and reduced benefits upon early retirement.

The annual amount of benefits in either pre-retirement scenario is based on a vesting schedule unique to each executive.

The SERP also provides for lump sum benefits in the event of a change in control followed by the termination of the executive.

Payments under the SERPs are expected to be funded by income from bank-owned life insurance policies.

On December 31, 2023 and 2022, our liabilities under the SERPs totaled $4.5 million and $4.7 million, respectively, and were recorded in interest payable and other liabilities in the consolidated statements of condition.

The SERPs are unfunded and non-qualified for tax purposes and subject to Title I of the Employee Retirement Income Security Act of 1974.

Decreases in both the deferred compensation plans and SERP liabilities in 2023 mainly resulted from increases in benefit payments to retired employees.

In addition, we increased the discount rate on the SERP payments to reflect market conditions, which reduced the present value of the SERP obligation.

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For further discussion of bank capital requirements, refer to the SUPERVISION AND REGULATION section in ITEM 1 of this report.

The Bank's total risk-based capital ratio increased from 14.4% at December 31, 2021 to 15.7% at December 31, 2022, primarily due to capital creation from net income, partially offset by a $16.2 million dividend to the Holding Company to cover dividends to shareholders and Holding Company operating costs.

Bancorp's total risk-based capital ratio was 14.6% at December 31, 2021 and 15.9% at December 31, 2022.

Bancorp's total risk-based capital ratio increased to 16.89% at December 31, 2023, from 15.90% at December 31, 2022.

Bancorp's tangible common equity to tangible assets ("TCE ratio") increased to 9.73% at December 31, 2023, from 8.21% at December 31, 2022, primarily due to a decrease in unrealized losses on available-for-sale securities and a decrease in tangible assets.

Bancorp's TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.80% as of December 31, 2023, compared to 6.15% (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures ).

The Bank's total risk-based capital ratio increased to 16.62 % at December 31, 2023, from 15.73 % at December 31, 2022, primarily from net income and a decrease in risk-weighted assets, partially offset by $20.0 million in dividends to Bancorp to be used for cash dividends to shareholders and operating costs.

Bancorp's share repurchase program and activity are discussed in detail in ITEM 5 and in Note 8 to the Consolidated Financial Statements in ITEM 8 of this report.

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Liquidity and Capital Resources

The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals.

The goal of liquidity management is to provide adequate funds to meet loan demand and fund operating activities and deposit withdrawals.

We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds, as discussed in Note 7 to the Consolidated Financial Statement in ITEM 8 of this report.

Our Asset Liability Management Committee

("ALCO"), which is comprised of independent Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies.

ALCO has adopted a contingency funding plan that provides early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis.

Our Asset Liability Management Committee ("ALCO"), which is comprised of independent Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies.

The Bank has long-established minimum liquidity requirements that are regularly monitored using metrics and tools similar to those used by larger banks, such as the liquidity coverage ratio, and multi-scenario, long-horizon stress tests.

Our c on tingency funding plan provides for early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a liquidity crisis.

Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs.

We also have relationships with third-party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash management strategy, as discussed in Note 6 to the Consolidated Financial Statement in ITEM 8 of this report.

Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and available borrowing capacity, totaled $1.967 billion, or 60% of total deposits, and 213% of estimated uninsured and/or uncollateralized deposits as of December 31, 2023.

The Federal Reserve's BTFP facility offers borrowing capacity based on the par value of securities pledged, making it less sensitive to changes in market rates.

The following table details the components of our contingent liquidity sources as of December 31, 2023.

(in thousands) Total Available Amount Used Net Availability

Internal Sources

Unrestricted cash 1

$ 13,536 N/A $ 13,536

Unencumbered securities at market value 501,672 N/A 501,672

External Sources

FHLB line of credit 1,009,044 $ — 1,009,044

FRB line of credit and BTFP facility

334,192 (26,000) 308,192

Lines of credit at correspondent banks 135,000 — 135,000

Total Liquidity $ 1,993,444 $ (26,000) $ 1,967,444

1 Excludes cash items in transit as of December 31, 2023.

Brokered deposits available through third-party networks are not included above.

We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities, sales and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations.

Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, and dividends to common stockholders.

T he most significant component of our daily liquidity position is customer deposits.

The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength.

Customer deposits are a significant component of our daily liquidity position.

The attraction and retention of deposits depends on the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength.

The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.

Our cash and cash equivalents decreased by $15.0 million to $30.5 million at December 31, 2023, from $45.4 million at December 31, 2022.

Significant uses of liquidity during 2022 were $563.4 million in investment securities purchased, $235.2 million in withdrawals of deposits, $15.7 million in cash dividends paid on common stock to our shareholders, $4.7 million in purchase of bank owned life insurance policies and $1.2 million in common stock repurchases.

