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What changed in Bank of Marin Bancorp's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Bank of Marin Bancorp's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+338 added−329 removedSource: 10-K (2024-03-14) vs 10-K (2023-03-16)

Top changes in Bank of Marin Bancorp's 2023 10-K

338 paragraphs added · 329 removed · 211 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

39 edited+4 added−7 removed67 unchanged
Biggest changeCompetition The banking business in California generally, and in our market area specifically, is highly competitive with respect to attracting both loan and deposit relationships. The increasingly competitive environment is affected by changes in regulation, interest rates, technology and product delivery systems, and consolidation among financial service providers.
Biggest changeThe increasingly competitive environment is affected by changes in regulation, interest rates, technology and product delivery systems, and consolidation among financial service providers. The banking industry is seeing strong competition for high quality loans, with larger banks expanding activities to attract businesses that are traditionally community bank customers.
Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, financial institutions are subject to prohibitions against specified financial transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial institutions, and foreign individuals and entities.
Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, financial institutions are subject to prohibitions 8 against specified financial transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial institutions, and foreign individuals and entities.
Our deposit operations are also subject to laws and regulations that protect consumer rights including Expedited Funds Availability, Truth in Savings Act ("TISA"), and Electronic Funds Transfers. Other regulatory requirements include the Unfair, Deceptive or Abusive Acts and Practices ("UDAAP"), Dodd-Frank Act, Right to Financial Privacy, Telephone Consumer Protection Act and Privacy of Consumer Financial Information.
Our deposit operations are also subject to laws 9 and regulations that protect consumer rights including Expedited Funds Availability, Truth in Savings Act ("TISA"), and Electronic Funds Transfers. Other regulatory requirements include the Unfair, Deceptive or Abusive Acts and Practices ("UDAAP"), Dodd-Frank Act, Right to Financial Privacy, Telephone Consumer Protection Act and Privacy of Consumer Financial Information.
In addition, copies of our filings are available by requesting them in writing or by phone from: Corporate Secretary Bank of Marin Bancorp 504 Redwood Boulevard, Suite 100 Novato, CA 94947 415-763-4523 These materials are also available at the SEC’s internet website (https://www.sec.gov).
In addition, copies of our filings are available by requesting them in writing or by phone from: Corporate Secretary Bank of Marin Bancorp 504 Redwood Boulevard, Suite 100 Novato, CA 94947 415-763-4523 These materials are also available at the SEC’s internet website (https://www.sec.gov). 12
Our customer base is comprised of business, not-for-profit and personal banking relationships wit hin our Northern California footprint. Our business banking focus is on small to medium-sized businesses, not-for-profit organizations, and commercial real estate investors. We offer a suite of business and personal financial products designed to meet the needs of our customers.
Our customer base is comprised of business, not-for-profit, and personal banking relationships wit hin our Northern California footprint. Our business banking focus is on small to medium-sized businesses, not-for-profit organizations, and commercial real estate investors. We offer a suite of business and personal financial products and services designed to meet the needs of our customers.
In addition, any capital loans Bancorp makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. The BHCA regulates the activities of holding companies including acquisitions, mergers and consolidations and, together with the Gramm-Leach Bliley Act of 1999, the scope of allowable banking activities.
In addition, any capital loans Bancorp makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. The BHCA regulates the activities of holding companies 6 including acquisitions, mergers and consolidations and, together with the Gramm-Leach Bliley Act of 1999, the scope of allowable banking activities.
All such materials on our website are available free of charge. This website address is for information only and is not intended to be an active link, or to incorporate any website information into this document.
All such materials on our website are available free of charge. This website 11 address is for information only and is not intended to be an active link, or to incorporate any website information into this document.
In addition to our headquarters and a regional office in the Greater Sacramento region, we operate 31 retail branches and 8 commercial banking offices across 10 counties - Alameda, Amador, Contra Costa, Marin, Napa, Placer, Sacramento, San Francisco, San Mateo and Sonoma - with a strong emphasis on supporting 4 local communities.
In addition to our headquarters and a regional office in the Greater Sacramento region, we 4 operate 27 retail branches and 8 commercial banking offices across 10 counties - Alameda, Amador, Contra Costa, Marin, Napa, Placer, Sacramento, San Francisco, San Mateo and Sonoma - with a strong emphasis on supporting local communities.
On November 23, 2021, the federal banking agencies issued a final rule requiring banking organizations that experience a computer-security incident to notify their primary Federal regulator of the occurrence of an event that rises to the level of a “notification incident.” Generally, a notification incident occurs when a banking organization has suffered a computer-security incident that has a reasonable likelihood of materially disrupting or degrading the banking organization or its operations.
In November 2021, the federal banking agencies issued a final rule requiring banking organizations that experience a computer-security incident to notify their primary Federal regulator of the occurrence of an event that rises to the level of a “notification incident.” Generally, a notification incident occurs when a banking organization has suffered a computer-security incident that has a reasonable likelihood of materially disrupting or degrading the banking organization or its operations.
Incentive Compensation The Dodd-Frank Act required federal bank regulators and the Securities and Exchange Commission ("SEC") to establish joint regulations or guidelines prohibiting incentive-based payment arrangements that encourage inappropriate risks by providing an executive officer, employee, director or principal stockholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity.
Incentive Compensation The Dodd-Frank Act required federal bank regulators and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements that encourage inappropriate risks by providing an executive officer, employee, director or principal stockholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity.
See below, for further discussion of the Economic Growth Act. 10 The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act The Dodd-Frank Act, a landmark financial reform bill comprised of voluminous new rules and restrictions on bank operations, included provisions aimed at preventing a repeat of the 2008 financial crisis and a new process for winding down failing, systemically important institutions in a manner as close to a controlled bankruptcy as possible.
The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act The Dodd-Frank Act, a landmark financial reform bill comprised of voluminous new rules and restrictions on bank operations, included provisions aimed at preventing a repeat of the 2008 financial crisis and a new process for winding down failing, systemically important institutions in a manner as close to a controlled bankruptcy as possible.
FDIC insurance coverage is funded by the FDIC's assessment on insured depository institutions like us and FDIC's annual base assessment rates are currently between 1.5 and 40 basis points on the depository institution's quarterly average consolidated total assets minus average tangible equity.
FDIC insurance coverage is funded by the FDIC's assessment on insured depository institutions like us and FDIC's annual base assessment rates are currently between 2.5 and 42 basis points on the depository institution's quarterly average consolidated total assets minus average tangible equity.
The proposed rules, among other things, seek to (i) expand access to credit, investment, and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency, and transparency, (iv) tailor CRA evaluations and data collection to bank size and type, and (v) maintain a unified approach among the bank regulatory agencies.
The final rule, among other things, seeks to (i) expand access to credit, investment, and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency, and transparency, (iv) tailor CRA evaluations and data collection to bank size and type, and (v) maintain a unified approach among the bank regulatory agencies.
The rule further describes what is included in tangible equity capital and average total consolidated assets. Qualifying banks may opt in and out of the CBLR framework at any time. While we are a qualifying community banking organization, we have not opted into the CBLR framework at this time.
The rule further describes what is included in tangible equity capital and average total consolidated assets. Qualifying banks may opt in and out of the CBLR framework at any time. While we are a qualifying community banking organization, we have not opted into the CBLR framework at this time. See below, for further discussion of the Economic Growth Act.
Automated teller machines (“ATM's”) are available at most branch locations. Our ATM network is linked to the PLUS, CIRRUS and NYCE networks, as well as to a network of nation-wide surcharge-free ATM's called MoneyPass ® . We also offer our depositors 24-hour access to their accounts by telephone and through digital banking services available to personal and business account holders.
Automated teller machines (“ATMs”) are available at most branch locations. Our ATMs are linked to PLUS, CIRRUS and NYCE, as well as MoneyPass ® - a network of nation-wide, surcharge-free ATMs. We also offer our depositors 24-hour access to their accounts by telephone and through digital banking services available to personal and business account holders.
Other products and services include payment solutions (e.g., mobile deposit and Zelle ® ) and treasury management services.
Other products and services include payment solutions (e.g., mobile deposit and Zelle ® ) and a wide array of treasury management services.
The rule also requires bank service providers to notify each affected banking organization if that bank service provider experiences a computer-security incident that has caused, or is reasonably likely to cause, a material service disruption or degradation for four or more hours.
The rule also requires bank service providers to notify each affected banking organization if that bank service provider experiences a computer-security incident that has caused, or is reasonably likely to cause, a material service disruption or degradation for four or more hours. The rule became effective on April 1, 2022, with a compliance date of May 1, 2022.
The following discus sion summarizes certain significant laws, rules and regulations affecting Bancorp and the Bank. Bank Holding Company Regulation Upon formation of the bank holding company on July 1, 2007, we became subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”) which subjects Bancorp to Federal Reserve reporting and examination requirements.
Bank Holding Company Regulation Upon formation of the bank holding company on July 1, 2007, we became subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”) which subjects Bancorp to Federal Reserve reporting and examination requirements.
Bancorp files periodic reports and proxy statements with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. References in this report to “Bancorp” mean Bank of Marin Bancorp, parent holding company for the Bank. References to “we,” “our,” “us” mean the holding company and the Bank that are consolidated for financial reporting purposes.
Bancorp files periodic reports and proxy statements with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. References in this report to “Bancorp” or the "Company" mean Bank of Marin Bancorp, parent holding company for the Bank.
The final rule requires us to adopt a clawback policy within 60 days after such listing standard becomes effective and file the policy as an exhibit in our Annual Report on Form 10-K.
The final rule required us to adopt a clawback policy within 60 days after such listing standard became effective and file the policy as an exhibit in our Annual Report on Form 10-K. Please see exhibit 97.1 for a copy of our policy.
Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. 11 In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including the Nasdaq, to implement listing standards that require public companies to adopt policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error was either corrected or left uncorrected in the current period.
In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including the Nasdaq, to implement listing standards that require public companies to adopt policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error was either corrected or left uncorrected in the current period.
As a general matter, a party is deemed to control a depository institution or other company if the party owns or controls 25% or more of any class of voting stock.
The determination whether an investor "controls" a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, a party is deemed to control a depository institution or other company if the party owns or controls 25% or more of any class of voting stock.
FDIC Insurance Assessments The FDIC insures our customers' deposits to the maximum amount permitted by law, which is currently $250,000 per depositor, based on the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
Refer to Note 8 to the Consolidated Financial Statements, under the heading “Dividends” in ITEM 8 of this report for more information. 7 FDIC Insurance Assessments The FDIC insures our customers' deposits to the maximum amount permitted by law, which is currently $250,000 per depositor, based on the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
Among other things, these laws require regulatory filings by a shareholder or other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution or bank holding company. The determination whether an investor "controls" a depository institution is based on all of the facts and circumstances surrounding the investment.
These laws include the BHCA and the Change in Bank Control Act. Among other things, these laws require regulatory filings by a shareholder or other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution or bank holding company.
We hold no patents, licenses (other than licenses required by the appropriate banking regulatory agencies), franchises or concessions. The Bank has registered the service marks "The Spirit of Marin," the words “Bank of Marin,” the Bank of Marin logo, and the Bank of Marin tagline, “Committed to your business and our community” with the United States Patent & Trademark Office.
The Bank has registered the service marks "The Spirit of Marin," the words “Bank of Marin,” the Bank of Marin logo, and the Bank of Marin tagline, “Committed to your business and our community” with the United States Patent & Trademark Office.
Additionally, in March 2022, the SEC issued proposed rules that would, among other things, require disclosures of material cybersecurity incidents, along with cybersecurity risk management, strategy and governance.
In July 2023, the Securities and Exchange Commission ("SEC") adopted final rules that, among other things, require disclosures of material cybersecurity incidents, along with cybersecurity risk management, strategy and governance.
Other competitors for depositors' funds are money market mutual funds and non-bank financial institutions such as brokerage firms and insurance companies. We differentiate ourselves from the numerous, and often larger, financial institutions in our primary market area with a business model built on relationship banking, disciplined fundamentals and commitment to the communities we serve.
We differentiate ourselves from the numerous, and often larger, financial institutions in our primary market area with a business model built on relationship banking, exemplary service, disciplined fundamentals, local decision making and commitment to the communities we serve.
With certain exceptions, the value of stock repurchased is net of stock issued in the year, including those issued pursuant to share-based compensation programs. Refer to Note 8 to the Consolidated Financial Statements, under the heading “Dividends” in ITEM 8 of this report for more information.
With certain exceptions, the value of stock repurchased is net of stock issued in the year, including those issued pursuant to share-based compensation programs.
We offer Wealth Management and Trust Services (“WMTS”), which include customized investment portfolio management, financial planning, trust administration, estate settlement and custody services. We also offer 401(k) plan services to small and medium-sized businesses through a third-party vendor. We make international banking services available to our customers indirectly through other financial institutions with whom we have correspondent banking relationships.
We offer wealth management and trust services, which include customized investment portfolio management, trust administration, estate settlement and custody services. We make international banking services available to our customers indirectly through other financial institutions with whom we have correspondent banking relationships. We hold no patents, licenses (other than licenses required by the appropriate banking regulatory agencies), franchises or concessions.
The Economic Growth Act’s highlights included improving consumer access to mortgage credit, added certain protections for consumers, included veterans and active duty military personnel, expanded credit freezes and created an identity theft protection database.
The Economic Growth Act’s highlights included improving consumer access to mortgage credit, added certain protections for consumers, included veterans and active duty military personnel, expanded credit freezes and created an identity theft protection database. 10 Notice and Approval Requirements Related to Control Banking laws impose notice, approval and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution.
The Board of Directors and various sub-committees oversee Bancorp's consolidated enterprise risk management program that ensures the adequacy of policies, procedures, tolerance levels, risk measurement systems, monitoring processes, management information systems and internal controls. 7 Dividends and Stock Repurchases Bancorp's ability to pay dividends to its shareholders may be affected by both general corporate law considerations and the policies of the Federal Reserve applicable to bank holding companies.
Dividends and Stock Repurchases Bancorp's ability to pay dividends to its shareholders may be affected by both general corporate law considerations and the policies of the Federal Reserve applicable to bank holding companies.
This record is taken into consideration when the institution establishes a new branch that accepts deposits, relocates an office, applies to merge or consolidate, or expands into other activities.
This record is taken into consideration when the institution establishes a new branch that accepts deposits, relocates an office, applies to merge or consolidate, or expands into other activities. The FDIC assigned a “Satisfactory” rating to Bank of Marin's CRA performance examination based on their most recent examination completed in January 2021, which was performed under the large bank requirements.
New products and services, third-party risk management and cybersecurity are critical sources of operational risk that financial institutions are expected to address in the current environment.
New products and services, third-party risk management and cybersecurity are critical sources of operational risk that financial institutions are expected to address in the current environment. The Board of Directors and various sub-committees oversee Bancorp's consolidated enterprise risk management program that ensures the adequacy of policies, procedures, tolerance levels, risk measurement systems, monitoring processes, management information systems and internal controls.
The banking industry is seeing strong competition for quality loans, with larger banks expanding their activities to attract businesses that are traditionally community bank customers. In all of our 10 counties, we have significant competition from nationwide banks with much larger branch networks and greater financial resources, as 5 well as credit unions and other local and regional banks.
In all of our 10 counties, we have significant competition from nationwide banks with much larger branch networks and greater financial resources, as well as credit unions and other local and regional banks. Nationwide banks have the competitive advantages of developing data analytics and artificial intelligence tools and other technological platforms.
Virtually all of our business is conducted through Bancorp's subsidiary, Bank of Marin, which is headquartered in Novato, California.
References to “we,” “our,” “us” mean the holding company and the Bank that are consolidated for financial reporting purposes. Virtually all of our business is conducted through Bancorp's subsidiary, Bank of Marin, which is headquartered in Novato, California.
As of December 31, 2022, the majority of our deposits were in Marin, Sacramento and southern Sonoma counties, and approximately 60% of our deposits were from businesses and 40% from consumers.
As of December 31, 2023, the majority of our deposits were in Marin, Sacramento and southern Sonoma counties, and approximately 59% of our deposits were from businesses and 41% from consumers. Competition The banking business in California generally, and in our market area specifically, is highly competitive with respect to attracting both loan and deposit relationships.
Nationwide banks have the competitive advantages of developing data analytics and artificial intelligence tools and other technological platforms. Large commercial banks also have substantially greater lending limits and the ability to offer certain services, which are not offered directly by us.
Large commercial banks 5 also have substantially greater lending limits and the ability to offer certain services, which are not offered directly by us. Other competitors for depositors' funds are money market mutual funds and non-bank financial institutions such as brokerage firms and insurance companies.
A significant driver of our franchise value is the growth and stability of our deposits, a low-cost funding source for our loan portfolio. Human Capital Resources As of December 31, 2022, we employed 313 full-time equivalent staff. The actual number of employees, including part-time employees, at year-end 2022 included seven executive officers, 145 other corporate officers and 172 staff.
The Bank's experienced professionals deliver innovative and custom financing, with a deep local market knowledge and a personal understanding of each customer's unique needs. Human Capital Resources As of December 31, 2023, we employed 329 full-time equivalent staff. The actual number of employees, including part-time employees, at year-end 2023 included eight executive officers, 153 other corporate officers and 176 staff.
We believe that our employee relations are good. We have been recognized as one of the “Best Places to Work” by the North Bay Business Journal. COVID-19 Pandemic-Related Response Since the onset of the pandemic and national emergency, we have taken actions to ensure the health and safety of employees and customers.
We believe that our employee relations are good. We have been recognized as one of the “Best Places to Work” by the North Bay Business Journal. SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under both federal and state law. The following discus sion summarizes certain significant laws, rules and regulations affecting Bancorp and the Bank.
Removed
As discussed in Note 18 to the Consolidated Financial Statements in ITEM 8 of this report, in August 2021, we expanded our presence in Amador, Placer, Sacramento and Sonoma counties through the acquisition of American River Bankshares and its subsidiary American River Bank resulting in the addition of 10 branch offices.
Added
In October 2023, the federal banking agencies issued a final rule to strengthen and modernize regulations implementing the CRA.
Removed
The Bank's experienced professionals deliver innovative and custom financing, with a deep local market knowledge and a personal understanding of each customer's unique needs. In Marin County, we have the fourth largest market share of total deposits at 11.5%, based upon FDIC deposit market share data as of June 30, 2022 1 (most recent data available).
Added
The new rules require timely reporting of incidents determined to be material, and annual disclosure of the processes for assessing, identifying and managing material risks from cybersecurity threats including a description of board of directors' oversight and management's role in assessing and managing material risks from cybersecurity threats.
Removed
To protect the health of everyone, we have implemented COVID-19 safety protocols and continue to actively monitor federal, state and local guidelines and information related to COVID-19 to ensure the safety of our employees and customers.
Added
The disclosures are required beginning with annual reports for fiscal years ending on or after December 15, 2023.
Removed
No employees have been laid off and no employees have had their pay reduced as a result of the pandemic. 1 Source: S&P Global Market Intelligence of New York, New York 6 SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under both federal and state law.
Added
Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
Removed
The FDIC assigned a “Satisfactory” rating to Bank of Marin's CRA performance examination based on their most recent examination completed in January 2021, which was performed under the large bank requirements. 8 In May 2022, the federal banking agencies issued a joint notice of proposed rule to revise the regulations implementing the CRA.
Removed
The rule became effective on April 1, 2022, with a compliance date of May 1, 2022. 9 In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.
Removed
Notice and Approval Requirements Related to Control Banking laws impose notice, approval and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution. These laws include the BHCA and the Change in Bank Control Act.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

43 edited+21 added−21 removed74 unchanged
Biggest changeIf general economic conditions negatively affect the California markets in which we operate and small to medium-sized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations may be negatively affected. 17 Negative Conditions Affecting Real Estate May Harm Our Business and Our Commercial Real Estate Concentration May Heighten Such Risk Concentration of our lending activities in the California real estate sector could negatively affect our results of operations if adverse changes in our lending area occur.
Biggest changeIf general economic conditions negatively affect the California markets in which we operate and small to medium-sized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations may be negatively affected.
The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase our allowance for credit losses on loans, each of which could adversely affect our net income.
The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we 17 significantly increase our allowance for credit losses on loans, each of which could adversely affect our net income.
The CRE Concentration Guidance provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital.
The CRE Concentration Guidance provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) total commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital.
For example, our primary market is located in both earthquake and wildfire-prone 19 zones in Northern California, which is also subject to other weather or disasters, such as severe rainstorms, drought or flood. These events have interrupted our business operations unexpectedly (e.g., PG&E power shutoffs in the North Bay and Sacramento Region) at times.
For example, our primary market is located in both earthquake and wildfire-prone zones in Northern California, which is also subject to other weather or disasters, such as severe rainstorms, drought or flood. These events have interrupted our business operations unexpectedly at times (e.g., PG&E power shutoffs in the North Bay and Sacramento Region).
Further, intense competition for creditworthy borrowers could lead to pressure for loan rate concessions and affect our ability to generate profitable loans. Going forward, we may see continued competition in the industry as competitors seek to expand market share in our core markets. Further, our customers may withdraw deposits to pursue alternative investment opportunities in the equity market.
Further, intense competition for creditworthy borrowers could lead to pressure for loan rate concessions and affect our ability to generate profitable loans. Going forward, we may see continued competition in the industry as competitors seek to expand market share in our core markets. Further, our customers may withdraw deposits to pursue alternative investment opportunities.
National and regional banks much larger than our size have entered our market through acquisitions and they may be able to benefit from economies of scale through their wider branch networks, more prominent national advertising campaigns, lower cost of borrowing, capital market access and sophisticated technology infrastructures.
National 13 and regional banks much larger than our size have entered our market through acquisitions and they may be able to benefit from economies of scale through their wider branch networks, more prominent national advertising campaigns, lower cost of borrowing, capital market access and sophisticated technology infrastructures.
A cybersecurity breach of systems operated by the Bank, merchants, vendors, customers, or externally publicized breaches of other financial institutions may significantly harm our reputation, result in a loss of customer business, subject us to regulatory scrutiny, or expose us to civil litigation and financial liability.
A cybersecurity breach of systems operated by the Bank, merchants, vendors, customers, or externally publicized breaches of other financial 19 institutions may significantly harm our reputation, result in a loss of customer business, subject us to regulatory scrutiny, or expose us to civil litigation and financial liability.
Our ability to operate, as well as our financial condition and results of operations, could be negatively affected in the event of an interruption of an information system, an undetected error, a cyber-breach, or in the event of a natural disaster whereby certain vendors are unable to maintain business continuity.
Our ability to operate, as well as our financial condition and results of operations, could be negatively affected in the event of an interruption of an information 20 system, an undetected error, a cyber-breach, or in the event of a natural disaster whereby certain vendors are unable to maintain business continuity.
The local economic conditions in these areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposits as our primary funding source.
The local economic conditions in these areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the 15 collateral securing loans and the stability of our deposits as our primary funding source.
The loss of key personnel and/or our inability to secure qualified candidates to replace retiring executives could have an unfavorable effect on our business due to the required skills and knowledge of our market and years of industry experience.
The loss of key personnel and/or our inability to secure qualified 14 candidates to replace retiring executives could have an unfavorable effect on our business due to the required skills and knowledge of our market and years of industry experience.
Inherent uncertainties exist in integrating the operations of an acquired 12 institution and there is no assurance that we will be able to do so successfully.
Inherent uncertainties exist in integrating the operations of an acquired institution and there is no assurance that we will be able to do so successfully.
While we generally seek to minimize our exposure by strategically diversifying our credit exposure to obligations of issuers in various geographic locations throughout California and the U.S., investing in investment grade securities and actively monitoring the credit worthiness of the issuers and/or credit guarantee providers, there is no guarantee that the issuers will remain financially sound or continue their payments on these debentures.
While we generally seek to minimize our exposure by strategically diversifying our credit exposure to obligations of issuers in various geographic locations throughout California and the U.S., investing in investment-grade securities, and actively monitoring the creditworthiness of the issuers and/or credit guarantee providers, there is no guarantee that the issuers will remain financially sound or continue their payments on these debentures.
Compliance risk can lead to diminished reputation, reduced franchise value, limited business opportunities, reduced expansion potential and an inability to enforce contracts. The Bank manages these risks through its extensive compliance plan, policies and procedures. For further information on supervision and regulation, see the section captioned “SUPERVISION AND REGULATION” in ITEM 1 of this report. 20 ITEM 1B.
Compliance risk can lead to diminished reputation, reduced franchise value, limited business opportunities, reduced expansion potential and an inability to enforce contracts. The Bank manages these risks through its extensive compliance plan, policies and procedures. For further information on supervision and regulation, see the section captioned “SUPERVISION AND REGULATION” in ITEM 1 of this report.
Unexpected Early Termination of Interest Rate Swap Agreements May Affect Earnings We have entered into interest-rate swap agreements, primarily as an asset/liability risk management tool, in order to mitigate the interest rate risk that causes fluctuations in the fair value of specified long-term fixed-rate loans or firm commitments to originate long-term fixed rate loans.
Unexpected Early Termination of Interest Rate Swap Agreements May Affect Earnings We have entered into interest-rate swap agreements, primarily as an asset/liability risk management tool, in order to mitigate the interest rate risk that causes fluctuations in the fair value of specified long-term fixed-rate loans and securities or firm commitments to originate long-term fixed rate loans.
Given the low trading volume of our common stock, significant trades of our stock in a given time, or the expectations of these trades, could cause volatility in the stock price.
Given the low trading volume of our common stock, significant trades of our stock in a given time period, or the expectations of these trades, could cause volatility in the stock price.
Although Congress has taken steps to improve regulation and consumer protection related to the housing finance system (e.g., Dodd-Frank Act), FNMA and FHLMC have entered their 15th year of U.S. government conservatorship via the Federal Housing Finance Agency (the "FHFA").
Although Congress has taken steps to improve regulation and consumer protection related to the housing finance system (e.g., the Dodd-Frank Act), FNMA and FHLMC have entered their 16th year of U.S. government conservatorship via the Federal Housing Finance Agency ("FHFA").
In addition, such a lack of liquidity could result in the sale of securities in an unrealized loss position and/or alter our ability to hold our held-to-maturity securities to their maturity dates. All of 13 these factors could have a material adverse impact on our liquidity, business, financial condition and results of operations.
In addition, such a lack of liquidity could result in the sale of securities in an unrealized loss position and/or alter our ability to hold our held-to-maturity securities to their maturity dates. All of these factors could have a material adverse impact on our asset growth, liquidity, business, financial condition, and results of operations.
Financial Challenges at Other Banking Institutions Could Lead to Depositor Concerns That Spread Within the Banking Industry Causing Disruptive Deposit Outflows and Other Destabilizing Results That Could Adversely Affect Our Liquidity, Business, Financial Condition and Results of Operations In March 2023, certain specialized banking institutions with elevated concentrations of uninsured deposits experienced large deposit outflows, resulting in the institutions being placed into FDIC receiverships.
Financial Challenges at Other Banking Institutions Could Lead to Depositor Concerns That Spread Within the Banking Industry Causing Disruptive Deposit Outflows and Other Destabilizing Results That Could Adversely Affect Our Liquidity, Business, Financial Condition and Results of Operations In the first and second quarters of 2023, certain specialized banking institutions with elevated concentrations of uninsured deposits experienced large deposit outflows, resulting in the institutions being placed into FDIC receiverships.
Our future success will depend in part upon our ability to use technology to provide products and services that will satisfy client demands securely and cost-effectively.
Our future success will depend in part on our ability to use technology to provide products and services that will satisfy client demands securely and cost-effectively.
Loans secured by CRE include those secured by office buildings, owner-user office/warehouses, mixed-use commercial and retail properties. There can be no assurance that properties securing our loans will generate sufficient cash flows to allow borrowers to make full and timely loan payments to us.
Loans secured by CRE include those secured by office buildings, owner-user office/warehouses, mixed-use commercial, retail properties and multi-family residential real estate. There can be no assurance that properties securing our loans will generate sufficient cash flows to allow borrowers to make full and timely loan payments to us.
Operational and Other Risks Risks Associated with Cybersecurity Could Negatively Affect Our Earnings and Reputation Our business requires the secure management of sensitive client and bank information. We work diligently to implement security measures that intend to make our communications and information systems s afe to conduct business.
Operational and Other Risks Risks Associated with Cybersecurity Could Negatively Affect Our Earnings and Reputation Our business requires the secure management of sensitive client and bank information. We work diligently to implement layered security measures that intend to make our communications and information systems resilient and safe to conduct business.
In addition, our top ten depositor relationships accounted for approximately 8% and 11% of our total deposit balances at December 31, 2022 and 2021, resp ectively. The business models and cash cycles of some of our large commercial depositors may also cause short-term volatility in their deposit balances held with us.
In addition, our top ten depositor relationships accounted for approximately 8% of total deposit balances at both December 31, 2023 and 2022. The business models and cash cycles of some of our large commercial depositors may also cause short-term volatility in their deposit balances held with us.
As of December 31, 2022 and 2021, using regulatory definitions in the CRE Concentration Guidance, our CRE loans represented 307% and 332%, respectively, of our total risk-based capital.
As of December 31, 2023 and 2022, using regulatory definitions in the CRE Concentration Guidance, our CRE loans represented 300% and 307%, respectively, of our total risk-based capital.
The Value of Goodwill and Other Intangible Assets May Decline in the Future As of December 31, 2022, we had goodwill totaling $72.8 million and a core deposit intangible asset totaling $5.1 million from business acquisitions.
