# Bank of Marin Bancorp (BMRC) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Bank of Marin Bancorp's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1403475/000140347524000012/bmrc-20231231.htm
Accession: 0001403475-24-000012
Filing date: 2024-03-14
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BMRC/
All MD&A years: /company/BMRC/mda/
Previous year: /company/BMRC/mda/fy2022/ (FY 2022)
Next year: /company/BMRC/mda/fy2024/ (FY 2024)

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of financial condition as of December 31, 2023 and 2022 and results of operations for each of the years in the three-year period ended December 31, 2023 should be read in conjunction with our consolidated financial statements and related notes thereto, included in Part II ITEM 8 of this report.

Forward-Looking Statements

The disclosures set forth in this item are qualified by important factors detailed in Part I captioned Forward-Looking Statements and ITEM 1A captioned Risk Factors of this report and other cautionary statements set forth elsewhere in the report.

Critical Accounting Estimates

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation and uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. We consider accounting estimates to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. Management has determined the following accounting estimates and related policies to be critical.

Allowance for Credit Losses on Loans and Unfunded Commitments

The allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis at the balance sheet date to present the net amount of loans expected to be collected. The allowance for losses on unfunded loan commitments is based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity, and loss rates as determined for pooled funded loans. The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities. Management estimates these allowances quarterly using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

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

The allowance for credit losses ("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 generally correspond to federal regulatory reporting codes. In addition, 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.

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

Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which increased to 5.1% at December 31, 2023, from 4.1% at December 31, 2022. The ACL model incorporates a one-year forecast. For periods beyond the forecast horizon, the economic factors revert to historical averages on a straight-line basis over a one-year period. We performed a sensitivity analysis as of December 31, 2023, and estimated that a 100 basis point change (e.g., 4.5% to 5.5%) in the forecasted unemployment rates over the next four quarters would result in about a 5% change to our allowance for credit losses on loans. This impact does not consider changes to other assumptions for either the quantitative factors, such as probability of default, loss given default, loan mix or cash flows, prepayment/curtailment rates, and individually analyzed loans, or qualitative factors as discussed in Note 1 - Summary of Significant Accounting Policies. Additionally, because current economic conditions and forecasts can change, as future events are inherently difficult to predict, the estimated credit losses on loans and unfunded commitments could change significantly.

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

Fair Value Measurements

We use fair value measurements to record certain financial instruments and to determine fair value disclosures. Available-for-sale securities and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis. Additionally, we record at fair value other financial assets on a nonrecurring basis, such as collateral dependent loans and other real estate owned. These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets. We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement. Fair value is discussed further in Note 1 - Summary of Significant Accounting Policies, and Note 9 - Fair Value of Assets and Liabilities in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.

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Goodwill

Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is tested annually for impairment, or more often if conditions change and indicate a possible impairment. Significant judgment is used in the assessment of goodwill, both in a qualitative assessment and a quantitative assessment. Assessments of goodwill often require the use of fair value estimates, which are dependent upon various factors, including estimates concerning the Company’s long-term growth prospects and comparability to industry data. Uncertainty and imprecision in estimates can affect the estimated fair value of the reporting unit in a goodwill assessment. Additionally, various events or circumstances could have a negative effect on the estimated fair value of a reporting unit, such as declines in business performance, increases in credit losses, and deterioration in economic or market conditions, which may result in a material impairment charge to earnings in future periods.

In 2023, the Company assessed goodwill for impairment by performing a quantitative assessment, which encompassed an income approach and a market approach. The income approach considered such factors as the estimated future cash flows of our reporting unit based on internal long-term forecasts, assumptions concerning potential synergies and other economic benefits, and a discount rate used to present value such cash flows to determine the fair value. The market approach utilized observable market data from comparable public companies, including price-to-tangible book value ratios, to estimate the Company’s fair value. The market approach also incorporated a control premium to represent the Company’s expectation of a hypothetical acquisition. Management used judgment in the selection of comparable companies and included those with similar business activities, and related operating environments. In addition, the selection and weighting of the various fair value techniques may result in higher or lower estimates of fair value. Judgment is applied in determining the weightings between the income approach and the market approach in determining fair value. The results of this assessment indicated the value of goodwill was not impaired as of our annual impairment testing date of November 30, 2023, and there were no changes to our assessment through December 31, 2023.

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RESULTS OF OPERATIONS

Financial Highlights

The following are highlights of our financial condition and results of operations. The data was derived from the audited consolidated financial statements of Bank of Marin Bancorp.

[[GREPCENT_TABLE]]
[["","","At December 31,"],["(dollars in thousands, except per share data)","","2023","2022"],["Selected financial condition data:"],["Total assets","","$","3,803,903","","$","4,147,464"],["Investment securities","","$","1,477,226","","$","1,774,303"],["Loans, net of allowance for credit losses on loans","","$","2,048,548","","$","2,069,563"],["Deposits","","$","3,290,075","","$","3,573,348"],["Borrowings and other obligations","","$","26,298","","$","112,439"],["Stockholders' equity","","$","439,062","","$","412,092"],["Book value per share","","$","27.17","","$","25.71"],["Asset quality ratios:"],["Allowance for credit losses to total loans","","1.21","%","1.10","%"],["Allowance for credit losses to non-accrual loans","","3.15x","9.45x"],["Non-accrual loans to total loans","","0.39","%","0.12","%"],["Classified loans (graded substandard and doubtful) as a percentage of total loans","","1.56","%","1.34","%"],["Capital ratios:"],["Equity to total assets","","11.54","%","9.94","%"],["Tangible common equity to tangible assets","","9.73","%","8.21","%"],["Total capital (to risk-weighted assets)","","16.89","%","15.90","%"],["Tier 1 capital (to risk-weighted assets)","","15.91","%","15.02","%"],["Tier 1 capital (to average assets)","","10.46","%","9.60","%"],["Common equity Tier 1 capital (to risk-weighted assets)","","15.91","%","15.02","%"],["Other data:"],["Loan-to-deposit ratio","","63.03","%","58.56","%"],["Number of branches","","27","31"],["Full-time equivalent employees","","329","313"],["","For the Years Ended December 31,"],["(dollars in thousands, except per share data)","2023","2022","2021"],["Selected operating data:"],["Net interest income","$","102,761","","$","127,492","","$","104,951"],["Provision for (reversal of) credit losses on loans","2,575","","(63)","","(1,449)"],["Reversal of credit losses on unfunded loan commitments","(342)","","(318)","","(992)"],["Non-interest income","4,989","","10,905","","10,132"],["Non-interest expense","79,481","","75,269","","72,638"],["Net income","19,895","","46,586","","33,228"],["Net income per common share:"],["Basic","$","1.24","","$","2.93","","$","2.32"],["Diluted","$","1.24","","$","2.92","","$","2.30"],["Performance and other financial ratios:"],["Return on average assets","0.49","%","1.08","%","0.94","%"],["Return on average equity","4.69","%","11.16","%","8.43","%"],["Tax-equivalent net interest margin","2.63","%","3.11","%","3.17","%"],["Cost of deposits","0.74","%","0.06","%","0.07","%"],["Efficiency ratio","73.76","%","54.39","%","63.12","%"],["Net charge-offs (recoveries)","$","386","","$","(23)","","$","(93)"],["Net charge-offs (recoveries) to average loans","0.02","%","NM","NM"],["Cash dividend payout ratio on common stock 1","80.65","%","33.45","%","40.52","%"],["Cash dividends per common share","$","1.00","","$","0.98","","$","0.94"],["1 Calculated as cash dividends per common share divided by basic net income per common share."],["NM - Not meaningful."]]
[[/GREPCENT_TABLE]]

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Executive Summary

Annual earnings were $19.9 million in 2023, compared to $46.6 million in 2022. Diluted earnings were $1.24 per share in 2023, compared to $2.92 per share in 2022. Results for 2023 were significantly impacted by industry disruptions and the aftermath of a few regional bank failures in the first half of the year, causing some deposit run-off and a shift to higher cost funding sources, coupled with the FOMC's monetary policy resulting in rapid interest rate increases impacting both our funding costs and lending activity. However, we took several actions to reposition our balance sheet and improve our net interest margin, and, although there can be no assurance given, believe we laid the foundation for improved earnings in 2024, as discussed below.

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

•Over the course of 2023, balance sheet restructuring activities included the sale of $214.5 million in lower yielding available-for-sale securities, offsetting some losses with a gain from the sale of our remaining investment in Visa Inc. Class B restricted common stock, for a net pretax loss of $5.9 million. At the time, the sales proceeds were largely directed toward new loan originations and repayment of borrowings, which is expected to accelerate the improvement of the net interest margin over the coming quarters through higher interest earned on cash and loans and lower borrowing costs. In addition, the Bank entered into various interest rate swap agreements with notional values totaling $101.8 million to hedge balance sheet interest rate sensitivity and protect certain of our fixed-rate available-for-sale securities against changes in fair value related to changes in the benchmark interest rate. These interest rate swaps were accretive to net interest income in 2023.

•Loan balances of $2.074 billion as of December 31, 2023, were down slightly from $2.093 billion as of December 31, 2022. Loan originations were $144.1 million in 2023, compared to $240.2 million in 2022. Excluding paycheck protection loans ("PPP loans"), payoffs were $107.1 million in 2023, compared to $258.5 million in 2022. PPP loan payoffs during 2023 and 2022 were $2.7 million and $107.7 million, respectively. In addition, loan amortization from scheduled repayments, partially offset by the net utilization of lines of credit, reduced loans by $53.1 million in 2023.