The most significant sources of liquidity during 2022 were proceeds from loans collected net of originations totaling $164.0 million, proceeds from principal paydowns, maturities and sales of investment securities totaled $187.9 million and Federal Home Loan Bank borrowings of $112.0 million.

Significant uses of liquidity during 2023 were $283.3 million in withdrawals of deposits, $86.0 million in repayments of short-term borrowings, and $16.1 million in cash dividends paid on common stock to our shareholders.

The most significant sources of liquidity during 2023 were proceeds from principal paydowns, maturities and sales of investment securities totaling $315.1 million, and proceeds from loans collected net of originations totaling $16.9 million.

In addition, $35.7 million in net cash was provided by operating activities.

Refer to the Consolidated Statement of Cash Flows in this Form 10-K for additional information on our sources and uses of liquidity.

Management anticipates that our current liquidity position and core deposit base are adequate to fund our operations.

Total immediate contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total borrowing capacity was $1.7 billion, or 49% of total deposits as of December 31, 2022.

In February 2023, we enhanced our borrowing capacity at the FHLB by pledging certain held-to-maturity securities to the Securities-Backed Credit Program, increasing the Bank's total immediate contingent funding sources to approximately $2.0 billion, or 59% of deposits as of February 28, 2023.

In addition, under the Federal Reserve’s new BTFP facility, the the Bank has the option to add approximately $267 million to its borrowing capacity.

Undrawn credit commitments, as discussed in Note 16 to the Consolidated Financial Statements in ITEM 8 of this rep ort, totaled $566.9 million at December 31, 2022.

We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth and liquid assets.

Management anticipates that our current strong liquidity position, as detailed in this report, and contingent funding sources are adequate to support our operational needs.

Unfunded credit commitments, as discussed in Note 16 to the Consolidated Financial Statements in ITEM 8 of this report, totaled $505.2 million at December 31, 2023.

We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, principal paydowns of investment securities, and liquid assets.

Over the next twelve months, $233.7 million of time deposits will mature.

We expect to replace these funds with new deposits.

Our emphasis on local deposits, combined with our liquid investment portfolio, provides a very stable funding base.

Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank.

We expect to replace these funds with new deposits or excess liquidity.

We believe our emphasis on local deposits, combined with our immediately available funding sources, provides a very stable base for our liquidity needs.

We had outstanding borrowings under our credit facilities of $26.0 million and $112.0 million as of December 31, 2023 and 2022, respectively, as discussed in Note 7 to the Consolidated Financial Statements in ITEM 8 of this report.

Because Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank.

Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period.

The primary uses of funds for Bancorp are shareholder dividends, ordinary operating expenses and stock repurchases.

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

Bancorp held $7.2 million in cash as of December 31, 2023 .

Manag ement anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.

Statement Regarding Use of Non-GAAP Financial Measures

Financial results for 2022 and 2021 we re impacted by costs associated with our 2021 acquisition of American River Bankshares, for which non-GAAP financial measures are not repeated in this report.

For additional information regarding the impact of non-GAAP adjustments for 2022 and 2021 performance measures, refer to Form 10-K filed with the Securities and Exchange Commission (" SEC") on March 15, 2023.

Financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures.

Management believes that, given recent industry turmoil, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after-tax impact of unrealized losses on held-to-maturity securities provides useful supplemental information to investors because it reflects the level of capital remaining after a hypothetical liquidation of the entire securities portfolio.

Because there are limits to the usefulness of this measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the SEC, and not to rely on any single financial measure.

A reconciliation of the non-GAAP TCE ratio is presented below.

Reconciliation of GAAP and Non-GAAP Financial Measures

(in thousands, unaudited) December 31, 2023 December 31, 2022

Tangible Common Equity - Bancorp

Total stockholders' equity $ 439,062 412,092

Goodwill and core deposit intangible (76,520) (77,870)

Total TCE a 362,542 334,222

Unrealized losses on HTM securities, net of tax 1

(77,739) (89,432)

TCE, net of unrealized losses on HTM securities (non-GAAP) b $ 284,803 244,790

Total assets $ 3,803,903 4,147,464

Goodwill and core deposit intangible (76,520) (77,870)

Total tangible assets c 3,727,383 4,069,594

Unrealized losses on HTM securities, net of tax 1

(77,739) (89,432)

Total tangible assets, net of unrealized losses on HTM securities (non-GAAP) d $ 3,649,644 3,980,162

Bancorp TCE ratio a / c 9.73 % 8.21 %

Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP) b / d 7.80 % 6.15 %

1 Net unrealized losses on held-to-maturity securities as of December 31, 2023 and 2022 of $110.4 million and $127.0 million, respectively, as shown in Note 2, net of an estimated $32.6 million and $37.5 million, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis