Bank of Marin Bancorp 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors Bank of Marin Bancorp Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of condition of Bank of Marin Bancorp and Subsidiary (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 51 Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Credit Losses on Loans As discussed in Notes 1 and 3 to the consolidated financial statements, the Allowance for Credit Losses on Loans at December 31, 2023, was $25.2 million on a total loan portfolio of $2.1 billion. The allowance for credit losses provides an estimate of lifetime expected losses in the loan portfolio. The measurement of expected credit losses is based on relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. We identified the Allowance for Credit Losses on Loans as a critical audit matter. The principal considerations for our determination of the Allowance for Credit Losses on Loans as a critical audit matter are subjectivity of the estimation and application of forecasted economic conditions and qualitative internal and external risk factors used in the calculation of the Allowance for Credit Losses on Loans. The economic forecast component of the Allowance for Credit Losses on Loans is used to compare the conditions that existed during the historical period to current conditions and future expectations. The qualitative internal and external risk factors are used to adjust for differences in segment-specific risk characteristics or conditions that differ from those that existed during the historical period for which the probability of default and loss given default factors were developed. Auditing management’s judgements regarding forecasted economic conditions and qualitative internal and external risk factors applied to the Allowance for Credit Losses on Loans involved a high degree of subjectivity. The primary procedures we performed to address this critical audit matter included: • Testing the design, implementation, and operating effectiveness of controls related to management’s calculation of the Allowance for Credit Losses on Loans, including controls over qualitative internal and external risk factors and the forecasted economic conditions utilized. • Testing the appropriateness of the methodology used in the calculation of the Allowance for Credit Losses on Loans, as well as testing completeness and accuracy of the data used in the calculation, application of the forecasted economic conditions, and qualitative internal and external risk factors determined by management and used in the calculation, and verifying calculations in the Allowance for Credit Losses on Loans. 52 • Obtaining management’s analysis and supporting documentation related to the forecasted economic conditions, and testing whether the forecasts used in the calculation of the Allowance for Credit Losses on Loans are reasonable and supportable based on the analysis provided by management. • Obtaining management’s analysis of internal and external qualitative factors, and evaluating the reasonableness of the assumptions used in determining the qualitative factor adjustments. Goodwill Impairment Assessment As described in Note 1 to the consolidated financial statements, the Company’s goodwill balance was $72.8 million at December 31, 2023, which is allocated to the Company’s sole reporting unit. Goodwill is evaluated for impairment, at a minimum, on an annual basis. To test for goodwill impairment, the Company may apply a qualitative analysis of conditions in order to determine whether it is more likely than not that the carrying value is impaired. If the qualitative analysis is bypassed or in the event the qualitative analysis suggests that the carrying value of goodwill may be impaired, the Company uses several quantitative valuation methodologies in evaluating goodwill for impairment. We identified the quantitative goodwill impairment evaluation performed as of the annual impairment testing date as a critical audit matter. The Company bypassed the qualitative analysis and the quantitative goodwill impairment assessment is considered a significant accounting estimate for which our audit procedures to evaluate management's judgments involved subjectivity and increased audit effort, including use of an internal valuation specialist. The primary procedures we performed to address this critical audit matter included: • Testing the design, implementation, and operating effectiveness of the management review control related to the management’s quantitative goodwill impairment test, including the reporting unit determination and the determination of the fair value of the reporting unit. • Testing the Company’s financial projections utilized in the discounted cash flow methodology for reasonableness, including the terminal period growth rate. • Utilizing an internal valuation specialist to assist in performing the following: ◦ Evaluating the methodologies and weighting of methodologies utilized by management. ◦ Testing key inputs used by management to determine the fair value of the reporting unit, including: ▪ Independently assessing the appropriateness of selected peers in the publicly traded guideline market approach. ▪ Independently assessing the appropriateness of selected acquisitions in the guideline transactions market approach. ▪ Independently obtaining data to verify key ratios and market value indicators for selected acquisitions. ▪ Independently assessing the appropriateness of cost savings and equity cost of capital assumptions utilized in the discounted cash flow methodology. /s/ Moss Adams LLP Portland, Oregon March 14, 2024 We have served as the Company’s auditor since 2004. 53 March 14, 2024 Management's Report on Internal Control over Financial Reporting Management of Bank of Marin Bancorp and subsidiary, (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles ("GAAP"). The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and board of directors; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Management conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 2023, utilizing the framework established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2023. The Company's independent registered public accounting firm, Moss Adams LLP, has issued an attestation report on our internal control over financial reporting, which appears on the previous page. /s/ Timothy D. Myers Timothy D. Myers, President and Chief Executive Officer /s/ Tani Girton Tani Girton, EVP and Chief Financial Officer 54 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CONDITION As of December 31, 2023 and 2022 (in thousands, except share data) 2023 2022 Assets Cash, cash equivalents and restricted cash $ 30,453 $ 45,424 Investment securities: Held-to-maturity, at amortized cost (net of zero allowance for credit losses at December 31, 2023 and 2022) 925,198 972,207 Available-for-sale, at fair value (net of zero allowance for credit losses at December 31, 2023 and 2022) 552,028 802,096 Total investment securities 1,477,226 1,774,303 Loans, at amortized cost 2,073,720 2,092,546 Allowance for credit losses on loans ( 25,172 ) ( 22,983 ) Loans, net of allowance for credit losses on loans 2,048,548 2,069,563 Goodwill 72,754 72,754 Bank-owned life insurance 68,102 67,066 Operating lease right-of-use assets 20,316 24,821 Bank premises and equipment, net 7,792 8,134 Core deposit intangible, net 3,766 5,116 Other real estate owned — 455 Interest receivable and other assets 74,946 79,828 Total assets $ 3,803,903 $ 4,147,464 Liabilities and Stockholders' Equity Liabilities Deposits: Non-interest bearing $ 1,441,987 $ 1,839,114 Interest bearing: Transaction accounts 225,040 287,651 Savings accounts 233,298 338,163 Money market accounts 1,138,433 989,390 Time accounts 251,317 119,030 Total deposits 3,290,075 3,573,348 Borrowings and other obligations 26,298 112,439 Operating lease liabilities 22,906 26,639 Interest payable and other liabilities 25,562 22,946 Total liabilities 3,364,841 3,735,372 Commitments and contingent liabilities (Note 12) Stockholders' Equity Preferred stock, no par value, Authorized - 5,000,000 shares, none issued — — Common stock, no par value, Authorized - 30,000,000 shares; Issued and outstanding - 16,158,413 and 16,029,138 at December 31, 2023 and 2022, respectively 217,498 215,057 Retained earnings 274,570 270,781 Accumulated other comprehensive loss, net of tax ( 53,006 ) ( 73,746 ) Total stockholders' equity 439,062 412,092 Total liabilities and stockholders' equity $ 3,803,903 $ 4,147,464 The accompanying notes are an integral part of these consolidated financial statements. 55 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Years ended December 31, 2023, 2022 and 2021 (in thousands, except per share amounts) 2023 2022 2021 Interest income Interest and fees on loans $ 98,505 $ 93,868 $ 91,612 Interest on investment securities 38,660 34,766 16,342 Interest on federal funds sold and due from banks 2,329 1,407 399 Total interest income 139,494 130,041 108,353 Interest expense Interest on interest-bearing transaction accounts 1,036 421 172 Interest on savings accounts 867 125 94 Interest on money market accounts 18,553 1,589 1,520 Interest on time accounts 4,715 323 246 Interest on borrowings and other obligations 11,562 91 9 Interest on subordinated debenture — — 1,361 Total interest expense 36,733 2,549 3,402 Net interest income 102,761 127,492 104,951 Provision for (reversal of) credit losses on loans 2,575 ( 63 ) ( 1,449 ) Reversal of credit losses on unfunded loan commitments ( 342 ) ( 318 ) ( 992 ) Net interest income after (reversal of) provision for credit losses 100,528 127,873 107,392 Non-interest income Wealth management and trust services 2,145 2,227 2,222 Service charges on deposit accounts 2,083 2,007 1,593 Debit card interchange fees, net 1,831 2,051 1,812 Earnings on bank-owned life insurance, net 1,802 1,229 2,194 Dividends on Federal Home Loan Bank stock 1,265 1,056 760 Merchant interchange fees, net 496 549 422 Losses on sale of investment securities, net of gains ( 5,893 ) ( 63 ) ( 16 ) Other income 1,260 1,849 1,145 Total non-interest income 4,989 10,905 10,132 Non-interest expense Salaries and employee benefits 43,448 42,046 41,939 Occupancy and equipment 8,306 7,823 7,297 Data processing 4,057 4,649 5,139 Professional services 3,598 3,299 4,974 Deposit network fees 2,783 258 26 Depreciation and amortization 2,098 1,840 1,740 Federal Deposit Insurance Corporation insurance 1,878 1,179 889 Information technology 1,569 2,197 1,550 Amortization of core deposit intangible 1,350 1,489 1,135 Directors' expense 1,212 1,107 957 Charitable contributions 717 709 587 Other real estate owned 48 359 5 Other expense 8,417 8,314 6,400 Total non-interest expense 79,481 75,269 72,638 Income before provision for income taxes 26,036 63,509 44,886 Provision for income taxes 6,141 16,923 11,658 Net income $ 19,895 $ 46,586 $ 33,228 Net income per common share: Basic $ 1.24 $ 2.93 $ 2.32 Diluted $ 1.24 $ 2.92 $ 2.30 Weighted average common shares: Basic 16,012 15,921 14,340 Diluted 16,026 15,969 14,422 Comprehensive income (loss): Net income $ 19,895 $ 46,586 $ 33,228 Other comprehensive income (loss): Change in net unrealized gains or losses on available-for-sale securities 20,358 ( 88,620 ) ( 21,281 ) Reclassification adjustment for realized losses on available-for-sale securities in net income 8,700 63 16 Reclassification adjustment for gains or losses on fair value hedges ( 1,359 ) — — Net unrealized losses on securities transferred from available-for-sale to held-to-maturity — ( 14,847 ) — Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity 1,743 1,580 493 Other comprehensive income (loss), before tax 29,442 ( 101,824 ) ( 20,772 ) Deferred tax expense (benefit) 8,702 ( 30,102 ) ( 6,147 ) Other comprehensive income (loss), net of tax 20,740 ( 71,722 ) ( 14,625 ) Comprehensive income (loss) $ 40,635 $ ( 25,136 ) $ 18,603 The accompanying notes are an integral part of these consolidated financial statements. 56 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 2023, 2022 and 2021 (in thousands, except share data) Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss), Net of Taxes Total Shares Amount Balance at December 31, 2020 13,500,453 $ 125,905 $ 219,747 $ 12,601 $ 358,253 Net income — — 33,228 — 33,228 Other comprehensive loss, net of tax — — — ( 14,625 ) ( 14,625 ) Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 36,338 463 — — 463 Stock issued under employee stock purchase plan 2,648 90 — — 90 Stock issued under employee stock ownership plan 36,075 1,330 — — 1,330 Restricted stock granted 30,742 — — — — Restricted stock surrendered for tax withholdings upon vesting ( 4,211 ) ( 166 ) — — ( 166 ) Restricted stock forfeited / cancelled ( 3,848 ) — — — — Stock-based compensation - stock options — 491 — — 491 Stock-based compensation - restricted stock — 481 — — 481 Cash dividends paid on common stock ($ 0.94 per share) — — ( 13,107 ) — ( 13,107 ) Stock purchased by directors under director stock plan 1,034 34 — — 34 Stock issued in payment of director fees 6,443 217 — — 217 Stock issued to American River Bankshares shareholders 3,441,235 124,401 — — 124,401 Stock repurchased, including commissions ( 1,117,666 ) ( 40,722 ) — — ( 40,722 ) Balance at December 31, 2021 15,929,243 $ 212,524 $ 239,868 $ ( 2,024 ) $ 450,368 Net income — — 46,586 — 46,586 Other comprehensive loss, net of tax — — — ( 71,722 ) ( 71,722 ) Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 40,674 821 — — 821 Stock issued under employee stock purchase plan 2,025 62 — — 62 Stock issued under employee stock ownership plan 38,000 1,233 — — 1,233 Restricted stock granted 46,672 — — — — Restricted stock surrendered for tax withholdings upon vesting ( 1,169 ) ( 40 ) — — ( 40 ) Restricted stock forfeited / cancelled ( 13,692 ) — — — — Stock-based compensation - stock options — 251 — — 251 Stock-based compensation - restricted stock — 712 — — 712 Cash dividends paid on common stock ($ 0.98 per share) — — ( 15,673 ) — ( 15,673 ) Stock purchased by directors under director stock plan 515 16 — — 16 Stock issued in payment of director fees 10,145 355 — — 355 Stock repurchased, including commissions ( 23,275 ) ( 877 ) — — ( 877 ) Balance at December 31, 2022 16,029,138 $ 215,057 $ 270,781 $ ( 73,746 ) $ 412,092 Net income — — 19,895 — 19,895 Other comprehensive income, net of tax — — — 20,740 20,740 Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 11,530 230 — — 230 Stock issued under employee stock purchase plan 2,527 46 — — 46 Stock issued under employee stock ownership plan 58,400 1,315 — — 1,315 Restricted stock granted 61,978 — — — — Restricted stock surrendered for tax withholdings upon vesting ( 2,498 ) ( 70 ) — — ( 70 ) Restricted stock forfeited / cancelled ( 21,024 ) — — — — Stock-based compensation - stock options — 181 — — 181 Stock-based compensation - restricted stock — 341 — — 341 Cash dividends paid on common stock ($ 1.00 per share) — — ( 16,106 ) — ( 16,106 ) Stock issued in payment of director fees 18,362 398 — — 398 Balance at December 31, 2023 16,158,413 $ 217,498 $ 274,570 $ ( 53,006 ) $ 439,062 The accompanying notes are an integral part of these consolidated financial statements. 57 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2023, 2022 and 2021 (in thousands) 2023 2022 2021 Cash Flows from Operating Activities: Net income $ 19,895 $ 46,586 $ 33,228 Adjustments to reconcile net income to net cash provided by operating activities: Provision for (reversal of) credit losses on loans 2,575 ( 63 ) ( 1,449 ) Reversal of credit losses on unfunded loan commitments ( 342 ) ( 318 ) ( 992 ) Noncash contribution expense to employee stock ownership plan 1,315 1,233 1,330 Noncash director compensation expense 398 355 217 Stock-based compensation expense 522 963 972 Amortization of core deposit intangible 1,350 1,489 1,135 Amortization of investment security premiums, net of accretion of discounts 6,897 9,056 5,799 (Accretion of discounts) amortization of premiums on acquired loans, net ( 573 ) 153 ( 571 ) Accretion of discount on subordinated debenture — — 1,347 Net change in deferred loan origination costs/fees ( 836 ) ( 2,716 ) ( 3,155 ) Write-down of other real estate owned 40 345 — Losses on sale of investment securities, net of gains 5,893 63 16 Depreciation and amortization 2,098 1,840 1,740 Earnings on bank-owned life insurance policies ( 1,802 ) ( 1,229 ) ( 2,194 ) Net changes in interest receivable and other assets ( 4,149 ) 2,228 5,554 Net changes in interest payable and other liabilities 2,378 ( 4,708 ) 2,276 Total adjustments 15,764 8,691 12,025 Net cash provided by operating activities 35,659 55,277 45,253 Cash Flows from Investing Activities: Purchase of held-to-maturity securities — ( 319,937 ) ( 305,329 ) Purchase of available-for-sale securities — ( 243,459 ) ( 620,236 ) Proceeds from sale of available-for-sale securities 205,795 10,664 6,632 Proceeds from paydowns/maturities of held-to-maturity securities 47,170 47,098 71,682 Proceeds from paydowns/maturities of available-for-sale securities 59,316 130,178 110,059 Proceeds from sale of Visa Inc. Class B restricted common stock 2,807 — — Decrease in loans receivable, net 16,945 164,019 256,856 Proceeds from sale of loan 3,263 — — Purchase of bank-owned life insurance policies — ( 4,714 ) ( 1,943 ) Proceeds from bank-owned life insurance policies 766 350 2,478 Purchase of premises and equipment ( 1,749 ) ( 2,266 ) ( 1,044 ) Proceeds from sale of other real estate owned 420 — — Cash and cash equivalents acquired from American River Bankshares — — 140,577 Cash paid for low income housing tax credit investment ( 42 ) ( 30 ) ( 398 ) Net cash provided by (used in) investing activities 334,691 ( 218,097 ) ( 340,666 ) Cash Flows from Financing Activities: Net (decrease) increase in deposits ( 283,273 ) ( 235,202 ) 514,279 (Repayment of) proceeds from short-term borrowings, net ( 86,000 ) 112,000 ( 13,885 ) Repayment of finance lease obligations ( 148 ) ( 131 ) ( 86 ) Repayment of subordinated debenture including execution costs — — ( 4,126 ) Proceeds from stock options exercised 230 821 463 Restricted stock surrendered for tax withholdings upon vesting ( 70 ) ( 40 ) ( 166 ) Cash dividends paid on common stock ( 16,106 ) ( 15,673 ) ( 13,107 ) Stock repurchased, including commissions — ( 1,250 ) ( 40,762 ) Proceeds from stock issued under employee and director stock purchase plans 46 78 124 Net cash (used in) provided by financing activities ( 385,321 ) ( 139,397 ) 442,734 Net (decrease) increase in cash, cash equivalents and restricted cash ( 14,971 ) ( 302,217 ) 147,321 Cash, cash equivalents and restricted cash at beginning of period 45,424 347,641 200,320 Cash, cash equivalents and restricted cash at end of period $ 30,453 $ 45,424 $ 347,641 Supplemental disclosure of cash flow information: Interest paid on deposits and borrowings $ 34,038 $ 2,560 $ 2,105 Income taxes paid, net of refunds $ 8,428 $ 13,730 $ 12,350 Supplemental disclosure of noncash investing and financing activities: Change in net unrealized gains or losses on available-for-sale securities $ 20,358 $ ( 88,620 ) $ ( 21,281 ) Securities transferred from available-for-sale to held-to-maturity, at fair value $ — $ 357,482 $ — Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity $ 1,743 $ 1,580 $ 493 Transfer of loan to loans held-for-sale $ 3,263 $ — $ — Repurchase of stock not yet settled $ — $ — $ 373 Acquisition: Fair value of assets acquired, excluding cash and cash equivalents $ — $ — $ 757,844 Fair value of liabilities assumed $ — $ — $ 816,558 Restricted cash 1 $ 330 $ — $ 1,930 1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco and other cash pledged. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020. The accompanying notes are an integral part of these consolidated financial statements. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Summary of Significant Accounting Policies Nature of Operations: Bank of Marin Bancorp ("Bancorp"), headquartered in Novato, California, conducts business primarily through its wholly-owned subsidiary, Bank of Marin (the "Bank"), a California state-chartered commercial bank that provides a wide range of financial services through 27 retail branches and 8 commercial banking offices across 10 counties, including Alameda, Amador, Contra Costa, Marin, Napa, Placer, Sacramento, San Francisco, San Mateo and Sonoma. Our customer base is made up of business, not-for-profit and personal banking relationships from the communities within our Northern California footprint. Basis of Presentation: The consolidated financial statements include the accounts of Bancorp, a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin, a California state-chartered commercial bank. References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes. Our accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP"), general practice, and regulatory guidance within the banking industry. A summary of our significant policies follows. All material intercompany transactions have been eliminated. We monitor financial performance and evaluate the revenue streams of the various products, services, locations, and operations on a company-wide basis. Accordingly, all of the community banking and wealth m anagement and trust services are considered by management to be aggregated into one reportable operating segment, community banking. We evaluated subsequent events through the date of filing with the Securities and Exchange Commission (“SEC”) and determined there were no subsequent events that required additional recognition or disclosure. Accounting Changes and Reclassifications: Certain items in prior financial statements have been reclassified to conform to the current presentation, including the reclassification of the provision for credit losses on unfunded commitments in the second quarter of 2021 from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income (loss). Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the consolidated financial statements include the allowance for credit losses, fair value measurements, and goodwill impairment assessment, as discussed in the Notes herein. Cash, Cash Equivalents and Restricted Cash: This includes cash, due from banks, federal funds sold and other short-term investments with maturities of less than three months at the time of purchase. Restricted cash includes balances not immediately available for business operations such as Federal Reserve Bank of San Francisco reserve requirements and cash pledged for interest rate swap contracts and local agency deposits. Investment Securities: Investment securities are classified as "held-to-maturity," "trading securities" or "available-for-sale." Investments classified as held-to-maturity are those that we have the ability and intent to hold until maturity and are reported at cost, adjusted for the amortization or accretion of premiums or discounts. Investments held for resale in anticipation of short-term market movements are classified as trading securities and are reported at fair value, with unrealized gains and losses included in earnings. Investments that are neither held-to-maturity nor trading are classified as available-for-sale and are reported at fair value. Unrealized gains and losses for available-for-sale securities, net of related taxes, are reported as a separate component of comprehensive income (loss) and included in stockholders' equity until realized. For discussion of our methodology in determining fair value, see Note 9, Fair Value of Assets and Liabilities. Purchase premiums and discounts on investment securities are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. For certain callable debt securities purchased at a premium, we amortize the premium to the earliest call date. Dividend and interest income are recognized when earned. Realized gains and losses on the sale of securities are included in non-interest income. The specific identification method is used to calculate realized gains and losses on sales of securities. Securities transferred from the available-for-sale category to the held-to-maturity category are recorded at fair value 59 at the date of transfer. Unrealized holding gains or losses on the dates of the transfer of securities from available-for-sale to held-to-maturity are included in the balance of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets. These unrealized holding gains or losses on the dates of transfer are amortized over the remaining life of the securities as yield adjustments in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. Non-marketable equity securities include stock held for membership and regulatory purposes, such as Federal Home Loan Bank ("FHLB") stock and other non-marketable equity securities. These securities are accounted for at cost, evaluated for impairment as of each reporting period, and included in interest receivable and other assets on the consolidated statements of condition. During 2023, the Bank sold its remaining investment in Visa Inc. Class B restricted common stock, as discussed in Note 2 - Investment securities. As of December 31, 2023 and 2022 our investment in FHLB stock was carried at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Both cash and stock dividends from the FHLB are reported as non-interest income. Allowance for Credit Losses on Investment Securities: The allowance for credit losses on h eld-to-maturity securities is a contra-asset valuation account determined in accordance with ASC 326, which is deducted from the securities' amortized cost basis at the balance sheet date as a result of management's assessment of the net amount expected to be collected. The allowance is measured on a pooled basis for securities with similar risk characteristics using historical credit loss information, adjusted for current conditions and reasonable and supportable forecasts. Securities that are determined to be uncollectible are written off against the allowance. For available-for-sale securities in an unrealized loss position ("impaired security"), we assess whether 1) we intend to sell the security, or, 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. Under either of these conditions, the security's amortized cost is written down to fair value through a charge to previously recognized allowances or earnings, as applicable. For impaired securities that do not meet these conditions, we assess whether the decline in fair value was due to credit loss or other factors. This assessment considers, among other things: 1) the extent to which the fair value is less than amortized cost, 2) the financial condition and near-term prospects of the issuer, 3) any changes to the rating of the security by a rating agency, and 4) our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss component. Any impairment due to non-credit-related factors that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss). The discount rate used in determining the present value of the expected cash flows is based on the effective interest rate implicit in the security at the date of purchase. Accrued interest receivable is excluded from the amortized costs and fair values of both held-to-maturity and available-for-sale securities and included in interest receivable and other assets on the consolidated statements of condition. Investment securities are placed on non-accrual status when principal or interest is contractually past due more than ninety days, or management does not expect full payment of principal and interest. We do not record an allowance for credit losses for accrued interest on investment securities, as the amounts are written-off when the investment is placed on non-accrual status. There were no non-accrual investment securities in any of the years presented in the consolidated financial statements. Originated Loans: Loans are reported at amortized cost, which is the principal amount outstanding net of deferred fees (costs), purchase premiums (discounts) and net charge-offs (recoveries). Amortized cost excludes accrued interest, which is reflected in interest receivable and other assets in the consolidated statements of condition. We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed below. Interest income is accrued daily using the simple interest method. Fees collected upon loan origination and certain direct costs of originating loans are deferred and recognized over the contractual lives of the related loans as yield adjustments using the interest method or straight-line method, as applicable. Upon prepayment or other disposition of the underlying loans before their contractual maturities, any associated unearned fees or unamortized costs are recognized. 60 Acquired Loans: ASC 326 modified the accounting for purchased loans and requires that an allowance for credit losses be established at the date of acquisition. However, for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than reported as a provision for credit losses. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the provision for credit losses. Past-Due and Non-Accrual Loan Policy: A loan is considered past due when a payment has not been received by the contractual due date. Loans are placed on non-accrual status when management believes that there is substantial doubt as to the collection of principal or interest, generally when they become contractually past due by 90 days or more with respect to principal or interest, except for loans that are well-secured and in the process of collection. When loans are placed on non-accrual status, any accrued but uncollected interest is reversed from current-period interest income and the amortization of deferred loan origination fees and costs is suspended. Interest payments received on nonaccrual loans are either applied against principal or reported as interest income, according to management’s judgment as to the ultimate collectability of principal. We may return non-accrual loans to accrual status when one of the following occurs: • The borrower has resumed paying the full amount of the principal and interest and we are satisfied with the borrower's financial position. In order to meet this test, we must have received repayment of all past due principal and interest, unless the amounts contractually due are reasonably assured of repayment within a reasonable period of time, and there has been a sustained period of repayment performance (generally, six consecutive monthly payments), according to the original or modified contractual terms. • The loan has become well secured and is in the process of collection. Loan Charge-Off Policy: For all loan types excluding overdraft accounts, we generally make a charge-off determination at or before 90 days past due. A collateral-dependent loan is partially charged down to the fair value of collateral securing it if: (1) it is deemed unc ollectable, o r (2) it has been classified as a loss by either our internal loan review process or external examiners. A non-collateral-dependent loan is partially charged down to its net realizable value under the same circumstances. Overdraft accounts are generally charged off when they exceed 60 days past due. Collateral Dependent Loans: A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For collateral dependent loans, including those for which management determines foreclosure is probable, each loan is individually evaluated and the allowance for credit losses is based on the fair value of the collateral, adjusted for estimated selling costs when repayment is expected from the sale of the collateral, less the loan's amortized c ost. In determining the fair value, management consi ders such information as the appraised value of the c ollateral, observed and potential future changes in collateral value, and historical loss experience for loans that were secured by similar collateral. Generally, with problem credits that are collateral dependent, we obtain appraisals of the collateral at least annually. We may obtain appraisals more frequently if we believe the collateral value is subject to market volatility, if a specific event has affected the collateral, or if we believe foreclosure is imminent. Allowance for Credit Losses on Loans ("ACL"): The ACL 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. Amortized cost does not include accrued interest, which management elected to exclude from the estimate of expected credit losses (refer to the Past-Due and Non-Accrual Loan Policy section above). Management estimates the allowance quarterly using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Credit loss experience provides the basis for the estimation of expected credit losses. The ACL model utilizes a discounted cash flow ("DCF") method to measure the expected credit losses on loans collectively evaluated that are sub-segmented by loan pools with similar credit risk characteristics, which are generally comprised of federal regulatory reporting codes (i.e., Call codes). Pooled segments include the following: • Loans secured by real estate: - 1-4 family residential construction loans - Other construction loans and all land development and other land loans 61 - Secured by farmland (including residential and other improvements) - Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit - Closed-end loans secured by 1-4 family residential properties, secured by first liens - Closed-end loans secured by 1-4 family residential properties, secured by junior liens - Secured by multifamily (5 or more) residential properties - Commercial real estate loans secured by owner-occupied non-farm nonresidential properties - Commercial real estate loans secured by other non-farm nonresidential properties • Loans to finance agricultural production and other loans to farmers • Commercial and industrial loans • Loans to individuals for household, family and other personal expenditures (i.e., consumer loans) • Municipal entities • Non-profit organizations • Other loans (overdraft credit lines) The DCF method incorporates assumptions for probability of default ("PD"), loss given default ("LGD"), and prepayments and curtailments over the contractual terms of the loans. Under the DCF method, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows using the loan's effective rate. We elected to report the change in present values from one reporting period to the next due to the passage of time and changes in the estimate of future expected cash flows through the provision for credit losses, rather than though interest income. In determining the PD for each pooled segment, the Bank utilized regression analyses to identify certain economic drivers that were considered highly correlated to historical Bank or peer loan default experience. As a result, management chose the California unemployment rate as the primary economic forecast driver for all segments, except for municipal loans. In addition, the annual percentage change in the California gross domestic product was used in the commercial and industrial loan segment. For municipal loans, the ACL model utilized a constant default rate obtained from a nationally recognized default rate st udy, which is updated annually. A third party provides LGD estimates for each segment based on a banking industry Frye-Jacobs Risk Index approach. The ACL model incorporates a one-year reasonable and supportable forecast of economic factors, updated quarterly, which is based on Moody's Analytics' Baseline Forecast. For periods beyond the forecast horizon, the economic factors revert to historical averages on a straight-line basis over a one-year period. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments and curtailments, when appropriate. The pooled loans' contractual loan terms exclude assumptions about extensions, renewals, and modifications. Loans that do not share the same risk characteristics as pooled loans are evaluated individually for credit loss and generally include all non-accrual loans, collateral dependent loans, and certain modified loans and loans graded substandard or worse, as determined by management. 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. Qualitative internal and external risk factors include, but are not limited to, the following: • Changes in the nature and volume of the loan portfolio • Changes in the volume and severity of past due loans, the volume of non-accruals loans, and the volume and severity of adversely classified or graded loans • The existence and effect of individual loan and loan segment concentrations • Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere • Changes in the experience, ability, and depth of lending management and other relevant staff • Changes in the quality of our systematic loan review processes • Changes in economic and business conditions, and developments that affect the collectability of the portfolio • Changes in the value of underlying collateral, where applicable 62 • The effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the portfolio • The effect of acquisitions of other loan portfolios on our infrastructure, including risk associated with entering new geographic areas as a result of such acquisitions • The presence of specialized lending segments in the portfolio There were no material changes to the ACL methodology during 2023. However, assumptions that mainly influenced management's current estimate of the expected credit losses were primarily 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. Other elements of the estimated current expected credit losses included increased allowances for individually analyzed loans exhibiting unique credit risk characteristics and a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rate, partially offset by the impact of an overall decrease in loans. While we believe we use the best information available to determine the allowance for credit losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. Our ACL model is sensitive to changes in unemployment rate forecasts and certain other assumptions that could result in material fluctuations in the allowance for credit losses and adversely affect our financial condition and results of operations. As discussed in the Other Recently Adopted Accounting Standards section below, as of January 1 2023, we adopted ASU No. 2022-02 under which the concept of troubled debt restructured loans and its impact on the ACL calculation was eliminated in favor of the disclosure of certain loan modifications made to borrowers experiencing financial difficulty. Such modified loans are now subject to the Bank's standard ACL process, as outlined above. For further information regarding the allowance for loan losses, see Note 3, Loans and Allowance for Loan Losses. Allowance for Credit Losses on Unfunded Loan Commitments: We make commitments to extend credit to meet the financing needs of our customers in the form of loans or standby letters of credit. We are exposed to credit losses over a loan's contractual period in the event that a decline in credit quality of the borrower leads to nonperformance. We record an allowance for losses on unfunded loan commitments at the balance sheet date based on estimates of probability that these commitments will be drawn upon according to historical utilization experience of different types of commitments and expected loss severity and loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities on the consolidated statements of condition. Adjustments to the allowance for unfunded commitments are included in non-interest expense as a provision for (or reversal of) the allowance for unfunded commitments. Transfers of Financial Assets: We have entered into certain loan participation agreements with other organizations. We account for these transfers of financial assets as sales when control over the transferred financial assets has been surrendered. Control over transferred assets is deemed to be surrendered when 1) the assets and liabilities have been isolated from us, 2) the transferee has the right to pledge or exchange the assets (or beneficial interests) it received, free of conditions that constrain it from taking advantage of that right, beyond a trivial benefit and 3) we do not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred assets. Transfers of a portion of a loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, and the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan. We recognized no gains or losses on the sale of these participation interests in 2023, 2022 and 2021. Premises and Equipment: Lan d is carried at cost and not depreciated. Bank-owned buildings, leasehold improvements, furniture, fixtures, software and equipment and are stated at cost, less accumulated depreciation, and depreciated/amortized on a straight-line basis. Furniture an d fixtures are depreciated over eight years and 63 equipment is generally depreciated over three to twenty years . Bank-owned buildings are depreciated over twenty-five to thirty years . Lease hold improvements are amortized over the lesser of their estimated useful lives or the terms of the leases. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. Leases: We lease certain premises under long-term non-cancelable operating leases, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Only those renewal and termination options that management determines are reasonably certain of exercising are included in the calculation of the lease liability. In addition, we lease certain equipment under finance leases. The equipment finance lease terms do not contain renewal options, bargain purchase options or residual value guarantees. We did not have any significant short-term leases during the reported periods. Lease right-of-use assets represent the right to use the underlying asset while lease liabilities represent the present value of future lease obligations. We elected not to separate non-lease components from lease components and to exclude short-term leases (i.e., lease term of 12 months or less at the commencement date) from right-of-use assets and lease liabilities for all lease classifications. When calculating the lease liability, because most lease contracts do not contain an implicit interest rate, we discount lease payments over a lease's expected term based on the collateralized Federal Home Loan Bank borrowing rate that was commensurate with lease terms and minimum payments at the lease commencement date. Right-of-use assets for operating leases are amortized over the lease term by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion on the related liability to make lease payments, whereas finance leases are amortized on a straight-line basis over the term of the lease. Expense recognition for operating leases is recorded on a straight-line basis while expense recognition for finance leases represents the sum of periodic amortization of the associated right-of-use asset and the interest accretion on the lease liability. Refer to Note 12, Commitments and Contingencies, for further information. Business Combinations: Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations . A business is defined as a set of activities and assets that is both self-sustaining and managed to provide a return to investors and generally has three elements: inputs, processes and outputs. Under the acquisition method, the acquiring entity in a business combination recognizes the acquired assets and assumed liabilities at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceed the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from a business combination are recognized at fair value. Results of operations of an acquired business are included in the consolidated statements of operations from the date of acquisition. Business acquisition-related costs, including conversion and restructuring charges, are expensed as incurred. If substantially all of an acquisition is made up of one asset or several similar assets, or without a substantive process that together contributes to the ability to create outputs, the acquisition is accounted for as an asset acquisition and acquisition costs will be capitalized as part of the assets acquired, rather than expensed in a business combinations. Goodwill and Other Intangible Assets: 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 deemed to have an indefinite life, is not subject to amortization, and as such is tested for impairment at least annually or more frequently if events and circumstances lead management to believe the value of goodwill may be impaired. Goodwill is the only intangible asset with an indefinite life recorded in the Company’s consolidated statements of financial condition. Impairment testing is performed at the reporting unit level. Management considered the Company to be its sole reporting unit for the year ended December 31, 2023. Management’s assessment of goodwill impairment is performed in accordance with ASC 350-20, Intangibles - Goodwill and Other - Goodwill and encompasses a two-step process. First, the Company has the option to perform a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not the fair value of the Company is less than its carrying amount, including goodwill. The factors considered in the qualitative assessment typically include macroeconomic conditions, industry and market conditions and the overall financial performance of the Company, among other factors. If the Company determines that it is more likely than 64 not the fair value of the Company may be less than its carrying amounts, then it proceeds to the quantitative impairment test, whereby it calculates the fair value of the Company. Under GAAP, in its performance of impairment testing, management has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the Company exceeds its fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge recorded in non-interest expense. If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the Company that is greater than the carrying amount, then no impairment charge is recorded. The Company performs its annual goodwill impairment test as of November 30 th each year. Due to the market volatility experienced in the banking sector during 2023, the Company elected to bypass a qualitative assessment of goodwill and proceed directly to a quantitative assessment, the results of which indicated that goodwill totaling $ 72.8 million was not impaired as of December 31, 2023, and there were no changes to our assessment through December 31, 2023. In addition, the Company recorded no goodwill impairment for the years ended December 31, 2022, and 2021. Core deposit intangibles ("CDI") arising from the acquisition of other financial institutions are considered to have definite useful lives and are amortized on an accelerated method over their estimated useful life of ten years . At December 31, 2023, the future estimated amortization expens e for the CDI arising from our past acquisitions was as follows: (in thousands) 2024 2025 2026 2027 2028 Thereafter Total Core deposit intangible amortization $ 975 $ 875 $ 773 $ 634 $ 242 $ 267 $ 3,766 The CDI represents the estimated future benefit of deposits related to an acquisition and is recorded separately from the related deposits and evaluated at least annually or when events and circumstances change. We recorded no impairment adjustments for the CDI in 2023, 2022 and 2021. Other Real Estate Owned ("OREO"): OREO is comprised of property acquired through a business combination, foreclosure, in substance repossession or acceptance of deeds-in-lieu of foreclosure when the related loan receivable is de-recognized. OREO is recorded at fair value of the collateral less estimated costs to sell, establishing a new cost basis, and subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Any shortfall of collateral value from the recorded investment of the related loan is recognized as loss at the time of foreclosure and is charged against the allowance for loan losses. Fair value of collateral is generally based on an independent appraisal of the property. Revenues and expenses associated with OREO, and subsequent adjustments to the fair value of the property and to the estimated costs of disposal, are realized and reported as a component of non-interest income and expense when incurred. We recorded a $ 40 thousand and $ 345 thousand valuation adjustment to OREO in 2023 and 2022, respectively. In July 2023, the Bank completed the sale of its only OREO property. Bank Owned Life Insurance ("BOLI"): The Bank owns life insurance policies on certain key current and former officers. BOLI is recorded in interest receivable and other assets on the consolidated statements of condition at the amount that can be realized under the insurance contract at period-end, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement. Investments in Low Income Housing Tax Credit Funds: We have invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate-income tenants throughout California. Our ownership percentage in each limited partnership ran ges from 1.0 % to 3.5 %. We account for the investments in qualified affordable housing tax credit funds using the proportional amortization method, where the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received. Low income housing tax credits and other tax benefits received, net of the amortization of the investment is recognized as part of income tax benefit. Each of the partnerships must meet the regulatory minimum requirements for affordable housing for a mini mum 15-year compliance period t o fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credit may be denied for any period in which the project is not in compliance and a portion of the credit previously taken is subject to recapture with interest. We record an impairment charge if the value of the future tax credits and other tax benefits is less than the carrying value of the investments. 65 Employee Stock Ownership Plan (“ESOP”): We recognize compensation cost for ESOP contributions when funds become committed for the purchase of Bancorp's common shares into the ESOP in the year in which the employees render service entitling them to the contribution. If we contribute stock, the compensation cost is the fair value of the shares when they are committed to be released (i.e., when the number of shares becomes known and formally approved). In 2023, 2022 and 2021, Bancorp only made stock contributions to the ESOP. Income Taxes: Income taxes reported in the consolidated financial statements are computed based on an asset and liability approach. We recognize the amount of taxes payable or refundable for the current year and we record deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. We record net deferred tax assets to the extent it is more likely than not that they will be realized. In evaluating our ability to recover the deferred tax assets and the need to establish a valuation allowance against the deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. In projecting future taxable income, management develops assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates being used to manage the underlying business. Bancorp files consolidated federal and combined state income tax returns. We recognize the financial statement effect of a tax position when it is more likely than not, based on the technical merits and all available evidence, that the position will be sustained upon examination, including the resolution through protests, appeals or litigation processes. For tax positions that meet the more likely than not threshold, we measure and record the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the taxing authority. The remainder of the benefits associated with tax positions taken is recorded as unrecognized tax benefits, along with any related interest and penalties. Interest and penalties related to unrecognized tax benefits are recorded in tax expense. In deciding whether or not our tax positions taken meet the more likely than not recognition threshold, we must make judgments and interpretations about the application of inherently complex state and federal tax laws. To the extent tax authorities disagree with tax positions taken by us, our effective tax rates could be materially affected in the period of settlement with the taxing authorities. Revision of our estimate of accrued income taxes also may result from our own income tax planning, which may affect effective tax rates and results of operations for any reporting period. We present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss ("NOL") carryforward, or similar tax loss or tax credit carryforward, rather than as a liability, when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) we intend to and are able to use the deferred tax asset for that purpose. Otherwise, the unrecognized tax benefit is presented as a liability instead of being netted with deferred tax assets. Earnings per share (“EPS”): EPS is based upon the weighted average number of common shares outstanding during each year. The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic EPS are calculated by dividing net income by the weighted average number of common shares outstanding during each annual period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury stock method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, the difference in EPS is nominal for these participating securities. 66 (in thousands, except per share data) 2023 2022 2021 Weighted average basic common shares outstanding 16,012 15,921 14,340 Potentially dilutive common shares related to: Stock options 3 31 62 Unvested restricted stock awards 11 17 20 Weighted average diluted common shares outstanding 16,026 15,969 14,422 Net income $ 19,895 $ 46,586 $ 33,228 Basic EPS $ 1.24 $ 2.93 $ 2.32 Diluted EPS $ 1.24 $ 2.92 $ 2.30 Weighted average anti-dilutive common shares not included in the calculation of diluted EPS 364 211 97 Share-Based Compensation: All share-based payments, including stock options and restricted stock, are recognized as stock-based compensation expense in the consolidated statements of comprehensive income (loss) based on the grant-date fair value of the award with a corresponding increase in common stock. The grant-date fair value of the award is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. The stock-based compensation expense excludes stock grants to directors as compensation for their services, which are recognized as director expenses separately based on the grant-date value of the stock. We account for forfeitures as they occur. See Note 8, Stockholders' Equity and Stock Option Plans, for further discussion. We determine the fair value of stock options at the grant date using a Black-Scholes pricing model that takes into account the stock price at the grant date, exercise price, expected life of the option, volatility of the underlying stock, expected dividend yield and risk-free interest rate over the expected life of the option. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatility is based on the historical volatility of the common stock over the most recent period that is generally commensurate with the expected life of the options. The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based award and stock price volatility. The assumptions used represent management's best estimates based on historical information, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if other assumptions had been used, the recorded stock-based compensation expense could have been materially different from that recorded in the consolidated financial statements. The fair value of restricted stock is based on the stock price on the grant date. We record excess tax benefits resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as tax benefits in the consolidated statements of comprehensive income (loss) with a corresponding decrease to current taxes payable. In addition, we reflect excess tax benefits as an operating activity in the consolidated statements of cash flows. Cash paid for tax withholdings when shares are surrendered in a cashless stock option exchange is classified as a financing activity in the consolidated statements of cash flows. Derivative Financial Instruments and Hedging Activities - Fair Value Hedges: All of our interest rate swap contracts are designated and qualified as fair value hedges. The terms of our loan interest rate swap contracts are closely aligned to the terms of the designated fixed-rate loans. The hedging relationships are tested for effectiveness on a quarterly basis using a qualitative approach. The qualitative analysis includes verification that there are no changes to the derivative's or hedged item's key terms and conditions and no adverse developments regarding risk of counterparty default, and validation that we continue to have fair value hedge designation. Our rate swaps on available-for-sale securities were designated as partial term fair value hedges and structured such that the changes in fair value of the interest rate swaps are expected to be perfectly effective in offsetting the changes in the fair value of the hedged items attributable to changes in the swap rate. Because the hedges met the criteria for using the shortcut method, there is no need to periodically reassess effectiveness during the term of the hedges. The interest rate swaps are carried on the consolidated statements of condition at their fair value in other assets (when the fair value is positive) or in other liabilities (when the fair value is negative). For fair value designated 67 hedges, the gain or loss on the hedging instruments, as well as the offsetting loss or gain on the hedged items, are recognized in current earnings as fair values change. For derivative instruments executed with the same counterparty under a master netting arrangement, we do not offset fair value amounts of interest rate swaps in liability positions with the ones in asset positions. From time to time, we make firm commitments to enter into long-term fixed-rate loans with borrowers backed by yield maintenance agreements and simultaneously enter into forward interest rate swap agreements with correspondent banks to mitigate the change in fair value of the yield maintenance agreement. Prior to loan funding, yield maintenance agreements with net settlement features that meet the definition of a derivative are considered as non-designated hedges and are carried on the consolidated statements of condition at their fair value in other assets (when the fair value is positive) or in other liabilities (when the fair value is negative). The offsetting changes in the fair value of the forward swap and the yield maintenance agreement are recorded in interest income. When the fixed-rate loans are originated, the forward swaps are designated to offset the change in fair value in the loans. Subsequent to the point of the swap designations, the fair value of the related yield maintenance agreements at the designation date that was recorded in other assets is amortized using the effective yield method over the life of the respective designated loans. For further detail, refer to Note 14, Derivative Financial Instruments and Hedging Activities. Revenue Recognition: We utilize the following five-step model for non-financial instrument related revenue that is in scope for ASC 606, Revenue from Contracts with Customers : 1) identify the contract, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and, 5) recognize revenue when (or as) the entity satisfies the performance obligation. Our main revenue streams in scope for ASC 606 include: • Wealth management and trust services ("WMTS") fees - WMTS services include, but are not limited to: customized investment advisory and management; administrative services such as bill pay and tax reporting; trust administration, estate settlement, custody and fiduciary services. Performance obligations for investment advisory and management services are generally satisfied over time. Revenue is recognized monthly according to a tiered fee schedule based on the client's month-end market value of assets under our management. WMTS does not earn revenue based on performance or incentives. Costs associated with WMTS revenue-generating activities, such as payments to sub-advisors, are recorded separately as part of professional service expenses when incurred. • Deposit account service charges - Service charges on deposit accounts consist of monthly maintenance fees, business account analysis fees, business online banking fees, check order charges, and other deposit account-related fees. Performance obligations for monthly maintenance fees and account analysis fees are satisfied, and the related revenue recognized, when we complete our performance obligation each month. Performance obligations related to transaction-based services (such as check orders) are satisfied, and the related revenue recognized, at a point in time typically when the transaction is completed, except for business accounts subject to analysis where the transaction-based fees are part of the monthly account analysis fees. • Debit card interchange fees - We issue debit cards to our consumer and small business customers that allow them to purchase goods and services from merchants in person, online, or via mobile devices using funds held in their demand deposit accounts held with us. Debit cards issued to our customers are part of global electronic payment networks (such as Visa) who pass a portion of the merchant interchange fees to debit card-issuing member banks like us when our customers make purchases through their networks. Performance obligations for debit card services are satisfied and revenue is recognized daily as the payment networks process transactions. Because we act in an agent capacity, we recognize network costs on a net basis with interchange fees in non-interest income. Advertising Costs: Advertising costs are expensed as incurred. For the years ended December 31, 2023, 2022, and 2021, advertising costs totaled $ 1.2 million, $ 1.1 million, and $ 908 thousand, respectively. Comprehensive Income (Loss): Comprehensive income (loss) primarily includes net income, changes in the unrealized gains or losses on available-for-sale investment securities, reclassification adjustment for gains or losses 68 on fair value hedges, reclassification adjustment for realized (gains) losses on available-for-sale securities in net income, and amortization of net unrealized gains or losses on securities transferred from available-for-sale to held-to-maturity, net of related taxes, reported on the consolidated statements of comprehensive income (loss) and as components of stockholders' equity. Fair Value Measurements: We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price notion) reflecting factors such as a liquidity premium. Securities available-for-sale and derivatives are recorded at fair value on a recurring basis. Equity investments that do not have readily determinable fair values are recorded at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. FHLB stock was carried at cost as of December 31, 2023, as there was no impairment or changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Additionally, from time to time, we may be required to record certain assets and liabilities at fair value on a non-recurring basis, such as purchased loans and acquired deposits recorded at acquisition date, certain collateral dependent loans, other real estate owned and securities held-to-maturity that are other-than-temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting. When we develop our fair value measurement process, we maximize the use of observable inputs. Whenever there is no readily available market data, we use our best estimates and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these consolidated financial statements. Other Recently Adopted Accounting Standards In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . The amendment eliminated the recognition measurement guidance for troubled debt restructured ("TDR") loans and instead enhanced disclosure requirements for certain loan modifications when a borrower is experiencing financial difficulty. In addition, the amendment required that an entity include in its vintage disclosures the current period gross loan charge-offs by year of origination. We early adopted the current period charge-off disclosures in the first quarter of 2022. We adopted the loan modification provisions as of January 1, 2023 using a modified retrospective method. The cumulative-effect adjustment to retained earnings was considered immaterial. Refer to Note 5, Loans and Allowance for Credit Losses on Loans, for additional information. In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method . Among other things, the ASU renamed the "last-of-layer" method to the "portfolio layer" method and made fair value hedging more accessible for hedge accounting of interest rate risk for portfolios and financial assets. For example, the guidance permits an entity to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby providing for consistency between accounting for similar hedges. We adopted the amendments on January 1, 2023, which had no effect on our existing hedge accounting, disclosures, financial condition or results of operations. In March 2020, the FASB issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848) . The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden of accounting for, or recognizing the effects of reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Topic 848 was further amended in January 2021 with ASU No. 2021-01, which provided additional guidance on certain optional expedients and scope of derivative instruments, and in December 2022 with ASU 2022-06, which extended the sunset date of Topic 848 to December 31, 2024 given the UK Financial Conduct Authority ("FCA") March 2021 announcement that the intended cessation date of certain tenors of USD LIBOR would be June 30, 2023. An entity may elect the amendments in these updates at an interim period with adoption methods varying based on transaction type. As of December 31, 2023, we had three interest rate swap contracts with notional values totaling $ 8.6 million that were indexed to LIBOR, which transitioned to the Secured Overnight 69 Financing Rate ("SOFR") effective July 1, 2023. The transition to SOFR did not have a material impact to either our financial condition or results of operations. Accounting Standards Not Yet Effective In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . The amendment reduces diversity in practice by clarifying that a separate contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. In addition, this ASU provided amended examples to illustrate that a restriction that is a characteristic of the equity security, which market participants would take into account when pricing them, would be considered in measuring fair value. This ASU also introduces new disclosure requirements. The amendments are effective prospectively for years beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements. As discussed in Note 2, Investment Securities, in July 2023 we sold our remaining shares of Visa Inc. Class B restricted common stock. As a result of the sale, this update will not impact our financial condition, results of operations or disclosures. In March 2023, the FASB issued ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements . For public companies, the amendment requires entities to amortize leasehold improvements associated with common control lease arrangements over the useful life of the improvements to the common control group, as opposed to the shorter of the remaining lease term and the useful life of the improvements for all other operating leases. The amendments are effective for years beginning after December 15, 2023, and may be adopted either prospectively or retrospectively. Early adoption is permitted for both interim and annual financial statements. We currently do not have common control lease arrangements, and therefore do not anticipate that the amendments will impact our financial condition and results of operations. In March 2023, the FASB issued ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method . Under current GAAP, an entity can only elect to apply the proportional amortization method to investments in low-income housing tax credit ("LIHTC") structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the consolidated statements of income as a component of income tax expense (benefit). The amendments will allow entities to elect to account for all other equity investments made primarily for the purpose of receiving income tax credits to using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, when certain conditions are met. The amendments are effective for fiscal years beginning after December 15, 2023, and may be adopted either on a modified retrospective basis or retrospectively. Other than investments in LIHTC funds, as disclosed in Note 4, Investment Securities, we currently have no other equity investments made primarily for the purpose of receiving income tax credits, and therefore do not anticipate that the amendments will impact our financial condition and results of operations. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The amendments are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, enhanced interim disclosure requirements, clarifying circumstances in which an entity can disclose multiple segment measures of profit or loss, providing new segment disclosure requirements for entities with a single reportable segment, and requiring other disclosures. The amendments are effective for annual reporting periods beginning after December 15, 2023 (i.e., 2024 Form 10-K) and interim periods within fiscal years beginning after December 31, 2024, and shall be applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. We currently have only one reportable segment and are evaluating the impact of the amendments on our financial statement disclosures upon adoption. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . The amendments require disaggregated information about the effective tax rate reconciliation and additional disclosures on reconciling items and taxes paid that meet a quantitative threshold. The amendments are effective for annual reporting periods beginning after December 15, 2024, and may be adopted either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact of the amendments on our financial statement disclosures upon adoption. 70 Note 2: Investment Securities Our investment securities portfolio consists of U.S. Treasury securities, obligations of state and political subdivisions, U.S. federal government agencies, such as the Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), and U.S. government-sponsored enterprises ("GSEs"), such as the Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB, and U.S. Corporations. We also invest in residential and commercial mortgage-backed securities ("MBS"/"CMBS") and collateralized mortgage obligations ("CMOs") issued or guaranteed by the GSEs, as reflected in the following table. A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of December 31, 2023 and December 31, 2022 is presented below. Held-to-maturity: Amortized Cost 1 Allowance for Credit Losses Net Carrying Amount Gross Unrealized Fair Value (in thousands) Gains (Losses) December 31, 2023 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 306,261 $ — $ 306,261 $ — $ ( 44,396 ) $ 261,865 CMOs issued by FHLMC 226,416 — 226,416 28 ( 24,869 ) 201,575 CMOs issued by FNMA 101,502 — 101,502 — ( 4,779 ) 96,723 CMOs issued by GNMA 51,006 — 51,006 — ( 5,235 ) 45,771 SBA-backed securities 1,853 — 1,853 — ( 90 ) 1,763 Debentures of government-sponsored agencies 146,126 — 146,126 — ( 21,994 ) 124,132 Obligations of state and political subdivisions 62,034 — 62,034 47 ( 7,884 ) 54,197 Corporate bonds 30,000 — 30,000 — ( 1,196 ) 28,804 Total held-to-maturity $ 925,198 $ — $ 925,198 $ 75 $ ( 110,443 ) $ 814,830 December 31, 2022 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 331,281 $ — $ 331,281 $ — $ ( 50,147 ) $ 281,134 CMOs issued by FHLMC 235,971 — 235,971 59 ( 29,503 ) $ 206,527 CMOs issued by FNMA 111,904 — 111,904 — ( 5,419 ) 106,485 CMOs issued by GNMA 52,356 — 52,356 11 ( 3,076 ) 49,291 SBA-backed securities 2,372 — 2,372 — ( 133 ) 2,239 Debentures of government-sponsored agencies 145,823 — 145,823 — ( 26,467 ) 119,356 Obligations of state and political subdivisions 62,500 — 62,500 — ( 10,741 ) 51,759 Corporate bonds 30,000 — 30,000 — ( 1,552 ) 28,448 Total held-to-maturity $ 972,207 $ — $ 972,207 $ 70 $ ( 127,038 ) $ 845,239 1 Amortized cost and fair values exclude accrued interest receivable of $ 3.6 million and $ 3.7 million at December 31, 2023 and 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. Management measures expected credit losses on held-to-maturity securities collectively by major security type, with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued or guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities, as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions and corporate bonds, management considers: (i) issuer and/or guarantor credit ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. Based on the comprehensive analysis, no credit losses are expected. The following table summarizes the amortized cost of our portfolio of held-to-maturity securities issued by states and political subdivisions and corporate bonds by Moody's and/or Standard & Poor's bond ratings as of December 31, 2023 and 2022. 71 Obligations of state and political subdivisions Corporate bonds (in thousands) December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 Aaa / AAA $ 42,577 $ 42,986 $ — $ — Aa2 / AA 19,457 19,514 — — A2 / A — — 30,000 30,000 Total $ 62,034 $ 62,500 $ 30,000 $ 30,000 A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of December 31, 2023 and 2022 is presented below. Available-for-sale: Amortized Cost 1 Gross Unrealized Allowance for Credit Losses Fair Value (in thousands) Gains (Losses) December 31, 2023 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 81,937 $ 2 $ ( 9,516 ) $ — $ 72,423 CMOs issued by FHLMC 266,407 — ( 24,758 ) — 241,649 CMOs issued by FNMA 23,987 — ( 2,715 ) — 21,272 CMOs issued by GNMA 20,006 — ( 2,878 ) — 17,128 SBA-backed securities 21,126 — ( 1,655 ) — 19,471 Debentures of government- sponsored agencies 73,899 — ( 7,037 ) — 66,862 U.S. Treasury securities 11,923 — ( 1,300 ) — 10,623 Obligations of state and political subdivisions 102,202 1 ( 10,321 ) — 91,882 Corporate bonds 11,992 — ( 1,274 ) — 10,718 Asset-backed securities — — — — — Total available-for-sale $ 613,479 $ 3 $ ( 61,454 ) $ — $ 552,028 December 31, 2022 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 109,736 $ 3 $ ( 12,133 ) $ — $ 97,606 CMOs issued by FHLMC 347,437 — ( 33,682 ) — 313,755 CMOs issued by FNMA 36,172 — ( 3,852 ) — 32,320 CMOs issued by GNMA 35,120 — ( 3,296 ) — 31,824 SBA-backed securities 47,724 2 ( 3,371 ) — 44,355 Debentures of government- sponsored agencies 149,114 — ( 14,008 ) — 135,106 U.S. Treasury securities 11,904 — ( 1,635 ) — 10,269 Obligations of state and political subdivisions 116,855 29 ( 14,761 ) — 102,123 Corporate bonds 36,990 — ( 3,714 ) — 33,276 Asset-backed securities 1,553 — ( 91 ) — 1,462 Total available-for-sale $ 892,605 $ 34 $ ( 90,543 ) $ — $ 802,096 1 Amortized cost and fair value exclude accrued interest receivable of $ 2.3 million and $ 3.2 million at December 31, 2023 and 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government-sponsored agencies. In March 2022, we transferred $ 357.5 million of these securities from available-for-sale to held-to-maturity at fair value. We intend and have the ability to hold these securities to maturity. The net unrealized pre-tax loss of $ 14.8 million that remained and the related accumulated other comprehensive loss are accreted to interest income over the remaining lives of the securities. Because these entries offset each other, there is no impact on net income. The amortized cost and fair value of investment debt securities by contractual maturity at December 31, 2023 and 2022 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties. 72 December 31, 2023 December 31, 2022 Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ — $ — $ 101 $ 100 $ 450 $ 446 $ 1,254 $ 1,239 After one but within five years 87,887 84,541 226,669 208,444 87,418 83,663 335,813 307,843 After five years through ten years 304,976 261,654 95,552 85,447 262,072 222,280 185,997 166,273 After ten years 532,335 468,635 291,157 258,037 622,267 538,850 369,541 326,741 Total $ 925,198 $ 814,830 $ 613,479 $ 552,028 $ 972,207 $ 845,239 $ 892,605 $ 802,096 Sales of investment securities and gross gains and losses for the years ended December 31, 2023, 2022 and 2021 are shown in the following table. (in thousands) 2023 2022 2021 Available-for-sale: Sales proceeds $ 205,795 $ 10,664 $ 6,632 Gross realized gains $ 5 $ 17 $ 1 Gross realized losses $ ( 8,705 ) $ ( 80 ) $ ( 17 ) Sale of equity securities: 1 Sales proceeds $ 2,807 $ — $ — Gross realized gain $ 2,807 $ — $ — 1 Refer to VISA Inc. Class B Common Stock section below for more information. The reported values of pledged investment securities are shown in the following table. (in thousands) December 31, 2023 December 31, 2022 Pledged to the State of California: Secure public deposits in compliance with the Local Agency Security Program $ 287,436 $ 231,307 Collateral for trust deposits 666 669 Collateral for Wealth Management and Trust Services checking account 562 564 Total investment securities pledged to the State of California 288,664 232,540 Bankruptcy trustee deposits pledged with Federal Reserve Bank 1,151 1,686 Pledged to FHLB Securities-Backed Credit Program 383,484 — Pledged to the Federal Reserve "BTFP" 265,660 — Total pledged investment securities $ 938,959 $ 234,226 73 There were 313 and 407 securities in unrealized loss positions at December 31, 2023 and 2022, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below. December 31, 2023 < 12 continuous months ≥ 12 continuous months Total securities in a loss position (in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Held-to-maturity: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ — $ — $ 261,865 $ ( 44,396 ) $ 261,865 $ ( 44,396 ) CMOs issued by FHLMC 8,662 ( 21 ) 188,657 ( 24,848 ) 197,319 ( 24,869 ) CMOs issued by FNMA 42,474 ( 411 ) 54,249 ( 4,368 ) 96,723 ( 4,779 ) CMOs issued by GNMA 10,988 ( 244 ) 34,783 ( 4,991 ) 45,771 ( 5,235 ) SBA-backed securities — — 1,763 ( 90 ) 1,763 ( 90 ) Debentures of government-sponsored agencies — — 124,132 ( 21,994 ) 124,132 ( 21,994 ) Obligations of state and political subdivisions — — 44,437 ( 7,884 ) 44,437 ( 7,884 ) Corporate bonds — — 28,804 ( 1,196 ) 28,804 ( 1,196 ) Total held-to-maturity $ 62,124 $ ( 676 ) $ 738,690 $ ( 109,767 ) $ 800,814 $ ( 110,443 ) Available-for-sale: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ — $ — $ 72,146 $ ( 9,516 ) $ 72,146 $ ( 9,516 ) CMOs issued by FHLMC 1,235 ( 7 ) 240,414 ( 24,751 ) 241,649 ( 24,758 ) CMOs issued by FNMA — — 21,272 ( 2,715 ) 21,272 ( 2,715 ) CMOs issued by GNMA — — 17,128 ( 2,878 ) 17,128 ( 2,878 ) SBA-backed securities — — 19,471 ( 1,655 ) 19,471 ( 1,655 ) Debentures of government-sponsored agencies — — 66,862 ( 7,037 ) 66,862 ( 7,037 ) U.S. Treasury securities — — 10,623 ( 1,300 ) 10,623 ( 1,300 ) Obligations of state and political subdivisions 666 ( 1 ) 90,655 ( 10,320 ) 91,321 ( 10,321 ) Corporate bonds — — 10,718 ( 1,274 ) 10,718 ( 1,274 ) Asset-backed securities — — — — — — Total available-for-sale $ 1,901 $ ( 8 ) $ 549,289 $ ( 61,446 ) $ 551,190 $ ( 61,454 ) Total securities at a loss position $ 64,025 $ ( 684 ) $ 1,287,979 $ ( 171,213 ) $ 1,352,004 $ ( 171,897 ) 74 December 31, 2022 < 12 continuous months > 12 continuous months Total securities in a loss position (in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Held-to-maturity: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 62,627 $ ( 5,960 ) $ 218,507 $ ( 44,187 ) $ 281,134 $ ( 50,147 ) CMOs issued by FHLMC 78,144 ( 5,874 ) 113,796 ( 23,629 ) 191,940 ( 29,503 ) CMOs issued by FNMA 106,485 ( 5,419 ) — — 106,485 ( 5,419 ) CMOs issued by GNMA 27,570 ( 1,676 ) 10,331 ( 1,400 ) 37,901 ( 3,076 ) SBA-backed securities 2,239 ( 133 ) — — 2,239 ( 133 ) Debentures of government-sponsored agencies 38,645 ( 2,530 ) 80,711 ( 23,937 ) 119,356 ( 26,467 ) Obligations of state and political subdivisions 15,155 ( 589 ) 36,603 ( 10,152 ) 51,758 ( 10,741 ) Corporate bonds 28,448 ( 1,552 ) — — 28,448 ( 1,552 ) Total held-to-maturity $ 359,313 $ ( 23,733 ) $ 459,948 $ ( 103,305 ) $ 819,261 $ ( 127,038 ) Available-for-sale: MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 44,630 $ ( 4,501 ) $ 52,235 $ ( 7,632 ) $ 96,865 $ ( 12,133 ) CMOs issued by FHLMC 169,760 ( 15,144 ) 143,995 ( 18,538 ) 313,755 ( 33,682 ) CMOs issued by GNMA 4,790 ( 235 ) 27,529 ( 3,617 ) 32,319 ( 3,852 ) CMOs issued by FNMA 8,214 ( 374 ) 23,612 ( 2,922 ) 31,826 ( 3,296 ) SBA-backed securities 37,845 ( 3,228 ) 6,133 ( 143 ) 43,978 ( 3,371 ) Debentures of government- sponsored agencies 19,054 ( 946 ) 116,052 ( 13,062 ) 135,106 ( 14,008 ) U.S. Treasury securities — — 10,269 ( 1,635 ) 10,269 ( 1,635 ) Obligations of state and political subdivisions 70,402 ( 9,459 ) 28,711 ( 5,302 ) 99,113 ( 14,761 ) Corporate bonds — — 33,276 ( 3,714 ) 33,276 ( 3,714 ) Asset-backed securities — — 1,462 ( 91 ) 1,462 ( 91 ) Total available-for-sale $ 354,695 $ ( 33,887 ) $ 443,274 $ ( 56,656 ) $ 797,969 $ ( 90,543 ) Total $ 714,008 $ ( 57,620 ) $ 903,222 $ ( 159,961 ) $ 1,617,230 $ ( 217,581 ) As of December 31, 2023, the investment portfolio included 306 investment securities that had been in a continuous loss position for twelve months or more and 7 investment securities that had been in a loss position for less than twelve months. Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support from the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government while FNMA and FHLMC remain under conservatorship. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities. Our investments in obligations of state and political subdivision bonds are deemed creditworthy after our comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or credit enhancements. No allowances for credit losses have been recognized on available-for-sale securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality at either December 31, 2023 or 2022. In addition, for any available-for-sale securities in an unrealized loss position at December 31, 2023 and 2022, the Bank assessed whether it intended to sell the securities, or if it was more likely than not that it would be required to sell the securities before recovery of its amortized cost basis, which would require a write-down to fair value through net income. Because the Bank did not intend to sell those securities that were in an unrealized loss position, and it was not more-likely-than-not that the Bank would be required to sell the securities before recovery of their amortized cost bases, the Bank determined that no write-down was necessary as of the reporting date. 75 On July 7, 2023, 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 selected securities in its available-for-sale portfolio against changes in fair value related to changes in the benchmark interest rate. For additional details, refer to Note 14, Derivative Financial Instruments and Hedging Activities. Non-Marketable Securities Included in Other Assets FHLB Capital Stock As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock as determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $ 100 per share par value. We held $ 16.7 million of FHLB stock included in other assets on the consolidated statements of condition at both December 31, 2023 and 2022. The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and do not have a readily determinable market value. Based on our analysis of FHLB’s financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at December 31, 2023 or 2022. On February 21, 2024 , FHLB announced a cash dividend for the fourth quarter of 2023 at an annualized dividend rate of 8.75 % to be distributed in mid-March 2024. Cash dividends paid on FHLB capital stock are recorded as non-interest income. Visa Inc. Class B Common Stock As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock as of December 31, 2022. These shares had a carrying value of zero because they lacked a readily determinable fair value due to the restriction from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation, and uncertainty about the conversion rate to Class A shares. On July 13, 2023, the Bank sold the entirety of its remaining investment in Visa Inc. Class B restricted common stock for a $ 2.8 million gain. For further information, refer to Note 12, Commitments and Contingencies. Low Income Housing Tax Credits We invest in low-income housing tax credit funds as a limited partner, which totaled $ 2.0 million and $ 2.5 million recorded in other assets as of December 31, 2023 and 2022, respectively. In 2023, we recognized $ 600 thousand of low income housing tax credits and other tax benefits, offset by $ 503 thousand of amortization expense for low-income housing tax credit investments, as a component of income tax expense. As of December 31, 2023, our unfunded commitments for these low-income housing tax credit funds totaled $ 344 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during 2023 or 2022, as the value of the future tax benefits exceeds the carrying value of the investments. 76 Note 3: Loans and Allowance for Credit Losses on Loans The following table presents the amortized cost of loans by portfolio class as of December 31, 2023 and 2022. December 31, (in thousands) 2023 2022 Commercial and industrial $ 153,750 $ 173,547 Real estate: Commercial owner-occupied 333,181 354,877 Commercial non-owner occupied 1,219,385 1,191,889 Construction 99,164 114,373 Home equity 82,087 88,748 Other residential 118,508 112,123 Installment and other consumer loans 67,645 56,989 Total loans, at amortized cost 1 2,073,720 2,092,546 Allowance for credit losses on loans ( 25,172 ) ( 22,983 ) Total loans, net of allowance for credit losses on loans $ 2,048,548 $ 2,069,563 1 A mortized cost includes net deferred loan origination costs of $ 2.7 million and $ 1.8 million at December 31, 2023 and 2022, respectively. Amounts are also net of unrecognized purchase discounts of $ 2.0 million and $ 2.6 million at December 31, 2023 and 2022, respectively. Amortized cost excludes accrued interest, which totaled $ 6.6 million and $ 6.1 million at December 31, 2023 and 2022, respectively, and is included in interest receivable and other assets in the consolidated statements of condition. Lending Risks Concentrations of Credit: Virtually all of our loans are from customers located in Northern California. Approximately 90 % of total loans were secured by real estate at both December 31, 2023 and 2022. At December 31, 2023 and 2022, 75 % and 74 %, respectively, of our loans were for commercial real estate, the majority of which were secured by real estate located in Marin, Sonoma, San Francisco, Napa, Alameda, Sacramento, and Contra Costa counties (California). Commercial and Industrial Loans: Commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable and inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress. A weakened economy, and the resultant decreased consumer and/or business spending, may have an effect on the credit quality of commercial loans. Commercial Real Estate Loans: Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, are subject to underwriting standards and processes similar to those for commercial loans discussed above. We underwrite these loans to be repaid from cash flow from either the business or investment property and supported by real property collateral. Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios. Furthermore, a large majority of our loans are guaranteed by the owners of the properties. Conditions in the real estate markets or a downturn in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong economic incentive to continue to support their commercial real estate projects. As such, we have generally experienced a relatively low level of losses and delinquencies in this portfolio. Construction Loans: Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loans include interest reserves that are used for the payment of interest during the development and marketing periods and are capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the 77 depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after an evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project. Consumer Loans: Consumer loans primarily consist of home equity lines of credit, other residential loans, floating homes, and indirect luxury auto loans, along with a small number of installment loans. Our other residential loans include tenancy-in-common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer loans utilizing credit score information, debt-to-income ratio, and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores, or collateral with high loan-to-value ratios. Credit Quality Indicators We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of “Special Mention” risk graded loans, or worse, are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows: Pass and Watch: Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt-service-coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured, or supported by non-real estate collateral for which the value is more difficult to determine and/or whose marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. The “Watch” risk rating is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period. Special Mention: Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification. Substandard: Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has well-defined weaknesses that jeopardize the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments in the borrower’s financial condition, managerial weaknesses, and/or significant collateral deficiencies. Doubtful: Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and are usually collateral-dependent. We regularly review our credits for the accuracy of risk grades whenever we receive new information and at each quarterly and year-end reporting period. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home 78 equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly. The following tables present the loan portfolio by loan portfolio class, origination/renewal year and internal risk rating as of December 31, 2023 and 2022. The current year vintage table reflects gross charge-offs by portfolio class and year of origination. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination. (in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost December 31, 2023 2023 2022 2021 2020 2019 Prior Total Commercial and industrial: Pass and Watch $ 25,615 $ 9,187 $ 2,970 $ 3,718 $ 15,128 $ 21,004 $ 62,486 $ 140,108 Special Mention — — — — 334 — 9,300 9,634 Substandard — — — — 1,311 2,697 — 4,008 Total commercial and industrial $ 25,615 $ 9,187 $ 2,970 $ 3,718 $ 16,773 $ 23,701 $ 71,786 $ 153,750 Gross current period charge-offs $ — $ — $ — $ ( 4 ) $ ( 3 ) $ ( 3 ) $ ( 1 ) $ ( 11 ) Commercial real estate, owner-occupied: Pass and Watch $ 13,128 $ 41,808 $ 49,887 $ 37,708 $ 40,994 $ 114,018 $ 56 $ 297,599 Special Mention 1,431 4,498 15,636 820 286 8,902 — 31,573 Substandard — 2,231 — — — 1,778 — 4,009 Total commercial real estate, owner-occupied $ 14,559 $ 48,537 $ 65,523 $ 38,528 $ 41,280 $ 124,698 $ 56 $ 333,181 Gross current period charge-offs $ — $ — $ — $ — $ ( 406 ) $ — $ — $ ( 406 ) Commercial real estate, non-owner occupied: Pass and Watch $ 76,718 $ 172,028 $ 196,340 $ 150,831 $ 139,860 $ 368,675 $ 9,832 $ 1,114,284 Special Mention — 2,790 9,498 11,776 15,708 41,602 — 81,374 Substandard 878 272 2,204 — — 20,373 — 23,727 Total commercial real estate, non-owner occupied $ 77,596 $ 175,090 $ 208,042 $ 162,607 $ 155,568 $ 430,650 $ 9,832 $ 1,219,385 Construction: Pass and Watch $ 13,138 $ 24,403 $ 19,521 $ 29,512 $ — $ — $ — $ 86,574 Special Mention 12,590 — — — — — — 12,590 Total construction $ 25,728 $ 24,403 $ 19,521 $ 29,512 $ — $ — $ — $ 99,164 Home equity: Pass and Watch $ — $ — $ — $ — $ — $ 734 $ 80,773 $ 81,507 Substandard — — — — — 369 211 580 Total home equity $ — $ — $ — $ — $ — $ 1,103 $ 80,984 $ 82,087 Other residential: Pass and Watch $ 17,861 $ 20,114 $ 13,390 $ 25,637 $ 20,935 $ 20,571 $ — $ 118,508 Total other residential $ 17,861 $ 20,114 $ 13,390 $ 25,637 $ 20,935 $ 20,571 $ — $ 118,508 Installment and other consumer: Pass and Watch $ 22,038 $ 14,528 $ 10,632 $ 4,687 $ 5,300 $ 9,399 $ 1,061 $ 67,645 Total installment and other consumer $ 22,038 $ 14,528 $ 10,632 $ 4,687 $ 5,300 $ 9,399 $ 1,061 $ 67,645 Gross current period charge-offs $ ( 7 ) $ ( 6 ) $ ( 1 ) $ ( 4 ) $ — $ ( 1 ) $ ( 5 ) $ ( 24 ) Total loans: Pass and Watch $ 168,498 $ 282,068 $ 292,740 $ 252,093 $ 222,217 $ 534,401 $ 154,208 $ 1,906,225 Total Special Mention $ 14,021 $ 7,288 $ 25,134 $ 12,596 $ 16,328 $ 50,504 $ 9,300 $ 135,171 Total Substandard $ 878 $ 2,503 $ 2,204 $ — $ 1,311 $ 25,217 $ 211 $ 32,324 Totals $ 183,397 $ 291,859 $ 320,078 $ 264,689 $ 239,856 $ 610,122 $ 163,719 $ 2,073,720 Total gross current period charge-offs $ ( 7 ) $ ( 6 ) $ ( 1 ) $ ( 8 ) $ ( 409 ) $ ( 4 ) $ ( 6 ) $ ( 441 ) 79 (in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost December 31, 2022 2022 2021 2020 2019 2018 Prior Total Commercial and industrial: Pass and Watch $ 15,349 $ 6,679 $ 7,603 $ 19,982 $ 5,362 $ 24,954 $ 84,655 $ 164,584 Special Mention 275 — — 2,272 3,836 — 402 6,785 Substandard — — 1,252 — — 625 301 2,178 Total commercial and industrial $ 15,624 $ 6,679 $ 8,855 $ 22,254 $ 9,198 $ 25,579 $ 85,358 $ 173,547 Commercial real estate, owner-occupied: Pass and Watch $ 54,188 $ 52,080 $ 40,369 $ 44,798 $ 29,856 $ 104,377 $ — $ 325,668 Special Mention — 16,199 — 304 5,255 4,493 — 26,251 Substandard — — — 1,160 — 1,699 — 2,859 Doubtful — — 99 — — — — 99 Total commercial real estate, owner-occupied $ 54,188 $ 68,279 $ 40,468 $ 46,262 $ 35,111 $ 110,569 $ — $ 354,877 Commercial real estate, non-owner occupied: Pass and Watch $ 177,822 $ 211,228 $ 155,278 $ 160,670 $ 129,166 $ 308,509 $ 57 $ 1,142,730 Special Mention — 1,172 12,097 3,934 678 9,290 — 27,171 Substandard — 2,264 — — — 19,724 — 21,988 Total commercial real estate, non-owner occupied $ 177,822 $ 214,664 $ 167,375 $ 164,604 $ 129,844 $ 337,523 $ 57 $ 1,191,889 Construction: Pass and Watch $ 49,262 $ 19,393 $ 28,861 $ 7,745 $ 9,112 $ — $ — $ 114,373 Total construction $ 49,262 $ 19,393 $ 28,861 $ 7,745 $ 9,112 $ — $ — $ 114,373 Home equity: Pass and Watch $ — $ — $ — $ — $ — $ 883 $ 86,971 $ 87,854 Substandard — — — — — 480 414 894 Total home equity $ — $ — $ — $ — $ — $ 1,363 $ 87,385 $ 88,748 Other residential: Pass and Watch $ 21,154 $ 14,547 $ 29,018 $ 21,890 $ 11,064 $ 14,450 $ — $ 112,123 Total other residential $ 21,154 $ 14,547 $ 29,018 $ 21,890 $ 11,064 $ 14,450 $ — $ 112,123 Installment and other consumer: Pass and Watch $ 20,054 $ 13,022 $ 5,727 $ 6,492 $ 4,181 $ 6,478 $ 944 $ 56,898 Substandard — — — — — 91 — 91 Total installment and other consumer $ 20,054 $ 13,022 $ 5,727 $ 6,492 $ 4,181 $ 6,569 $ 944 $ 56,989 Total loans: Pass and Watch $ 337,829 $ 316,949 $ 266,856 $ 261,577 $ 188,741 $ 459,651 $ 172,627 $ 2,004,230 Total Special Mention $ 275 $ 17,371 $ 12,097 $ 6,510 $ 9,769 $ 13,783 $ 402 $ 60,207 Total Substandard $ — $ 2,264 $ 1,252 $ 1,160 $ — $ 22,619 $ 715 $ 28,010 Total Doubtful $ — $ — $ 99 $ — $ — $ — $ — $ 99 Totals $ 338,104 $ 336,584 $ 280,304 $ 269,247 $ 198,510 $ 496,053 $ 173,744 $ 2,092,546 80 The following table shows the amortized cost of loans by portfolio class, payment aging and non-accrual status as of December 31, 2023 and 2022. Loan Aging Analysis by Portfolio Class (in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, non-owner occupied Construction Home equity Other residential Installment and other consumer Total December 31, 2023 30-59 days past due $ 2,991 $ 618 $ — $ — $ 43 $ 83 $ 195 $ 3,930 60-89 days past due 69 — 2,204 — — — 1 2,274 90 days or more past due 1 1,311 149 — — — — — 1,460 Total past due 4,371 767 2,204 — 43 83 196 7,664 Current 149,379 332,414 1,217,181 99,164 82,044 118,425 67,449 2,066,056 Total loans 1 $ 153,750 $ 333,181 $ 1,219,385 $ 99,164 $ 82,087 $ 118,508 $ 67,645 $ 2,073,720 Non-accrual loans 2 $ 4,008 $ 434 $ 3,081 $ — $ 469 $ — $ — $ 7,992 Non-accrual loans with no allowance $ 1,311 $ 434 $ 877 $ — $ 469 $ — $ — $ 3,091 December 31, 2022 30-59 days past due $ 3 $ — $ — $ — $ 319 $ 93 $ 5 $ 420 60-89 days past due — — — — 244 — — 244 90 days or more past due 1 264 — — — 414 — — 678 Total past due 267 — — — 977 93 5 1,342 Current 173,280 354,877 1,191,889 114,373 87,771 112,030 56,984 2,091,204 Total loans 1 $ 173,547 $ 354,877 $ 1,191,889 $ 114,373 $ 88,748 $ 112,123 $ 56,989 $ 2,092,546 Non-accrual loans 2 $ — $ 1,563 $ — $ — $ 778 $ — $ 91 $ 2,432 Non-accrual loans with no allowance $ — $ 1,563 $ — $ — $ 778 $ — $ 91 $ 2,432 1 There were no non-performing loans past due more than ninety days and accruing interest at December 31, 2023 and 2022. 2 None of the non-accrual loans as of December 31, 2023 or 2022 were earning interest on a cash basis. We recognized no interest income on non-accrual loans in 2023, 2022 or 2021. Accrued interest of $ 206 thousand and $ 48 thousand was reversed from interest income for the loans that were placed on non-accrual status in 2023 and 2022, respectively. No interest income was reversed for the single loan that was placed on non-accrual status in 2021. Collateral Dependent Loans The following table presents the amortized cost basis of individually analyzed collateral-dependent loans, which were all on non-accrual status, by portfolio class and collateral type as of December 31, 2023 and 2022. Amortized Cost by Collateral Type (in thousands) Commercial Real Estate Residential Real Estate Other Total 1 Allowance for Credit Losses December 31, 2023 Commercial and industrial $ 1,311 $ — $ — $ 1,311 $ — Commercial real estate, owner-occupied 434 — — 434 — Commercial real estate, non-owner occupied 3,081 — — 3,081 408 Home equity — 469 — 469 — Total $ 4,826 $ 469 $ — $ 5,295 $ 408 December 31, 2022 Commercial real estate, owner-occupied $ 1,563 $ — $ — $ 1,563 $ — Home equity — 778 — 778 — Installment and other consumer — — 91 91 — Total $ 1,563 $ 778 $ 91 $ 2,432 $ — 1 There were no collateral-dependent residential real estate mortgage loans in process of foreclosure or in substance repossessed at December 31, 2023 and 2022. The weighted average loan-to-value of collateral-dependent loans was approximately 70 % and 42 % at December 31, 2023 and 2022, respectively. 81 Loan Modifications to Borrowers Experiencing Financial Difficulty We adopted ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023, as described in the Other Recently Adopted Accounting Standards section of Note 1 - Summary of Significant Accounting Policies. The amendments eliminated the accounting guidance for troubled debt restructurings and enhanced disclosures related to certain types of loan modifications for borrowers experiencing financial difficulty, including principal forgiveness, interest rate reductions, other-than-insignificant payment delays, and/or term extensions, which are intended to minimize the economic loss and avoid foreclosure or repossession of collateral. The following table summarizes the amortized cost of loans as of December 31, 2023 modified for borrowers experiencing financial difficulty during the year ended December 31, 2023 by portfolio class and type of modification granted. (in thousands) Term Extension Percent of Portfolio Class Total December 31, 2023 Commercial real estate, owner-occupied $ 1,431 0.4 % Commercial real estate, non-owner occupied 878 0.1 % Total $ 2,309 As of December 31, 2023, there were no unfunded loan commitments for loans that were modified during the year ended December 31, 2023. The following table summarizes the financial effect of loan modifications presented in the table above during the year ended December 31, 2023 by portfolio class. (in thousands) Weighted-Average Term Extension (in years) Year ended December 31, 2023 Commercial real estate, owner-occupied 2.3 Commercial real estate, non-owner occupied 0.5 The loan modifications did not significantly impact the determination of the allowance for credit losses on loans during the year ended December 31, 2023. The Bank closely monitors the performance of the modified loans to understand the effectiveness of its modification efforts. The following table summarizes the amortized cost and payment status of loans as of December 31, 2023 that were modified during the year ended December 31, 2023 by portfolio class. (in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Non-Accrual December 31, 2023 Commercial real estate, owner-occupied $ 1,431 $ — $ — $ — $ 1,431 $ — Commercial real estate, non-owner occupied 878 — — — 878 878 Total $ 2,309 $ — $ — $ — $ 2,309 $ 878 There were no loans to borrowers experiencing financial difficulty that were modified within the previous twelve months that had subsequently defaulted (i.e., fully or partially charged-off or became 90 days or more past due). 