•Our loan portfolio continues to perform well, with classified loans at 1.56% of total loans as of December 31, 2023, compared to 1.34% as of December 31, 2022. Non-owner-occupied commercial real estate loans made up $23.7 million, or 73%, of total classified loans as of December 31, 2023. Non-accrual loans were 0.39% and 0.12% of total loans as of December 31, 2023 and 2022, respectively. The Bank continues to proactively identify and manage credit risk within the loan portfolio.

•A $2.6 million provision for credit losses on loans in 2023 brought the allowance for credit losses to 1.21% of total loans, compared to 1.10% as of December 31, 2022. The increase was due primarily to adjustments to qualitative risk factors and specific allowances on loans with unique credit risk characteristics not indicative of pooled loans, as discussed below. This compares to a $63 thousand provision reversal in 2022.

•Total deposits decreased by $283.3 million to $3.290 billion as of December 31, 2023, from $3.573 billion as of December 31, 2022. As discussed further below, the decline was primarily due to a combination of outflows related to planned business activities, some balance declines associated with loan relationships exited during the year, and a number of customers moving cash into alternative investments to capture higher returns, a portion of which was directed to our own wealth management group. In addition, we had some deposit run-off as a result of regional bank failures and industry disruptions in the first half of the year. Non-interest bearing deposits continue to remain strong compared to our peers and made up 43.8% of total deposits as of December 31, 2023, compared to 51.5% as of December 31, 2022. We believe we are appropriately competitive in regard to deposit pricing, given our relationship banking model, which differentiates Bank of Marin through exceptional service. Estimated uninsured and/or uncollateralized deposits comprised 28% of total deposits as of December 31, 2023.

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•Total borrowings decreased by $86.0 million to $26.0 million, compared to $112.0 million at December 31, 2022, as part of the strategic balance sheet restructuring in 2023. Net available funding sources of $2.0 billion provided 213% coverage of uninsured deposits as of December 31, 2023.

•The tax-equivalent net interest margin was 2.63% for 2023, compared to 3.11% for 2022. The decrease was primarily attributed to higher deposit and borrowing costs, partially offset by higher yields on loans and investment securities.

•All capital ratios were above well-capitalized regulatory requirements. Bancorp's total risk-based capital ratio was 16.89% as of December 31, 2023, compared to 15.90% as of December 31, 2022. Tangible common equity to tangible assets ("TCE ratio") increased to 9.73% as of December 31, 2023, from 8.21% as of December 31, 2022. While we do not intend to sell our held-to-maturity securities, the TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.80% as of December 31, 2023, compared to 6.15% as of December 31, 2022 (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures).

•The Board of Directors declared a cash dividend of $0.25 per share on January 25, 2024, which was the 75th consecutive quarterly dividend paid by Bancorp. The dividend was paid on February 15, 2024 to shareholders of record at the close of business on February 8, 2024.

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Net Interest Income

Net interest income is the interest earned on loans, investments and other interest-earning assets minus interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in net interest income and/or margin due to an imbalance in the timing of repricing or maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income.

Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders’ equity.

The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for the years indicated.

[[GREPCENT_TABLE]]
[["Average Statements of Condition and Analysis of Net Interest Income"],["","","Year ended","","Year ended","","Year ended"],["","","December 31, 2023","","December 31, 2022","","December 31, 2021"],["","","","Interest","","","","Interest","","","","Interest"],["","","Average","Income/","Yield/","","Average","Income/","Yield/","","Average","Income/","Yield/"],["(dollars in thousands; unaudited)","Balance","Expense","Rate","","Balance","Expense","Rate","","Balance","Expense","Rate"],["Assets"],["","Interest-earning deposits with banks 1","$","42,864","","$","2,329","","5.36","%","","$","120,395","","$","1,407","","1.15","%","","$","287,626","","$","399","","0.14","%"],["","Investment securities 2, 3","1,753,708","","39,100","","2.23","%","","1,796,628","","35,534","","1.98","%","","866,790","","16,999","","1.96","%"],["","Loans 1, 3, 4, 7","2,099,719","","99,018","","4.65","%","","2,175,259","","94,614","","4.29","%","","2,155,982","","92,376","","4.23","%"],["","Total interest-earning assets 1","3,896,291","","140,447","","3.56","%","","4,092,282","","131,555","","3.17","%","","3,310,398","","109,774","","3.27","%"],["","Cash and non-interest-bearing due from banks","37,868","","","","","53,534","","","","","61,299"],["","Bank premises and equipment, net","8,348","","","","","7,400","","","","","5,964"],["","Interest receivable and other assets, net","135,200","","","","","151,295","","","","","159,502"],["Total assets","$","4,077,707","","","","","$","4,304,511","","","","","$","3,537,163"],["Liabilities and Stockholders' Equity"],["","Interest-bearing transaction accounts","$","240,524","","$","1,036","","0.43","%","","$","294,682","","$","421","","0.14","%","","$","217,924","","$","172","","0.08","%"],["","Savings accounts","281,611","","867","","0.31","%","","341,710","","125","","0.04","%","","268,397","","94","","0.04","%"],["","Money market accounts","1,013,620","","18,553","","1.83","%","","1,065,104","","1,589","","0.15","%","","864,625","","1,520","","0.18","%"],["","Time accounts, including CDARS","191,056","","4,715","","2.47","%","","140,547","","323","","0.23","%","","115,393","","246","","0.21","%"],["","Borrowings and other obligations 1, 6","221,623","","11,562","","5.15","%","","2,295","","91","","3.90","%","","892","","9","","1.08","%"],["","Subordinated debenture 1, 5","\u2014","","\u2014","","\u2014","%","","\u2014","","\u2014","","\u2014","%","","534","","1,361","","251.54","%"],["","Total interest-bearing liabilities","1,948,434","","36,733","","1.89","%","","1,844,338","","2,549","","0.14","%","","1,467,765","","3,402","","0.23","%"],["","Demand accounts","1,656,047","","","","","1,993,373","","","","","1,628,289"],["","Interest payable and other liabilities","49,442","","","","","49,456","","","","","46,746"],["","Stockholders' equity","423,784","","","","","417,344","","","","","394,363"],["Total liabilities & stockholders' equity","$","4,077,707","","","","","$","4,304,511","","","","","$","3,537,163"],["Tax-equivalent net interest income/margin 1","","$","103,714","","2.63","%","","","$","129,006","","3.11","%","","","$","106,372","","3.17","%"],["Reported net interest income/margin 1","","$","102,761","","2.60","%","","","$","127,492","","3.07","%","","","$","104,951","","3.13","%"],["Tax-equivalent net interest rate spread","","","1.67","%","","","","3.03","%","","","","3.04","%"],["1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable."],["2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly."],["3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%."],["4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield."],["5 2021 interest on the subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021."],["6 Average balances and rate consider $13.9 million in FHLB borrowings acquired from AMRB that were redeemed on August 25, 2021."],["7 Net loan origination (costs) fees included in interest income totaled $(1.3) million, $1.1 million, and $7.0 million in 2023, 2022, and 2021, respectively."]]
[[/GREPCENT_TABLE]]

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Analysis of Changes in Net Interest Income

The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the years indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances.

[[GREPCENT_TABLE]]
[["","2023 compared to 2022","2022 compared to 2021"],["(in thousands, unaudited)","Volume","Yield/Rate","Mix","Total","Volume","Yield/Rate","Mix","Total"],["Interest-earning deposits with banks","$","(906)","","$","5,135","","$","(3,307)","","$","922","","$","(233)","","$","2,961","","$","(1,720)","","$","1,008"],["Investment securities 1","(849)","","4,523","","(108)","","3,566","","18,233","","146","","156","","18,535"],["Loans 1","(3,286)","","7,966","","(276)","","4,404","","826","","1,401","","11","","2,238"],["Total interest-earning assets","(5,041)","","17,624","","(3,691)","","8,892","","18,826","","4,508","","(1,553)","","21,781"],["Interest-bearing transaction accounts","(77)","","848","","(156)","","615","","61","","139","","49","","249"],["Savings accounts","(22)","","926","","(162)","","742","","26","","5","","\u2014","","31"],["Money market accounts","(77)","","17,906","","(865)","","16,964","","352","","(229)","","(54)","","69"],["Time accounts, including CDARS","116","","3,146","","1,130","","4,392","","54","","19","","4","","77"],["Borrowings and other obligations","8,697","","29","","2,745","","11,471","","16","","25","","41","","82"],["Subordinated debenture","\u2014","","\u2014","","","\u2014","","\u2014","","(1,361)","","\u2014","","(1,361)"],["Total interest-bearing liabilities","8,637","","22,855","","2,692","","34,184","","509","","(1,402)","","40","","(853)"],["Tax-equivalent net interest income","$","(13,678)","","$","(5,231)","","$","(6,383)","","$","(25,292)","","$","18,317","","$","5,910","","$","(1,593)","","$","22,634"],["1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%."]]
[[/GREPCENT_TABLE]]

2023 Compared to 2022

Net interest income totaled $102.8 million in 2023, compared to $127.5 million in 2022. The $24.7 million decrease from the prior year was primarily due to higher funding costs of $34.2 million, partially offset by higher average yields on earning assets.

The tax-equivalent net interest margin was 2.63% for 2023, compared to 3.11% for 2022. The decrease was primarily attributed to higher deposit and borrowing costs, partially offset by higher yields on loans and investment securities. Average interest-bearing deposit balances decreased by $115.2 million, while the average rate increased by 133 basis points, decreasing the margin by 58 basis points. Average borrowings and other obligations increased by $219.3 million, while the average cost increased by 125 basis points, decreasing the net interest margin by 29 basis points. Average loan balances decreased by $75.5 million, while the average yield increased by 36 basis points, increasing the margin by 23 basis points. Average investment securities decreased $42.9 million, while their average yield increased 25 basis points, improving the margin by 14 basis points.

2022 Compared to 2021

Net interest income totaled $127.5 million in 2022, compared to $105.0 million in 2021. The $22.5 million increase from the prior year was primarily due to higher balances in the investment and commercial real estate loan portfolios, which added $18.4 million and $6.1 million, respectively, to net interest income. Additionally, 2022 incorporated a full year of net interest income from the acquired earning assets of AMRB, compared to five months in 2021. Average interest-bearing liabilities increased $376.6 million, while the average cost dropped nine basis points, largely due to the extinguishment of subordinated debt that generated $1.4 million of interest expense in 2021.

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

Market Interest Rates

Market interest rates are, in part, based on the target federal funds interest rate (the interest rate banks charge each other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC").

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In response to the evolving risks to economic activity caused by the COVID-19 pandemic, the FOMC made two emergency federal funds rate cuts totaling 150 basis points in March 2020. The federal funds rate range remained between 0.0% and 0.25% through the beginning of 2022, putting downward pressure on our asset yields and net interest margin. Beginning in March 2022, the FOMC began successive increases to the federal funds rate due to evolving inflation risks, international political unrest, and oil and other supply chain disruptions. As a result of seven rate adjustments during 2022, the federal funds target rate range increased to between 4.25% and 4.50% at year-end 2022 and our net interest margin increased gradually over the course of the year. In 2023, on each of February 1st, March 22nd, May 3rd, and July 26th, the FOMC increased the target rate by 25 basis points to a range of 5.25% to 5.50%. Rising interest rates and first quarter disruptions in the banking industry resulted in rapid increases in the cost of funds through rising deposit costs and increased borrowings, putting pressure on the net interest margin. Additional rate increases are not widely anticipated in 2024, as Federal Reserve policymakers continue to monitor inflation and economic developments throughout the year. See ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk for further information.

Provision for Credit Losses on Loans

Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors, including growth or contraction of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans. The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off.

The following table shows the activity for the periods presented.

[[GREPCENT_TABLE]]
[["","Years ended December 31,"],["(dollars in thousands)","2023","2022","2021"],["Provision for (reversal of) credit losses on loans","$","2,575","","$","(63)","","$","(1,449)"]]
[[/GREPCENT_TABLE]]

The provision in 2023 was due primarily to adjustments to qualitative risk factors from continued uncertainty about inflation and recession risks, the potential impact of rapidly increasing interest rates and other external factors on both our non-owner-occupied commercial real estate and construction portfolios, loan and collateral concentration risks in our construction and commercial real estate portfolios, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values for our non-owner occupied commercial real estate office and multi-family real estate portfolios. The allowance for individually evaluated loans increased for a small number of loans that exhibited credit risk characteristics over time that were not indicative of pooled loans in the CECL calculation, including collateral valuation issues caused by persistently higher than average vacancy rates and estimated credit losses from other adjustments to discounted expected cash flows or estimated loss rates. Other elements of the provision included a $406 thousand loss on the note sale of an owner-occupied agricultural commercial real estate loan to an unrelated third party that was charged to the allowance concurrent with the sale and a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rate, partially offset by the impact of a $45.0 million overall decrease in loans.

The provision reversal in 2022 was largely due to a $55.4 million decrease in applicable loan balances (excludes the $107.7 million decrease in PPP loans for which there was no allowance) and improvements in Moody's Analytics' Baseline Forecast of California unemployment rates since December 31, 2021, which decreased the quantitative "modeled" allowance for credit losses. These decreases were partially offset by adjustments to qualitative risk factors to account for the ongoing deterioration in the economic outlook that management believed was not captured in the quantitative portion of the allowance calculation.

The provision reversal in 2021 was primarily due to continued improvements in Moody's Analytics' Baseline Forecast of California unemployment rates at the time, and adjustments to qualitative risk factors due to a decline in the volume of loans downgraded to substandard classification, fewer delinquencies, and the elimination of an allowance related to a commercial real estate loan that had been individually analyzed for potential credit losses in the previous periods and paid off in 2021. These reversals were partially offset by an increase in the allowance for credit losses related to qualitative risk factor adjustments for recent changes in executive leadership and senior lending positions, and integration of loans from the merger with AMRB.

33

Non-interest Income

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

[[GREPCENT_TABLE]]
[["","","2023 compared to 2022","2022 compared to 2021"],["","Years ended December 31,","Amount Increase (Decrease)","Percent Increase (Decrease)","Amount Increase (Decrease)","Percent Increase (Decrease)"],["(dollars in thousands; unaudited)","2023","2022","2021"],["Wealth management and trust services","$","2,145","","$","2,227","","$","2,222","","$","(82)","","(3.7)","%","$","5","","0.2","%"],["Service charges on deposit accounts","2,083","","2,007","","1,593","","76","","3.8","%","414","","26.0","%"],["Debit card interchange fees, net","1,831","","2,051","","1,812","","(220)","","(10.7)","%","239","","13.2","%"],["Earnings on bank-owned life insurance, net","1,802","","1,229","","2,194","","573","","46.6","%","(965)","","(44.0)","%"],["Dividends on Federal Home Loan Bank stock","1,265","","1,056","","760","","209","","19.8","%","296","","38.9","%"],["Merchant interchange fees, net","496","","549","","422","","(53)","","(9.7)","%","127","","30.1","%"],["Losses on sale of investment securities, net","(5,893)","","(63)","","(16)","","(5,830)","","9,254.0","%","(47)","","293.8","%"],["Other income","1,260","","1,849","","1,145","","(589)","","(31.9)","%","704","","61.5","%"],["Total non-interest income","$","4,989","","$","10,905","","$","10,132","","$","(5,916)","","(54.3)","%","$","773","","7.6","%"]]
[[/GREPCENT_TABLE]]

2023 Compared to 2022

Non-interest income totaled $5.0 million in 2023, a $5.9 million decrease from $10.9 million in 2022. The decrease in 2023 was primarily due to the $5.9 million net loss on the sale of investment securities mentioned above. Excluding this loss, non-interest income decreased by $86 thousand, which included a $504 thousand decline in deposit network fees earned when deposit balances were brought back on the balance sheet, and a $220 thousand decrease in debit card interchange income. Decreases were partially offset by $573 thousand higher benefit payments from and earnings on bank-owned life insurance, and $209 thousand from increases in dividends on Federal Home Loan Bank stock.

2022 Compared to 2021

Non-interest income totaled $10.9 million in 2022, a $773 thousand increase from $10.1 million in 2021. The increase was primarily due to higher fees on deposit balances held in off-balance sheet deposit networks, contributing $504 thousand in additional income, $414 thousand more service charges on deposit accounts, a $366 thousand increase in debit card and merchant interchange fees, $296 thousand higher FHLB dividends, and a combination of smaller increases. Increases were partially offset by a $965 thousand reduction in bank-owned life insurance, as the prior year included $1.1 million in benefits collected on insurance policies. Additionally, 2022 incorporated a full year of non-interest income from the AMRB acquisition, compared to five months in 2021.

34

Non-interest Expense

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

[[GREPCENT_TABLE]]
[["","","2023 compared to 2022","2022 compared to 2021"],["","Years ended December 31,","Amount Increase (Decrease)","Percent Increase (Decrease)","Amount Increase (Decrease)","Percent Increase (Decrease)"],["(dollars in thousands; unaudited)","2023","2022","2021"],["Salaries and employee benefits","$","43,448","","$","42,046","","$","41,939","","$","1,402","","3.3","%","$","107","","0.3","%"],["Occupancy and equipment","8,306","","7,823","","7,297","","483","","6.2","%","526","","7.2","%"],["Data processing","4,057","","4,649","","5,139","","(592)","","(12.7)","%","(490)","","(9.5)","%"],["Professional services","3,598","","3,299","","4,974","","299","","9.1","%","(1,675)","","(33.7)","%"],["Deposit network fees","2,783","","258","","26","","2,525","","978.7","%","232","","892.3","%"],["Depreciation and amortization","2,098","","1,840","","1,740","","258","","14.0","%","100","","5.7","%"],["Federal Deposit Insurance Corporation insurance","1,878","","1,179","","889","","699","","59.3","%","290","","32.6","%"],["Information technology","1,569","","2,197","","1,550","","(628)","","(28.6)","%","647","","41.7","%"],["Amortization of core deposit intangible","1,350","","1,489","","1,135","","(139)","","(9.3)","%","354","","31.2","%"],["Directors' expense","1,212","","1,107","","957","","105","","9.5","%","150","","15.7","%"],["Charitable contributions","717","","709","","587","","8","","1.1","%","122","","20.8","%"],["Other real estate owned","48","","359","","5","","(311)","","(86.6)","%","354","","NM"],["Other non-interest expense:"],["Advertising","1,244","","1,070","","908","","174","","16.3","%","162","","17.8","%"],["Other expense","7,173","","7,244","","5,492","","(71)","","(1.0)","%","1,752","","31.9","%"],["Total other non-interest expense","8,417","","8,314","","6,400","","103","","1.2","%","1,914","","29.9","%"],["Total non-interest expense","$","79,481","","$","75,269","","$","72,638","","$","4,212","","5.6","%","$","2,631","","3.6","%"],["NM - not meaningful"]]
[[/GREPCENT_TABLE]]

2023 Compared to 2022

Non-interest expenses increased $4.2 million to $79.5 million in 2023 from $75.3 million in 2022. Significant fluctuations were as follows:

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

•Salaries and employee benefits increased by $1.4 million primarily due to the filling of open positions and the hiring of several key employees and officers, an increase in SERP-related expenses largely due to new and retired participant adjustments lowering costs for 2022, an increase in deferred officer compensation expense from increased participation and interest rates, higher insurance costs, and lower deferred loan origination costs. Increases to salaries and employee benefits were partially offset by a decrease in profit sharing expense mainly from accrual adjustments and because some contributions in 2023 were made from forfeitures rather than paid in cash, a decrease in accrued incentive bonuses, and a decrease in stock-based compensation from changes in award structure and estimated performance award payout estimates.

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

•Occupancy and equipment and depreciation and amortization expenses rose by $483 thousand and $258 thousand, respectively, mainly from the acceleration of lease-related costs for branch closures in the first quarter of 2023 and higher maintenance costs.

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

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

35

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

2022 Compared to 2021

Non-interest expenses increased $2.6 million to $75.3 million in 2022 from $72.6 million in 2021. Significant fluctuations were as follows:

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

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

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

•Salaries and employee benefits expense remained relatively flat year-over-year. In 2022, increases in staffing and profit sharing expenses, a reduction in deferred loan origination costs, and a combination of smaller items were largely offset by a decrease in supplemental executive retirement plan expense from an adjustment to the discount rate, and a decline in merger-related expenses, as shown in Note 18, Merger, in ITEM 8 of this report.

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

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

Provision for Income Taxes

Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, bank-owned life insurance ("BOLI"), low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).

The provision for income taxes totaled $6.1 million at an effective tax rate of 23.6% in 2023, compared to $16.9 million at an effective tax rate of 26.6% in 2022 and $11.7 million at an effective tax rate of 26.0% in 2021. The decrease in the provision for income taxes in 2023, as compared to 2022, reflected lower pre-tax income. The 300 basis point decrease in the effective tax rate in 2023, as compared to 2022, was primarily due to a larger proportional effect of permanent tax differences on lower pretax income and higher tax-exempt BOLI income. This decrease was partially offset by a reduction in the tax-exempt interest exclusion (due to a larger IRC Section 291(e) interest expense disallowance), compared to 2022. The 60 basis point increase in the effective tax rate in 2022 as compared to 2021 was primarily due to lower BOLI income and the smaller proportion of tax-exempt loan and investment securities interest income to pre-tax income in 2022, partially offset by the non-deductible merger expenses and executive compensation in 2021.

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

36

FINANCIAL CONDITION

Investment Securities

We maintain an investment securities portfolio to provide liquidity and generate earnings on funds that have not been loaned to customers. Management determines the maturities and types of securities to be purchased based on liquidity and interest rate risk position, and the desire to attain a reasonable investment yield balanced with risk exposure. The tables below show the composition of the debt securities portfolio by weighted average life at December 31, 2023 and 2022. Weighted average life takes into account the issuer's right to call or prepay obligations, with or without call or prepayment penalties. The weighted average life of the investment portfolio at December 31, 2023 and 2022 was approximately 6.6 and 6.8 years, respectively. The effective duration of the investment portfolio was 5.2 and 5.0 at December 31, 2023 and 2022, respectively.

[[GREPCENT_TABLE]]
[["December 31, 2023","Within 1 Year","","1-5 Years","","5-10 Years","","After 10 Years","","Total"],["(dollars in thousands; unaudited)","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","Amortized Cost1","Fair Value","Average Yield2"],["Held-to-maturity:"],["MBS/CMOs issued by U.S. government agencies","$","\u2014","","\u2014","%","","$","139,418","","3.41","%","","$","462,010","","2.23","%","","$","83,757","","2.1","%","","$","685,185","","$","605,934","","2.45","%"],["SBA-backed securities","\u2014","","\u2014","","","1,853","","3.17","","","\u2014","","\u2014","","","\u2014","","\u2014","","","1,853","","1,763","","3.17"],["Debentures of government-sponsored agencies","\u2014","","\u2014","","","29,994","","4.38","","","83,345","","1.83","","","32,787","","1.85","","","146,126","","124,132","","2.36"],["Obligations of state and political subdivisions - tax-exempt3","\u2014","","\u2014","","","3,070","","3.77","","","2,392","","3.65","","","26,220","","2.74","","","31,682","","29,820","","2.91"],["Obligations of state and political subdivisions - taxable","\u2014","","\u2014","","","\u2014","","\u2014","","","12,473","","1.99","","","17,879","","2.36","","","30,352","","24,377","","2.21"],["Corporate bonds","\u2014","","\u2014","","","30,000","","3.63","","","\u2014","","\u2014","","","\u2014","","\u2014","","","30,000","","28,804","","3.63"],["Total held-to-maturity","\u2014","","\u2014","","","204,335","","3.59","","","560,220","","2.17","","","160,643","","2.19","","","925,198","","814,830","","2.48"],["Available-for-sale:"],["MBS/CMOs issued by U.S. government agencies","677","","1.93","","","261,575","","2.05","","","116,365","","2.24","","","13,720","","3.05","","","392,337","","352,472","","2.14"],["SBA-backed securities","\u2014","","\u2014","","","21,126","","2.45","","","\u2014","","\u2014","","","\u2014","","\u2014","","","21,126","","19,471","","2.45"],["Debentures of government sponsored agencies","\u2014","","\u2014","","","64,929","","1.22","","","8,970","","1.36","","","\u2014","","\u2014","","","73,899","","66,862","","1.23"],["U.S. Treasury securities","\u2014","","\u2014","","","11,923","","1.00","","","\u2014","","\u2014","","","\u2014","","\u2014","","","11,923","","10,623","","1.00"],["Obligations of state and political subdivisions - tax-exempt3","\u2014","","\u2014","","","5,142","","1.59","","","14,602","","2.04","","","69,382","","2.68","","","89,126","","80,720","","2.51"],["Obligations of state and political subdivisions - taxable","100","","3.14","","","3,005","","1.31","","","8,956","","1.74","","","1,015","","1.98","","","13,076","","11,162","","1.67"],["Corporate bonds","\u2014","","\u2014","","","11,992","","1.19","","","\u2014","","\u2014","","","\u2014","","\u2014","","","11,992","","10,718","","1.19"],["Asset-backed securities","\u2014","","\u2014","","","\u2014","","\u2014","","","\u2014","","\u2014","","","\u2014","","\u2014","","","\u2014","","\u2014","","\u2014"],["Total available-for-sale","777","","2.08","","","379,692","","1.86","","","148,893","","2.13","","","84,117","","2.73","","","613,479","","552,028","","2.04"],["Total","$","777","","2.08","%","","$","584,027","","2.46","%","","$","709,113","","2.16","%","","$","244,760","","2.37","%","","$","1,538,677","","$","1,366,858","","2.31","%"]]
[[/GREPCENT_TABLE]]

37

[[GREPCENT_TABLE]]
[["December 31, 2022","Within 1 Year","","1-5 Years","","5-10 Years","","After 10 Years","","Total"],["(dollars in thousands; unaudited)","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","Amortized Cost1","Fair Value","Average Yield2"],["Held-to-maturity:"],["MBS/CMOs issued by U.S. government agencies","$","463","","0.63","%","","$","152,817","","3.36","%","","$","419,822","","2.20","%","","$","158,410","","2.28","%","","$","731,512","","$","643,437","","2.46","%"],["SBA-backed securities","\u2014","","\u2014","","","2,372","","3.17","","","\u2014","","\u2014","","","\u2014","","\u2014","","","2,372","","2,239","","3.17"],["Debentures of government-sponsored agencies","\u2014","","\u2014","","","24,993","","4.26","","","47,017","","2.06","","","73,813","","1.91","","","145,823","","119,356","","2.36"],["Obligations of state and political subdivisions - tax-exempt3","\u2014","","\u2014","","","\u2014","","\u2014","","","5,515","","3.72","","","26,600","","2.74","","","32,115","","28,846","","2.90"],["Obligations of state and political subdivisions - taxable","\u2014","","\u2014","","","\u2014","","\u2014","","","4,708","","1.84","","","25,677","","2.28","","","30,385","","22,913","","2.21"],["Corporate bonds","\u2014","","\u2014","","","30,000","","3.63","","","\u2014","","\u2014","","","\u2014","","\u2014","","","30,000","","28,448","","3.63"],["Total held-to-maturity","463","","0.63","","","210,182","","3.50","","","477,062","","2.20","","","284,500","","2.22","","","972,207","","845,239","","2.49"],["Available-for-sale:"],["MBS/CMOs issued by U.S. government agencies","2,305","","2.02","","","317,528","","2.13","","","198,809","","2.43","","","9,823","","2.55","","","528,465","","475,505","","2.25"],["SBA-backed securities","65","","1.01","","","47,166","","2.66","","","\u2014","","\u2014","","","493","","5.03","","","47,724","","44,355","","2.68"],["Debentures of government sponsored agencies","\u2014","","\u2014","","","140,145","","1.29","","","6,977","","1.35","","","1,992","","1.39","","","149,114","","135,106","","1.29"],["U.S. Treasury securities","\u2014","","\u2014","","","\u2014","","\u2014","","","11,904","","1.00","","","\u2014","","\u2014","","","11,904","","10,269","","1.00"],["Obligations of state and political subdivisions - tax-exempt3","\u2014","","\u2014","","","9,711","","2.09","","","11,721","","2.86","","","81,922","","2.67","","","103,354","","91,138","","2.64"],["Obligations of state and political subdivisions - taxable","200","","3.16","","","1,808","","1.65","","","10,475","","1.67","","","1,018","","1.98","","","13,501","","10,985","","1.71"],["Corporate bonds","\u2014","","\u2014","","","31,000","","1.03","","","5,990","","1.23","","","\u2014","","\u2014","","","36,990","","33,276","","1.05"],["Asset-backed securities","\u2014","","\u2014","","","\u2014","","\u2014","","","1,553","","5.04","","","\u2014","","\u2014","","","1,553","","1,462","","5.04"],["Total available-for-sale","2,570","","2.09","","","547,358","","1.89","","","247,429","","2.30","","","95,248","","2.64","","","892,605","","802,096","","2.09"],["Total","$","3,033","","1.87","%","","$","757,540","","2.34","%","","$","724,491","","2.24","%","","$","379,748","","2.33","%","","$","1,864,812","","$","1,647,335","","2.30","%"]]
[[/GREPCENT_TABLE]]

1 Book value reflects cost, adjusted for accumulated amortization and accretion.

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

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

The amortized cost of our investment securities portfolio decreased by $326.1 million, or 17.5%, in 2023. In 2023, we sold $214.5 million in available-for-sale securities with an average yield of 2.35%, as part of a balance sheet restructuring, including $75.2 million in debentures of government sponsored agencies, $69.6 million in agency collateralized mortgage obligations ("CMOs"), $25.0 million in corporate bonds, $15.4 million in SBA-backed securities, $14.6 million in agency mortgage-backed securities ("MBSs"), $13.2 million in obligations of state and political subdivisions, and $1.4 million in asset-backed securities. Offset by a $2.8 million pre-tax gain from the sale of our remaining holdings of Visa Inc. Class B restricted common stock, these sales of available-for-sale securities generated a net pre-tax loss of $5.9 million.

In 2022, we transferred $357.5 million of available-for-sale securities to held-to-maturity. Refer to Note 2, Investment Securities, to the Consolidated Financial Statements in ITEM 8 of this report for further information.

We consider agency debentures and CMOs issued by U.S. government sponsored entities to have low credit risk as they carry the credit support of the U.S. federal government. The debentures, CMOs and MBS issued by U.S. government sponsored agencies, SBA-backed securities and U.S. Treasury securities made up 86.6% of the portfolio as of December 31, 2023, compared to 86.7% at December 31, 2022. See the discussion in the section captioned “Securities May Lose Value Due to Credit Quality of the Issuers” in ITEM 1A Risk Factors above.

38

At December 31, 2023 and 2022, distribution of our investment in obligations of state and political subdivisions was as follows:

[[GREPCENT_TABLE]]
[["","December 31, 2023","December 31, 2022"],["(dollars in thousands; unaudited)","Amortized Cost","Fair Value","Percent of State and Municipal Securities","Amortized Cost","Fair Value","Percent of State and Municipal Securities"],["Within California:"],["General obligation bonds","$","24,191","","$","20,009","","14.7","%","$","25,806","","$","20,768","","14.4","%"],["Revenue bonds","3,507","","2,917","","2.1","","3,719","","2,987","","2.1"],["Tax allocation bonds","","","","\u2014","","\u2014","","\u2014"],["Total within California","27,698","","22,926","","16.8","","29,525","","23,755","","16.5"],["Outside California:"],["General obligation bonds","108,846","","98,139","","66.3","","121,908","","106,375","","68.0"],["Revenue bonds","27,692","","25,014","","16.9","","27,922","","23,752","","15.5"],["Total outside California","136,538","","123,153","","83.2","","149,830","","130,127","","83.5"],["Total obligations of state and political subdivisions","$","164,236","","$","146,079","","100.0","%","$","179,355","","$","153,882","","100.0","%"],["Percent of investment portfolio","10.7%","10.7%","","9.6%","9.3%"]]
[[/GREPCENT_TABLE]]

The portion of the portfolio outside the state of California is distributed among twelve states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside California are in Texas (37.1%), Washington (15.4%), and Wisconsin (9.0%). Our investments in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF"), rated AAA without enhancement, or backed by revenue sources from essential services (such as utilities and transportation).

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

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

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

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

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

•Credit ratings by major credit rating agencies

Loans

Loans Outstanding by Class and Percent of Total

[[GREPCENT_TABLE]]
[["","December 31, 2023","","December 31, 2022"],["(in thousands; unaudited)","Amortized Cost","Percent of Total","","Amortized Cost","Percent of Total"],["Commercial and industrial","$","153,750","","7.4","%","","$","173,547","","8.3","%"],["Real estate"],["Commercial owner-occupied","333,181","","16.1","","","354,877","","17.0"],["Commercial non-owner occupied","1,219,385","","58.8","","","1,191,889","","56.9"],["Construction","99,164","","4.8","","","114,373","","5.5"],["Home equity","82,087","","4.0","","","88,748","","4.2"],["Other residential","118,508","","5.7","","","112,123","","5.4"],["Installment and other consumer","67,645","","3.2","","","56,989","","2.7"],["Total loans, at amortized cost","2,073,720","","100.0","%","","2,092,546","","100.0","%"],["Allowance for credit losses on loans","(25,172)","","","","(22,983)"],["Total loans, net of allowance for credit losses","$","2,048,548","","","","$","2,069,563"]]
[[/GREPCENT_TABLE]]

39

Loans decreased by $18.8 million in 2023, or 1%, to $2.074 billion as of December 31, 2023, from $2.093 billion as of December 31, 2022. Loan originations were $144.1 million in 2023, compared to $240.2 million in 2022. Non-PPP payoffs were $107.3 million in 2023, compared to $258.5 million in 2022. PPP loan payoffs during 2023 and 2022 were $2.5 million and $107.7 million, respectively. The majority of the payoffs were a result of asset sales, cash payoffs, project completions, and purposeful relationship exits, all of which showcased the Bank's focus on credit quality and proactive engagement with customers. It should be noted that only a minimal amount was refinanced. In addition, $53.1 million of loan amortization from scheduled repayments, net of credit line utilization, contributed to the decline in loan balances for 2023. The originations and payoffs noted above, combined with utilization on lines of credit and amortization on existing loans, resulted in a net decrease for this period.

Non-PPP payoffs as a percentage of beginning-of-year loan balances were 5.1% in 2023 and 11.5% in 2022. Approximately 90%, of total loans were secured by real estate as of both December 31, 2023 and 2022. For additional information on loan concentration risk, see ITEM 1A, Risk Factors.

The following table summarizes our commercial real estate loan concentrations by the county in which the property was located as of December 31, 2023 and 2022.

Commercial Real Estate Loans Outstanding by County

[[GREPCENT_TABLE]]
[["(dollars in thousands; unaudited)","December 31, 2023","","December 31, 2022"],["County","Amount","Percent of Commercial Real Estate Loans","","Amount","Percent of Commercial Real Estate Loans"],["Marin","$","317,862","","20.5","%","","$","339,805","","22.0","%"],["Sonoma","256,516","","16.5","","","245,883","","15.9"],["San Francisco","186,803","","12.0","","","173,511","","11.2"],["Napa","178,685","","11.5","","","186,477","","12.1"],["Alameda","156,934","","10.1","","","163,381","","10.6"],["Sacramento","125,483","","8.1","","","120,146","","7.8"],["Contra Costa","72,580","","4.7","","","67,356","","4.4"],["Placer","40,733","","2.6","","","28,928","","1.9"],["Solano","39,247","","2.5","","","32,235","","2.1"],["San Mateo","35,420","","2.3","","","37,681","","2.4"],["Santa Clara","24,086","","1.6","","","21,091","","1.4"],["San Joaquin","15,261","","1.0","","","15,585","","1.0"],["El Dorado","11,257","","0.7","","","12,822","","0.8"],["Other","91,699","","5.9","","","101,865","","6.4"],["Total","$","1,552,566","","100.0","%","","$","1,546,766","","100.0","%"]]
[[/GREPCENT_TABLE]]

Commercial real estate loans increased by $5.8 million in 2023, compared to a $34.6 million decrease in 2022. The increase in 2023 was comprised of the $27.5 million increase within the non-owner occupied loan portfolio, partially offset by the $21.7 million decrease within the owner-occupied loan portfolio. The decrease in 2022 was primarily due to cash paydowns as part of ongoing deleveraging, refinancing, and asset sales. Of the commercial real estate loans as of December 31, 2023, 79% were non-owner occupied and 21% were owner-occupied. Almost the entire commercial real estate loan portfolio is comprised of term loans for which the primary source of repayment is either the cash flow from leasing activities of the real estate collateral or the operating cash flow of the owner occupant.

With the heightened market concern about non-owner-occupied commercial real estate, and in particular the office sector, we are providing the following additional information: We continue to maintain diversity among property types and within our geographic footprint. In particular, our office commercial real estate portfolio in the City of San Francisco represents just 3% of our total loan portfolio and 6% of our total non-owner-occupied commercial real estate portfolio. As of the last measurement period, the weighted average loan-to-value and weighted average debt-service coverage ratios for the entire non-owner-occupied office portfolio were 59% and 1.60x, respectively. For the thirteen non-owner-occupied office loans in the City of San Francisco, the weighted average loan-to-value and debt-service coverage ratios were 67% and 1.00x, respectively. As of December 31, 2023, we conducted a review of the refinance risk in our non-owner-occupied commercial real estate portfolio and evaluated 70 loans with commitments of $1.0 million or more, totaling $184.1 million, that mature or reprice in 2024 and 2025. As a result of our assessment, we determined that the refinance risk on these loans is manageable, with weighted average debt

40

service coverage ratios ranging from 1.52 to 1.69 times for maturities and from 1.20 to 1.59 times for repricings based on current market interest rates. As such, we believe the non-owner-occupied commercial real estate portfolio is well-positioned to absorb a higher rate environment at the loans' repricing or maturity dates.

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

Construction Loans Outstanding by Type and County

[[GREPCENT_TABLE]]
[["(dollars in thousands; unaudited)","December 31, 2023","","December 31, 2022"],["Loan Type","Amount","Percent of Construction Loans","","Amount","Percent of Construction Loans"],["Apartments and multifamily","$","45,390","","45.8","%","","$","60,347","","52.7","%"],["Commercial real estate","26,042","","26.3","","","33,746","","29.5"],["1-4 Single family residential","26,666","","26.9","","","19,171","","16.8"],["Land - unimproved","1,066","","1.0","","","1,109","","1.0"],["Total","$","99,164","","100.0","%","","$","114,373","","100.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(dollars in thousands; unaudited)","December 31, 2023","","December 31, 2022"],["County","Amount","Percent of Construction Loans","","Amount","Percent of Construction Loans"],["San Francisco","$","43,341","","43.7","%","","$","45,271","","39.6","%"],["Alameda","32,808","","33.1","","","20,163","","17.6"],["Solano","11,372","","11.5","","","18,873","","16.5"],["San Mateo","4,851","","4.9","","","4,409","","3.9"],["Marin","4,542","","4.6","","","7,784","","6.8"],["Other","2,250","","2.2","","","17,873","","15.6"],["Total","$","99,164","","100.0","%","","$","114,373","","100.0","%"]]
[[/GREPCENT_TABLE]]

Construction loans decreased by $15.2 million in 2023, compared to a decrease of $5.5 million in 2022. The decrease in 2023 was primarily due to $22.2 million in payoffs and $16.9 million in conversions to commercial real estate financing. These decreases were partially offset by $24.5 million in advances on existing construction loans. The decrease in 2022 was primarily due to $46.6 million in payoffs and $3.6 million in conversions to commercial real estate financing. These decreases were partially offset by $37.5 million advanced on existing construction loans and $7.2 million in new financing. Undisbursed construction loan commitments at December 31, 2023 and 2022 were $13.9 million and $43.2 million, respectively.

The following table presents the amortized costs and maturity distribution of our loans by portfolio class as of December 31, 2023 based on their contractual maturity dates. Maturities do not include scheduled payments or potential prepayments.

Loan Maturity Distribution

[[GREPCENT_TABLE]]
[["","Due within 1 year","Due after 1 through 5 years","Due after 5 through 15 years","Due after 15 years","Total"],["(in thousands; unaudited)"],["Commercial and industrial","$","68,410","","$","36,326","","$","46,095","","$","2,919","","$","153,750"],["Real estate"],["Commercial owner-occupied","12,224","","92,743","","221,009","","7,205","","333,181"],["Commercial non-owner occupied","65,360","","437,117","","699,118","","17,790","","1,219,385"],["Construction 1","69,652","","\u2014","","29,512","","\u2014","","99,164"],["Home equity","3,818","","20,856","","56,086","","1,327","","82,087"],["Other residential","1,283","","128","","1,684","","115,413","","118,508"],["Installment and other consumer loans","1,078","","9,393","","56,984","","190","","67,645"],["Total","$","221,825","","$","596,563","","$","1,110,488","","$","144,844","","$","2,073,720"]]
[[/GREPCENT_TABLE]]

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

41

The following table shows the mix of variable-rate loans and fixed-rate loans due after one year by portfolio class as of December 31, 2023. The large majority of variable-rate loans are tied to independent indices, such as the Prime Rate or a Treasury Constant Maturity Rate. Most loans with original terms of more than five years have provisions for the fixed rates to reset, or convert to variable rates, after three, five or seven years. These loans are included in the variable-rate balances below.

Loan Interest Rate Sensitivity - Due After One Year

[[GREPCENT_TABLE]]
[["(in thousands; unaudited)","Fixed","Variable","Total"],["Commercial and industrial","$","72,591","","$","12,749","","$","85,340"],["Real estate"],["Commercial owner-occupied","183,633","","137,324","","320,957"],["Commercial non-owner occupied","727,415","","426,610","","1,154,025"],["Construction","29,512","","\u2014","","29,512"],["Home equity","640","","77,629","","78,269"],["Other residential","1,327","","115,898","","117,225"],["Installment and other consumer loans","51,380","","15,187","","66,567"],["Total","$","1,066,498","","$","785,397","","$","1,851,895"]]
[[/GREPCENT_TABLE]]

Allowance for Credit Losses on Loans

The allowance for credit losses on loans is calculated in accordance with ASC 326 based on management's best estimate of current expected credit losses over the loans' contractual terms, adjusted for estimated prepayments where applicable. The contractual terms exclude anticipated extensions, renewals and modifications. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. All specifically identifiable and quantifiable losses are charged off against the allowance. The ultimate adequacy of the allowance depends on a variety of complex factors, some of which may be beyond management's control, such as volatility in the real estate market, changes in interest rates and economic and political environments. Based on the current conditions of the loan portfolio and reasonable and supportable forecasts, management believes that the $25.2 million allowance for credit losses at December 31, 2023 was adequate to absorb expected credit losses in our loan portfolio. For additional information on our allowance for credit losses methodology, refer to Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

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

The $2.2 million increase in the allowance for credit losses on loans in 2023 was largely due to 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, loan and collateral concentration risk, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values. The allowance for individually evaluated loans increased for a small number of loans that exhibited credit risk characteristics over time that were not indicative of pooled loans in the CECL calculation. Other elements of the increased allowance included a $406 thousand loss on the note sale of a loan that was charged to the allowance concurrent with the sale, contributing to the $386 thousand in net charge-offs and the impact of a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rate, partially offset by the effect of a $45.0 million overall decrease in loans. For further information, refer to the Provision for Credit Losses section above, and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

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

42

[[GREPCENT_TABLE]]
[["Allocation of the Allowance for Credit Losses"],["(dollars in thousands; unaudited)","Commercial and industrial","Commercial real estate, owner-occupied","Commercial real estate, non-owner occupied","Construction","Home equity","Other residential","Installment and other consumer","Unallocated","Total"],["December 31, 2023"],["Modeled expected credit losses","$","897","","$","1,270","","$","7,380","","$","185","","$","482","","$","619","","$","634","","$","\u2014","","$","11,467"],["Qualitative adjustments","622","","1,205","","6,327","","1,647","","70","","33","","342","","2,038","","12,284"],["Specific allocations","193","","1","","1,226","","\u2014","","\u2014","","1","","\u2014","","\u2014","","1,421"],["Total","$","1,712","","$","2,476","","$","14,933","","$","1,832","","$","552","","$","653","","$","976","","$","2,038","","$","25,172"],["Loans as a percent of total loans","7.4","%","16.1","%","58.8","%","4.8","%","4.0","%","5.7","%","3.2","%","N/A","100.0","%"],["December 31, 2022"],["Modeled expected credit losses","$","1,079","","$","1,497","","$","7,937","","$","453","","$","504","","$","571","","$","610","","$","\u2014","","$","12,651"],["Qualitative adjustments","706","","990","","4,739","","1,484","","54","","24","","258","","2,068","","10,323"],["Specific allocations","9","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","9"],["Total","$","1,794","","$","2,487","","$","12,676","","$","1,937","","$","558","","$","595","","$","868","","$","2,068","","$","22,983"],["Loans as a percent of total loans","8.3","%","17.0","%","56.9","%","5.5","%","4.2","%","5.4","%","2.7","%","N/A","100.0","%"]]
[[/GREPCENT_TABLE]]

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

Allowance for Credit Losses on Loans Rollforward

[[GREPCENT_TABLE]]
[["(dollars in thousands; unaudited)","2023","2022","2021"],["Beginning balance","$","22,983","","$","23,023","","$","22,874"],["Provision for (reversal of) credit losses","2,575","","(63)","","(1,449)"],["Initial allowance for PCD loans","\u2014","","\u2014","","1,505"],["Loans charged-off:"],["Commercial and industrial","(11)","","(9)","","\u2014"],["Real estate:"],["Commercial real estate, owner-occupied","(406)","","\u2014","","\u2014"],["Installment and other consumer","(24)","","(23)","","(5)"],["Total loans charged-off","(441)","","(32)","","(5)"],["Loans recovered:"],["Commercial and industrial","29","","22","","14"],["Real estate:"],["Construction","25","","33","","34"],["Home equity","\u2014","","\u2014","","50"],["Installment and other consumer","1","","\u2014","","\u2014"],["Total loans recovered","55","","55","","98"],["Net loans (charged-off) recovered","(386)","","23","","93"],["Ending balance","$","25,172","","$","22,983","","$","23,023"],["Total loans, at amortized cost","$","2,073,720","","$","2,092,546","","$","2,255,645"],["Average total loans outstanding during year","$","2,099,719","","$","2,175,259","","$","2,155,982"],["Ratio of allowance for credit losses to total loans at end of year","1.21","%","1.10","%","1.02","%"],["Net charge-offs (recoveries) to average loans","0.02","%","NM","NM"]]
[[/GREPCENT_TABLE]]

NM - Not meaningful.

43

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

Non-Performing Assets

[[GREPCENT_TABLE]]
[["(dollars in thousands; unaudited)","December 31, 2023","December 31, 2022"],["Non-accrual loans:"],["Commercial and industrial","$","4,008","","$","\u2014"],["Real estate:"],["Commercial, owner-occupied","434","","1,563"],["Commercial, non-owner occupied","3,081","","\u2014"],["Home equity","469","","778"],["Installment and other consumer","\u2014","","91"],["Total non-accrual loans","$","7,992","","$","2,432"],["Other real estate owned","$","\u2014","","$","455"],["Total non-performing assets","$","7,992","","$","2,887"],["Criticized and classified loans:"],["Special mention","$","135,171","","$","60,207"],["Substandard","$","32,324","","$","28,010"],["Doubtful","$","\u2014","","$","99"],["Allowance for credit losses to non-accrual loans","3.15x","9.45x"],["Non-accrual loans to total loans","0.39","%","0.12","%"],["Non-performing assets to total assets","0.21","%","0.07","%"]]
[[/GREPCENT_TABLE]]

Non-Accrual Loans

Non-accrual loans increased by $5.6 million in 2023, primarily due to $7.6 million in loans designated as non-accrual in 2023 comprised mostly of commercial and industrial and non-owner occupied commercial real estate loans. These increases were partially offset by the payoff of two owner-occupied commercial real estate loans totaling $1.3 million and four home equity loans totaling $421 thousand, the upgrade of a $223 thousand home equity loan and a $91 thousand personal loan to accrual status, as a result of improved financial condition and performance, and $83 thousand in paydowns. Over 66% of the non-accrual loans as of December 31, 2023 were well-secured by either commercial or residential real estate.

Non-accrual loans decreased by $5.9 million in 2022, primarily due to the payoff of two owner-occupied commercial real estate loans totaling $7.1 million and paydowns and the upgrade of a $695 thousand loan to accrual status as a result of improved financial condition and performance, partially offset by $2.0 million in loans designated as non-accrual in 2022. Over 96% of the non-accrual loans as of December 31, 2022 were well-secured by either commercial or residential real estate.

Criticized and Classified Loans

Loans designated as special mention, which are not considered adversely classified, increased by $75.0 million in 2023, primarily due to downgrades from the watch category to special mention. The majority of the downgrades from watch to special mention were not necessarily due to worsening conditions or deterioration in the borrowers' financial condition but to a lack of meaningful improvement over the most recent quarters. Of the $92.5 million in downgrades to special mention in 2023, $83.2 million (or 90%) were collateralized by real estate. These increases were partially offset by $7.7 million in paydowns and payoffs, $6.0 million in downgrades from special mention to substandard, and $3.8 million in upgrades to a pass risk rating.

Loans designated as special mention decreased by $13.1 million in 2022, primarily due to $30.2 million in upgrades to a pass risk rating, $7.7 million in paydowns and payoffs, and $3.6 million in downgrades from special mention to substandard. These decreases were partially offset by $27.8 million in downgrades from pass to special mention and $695 thousand in upgrades from substandard to special mention during 2022. Of the $27.8 million in downgrades to special mention, $22.5 million (or 81%) was well-secured by commercial real estate, and the remaining $5.3 million commercial loans had strong support.

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

44

payoffs and $939 thousand in upgrades to pass. Of the downgraded loans, $7.0 million (or 72%) was secured by commercial real estate, and the remaining $2.7 million was to commercial borrowers.

Loans classified as substandard decreased by $8.1 million in 2022, primarily due to $16.1 million in paydowns and payoffs and $871 thousand in upgrades to special mention or pass, partially offset by downgrades totaling $8.8 million. Of the downgraded loans, $4.7 million (or 53%) was secured by commercial real estate, and $3.6 million (or 41%) was to commercial borrowers. In addition, of the $16.1 million in paydowns and payoffs, $2.7 million was from loans downgraded in 2022.

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

Other Assets

BOLI totaled $68.1 million as of December 31, 2023, compared to $67.1 million at December 31, 2022. The $1.0 million increase was primarily due to earnings from the BOLI policies.

Interest receivable and other assets totaled $74.9 million and $79.8 million at December 31, 2023 and 2022, respectively. The $4.9 million decrease was primarily due to an $8.8 million decrease in net deferred tax assets, as discussed below.

Net deferred tax assets totaled $35.1 million and $43.9 million at December 31, 2023 and 2022, respectively. Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to temporary differences such as allowances for credit losses and unfunded loan commitments, net operating loss carryforwards, and deferred compensation and salary continuation obligations. The $8.8 million decrease in 2023 was primarily due to an $8.5 million decrease in deferred tax assets related to changes in unrealized losses on available-for-sale investment securities and an $803 thousand decrease in deferred tax assets related to state franchise tax. These decreases in net deferred tax assets were partially offset by a $399 thousand decrease in deferred tax liabilities related to core deposit intangibles. Management believes deferred tax assets will be realizable due to our expectation that earnings will continue to be at a level adequate to realize such tax benefits. Therefore, no valuation allowance was established as of December 31, 2023 or 2022. For additional information, refer to Note 11 to the Consolidated Financial Statements in ITEM 8 of this report.

We held $16.7 million of FHLB stock recorded at cost in other assets at both December 31, 2023 and 2022. We received $1.3 million, $1.0 million and $760 thousand in cash dividends in 2023, 2022 and 2021, respectively. For additional information, refer to Note 2 to the Consolidated Financial Statements in ITEM 8 of this report.

Deposits

Deposits decreased by $283.3 million, to $3.290 billion at December 31, 2023, compared to $3.573 billion at December 31, 2022. Non-interest bearing deposits declined to 43.8% of total deposits at December 31, 2023, compared to 51.5% at December 31, 2022.

While we saw a decline in deposits overall in 2023, deposits were up $39.5 million since the events that led to the failure of a few regional banks at the end of the first quarter of 2023, and we continue to execute our business model without the utilization of brokered deposits. In addition to the deposit run-off we experienced as a result of these bank failures, general market disruptions, and the FOMC's monetary policy of rapid interest rate increases, much of the decline, particularly in the fourth quarter, was due to a combination of outflows related to planned business activities. Additionally, some balance declines were associated with loan relationships exited during the year, and we saw some customers move cash into alternative investments to capture higher returns, a portion of which was directed to our own wealth management group. Given the nature of our customer base, our customers' daily operating balances can fluctuate significantly, which is a primary reason we maintain high levels of on-balance sheet and contingent liquidity.

Although we experienced growth and movement in both money market accounts and time deposits, all activity was a result of relationship pricing, the current rate environment, and customer behaviors, as opposed to offering CD specials or making blanket rate adjustments. We continued our disciplined and focused approach to relationship management and customer outreach, adding over 5,000 new accounts in 2023.

45

As of December 31, 2023, 59% of deposit balances were held in business accounts, with average balances of $120 thousand per account. The remaining 41% were consumer accounts, with average balances of $41 thousand per account. The largest depositor represented 1.7% of total deposits, and the combined four largest depositors represented 4.6% of total deposits.

Balances in the reciprocal deposit network program increased by $250.0 million during 2023 to $424.0 million as of December 31, 2023. Costs associated with network deposits are recorded as non-interest expense and totaled $2.8 million, $258 thousand, and $26 thousand for the years ended December 31, 2023, 2022 and 2021, respectively.

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

Our liquidity policies require that compensating cash balances be held against concentrations over a certain level. See ITEM 1A, Risk Factors, for a discussion of potential risks associated with concentrations and volatility due to the activity of our large deposit customers.

Distribution of Average Deposits

The table below shows the relative composition of our average deposits for 2023 and 2022. For average rates paid on deposits, refer to the Average Statements of Condition and Analysis of Net Interest Income table in ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations.

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["","2023","","2022"],["(in thousands; unaudited)","Average Amount","Percent of Total","","Average Amount","Percent of Total"],["Non-interest bearing","$","1,656,047","","49.0","%","","$","1,993,373","","52.0","%"],["Interest-bearing transaction","240,524","","7.1","","","294,682","","7.7"],["Savings","281,611","","8.3","","","341,710","","8.9"],["Money market 1","1,013,620","","30.0","","","1,065,104","","27.8"],["Time deposits, including CDARS","191,056","","5.6","","","140,547","","3.6"],["Total average deposits","$","3,382,858","","100.0","%","","$","3,835,416","","100.0","%"]]
[[/GREPCENT_TABLE]]

1 Money market balances include Insured Cash Sweep® ("ICS") in both 2023 and 2022. Demand Deposit Marketplace SM ("DDM") and ICS balances are discussed in Note 6 to the Consolidated Financial Statements in ITEM 8 of this report.

Maturities of Uninsured Time Deposits

The following table shows time deposits by account that are in excess of $250,000 by time remaining to maturity at December 31, 2023.

[[GREPCENT_TABLE]]
[["","December 31, 2023"],["(in thousands; unaudited)","Total","Uninsured Portion"],["Three months or less","$","30,998","","$","20,998"],["Over three months through six months","46,089","","26,339"],["Over six months through twelve months","23,500","","11,000"],["Over twelve months","5,033","","2,283"],["Total","$","105,620","","$","60,620"]]
[[/GREPCENT_TABLE]]

Borrowings

As of December 31, 2023 and 2022, our borrowing capacity with the Federal Home Loan Bank ("FHLB") under secured lines of credit totaled $1.009 billion and $711.6 million, respectively. The increase in our borrowing capacity at the FHLB resulted from pledging certain held-to-maturity securities to the Securities-Backed Credit Program in February 2023. Our borrowing capacity with the Federal Reserve Bank of San Francisco ("FRBSF") under a secured line of credit and the Bank Term Funding Program ("BTFP"), which was new in 2023, totaled $334.2 million and $58.7 million as of December 31, 2023 and 2022, respectively. In addition, as of December 31, 2023 and 2022

46

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

As of December 31, 2023, the Bank had $26.0 million outstanding in short-term borrowings under the BTFP facility at an average rate of 4.83%, compared to $112.0 million in FHLB overnight borrowings as of December 31, 2022 at a rate of 4.65%. Other correspondent bank lines of credit were not utilized as of December 31, 2023 or 2022.

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

Deferred Compensation Obligations

We maintain a non-qualified, unfunded deferred compensation plan for certain key management personnel. Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for up to, but not exceeding, fifteen years commencing upon retirement, death, disability or termination of employment. A similar Deferred Director Fee Plan entitles participating members of the Board of Directors to receive payments as elected by the participant upon separation from service, death, disability or termination of service. At December 31, 2023 and 2022, our aggregate payment obligations under both plans totaled $6.6 million and $7.1 million, respectively, and was recorded in interest payable and other liabilities in the consolidated statements of condition.

We have entered into supplemental executive retirement plans ("SERPs") with a select group of executive officers, providing for certain retirement benefits at age 65 and reduced benefits upon early retirement.  The annual amount of benefits in either pre-retirement scenario is based on a vesting schedule unique to each executive. The SERP also provides for lump sum benefits in the event of a change in control followed by the termination of the executive. Payments under the SERPs are expected to be funded by income from bank-owned life insurance policies. On December 31, 2023 and 2022, our liabilities under the SERPs totaled $4.5 million and $4.7 million, respectively, and were recorded in interest payable and other liabilities in the consolidated statements of condition. The SERPs are unfunded and non-qualified for tax purposes and subject to Title I of the Employee Retirement Income Security Act of 1974.

Decreases in both the deferred compensation plans and SERP liabilities in 2023 mainly resulted from increases in benefit payments to retired employees. In addition, we increased the discount rate on the SERP payments to reflect market conditions, which reduced the present value of the SERP obligation.

For additional information, see Note 10 to the Consolidated Financial Statements in ITEM 8 of this report.

Capital Adequacy

As discussed in Note 15 to the Consolidated Financial Statements in ITEM 8 of this report, the Bank's capital ratios were above regulatory guidelines to be considered "well capitalized" and Bancorp's ratios exceeded the required minimum ratios for capital adequacy purposes. For further discussion of bank capital requirements, refer to the SUPERVISION AND REGULATION section in ITEM 1 of this report.

Bancorp's total risk-based capital ratio increased to 16.89% at December 31, 2023, from 15.90% at December 31, 2022. Bancorp's tangible common equity to tangible assets ("TCE ratio") increased to 9.73% at December 31, 2023, from 8.21% at December 31, 2022, primarily due to a decrease in unrealized losses on available-for-sale securities and a decrease in tangible assets. Bancorp's TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.80% as of December 31, 2023, compared to 6.15% (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures). The Bank's total risk-based capital ratio increased to 16.62% at December 31, 2023, from 15.73% at December 31, 2022, primarily from net income and a decrease in risk-weighted assets, partially offset by $20.0 million in dividends to Bancorp to be used for cash dividends to shareholders and operating costs.

Bancorp's share repurchase program and activity are discussed in detail in ITEM 5 and in Note 8 to the Consolidated Financial Statements in ITEM 8 of this report. We expect to maintain strong capital levels and do not expect that we will be required to raise additional capital in 2024. Our anticipated sources of capital in 2024 include future earnings and shares issued under the stock-based compensation program.

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Liquidity and Capital Resources

The goal of liquidity management is to provide adequate funds to meet loan demand and fund operating activities and deposit withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds, as discussed in Note 7 to the Consolidated Financial Statement in ITEM 8 of this report. Our Asset Liability Management Committee ("ALCO"), which is comprised of independent Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies. The Bank has long-established minimum liquidity requirements that are regularly monitored using metrics and tools similar to those used by larger banks, such as the liquidity coverage ratio, and multi-scenario, long-horizon stress tests. Our contingency funding plan provides for early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a liquidity crisis. Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs. We also have relationships with third-party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash management strategy, as discussed in Note 6 to the Consolidated Financial Statement in ITEM 8 of this report.

Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and available borrowing capacity, totaled $1.967 billion, or 60% of total deposits, and 213% of estimated uninsured and/or uncollateralized deposits as of December 31, 2023. The Federal Reserve's BTFP facility offers borrowing capacity based on the par value of securities pledged, making it less sensitive to changes in market rates.

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

[[GREPCENT_TABLE]]
[["(in thousands)","Total Available","Amount Used","Net Availability"],["Internal Sources"],["Unrestricted cash 1","$","13,536","","N/A","$","13,536"],["Unencumbered securities at market value","501,672","","N/A","501,672"],["External Sources"],["FHLB line of credit","1,009,044","","$","\u2014","","1,009,044"],["FRB line of credit and BTFP facility","334,192","","(26,000)","","308,192"],["Lines of credit at correspondent banks","135,000","","\u2014","","135,000"],["Total Liquidity","$","1,993,444","","$","(26,000)","","$","1,967,444"]]
[[/GREPCENT_TABLE]]

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

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

We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities, sales and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations.  Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, dividends to common stockholders, and operating expenses.

Customer deposits are a significant component of our daily liquidity position. The attraction and retention of deposits depends on the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength. The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.

Our cash and cash equivalents decreased by $15.0 million to $30.5 million at December 31, 2023, from $45.4 million at December 31, 2022. Significant uses of liquidity during 2023 were $283.3 million in withdrawals of deposits, $86.0 million in repayments of short-term borrowings, and $16.1 million in cash dividends paid on common stock to our shareholders.

The most significant sources of liquidity during 2023 were proceeds from principal paydowns, maturities and sales of investment securities totaling $315.1 million, and proceeds from loans collected net of originations totaling $16.9 million. In addition, $35.7 million in net cash was provided by operating activities. Refer to the Consolidated Statement of Cash Flows in this Form 10-K for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position, as detailed in this report, and contingent funding sources are adequate to support our operational needs.

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Unfunded credit commitments, as discussed in Note 16 to the Consolidated Financial Statements in ITEM 8 of this report, totaled $505.2 million at December 31, 2023. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, principal paydowns of investment securities, and liquid assets.

Over the next twelve months, $233.7 million of time deposits will mature. We expect to replace these funds with new deposits or excess liquidity. We believe our emphasis on local deposits, combined with our immediately available funding sources, provides a very stable base for our liquidity needs.

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

Because Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period. The primary uses of funds for Bancorp are shareholder dividends, ordinary operating expenses and stock repurchases.  Bancorp held $7.2 million in cash as of December 31, 2023. Management anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.

Statement Regarding Use of Non-GAAP Financial Measures

Financial results for 2022 and 2021 were impacted by costs associated with our 2021 acquisition of American River Bankshares, for which non-GAAP financial measures are not repeated in this report. For additional information regarding the impact of non-GAAP adjustments for 2022 and 2021 performance measures, refer to Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 15, 2023.

Financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures. Management believes that, given recent industry turmoil, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after-tax impact of unrealized losses on held-to-maturity securities provides useful supplemental information to investors because it reflects the level of capital remaining after a hypothetical liquidation of the entire securities portfolio. Because there are limits to the usefulness of this measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the SEC, and not to rely on any single financial measure. A reconciliation of the non-GAAP TCE ratio is presented below.

Reconciliation of GAAP and Non-GAAP Financial Measures

[[GREPCENT_TABLE]]
[["(in thousands, unaudited)","","December 31, 2023","December 31, 2022"],["Tangible Common Equity - Bancorp"],["Total stockholders' equity","","$","439,062","","412,092"],["Goodwill and core deposit intangible","","(76,520)","","(77,870)"],["Total TCE","a","362,542","","334,222"],["Unrealized losses on HTM securities, net of tax 1","","(77,739)","","(89,432)"],["TCE, net of unrealized losses on HTM securities (non-GAAP)","b","$","284,803","","244,790"],["Total assets","","$","3,803,903","","4,147,464"],["Goodwill and core deposit intangible","","(76,520)","","(77,870)"],["Total tangible assets","c","3,727,383","","4,069,594"],["Unrealized losses on HTM securities, net of tax 1","","(77,739)","","(89,432)"],["Total tangible assets, net of unrealized losses on HTM securities (non-GAAP)","d","$","3,649,644","","3,980,162"],["Bancorp TCE ratio","a / c","9.73","%","8.21","%"],["Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP)","b / d","7.80","%","6.15","%"]]
[[/GREPCENT_TABLE]]

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

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