82 Allocation of the Allowance for Credit Losses on Loans The following table presents the details of the allowance for credit losses on loans segregated by loan portfolio class as of December 31, 2023 and 2022. Allocation of the Allowance for Credit Losses on Loans (in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, non-owner occupied Construction Home equity Other residential Installment and other consumer Unallocated Total December 31, 2023 Modeled expected credit losses $ 897 $ 1,270 $ 7,380 $ 185 $ 482 $ 619 $ 634 $ — $ 11,467 Qualitative adjustments 622 1,205 6,327 1,647 70 33 342 2,038 12,284 Specific allocations 193 1 1,226 — — 1 — — 1,421 Total $ 1,712 $ 2,476 $ 14,933 $ 1,832 $ 552 $ 653 $ 976 $ 2,038 $ 25,172 December 31, 2022 Modeled expected credit losses $ 1,079 $ 1,497 $ 7,937 $ 453 $ 504 $ 571 $ 610 $ — $ 12,651 Qualitative adjustments 706 990 4,739 1,484 54 24 258 2,068 10,323 Specific allocations 9 — — — — — — — 9 Total $ 1,794 $ 2,487 $ 12,676 $ 1,937 $ 558 $ 595 $ 868 $ 2,068 $ 22,983 Allowance for Credit Losses on Loans Rollforward The following table discloses activity in the allowance for credit losses for the periods presented. Allowance for Credit Losses on Loans Rollforward (in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, non-owner occupied Construction Home equity Other residential Installment and other consumer Unallocated Total Year ended December 31, 2023 Beginning balance $ 1,794 $ 2,487 $ 12,676 $ 1,937 $ 558 $ 595 $ 868 $ 2,068 $ 22,983 (Reversal) provision ( 100 ) 395 2,257 ( 130 ) ( 6 ) 58 131 ( 30 ) 2,575 (Charge-offs) ( 11 ) ( 406 ) — — — — ( 24 ) — ( 441 ) Recoveries 29 — — 25 — — 1 — 55 Ending balance $ 1,712 $ 2,476 $ 14,933 $ 1,832 $ 552 $ 653 $ 976 $ 2,038 $ 25,172 Year ended December 31, 2022 Beginning balance $ 1,709 $ 2,776 $ 12,739 $ 1,653 $ 595 $ 644 $ 621 $ 2,286 23,023 Provision (reversal) 72 ( 289 ) ( 63 ) 251 ( 37 ) ( 49 ) 270 ( 218 ) ( 63 ) (Charge-offs) ( 9 ) — — — — — ( 23 ) — ( 32 ) Recoveries 22 — — 33 — — — — 55 Ending balance $ 1,794 $ 2,487 $ 12,676 $ 1,937 $ 558 $ 595 $ 868 $ 2,068 $ 22,983 Year ended December 31, 2021 Beginning balance $ 2,530 $ 2,778 $ 12,682 $ 1,557 $ 738 $ 998 $ 291 $ 1,300 $ 22,874 (Reversal) provision ( 1,240 ) ( 561 ) ( 476 ) 62 ( 193 ) ( 360 ) 333 986 ( 1,449 ) Initial allowance for PCD loans 1 405 559 533 — — 6 2 — 1,505 (Charge-offs) — — — — — — ( 5 ) — ( 5 ) Recoveries 14 — — 34 50 — — — 98 Ending balance $ 1,709 $ 2,776 $ 12,739 $ 1,653 $ 595 $ 644 $ 621 $ 2,286 $ 23,023 1 The initial allowance for purchased credit impaired ("PCD") loans relates to the AMRB merger discussed in Note 18, Merger. Pledged Loans Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $ 1.288 billion and $ 1.298 billion at December 31, 2023 and 2022, respectively. In addition, we pledged eligible TIC loans, which totaled $ 110.4 million and $ 105.0 million at December 31, 2023 and 2022, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). For additional information, see Note 7, Borrowings. 83 Related Party Loans The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These transactions, including loans, are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. The following table shows changes in net loans to related parties for each of the three years ended December 31, 2023, 2022 and 2021. (in thousands) 2023 2022 2021 Balance at beginning of year $ 6,445 $ 7,942 $ 6,423 Additions — 1,525 — Assumed in the AMRB acquisition — — 4,037 Repayments ( 613 ) ( 364 ) ( 2,518 ) Reclassified due to a change in borrower status — ( 2,658 ) — Balance at end of year $ 5,832 $ 6,445 $ 7,942 Undisbursed commitments to related parties totaled $ 212 thousand and $ 562 thousand as of December 31, 2023 and 2022, respectively. Note 4: Bank Premises and Equipment A summary of bank premises and equipment follows: December 31, (in thousands) 2023 2022 Leasehold improvements $ 16,578 $ 16,115 Furniture and equipment 11,336 12,762 Buildings 1,248 1,217 Land 1,170 1,170 Finance lease right-of-use assets 1 608 616 Subtotal 30,940 31,880 Accumulated depreciation and amortization ( 23,148 ) ( 23,746 ) Bank premises and equipment, net $ 7,792 $ 8,134 1 See Note 12, Commitments and Contingencies, for more information. The amount of depreciation and amortization totaled $ 2.1 million, $ 1.8 million, and $ 1.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. Note 5: Bank Owned Life Insurance We own life insurance policies on the lives of certain current and former officers designated by the Board of Directors to fund our employee benefit programs. Death benefits, including gross amounts under split dollar agreements, were estimated to be $ 131.8 million as of December 31, 2023. Generally, under split dollar agreements, the benefits to the employees' beneficiaries are limited to each employee's active service period. The investments in BOLI policies are reported at their cash surrender value, net of surrender charges, of $ 68.1 million and $ 67.1 million at December 31, 2023 and 2022, respectively. The cash surrender value includes both the original premiums paid for the life insurance policies and the accumulated accretion of policy income since the inception of the policies, net of mortality costs and other fees. Earnings on BOLI totaled $ 1.8 million, $ 1.2 million and $ 2.2 million in 2023, 2022 and 2021, respectively. These earnings included death benefit proceeds in excess of the cash surrender values of the BOLI policies of $ 313 thousand in 2023, $ 86 thousand in 2022 and $ 1.1 million in 2021. We regularly monitor the financial information and credit ratings of our insurance carriers to ensure that they are creditworthy and comply with our policy. 84 Note 6: Deposits A stratification of time deposits is presented in the following table: December 31, (in thousands) 2023 2022 Time deposits of less than or equal to $250 thousand $ 145,697 $ 74,421 Time deposits of more than $250 thousand 105,620 44,609 Total time deposits $ 251,317 $ 119,030 Interest on time deposits was $ 4.7 million, $ 323 thousand and $ 246 thousand in 2023, 2022 and 2021, respectively. Scheduled maturities of time deposits at December 31, 2023 are as follows: (in thousands) 2024 2025 2026 2027 2028 Thereafter Total Scheduled time deposit maturities $ 233,726 $ 6,760 $ 5,510 $ 2,705 $ 2,616 $ — $ 251,317 As of December 31, 2023, $ 287.4 million in securities were pledged as collateral for our local agency deposits. Our deposit portfolio includes deposits offered through the Promontory Interfinancial Network that are comprised of Certificate of Deposit Account Registry Service ® ("CDARS") balances included in time deposits and Insured Cash Sweep ® ("ICS") balances included in money market deposits. In addition, we offer deposits through Reich & Tang Deposit Networks, LLC, comprised of Demand Deposit Marketplace SM ("DDM") balances. Through these two networks we are able to offer our customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through CDARS, ICS and DDM, on behalf of a customer, we have the option of receiving matching deposits through the network's reciprocal deposit program, or placing deposits "one-way" for which we receive no matching deposits. We consider reciprocal deposits to be in-market deposits, as distinguished from traditional out-of-market brokered deposits. The following table shows the composition of our network deposits at December 31, 2023 and 2022. (in thousands) December 31, 2023 December 31, 2022 Reciprocal 1 One-Way 1 Reciprocal 1 One-Way 1 CDARS $ 46,162 $ 2,164 $ 11,031 $ 2,162 ICS 245,577 — 100,749 — DDM 132,276 — 62,219 — Total network deposits $ 424,015 $ 2,164 $ 173,999 $ 2,162 1 Reciprocal deposits are on-balance-sheet while one-way deposits are off-balance-sheet. The aggregate amount of deposit overdrafts that have been reclassified as loan balances was $ 320 thousand and $ 247 thousand at December 31, 2023 and 2022, respectively. The Bank accepts deposits from shareholders, members of the board of directors, and employees in the normal course of business, and the terms are comparable to those with non-affiliated parties. The total deposits from board directors and their businesses, and executive officers were $ 23.6 million and $ 11.2 million at December 31, 2023 and 2022, respectively. Note 7: Borrowings and Other Obligations Federal Home Loan Bank: The Bank had lines of credit with the FHLB totaling $ 1.009 billion and $ 711.6 million as of December 31, 2023 and 2022, respectively , based on the eligible collateral of certain loans and investment securities. Federal Funds Lines of Credit: The Bank had unsecured lines of credit with correspondent banks for overnight borrowings totaling $ 135.0 million and $ 150.0 million as of December 31, 2023 and 2022, respectively. In general, interest rates on these lines approximate the federal funds target rate. 85 Federal Reserve Bank: The Bank had a line of credit with the FRBSF secured by certain residential loans totaling $ 64.0 million and $ 58.7 million as of December 31, 2023 and 2022, respectively. In addition, under the Federal Reserve’s Bank Term Funding Program ("BTFP") facility, the Bank could borrow an additional $ 270.2 million based on the par values of pledged investment securities as of December 31, 2023. Other Obligations: Finance lease liabilities totaling $ 298 thousand and $ 439 thousand at December 31, 2023 and 2022, respectively, are included in borrowings and other obligations in the Consolidated Statements of Condition. Refer to Note 12, Commitments and Contingencies, for additional information. The carrying values, average balances and average rates on borrowings and other obligations as of and for the years ended December 31, 2023, 2022 and 2021 are summarized in the following table. 2023 2022 2021 (dollars in thousands) Carrying Value Average Balance Average Rate Carrying Value Average Balance Average Rate Carrying Value Average Balance Average Rate FHLB short-term borrowings $ — $ 164,299 5.10 % $ 112,000 $ 1,921 4.48 % $ — $ — — % FHLB fixed-rate advances — — — % — — — % — 642 1.18 % Federal funds lines of credit — — — % — — — % — — — % FRBSF short-term borrowings under the BTFP 26,000 56,959 5.30 % — — — % — — — % Other obligations (finance leases) 298 364 1.88 % $ 439 $ 374 0.65 % 419 250 0.71 % Total borrowings and other obligations $ 26,298 $ 221,623 5.15 % $ 112,439 $ 2,295 3.90 % $ 419 $ 892 1.08 % Subordinated Debenture: As part of an acquisition, Bancorp assumed a subordinated debenture with a contractual balance of $ 4.1 million due to NorCal Community Bancorp Trust II (the "Trust"), established for the sole purpose of issuing trust preferred securities. On March 15, 2021, Bancorp redeemed in full the $ 2.8 million (book value) subordinated debenture due to the Trust, which had a 251.5 % effective rate in 2021, and included accelerated accretion of the $ 1.3 million remaining purchase discount due to the early redemption. Note 8: Stockholders' Equity and Stock Plans Share-Based Awards The 2020 Director Stock Plan (the "Plan") provides for the payment of director fees in common shares of Bancorp's common stock not to exceed 250,000 shares and a way for directors to purchase shares at fair market value. During 2023, 2022 and 2021 we issued 18,362 , 10,145 and 6,443 shares of common stock, respectively, for director payments. As of December 31, 2023, 209,642 shares were available for future director fees and purchases. The 2017 Employee Stock Purchase Plan ("ESPP") gives our employees an opportunity to purchase Bancorp's common shares through payroll deductions of between one and fifteen percent of their pay. Shares are purchased quarterly at a five percent discount from the closing market price on the last day of the quarter. As of December 31, 2023, 372,923 shares were available for future purchases under the ESPP. Under the 2017 Equity Plan, the Compensation Committee of the Board of Directors has the discretion to determine, among other things, which employees, advisors and non-employee directors will receive share-based awards, the number and timing of awards, the vesting schedule for each award, and the type of award to be granted. As of December 31, 2023, there were 790,201 sh ares available for future grants to employees, advisors and non-employee directors. Options are issued at an exercise price equal to the fair value of the stock at the date of grant. Options granted to officers and employees generally vest by one-third on each anniversary of the grant for three years and expire ten years from the grant date. Options granted to non-employee directors vest immediately and expire ten years from the grant date. Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements. Shares withheld under net settlement arrangements are available for future grants. The table below depicts the total number of shares, amount, and weighted average price withheld for cashless exercises in each of the respective years. 86 December 31, 2023 December 31, 2022 December 31, 2021 Number of shares withheld 3,132 11,505 27,929 Total amount withheld (in thousands) $ 86 $ 393 $ 1,085 Weighted-average price $ 27.57 $ 34.13 $ 38.85 Performance-based stock awards (restricted stock) are issued to a selected group of employees under the 2017 Equity Plan. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0 % to 200 % of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be met to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly, and total compensation expense is adjusted for any change in the current period. A summary of stock option activity for the years ended December 31, 2023, 2022, and 2021 is presented in the following table. The intrinsic value of options outstanding and exercisable is calculated as the number of in-the-money options times the difference between the market price of our stock and the exercise prices of the in-the-money options as of each year-end period presented. Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value (in thousands) Weighted Average Grant-Date Fair Value Weighted Average Remaining Contractual Term (in years) Options outstanding at December 31, 2020 371,584 $ 29.92 $ 2,262 5.12 Granted 55,861 36.39 8.84 Cancelled, expired or forfeited ( 2,008 ) 42.50 Exercised ( 60,056 ) 23.01 885 Options outstanding at December 31, 2021 365,381 31.97 2,326 5.57 Exercisable (vested) at December 31, 2021 315,744 30.85 2,264 5.15 Options outstanding at December 31, 2021 365,381 31.97 2,326 5.57 Granted 39,094 34.16 8.49 Cancelled, expired or forfeited ( 23,760 ) 37.48 Exercised ( 51,010 ) 23.01 617 Options outstanding at December 31, 2022 329,705 33.22 813 5.59 Exercisable (vested) at December 31, 2022 287,228 32.81 813 5.15 Options outstanding at December 31, 2022 329,705 33.22 813 5.59 Granted 10,040 32.54 8.49 Cancelled, expired or forfeited ( 23,804 ) 35.06 Exercised ( 12,164 ) 20.25 88 Options outstanding at December 31, 2023 303,777 33.22 1 4.86 Exercisable (vested) at December 31, 2023 283,578 33.46 1 4.65 A summary of the options outstanding and exercisable by price range as of December 31, 2023 is presented in the following table: Stock Options Outstanding as of December 31, 2023 Stock Options Exercisable as of December 31, 2023 Range of Exercise Prices Stock Options Outstanding Remaining Contractual Life (in years) Weighted Average Exercise Price Stock Options Exercisable Weighted Average Exercise Price $ 10.00 - $ 20.00 402 3.1 $ 19.96 402 $ 19.96 $ 20.01 - $ 30.00 73,080 1.5 24.64 73,080 24.64 $ 30.01 - $ 40.00 171,457 6.0 34.48 151,258 34.39 $ 40.01 - $ 50.00 58,838 5.6 42.13 58,838 42.13 303,777 283,578 87 The following table summarizes non-vested restricted stock awards and changes during the years ended December 31, 2023, 2022, and 2021. Number of Shares Weighted Average Grant-Date Fair Value Non-vested awards at December 31, 2020 61,328 $ 39.50 Granted 30,742 38.00 Vested ( 26,392 ) 36.81 Cancelled or forfeited ( 3,848 ) 33.96 Non-vested awards at December 31, 2021 61,830 40.25 Granted 46,672 34.03 Vested ( 12,444 ) 41.49 Cancelled or forfeited ( 13,692 ) 41.80 Non-vested awards at December 31, 2022 82,366 36.28 Granted 61,978 27.10 Vested ( 15,768 ) 36.24 Cancelled or forfeited ( 21,024 ) 36.86 Non-vested awards at December 31, 2023 107,552 30.88 We determine the fair value of stock options at the grant date using the Black-Scholes pricing model that takes into account the stock price at the grant date, exercise price, and the following assumptions (weighted-average shown). Years ended December 31, 2023 2022 2021 Risk-free interest rate 3.94 % 1.86 % 0.98 % Expected dividend yield on common stock 3.07 % 2.85 % 2.57 % Expected life in years 5.0 6.0 6.1 Expected price volatility 34.68 % 33.44 % 33.12 % The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive income (loss) over the requisite service period, which is generally the vesting period, with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards, which equals the grant date price, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Stock options and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate the recording of stock-based compensation when the award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the exercisability of the stock options, which are based on the scheduled vesting period. Total compensation expense for stock options and restricted stock awards was $ 522 thousand, $ 962 thousand, and $ 972 thousand during 2023, 2022, and 2021, respectively, and the total recognized deferred tax benefits related thereto were $ 146 thousand, $ 257 thousand, and $ 213 thousand, respectively. As of December 31, 2023, there was $ 1.3 million of total unrecognized compensation expense related to non-vested stock options and restricted stock awards, which is expected to be recognized over a weighted-average period of approximately 2.2 years. The total grant-date fair value of stock options vested during the years ended December 31, 2023, 2022, and 2021 was $ 255 thousand, $ 356 thousand, and $ 514 thousand, respectively. The total grant-date fair value of restricted stock awards vested during 2023, 2022, and 2021 was $ 428 thousand, $ 431 thousand, and $ 1.0 million, respectively. We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income (loss), with a corresponding decrease (increase) to current taxes payable. In 2023, 2022, and 2021 we recognized $ 2 thousand, $ 3 thousand, and $ 87 thousand, respectively, in excess tax benefits recorded as a reduction to income tax expense related to these 88 types of transactions. The tax benefits realized from disqualifying dispositions of incentive stock options were recognized in tax expense to the extent of the book compensation cost recorded. Dividends Presented below is a summary of cash dividends paid in 2023, 2022 and 2021 to common shareholders, recorded as a reduction from retained earnings. On January 25, 2024, the Board of Directors declared a $ 0.25 per share cash dividend, paid on February 15, 2024 to the shareholders of record at the close of business on February 8, 2024. Years ended December 31, (in thousands except per share data) 2023 2022 2021 Cash dividends to common stockholders $ 16,106 $ 15,673 $ 13,107 Cash dividends per common share $ 1.00 $ 0.98 $ 0.94 Holders of unvested restricted stock awards are entitled to dividends at the same per-share ratio as holders of common stock. Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income (loss) with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense. Under the California Corporations Code, payment of dividends by Bancorp to its shareholders is restricted to the amount of retained earnings immediately prior to the distribution or the amount of assets that exceeds the total liabilities immediately after the distribution. As of December 31, 2023, Bancorp's retained earnings and total assets that exceeded total liabilities were $ 274.6 million and $ 439.1 million, respectively. Under the California Financial Code, payment of dividends by the Bank to Bancorp is restricted to the lesser of retained earnings or the amount of undistributed net profits of the Bank from the three most recent fiscal years. Under this restriction, approximately $ 6.1 million of the Bank's retained earnings balance was available for payment of dividends to Bancorp as of December 31, 2023. Bancorp held $ 7.2 million in cash as of December 31, 2023. Share Repurchase Program On July 16, 2021, Bancorp Board of Directors approved a share repurchase program under which Bancorp could repurchase up to $ 25.0 million of its outstanding common stock through July 31, 2023. On October 22, 2021, Bancorp's Board of Directors approved an amendment to the share repurchase program, which increased the total authorization from $ 25.0 million to $ 57.0 million and left the expiration date unchanged. The last activity under the program was in the first quarter of 2022 when Bancorp repurchased 23,275 shares totaling $ 877 thousand. On July 21, 2023, the Board of Directors approved the adoption of Bancorp's new share repurchase program, which replaced the existing program that expired on July 31, 2023, for up to $ 25.0 million and expires on July 31, 2025. There were no repurchases under this program in 2023. Under the share repurchase program, Bancorp may purchase shares of its common stock through various means, such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at Bancorp's discretion. Factors include, but are not limited to, stock price, trading volume and general market conditions, along with Bancorp’s general business conditions. The program may be suspended or discontinued at any time and does not obligate Bancorp to acquire any specific number of shares of its common stock. As part of the share repurchase program, Bancorp entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common stock to be repurchased at times that might otherwise be prohibited under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions. 89 Note 9: Fair Value of Assets and Liabilities Fair Value Hierarchy and Fair Value Measurement We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data. Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant management judgment and estimation. Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation process in the reporting period during which the event or circumstances that caused the transfer occurred. No such transfers occurred in the years presented. The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis. (in thousands) Description of Financial Instruments Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Measurement Categories: Changes in Fair Value Recorded In 1 December 31, 2023 Securities available for sale: Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 352,472 $ — $ 352,472 $ — OCI SBA-backed securities $ 19,471 $ — $ 19,471 $ — OCI Debentures of government sponsored agencies $ 66,862 $ — $ 66,862 $ — OCI U.S. Treasury securities $ 10,623 $ 10,623 $ — $ — OCI Obligations of state and political subdivisions $ 91,882 $ — $ 91,882 $ — OCI Corporate bonds $ 10,718 $ — $ 10,718 $ — OCI Derivative financial assets (interest rate contracts) $ 287 $ — $ 287 $ — NI Derivative financial liabilities (interest rate contracts) $ 1,361 $ — $ 1,361 $ — NI December 31, 2022 Securities available for sale: Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 475,505 $ — $ 475,505 $ — OCI SBA-backed securities $ 44,355 $ — $ 44,355 $ — OCI Debentures of government sponsored agencies $ 135,106 $ — $ 135,106 $ — OCI U.S. Treasury securities $ 10,269 $ 10,269 $ — $ — OCI Obligations of state and political subdivisions $ 102,123 $ — $ 102,123 $ — OCI Corporate bonds $ 33,276 $ — $ 33,276 $ — OCI Asset-backed securities $ 1,462 $ — $ 1,462 $ — OCI Derivative financial assets (interest rate contracts) $ 602 $ — $ 602 $ — NI 1 Other comprehensive income (loss) ("OCI") or net income ("NI"). Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. Level 1 securities include U.S. 90 Treasury securities. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2). Level 2 securities include asset-backed securities, obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued securities, and corporate bonds. As of December 31, 2023 and 2022, there were no Level 3 securities. Held-to-maturity securities may be subject to an allowance for credit losses as a result of our evaluation of expected losses due to credit quality factors. We did not record any credit loss expense on held-to-maturity securities during 2023 or 2022. The fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities. On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. These unobservable inputs are not considered significant inputs to the fair value measurement overall. Level 2 inputs for the valuations are limited to observable market prices for Secured Overnight Financing Rate ("SOFR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for SOFR futures contracts, observable market prices for SOFR and OIS swap rates, and one-month and three-month SOFR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as of the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties. We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and SOFR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. Because there is little to no counterparty risk, we did not incorporate credit adjustments from our assessment of the counterparty credit risk in determining fair value. For further discussion on our methodology for valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities. Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as individually analyzed loans that are collateral dependent and other real estate owned ("OREO"). OREO is classified as Level 3 and represents collateral acquired through foreclosure and is initially recorded at fair value as established by a current appraisal of the collateral. Subsequent to foreclosure, OREO is carried at the lower of cost or fair value, less estimated costs to sell. On July 12, 2023, the Bank completed the sale of its only OREO property. The following table presents the carrying value of assets measured at fair value on a non-recurring basis and that were held in the consolidated statements of condition at each respective period end, by level within the fair value hierarchy as of December 31, 2023 and 2022. (in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2023 Other real estate owned $ — $ — $ — $ — December 31, 2022 Other real estate owned $ 455 $ — $ — $ 455 91 Disclosures about Fair Value of Financial Instruments The table below is a summary of fair value estimates for financial instruments as of December 31, 2023 and 2022, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI"), lease obligations and non-maturity deposit liabilities. Additionally, we held shares of Federal Home Loan Bank ("FHLB") of San Francisco stock at cost as of December 31, 2023 and 2022, and Visa Inc. Class B common stock with no carrying value as of December 31, 2022, which was sold entirely in July of 2023. There were no impairments or changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer as of December 31, 2023 and 2022. See further discussion on values within Note 2, Investment Securities , above. December 31, 2023 December 31, 2022 (in thousands) Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy Financial assets (recorded at amortized cost) Cash and cash equivalents $ 30,453 $ 30,453 Level 1 $ 45,424 $ 45,424 Level 1 Investment securities held-to-maturity 925,198 814,830 Level 2 972,207 845,239 Level 2 Loans, net of allowance for credit losses 2,048,548 1,939,702 Level 3 2,069,563 1,993,866 Level 3 Interest receivable 12,752 12,752 Level 2 13,069 13,069 Level 2 Financial liabilities (recorded at amortized cost) Time deposits 251,317 252,824 Level 2 119,030 118,333 Level 2 Federal Home Loan Bank overnight borrowings — — Level 1 112,000 112,000 Level 1 FRBSF short-term borrowings under the BTFP 26,000 25,998 Level 2 — — Level 2 Interest payable 2,752 2,752 Level 2 75 75 Level 2 The fair value of loans is based on exit price techniques and obtained from an independent third-party that uses its proprietary valuation model and methodology and may differ from the actual price from a prospective buyer. The discounted cash flow valuation approach reflects key inputs and assumptions that are unobservable, such as loan probability of default, loss given default, prepayment speed, and market discount rates. The fair value of fixed-rate time deposits is estimated by discounting future contractual cash flows using discount rates that reflect the current observable market rates offered for time deposits of similar remaining maturities. The value of off-balance-sheet financial instruments is estimated based on the fee income associated with the commitments, which, in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material as of December 31, 2023 and 2022. Note 10: Benefit Plans Deferred Compensation Plans We established the Bank of Marin Executive Deferred Compensation Plan, which allows certain key management personnel designated by the Board of Directors of the Bank to defer up to 80 % of their salary and 100 % of their annual bonus. In addition, we assumed deferred compensation plans for certain members of management and non-employee directors as part of an acquisition in 2021. In 2021, we established a similar Deferred Director Fee Plan, which allows members of the Board of Directors to defer the cash portion of their director compensation. Amounts deferred earn interest equal to the prime rate, as published in the Wall Street Journal, on the first business day of each year, which was 7.50 % on January 1, 2023, and 3.25 % on January 1, 2022. Benefit payments will generally commence upon separation from service at or after normal retirement age, as elected by the participant. Our deferred compensation obligations under these plans totaled $ 6.6 million and $ 7.1 million at December 31, 2023 and 2022, respectively, and are included in interest payable and other liabilities. 92 401(k) Defined Contribution Plan Our 401(k) Defined Contribution Plan (“401(k) Plan”) is available to all regular employees at least eighteen years of age who complete ninety days of service, and participate in the plan beginning on the first day of the calendar quarter that immediately follows the date the participant meets the age and service requirements. Under the 401(k) Plan, employees can defer between 1 % and 50 % of their eligible compensation, up to the maximum amount allowed by the Internal Revenue Code. The Bank provides an employer-match of 70 % of each participant's contribution, with a maximum of $ 5 thousand per participant per year. Employer matching contributions to the 401(k) Plan vest at a rate of 20 % per year over five years . Employer contributions totaled $ 871 thousand, $ 949 thousand and $ 991 thousand for the years ended December 31, 2023, 2022 and 2021, respectively, and are recorded in salaries and employee benefits expense. Employee Stock Ownership Plan Our Employee Stock Ownership Plan (“ESOP”) is available to all employees under the same eligibility criteria as the 401(k) Plan; however, employee contributions are not permitted. The Board of Directors determines a specific portion of the Bank's profits to be contributed to the ESOP each year either in common stock or in cash for the purchase of Bancorp stock to be allocated to all eligible employees based on a percentage of their salaries, regardless of whether an employee participates in the 401(k) Plan. For all participants, employer contributions vest over a five-year service period. After five years of service, all future employer contributions vest immediately. Bancorp issued shares of common stock and contributed them to the ESOP totaling $ 1.3 million in 2023, $ 1.2 million in 2022 and $ 1.3 million in 2021, based on the quoted market price on the date of contribution. Cash dividends paid on Bancorp stock held by the ESOP are used to purchase additional shares in the open market. All shares of Bancorp stock held by the ESOP are included in the calculations of basic and diluted earnings per share. The Company's contributions to the ESOP are included in salaries and benefits expense. Supplemental Executive Retirement Plans Supplemental executive retirement plans ("SERPs") have been established for a select group of executive management who, upon retirement, will receive 25 % of their estimated salary as salary continuation benefit payments that are fixed between five to fifteen years , depending on the executives' service period. Each participant is required to participate in the plan for five years before vesting begins. After five years , the participant vests ratably in the benefit over the remaining service period until age 65 . As part of previous acquisitions, we assumed SERPs for certain former executive officers and directors. These plans are unfunded and nonqualified for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974. At December 31, 2023 and 2022, respectively, our total liability under the SERPs was $ 4.5 million and $ 4.7 million recorded in interest payable and other liabilities. Note 11: Income Taxes The current and deferred components of the income tax provision for each of the three years ended December 31 are as follows: (in thousands) 2023 2022 2021 Current tax provision Federal $ 3,234 $ 10,670 $ 6,627 State 2,823 6,687 4,815 Total current tax provision 6,057 17,357 11,442 Deferred tax provision (benefit) Federal 319 ( 441 ) 274 State ( 235 ) 7 ( 58 ) Total deferred tax provision (benefit) 84 ( 434 ) 216 Total income tax provision $ 6,141 $ 16,923 $ 11,658 93 The following table shows the tax effect of our cumulative temporary differences as of December 31: (in thousands) 2023 2022 Deferred tax assets: Net unrealized losses on securities available-for-sale $ 20,993 $ 29,458 Allowance for credit losses on loans and unfunded loan commitments 7,775 7,229 Operating and finance lease liabilities 6,860 8,002 Deferred compensation and salary continuation plans 3,289 3,481 Accrued but unpaid expenses 1,709 1,751 Net operating loss carryforwards 1,136 1,239 Fair value adjustment on acquired loans 695 905 Stock-based compensation 632 697 State franchise tax 593 1,396 Depreciation and disposals on premises and equipment 179 236 Other 74 194 Total gross deferred tax assets 43,935 54,588 Deferred tax liabilities: Operating and finance lease right-of-use assets ( 6,092 ) ( 7,465 ) Deferred loan origination costs and fees ( 1,435 ) ( 1,476 ) Core deposit intangible assets ( 1,113 ) ( 1,512 ) Other ( 226 ) ( 279 ) Total gross deferred tax liabilities ( 8,866 ) ( 10,732 ) Net deferred tax assets $ 35,069 $ 43,856 As of December 31, 2023, California net operating loss carryforwards ("NOLs") of $ 13.3 million corresponded to the total $ 1.1 million deferred tax asset above. If not fully utilized, the California NOLs will begin to expire in 2031. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are expected to be deductible, management believes it is more likely than not that we will realize the benefit of the remaining deferred tax assets. Accordingly, no valuation allowance has been established as of December 31, 2023 or 2022. The effective tax rate for 2023, 2022 and 2021 differs from the current federal statutory income tax rate as follows: 2023 2022 2021 Federal statutory income tax rate 21.0 % 21.0 % 21.0 % Increase (decrease) due to: California franchise tax, net of federal tax benefit 7.9 % 8.3 % 8.4 % Tax exempt interest on municipal securities and loans ( 3.1 ) % ( 1.9 ) % ( 2.5 ) % Tax exempt earnings on bank owned life insurance ( 1.5 ) % ( 0.4 ) % ( 1.0 ) % Non-deductible acquisition related expenses — % — % 0.6 % Non-deductible executive compensation — % — % 0.4 % Low income housing and qualified zone academy bond tax credits ( 0.6 ) % ( 0.2 ) % ( 0.4 ) % Stock-based compensation and excess tax deficiencies (benefits) 0.2 % — % ( 0.1 ) % Other ( 0.3 ) % ( 0.2 ) % ( 0.4 ) % Effective Tax Rate 23.6 % 26.6 % 26.0 % Bancorp and the Bank have entered into a tax allocation agreement, which provides that income taxes shall be allocated between the parties on a separate entity basis. The intent of this agreement is that each member of the consolidated group will incur no greater tax liability than it would have incurred on a stand-alone basis. 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 time of the issuance of this report. We are no longer subject to examinations by tax authorities for years before 2020 for federal income tax and before 2019 for California. At December 31, 2023 and 2022, there were no unrecognized tax benefits, and neither the Bank nor Bancorp had accruals for interest and penalties related to unrecognized tax benefits. 94 Note 12: Commitments and Contingencies Leases We lease premises under long-term non-cancelable operating leases with remaining terms of approximately 4 months to 18 years, 5 months , most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised. We lease certain equipment under finance leases with initial terms of 3 to 5 years. The equipment finance leases do not contain renewal options, bargain purchase options, or residual value guarantees. The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities as of December 31, 2023 and 2022. (in thousands) December 31, 2023 December 31, 2022 Operating leases: Operating lease right-of-use assets $ 20,316 $ 24,821 Operating lease liabilities 22,906 26,639 Finance leases: Finance lease right-of-use assets 608 616 Accumulated amortization ( 319 ) ( 187 ) Finance lease right-of-use assets, net 1 $ 289 $ 429 Finance lease liabilities 2 $ 298 $ 439 1 Included in premises and equipment in the consolidated statements of condition. 2 Included in borrowings and other obligations in the consolidated statements of condition. The following table shows supplemental disclosures of noncash investing and financing activities for the years ended December 31, 2023, 2022 and 2021. (in thousands) 2023 2022 2021 Right-of-use assets obtained in exchange for operating lease liabilities $ 437 $ 6,116 $ 2,376 Right-of-use assets obtained in exchange for finance lease liabilities $ 7 $ 151 $ 444 The following table shows components of operating and finance lease cost for the years ended December 31, 2023, 2022 and 2021. (in thousands) 2023 2022 2021 Operating lease cost 1 $ 5,493 $ 5,356 $ 4,823 Variable lease cost — — — Total operating lease cost $ 5,493 $ 5,356 $ 4,823 Finance lease cost: Amortization of right-of-use assets 2 $ 147 $ 127 $ 96 Interest on finance lease liabilities 3 7 3 2 Total finance lease cost $ 154 $ 130 $ 98 Total lease cost $ 5,647 $ 5,486 $ 4,921 1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income (loss). 2 Included in depreciation and amortization in the consolidated statements of comprehensive income (loss). 3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income (loss). The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of December 31, 2023. Total minimum lease payments do not include future minimum payment obligations of approximately $ 2.0 million, excluding renewal options, for an operating lease agreement related to an existing retail branch that commenced subsequent to December 31, 2023. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borro wing rates that were commensurate with lease terms and minimum payments on the lease commencement date. 95 (in thousands) December 31, 2023 Year Operating Leases Finance Leases 2024 $ 4,753 $ 155 2025 4,112 108 2026 3,373 38 2027 3,096 5 2028 2,710 — Thereafter 7,308 — Total minimum lease payments 25,352 306 Amounts representing interest (present value discount) ( 2,446 ) ( 8 ) Present value of net minimum lease payments (lease liability) $ 22,906 $ 298 Weighted average remaining term (in years) 7.3 2.2 Weighted average discount rate 2.40 % 2.07 % Litigation Matters Bancorp may be subject to legal actions that arise from time to time in the normal course of business. Bancorp's management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has recently been a party that will have a material adverse effect on the financial condition or results of operations of Bancorp or the Bank. The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). We sold our remaining shares on July 13, 2023, however, our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks or, per the terms of the sale, to the recent purchaser of our shares. Visa established an escrow account for the Covered Litigation that it periodically funds, which is expected to cover the settlement payment obligations. Litigation is ongoing, and until the court approval process is complete, there is no assurance that Visa will resolve the claims as contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote. Note 13: Concentrations of Credit Risk Concentration of credit risk is associated with a lack of diversification, such as having substantial investments in a few individual issuers, thereby potentially exposing us to adverse economic, political, regulatory, geographic, industrial or credit developments. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investment securities and loans. At times, our cash in correspondent bank accounts may exceed FDIC insured limits. We place cash and cash equivalents with the Federal Reserve Bank and other high credit quality financial institutions, periodically monitor their credit worthiness and limit the amount of credit exposure to any one institution according to regulations. Concentrations of credit risk with respect to investment securities primarily related to the U.S. government and GSEs, which accounted for $ 1.272 billion, or 86 % of our total investment portfolio at December 31, 2023 and $ 1.535 billion, or 87 % at December 31, 2022. The decrease was mainly due to the sale of $ 167.4 million and $ 106.1 million in paydowns of this security type in 2023. The largest security not issued by the U.S. government or a GSE accounted for approximately 1 % of our total investment portfolio at both December 31, 2023 and 2022. We also manage our credit exposure related to our loan portfolio to avoid the risk of undue concentration of credits in a particular industry or geographic location by reducing significant exposure to highly leveraged transactions or to 96 any individual customer or counterparty, and by obtaining collateral, as appropriate. With the heightened market concern about non-owner-occupied commercial real estate, and in particular the office sector, 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 represented 3 % of our total loan portfolio and 6 % of our total non-owner-occupied commercial real estate portfolio as of December 31, 2023. No single borrower relationship accounted for more than 3 % of outstanding loan balances at December 31, 2023 or 2022. The largest loan concentration is real estate, which accounted for 90 % of our loan portfolio at both December 31, 2023 and 2022. Note 14: Derivative Financial Instruments and Hedging Activities The Bank is exposed to certain risks from both its business operations and changes in economic conditions. As part of our asset/liability and interest rate risk management strategy, we may enter into interest rate derivative contracts to modify repricing characteristics of certain of our interest-earning assets and interest-bearing liabilities. The Bank generally designates interest rate hedging agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. On July 7, 2023, the Bank entered into various interest rate swap agreements with notional values totaling $ 101.8 million split evenly between terms of 2.5 and 3.0 years 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. The interest rate swaps involve the receipt of floating rate interest from a counterparty in exchange for us making fixed-rate interest payments over the lives of the agreements, without the exchange of the underlying notional values. The transactions were designated as partial term fair value hedges and structured such that the changes in the fair value of the interest rate swaps are expected to be perfectly effective in offsetting the changes in the fair value of the hedged items attributable to changes in the SOFR OIS swap rate, the designated benchmark interest rate. Because the hedges met the criteria for using the shortcut method, there is no need to periodically reassess effectiveness during the term of the hedges. For fair value designated hedges, the gains or losses on the hedging instruments as well as the offsetting gains or losses on the hedged items, are recognized in current earnings as their fair values change. In addition, we had three interest rate swap agreements on certain loans with our customers, which are scheduled to mature at various dates ranging from June 2031 to July 2032. In December 2023, one interest rate swap, scheduled to mature in October 2037, was terminated as the hedged loan was paid off. The loan interest rate swaps were designated as fair value hedges and allowed us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar SOFR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Information on our derivatives follows: Asset derivatives Liability derivatives (in thousands) December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 Available-for-sale securities: Interest rate swaps - notional amount $ — $ — $ 101,770 $ — Interest rate swaps - fair value 1 $ — $ — $ 1,359 $ — Loans receivable: Interest rate contracts - notional amount $ 6,441 $ 12,046 $ 2,157 $ — Interest rate contracts - fair value 1 $ 287 $ 602 $ 2 $ — 1 Refer to Note 9, Fair Value of Assets and Liabilities, for valuation methodology. 97 The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of December 31, 2023 and 2022. Carrying Amounts of Hedged Assets Cumulative Amounts of Fair Value Hedging Adjustments Included in the Carrying Amounts of the Hedged Assets (in thousands) December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 Available-for-sale securities 1 $ 107,181 $ — $ ( 1,359 ) $ — Loans receivable 2 $ 8,183 $ 11,319 $ ( 367 ) $ ( 726 ) 1 Carrying value equals the amortized cost basis of the securities underlying the hedge relationship, which is the book value net of the fair value hedge adjustment. Amortized cost excludes accrued interest totaling $ 222 thousand as of December 31, 2023. 2 Carrying value equals the amortized cost basis of the loans underlying the hedge relationship, which is the loan balance net of deferred loan origination fees and cost and the fair value hedge adjustment. Amortized cost excludes accrued interest, which was not material. The following table presents the pretax net gains (losses) recognized in interest income related to our fair value hedges for the years presented. Years ended December 31, (in thousands) 2023 2022 2021 Interest on investment securities 1 Decrease in fair value of interest rate swaps hedging available-for-sale securities $ ( 1,359 ) $ — $ — Hedged interest earned (paid) 367 — — Increase in carrying value included in the hedged available-for-sale securities 1,359 — — Net gain recognized in interest income on investment securities $ 367 $ — $ — Interest and fees on loans 1 (Decrease) increase in fair value of interest rate swaps hedging loans receivable $ ( 317 ) $ 1,687 $ 827 Hedged interest earned (paid) 268 ( 143 ) ( 369 ) Increase (decrease) in carrying value included in the hedged loans 359 ( 1,666 ) ( 814 ) Decrease in value of yield maintenance agreement ( 9 ) ( 10 ) ( 11 ) Net gain (loss) recognized in interest income on loans $ 301 $ ( 132 ) $ ( 367 ) 1 Represents the income line item in the statements of comprehensive income (loss) in which the effects of fair value hedges are recorded. Our derivative transactions with the counterparty are under an International Swaps and Derivative Association (“ISDA”) master agreement that includes “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes. Information on financial instruments that are eligible for offset in the consolidated statements of condition follows: Offsetting of Financial Assets and Derivative Assets Gross Amounts Net Amounts Gross Amounts Not Offset in the Statements of Condition Gross Amounts Offset in the of Assets Presented of Recognized Statements of in the Statements Financial Cash Collateral (in thousands) Assets 1 Condition of Condition 1 Instruments Received Net Amount December 31, 2023 Counterparty $ 287 $ — $ 287 $ — $ — $ 287 Total $ 287 $ — $ 287 $ — $ — $ 287 December 31, 2022 Counterparty $ 602 $ — $ 602 $ — $ — $ 602 Total $ 602 $ — $ 602 $ — $ — $ 602 98 Offsetting of Financial Liabilities and Derivative Liabilities Gross Amounts of Recognized Liabilities 1 Gross Amounts Offset in the Statements of Condition Net Amounts of Liabilities Presented in the Statements of Condition 1 Gross Amounts Not Offset in the Statements of Condition Financial Instruments Cash Collateral Pledged (in thousands) Net Amount December 31, 2023 Counterparty $ 1,361 $ — $ 1,361 $ ( 287 ) ( 330 ) $ 744 Total $ 1,361 $ — $ 1,361 $ ( 287 ) $ ( 330 ) $ 744 December 31, 2022 Counterparty $ — $ — $ — $ — — $ — Total $ — $ — $ — $ — $ — $ — 1 Amounts exclude accrued interest on swaps. Note 15: Regulatory Matters We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank’s prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors. Management reviews capital ratios on a regular basis and produces a five-year capital plan semi-annually to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. Stress tests are performed on capital ratios and include scenarios such as additional unrealized losses on the investment portfolio, additional deposit growth, loan credit quality deterioration, and potential share repurchases. For all periods presented, the Bank’s ratios exceed the regulatory definition of “well-capitalized” under the regulatory framework for prompt corrective action and Bancorp’s ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company. In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of December 31, 2023. There are no conditions or events since that notification that management believes have changed the Bank’s categories and we expect the Bank to remain well c apitalized for prompt corrective action purposes. The Bancorp’s and Bank's capital adequacy ratios as of December 31, 2023 and 2022 are presented in the following tables. Bancorp Capital Ratios (dollars in thousands) Actual Adequately Capitalized Threshold 1 Threshold to be a Well Capitalized Bank Holding Company December 31, 2023 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 440,842 16.89 % $ 274,002 10.50 % $ 260,954 10.00 % Tier 1 Capital (to risk-weighted assets) $ 415,224 15.91 % $ 221,811 8.50 % $ 208,763 8.00 % Tier 1 Leverage Capital (to average assets) $ 415,224 10.46 % $ 158,771 4.00 % $ 198,464 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 415,224 15.91 % $ 182,668 7.00 % $ 169,620 6.50 % December 31, 2022 Total Capital (to risk-weighted assets) $ 431,667 15.90 % $ 285,079 10.50 % $ 271,504 10.00 % Tier 1 Capital (to risk-weighted assets) $ 407,912 15.02 % $ 230,778 8.50 % $ 217,203 8.00 % Tier 1 Leverage Capital (to average assets) $ 407,912 9.60 % $ 169,948 4.00 % $ 212,435 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 407,912 15.02 % $ 190,053 7.00 % $ 176,478 6.50 % 99 Bank Capital Ratios (dollars in thousands) Actual Adequately Capitalized Threshold 1 Threshold to be Well Capitalized under Prompt Corrective Action Provisions December 31, 2023 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 433,598 16.62 % $ 273,986 10.50 % $ 260,939 10.00 % Tier 1 Capital (to risk-weighted assets) $ 407,981 15.64 % $ 221,798 8.50 % $ 208,751 8.00 % Tier 1 Leverage Capital (to average assets) $ 407,981 10.28 % $ 158,767 4.00 % $ 198,459 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 407,981 15.64 % $ 182,657 7.00 % $ 169,610 6.50 % December 31, 2022 Total Capital (to risk-weighted assets) $ 427,108 15.73 % $ 285,052 10.50 % $ 271,478 10.00 % Tier 1 Capital (to risk-weighted assets) $ 403,352 14.86 % $ 230,757 8.50 % $ 217,183 8.00 % Tier 1 Leverage Capital (to average assets) $ 403,352 9.49 % $ 169,940 4.00 % $ 212,425 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 403,352 14.86 % $ 190,035 7.00 % $ 176,461 6.50 % 1 Except for Tier 1 Leverage Capital, the adequately capitalized thresholds reflect the regulatory minimum plus a 2.5% capital conservation buffer as required under the Basel III Capital Standards in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. Note 16: Financial Instruments with Off-Balance Sheet Risk We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements. Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property. The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows: (in thousands) December 31, 2023 December 31, 2022 Commercial lines of credit $ 259,989 $ 292,204 Revolving home equity lines 218,935 218,907 Undisbursed construction loans 13,943 43,179 Personal and other lines of credit 9,136 10,842 Standby letters of credit 3,147 1,738 Total unfunded loan commitments and standby letters of credit $ 505,150 $ 566,870 As of December 31, 2023, approximately 38 % of the commitments expire in 2024, 51 % expire between 2025 and 2031 and 11 % expire thereafter. We record an allowance for credit losses on unfunded loan commitments at the balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and expected loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments totaled $ 1.1 million and $ 1.5 million as of December 31, 2023 and 2022, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition. We recorded reversals of the provision for credit losses on unfunded commitments totaling $ 342 thousand, $ 318 thousand and $ 992 thousand in 2023, 2022, and 2021, respectively. The reversals in 2023 and 2022 were due primarily to decreases in total unfunded loan commitments. The reversal in 2021 was largely due to ongoing improvements in the underlying economic forecasts under the CECL accounting method at the time . 100 Note 17: Condensed Bank of Marin Bancorp Parent Only Financial Statements Presented below is financial information for Bank of Marin Bancorp, parent holding company only. CONDENSED UNCONSOLIDATED STATEMENTS OF CONDITION December 31, 2023 and 2022 (in thousands) 2023 2022 Assets Cash and due from Bank of Marin $ 7,189 $ 4,493 Investment in bank subsidiary 431,819 407,532 Other assets 156 255 Total assets $ 439,164 $ 412,280 Liabilities and Stockholders' Equity Accrued expenses payable $ 102 $ 188 Other liabilities — — Total liabilities 102 188 Stockholders' equity 439,062 412,092 Total liabilities and stockholders' equity $ 439,164 $ 412,280 CONDENSED UNCONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2023, 2022 and 2021 (in thousands) 2023 2022 2021 Income Dividends from bank subsidiary $ 20,000 $ 16,200 $ 64,000 Miscellaneous income — — — Total income 20,000 16,200 64,000 Expense Interest expense — — 1,361 Non-interest expense 1,705 1,793 4,025 Total expense 1,705 1,793 5,386 Income before income taxes and equity in undistributed net income of subsidiary 18,295 14,407 58,614 Income tax benefit 504 530 1,235 Income before equity in undistributed net income of subsidiary 18,799 14,937 59,849 Earnings of bank subsidiary greater (less) than dividends received from bank subsidiary 1,096 31,649 ( 26,621 ) Net income $ 19,895 $ 46,586 $ 33,228 101 CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2023, 2022 and 2021 (in thousands) 2023 2022 2021 Cash Flows from Operating Activities: Net income $ 19,895 $ 46,586 $ 33,228 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Earnings of bank subsidiary (greater) less than dividends received from bank subsidiary ( 1,096 ) ( 31,649 ) 26,621 Accretion of discount on subordinated debenture — — 1,347 Noncash director compensation expense 60 36 35 Net changes in: Other assets 99 ( 12 ) ( 1,655 ) Other liabilities ( 86 ) ( 129 ) ( 88 ) Net cash provided by operating activities 18,872 14,832 59,488 Cash Flows from Investing Activities: Capital contribution to bank subsidiary ( 276 ) ( 899 ) ( 619 ) Net cash used in investing activities ( 276 ) ( 899 ) ( 619 ) Cash Flows from Financing Activities: Repayment of subordinated debenture including execution costs — — ( 4,126 ) Restricted stock surrendered for tax withholdings upon vesting ( 70 ) ( 40 ) ( 166 ) Cash dividends paid on common stock ( 16,106 ) ( 15,673 ) ( 13,107 ) Stock repurchased, including commissions — ( 1,250 ) ( 40,762 ) Proceeds from stock options exercised and stock issued under employee and director stock purchase plans 276 899 587 Net cash used in financing activities ( 15,900 ) ( 16,064 ) ( 57,574 ) Net increase (decrease) in cash and cash equivalents 2,696 ( 2,131 ) 1,295 Cash and cash equivalents at beginning of year 4,493 6,624 5,329 Cash and cash equivalents at end of year $ 7,189 $ 4,493 $ 6,624 Supplemental schedule of noncash investing and financing activities: Stock issued in payment of director fees $ 398 $ 355 $ 217 Repurchase of stock not yet settled $ — $ — $ 373 Stock issued to ESOP $ 1,315 $ 1,233 $ 1,330 Note 18: Merger Bancorp completed its merger and acquired all assets and assumed all liabilities of AMRB on August 6, 2021. The merger expanded Bank of Marin's presence throughout the Greater Sacramento, Amador and Sonoma County Regions where AMRB had ten branches. T he merger added $ 898.4 million in total assets, including $ 297.8 million in investment securities and $ 419.4 million in loans, and $ 816.6 million in total liabilities, including $ 790.0 million in deposits, to Bank of Marin as of the merger date. Bancorp accounted for the merger as a business combination under the acquisition method of accounting. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the merger date in accordance with ASC 805, Business Combinations . AMRB's shareholders received 0.575 shares of Bancorp's common stock for each share of AMRB common stock outstanding immediately prior to the Merger resulting in the issuance of 3,441,235 shares of Bancorp common stock. In addition, merger consideration included cash paid for outstanding stock options and cash paid in lieu of fractional shares, as summarized in the following table. (in thousands) Merger Consideration Value of common stock consideration paid to shareholders ( 0.575 fixed exchange ratio, stock price $ 36.15 ) $ 124,401 Cash consideration for stock options 63 Cash paid in lieu of fractional shares 13 Total merger consideration $ 124,477 102 We recorded $ 42.6 million in goodwill, which represented the excess of the total merger consideration paid of $ 124.5 million over the fair value of the net assets acquired of $ 81.9 million. Goodwill mainly reflects the expected value created through the combined operations of AMRB and Bancorp and is evaluated for impairment annually. Merger-related and conversion costs are recognized as incurred and continue until all systems have been converted and operational functions are fully integrated. Bancorp's pretax merger-related costs reflected in the consolidated statements of comprehensive income (loss) are summarized in the following table. Years ended December 31, (in thousands) 2023 2022 2021 Personnel and severance $ — $ 393 $ 3,005 Professional services — 67 1,976 Data processing — 77 1,127 Other expense — 321 350 Total merger-related and conversion costs $ — $ 858 $ 6,458 End of 2023 Audited Consolidated Financial Statements 103 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.