The Value of Goodwill and Other Intangible Assets May Decline in the Future As of December 31, 2023, we had goodwill totaling $72.8 million and a core deposit intangible asset totaling $3.8 million from business acquisitions.
Cyber threats such as social engineering, ransomware, and phishing emails are more prevalent now than ever before. These incidents include intentional and unintentional events that may present threats designed to disrupt operations, corrupt data, release sensitive information or cause denial-of-service attacks.
With the advent of artificial intelligence (AI), cyber threats such as social engineering, ransomware, and phishing are more sophisticated and prevalent now than ever before. These incidents include intentional and unintentional events that may present threats designed to disrupt operations, corrupt data, release sensitive information, or cause denial-of-service attacks.
In addition, health epidemics or pandemics (or expectations about them) such as the novel coronavirus (aka "COVID-19"), international trade disputes, inflation risks, oil price volatility, the level of U.S. debt and global economic conditions could destabilize financial markets in which we operate.
In addition, health epidemics or pandemics (or expectations about them), international trade disputes, inflation risks, oil price volatility, the level of U.S. debt and global economic conditions could destabilize financial markets in which we operate.
We are actively working to manage our CRE concentration and we have discussed the CRE Concentration Guidance with the regulatory agencies and believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance.
We manage our CRE concentrations and 18 discuss them as necessary with the banking regulatory agencies and believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance.
Although we maintain strong liquidity for the normal operations of the Bank, model various stress scenarios, and maintain significant contingent liquidity sources, general depositor concerns given the recent high profile bank closures could lead to deposit outflows from our Bank. Significant deposit outflows could negatively affect our ability to originate loans, invest in securities, and distribute dividends to our shareholders.
Although we maintain strong liquidity for the normal operations of the Bank, model various stress scenarios, and maintain significant contingent liquidity sources, general depositor concerns given the recent high profile bank closures could lead to deposit outflows from our Bank.
Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank and our ability to raise brokered deposits. We also may borrow funds from third-party lenders, such as other financial institutions.
Additional liquidity is provided by our ability to borrow from the Federal Reserve Bank of San Francisco, Federal Home Loan Bank and other financial institutions, as well as our ability to raise brokered deposits.
If customers move money out of 14 bank deposits and into other investments, then we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.
If customers move money out of bank deposits and into other investments, then we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income. Based on experience, we believe that our deposit accounts are relatively stable sources of funds.
While we have systems and procedures designed to prevent security breaches, we cannot be certain that advances in criminal capabilities, physical system or network break-ins or inappropriate access will not compromise or breach the technology protecting our networks or proprietary client information.
While we have systems and procedures designed to prevent security breaches, we cannot be certain that advances in cyberthreats, criminal capabilities, network break-ins, or inappropriate access will not compromise or breach the technology protecting our networks or proprietary client information. If a material security breach were to occur, the Bank has policies and procedures in place to ensure timely disclosure.
The fair value of our securities issued or 18 guaranteed by these two GSE entities may be negatively impacted if the U.S. government ceases to provide support to the conservatorship or phases out its current practice of purchasing treasury and agency mortgage-backed securities.
The fair value of our securities issued or guaranteed by these two GSE entities may be negatively impacted if the U.S. government ceases to provide support to the conservatorship.
As of December 31, 2022, approximately 90% of our loans had real estate as a primary or secondary component of collateral, with CRE comprising 77% and residential real estate the remaining 23%. Real estate valuations are influenced by demand, and demand is driven by economic factors such as employment rates and interest rates.
As of December 31, 2023, approximately 90% of our loans had real estate as a primary or secondary component of collateral, which were comprised of 75% commercial real estate and 25% residential real estate. Real estate valuations are influenced by demand, and demand is driven by economic factors such as employment rates and interest rates.
Some of our non-bank competitors and peer-to-peer lenders may not be subject to the same extensive regulations as we are, giving them greater flexibility in competing for business. We anticipate intense competition will continue for the coming year due to the consolidation of many financial institutions and more changes in legislation, regulation and technology.
Some of our non-bank competitors and peer-to-peer lenders may not be subject to the same extensive regulations as we are, giving them greater flexibility in competing for business.
If our customers move money into higher yielding deposits or alternative investments, we may lose a relatively inexpensive source of funds, thus increasing our funding costs through more expensive wholesale funding sources, such as federal funds or FHLB borrowings.
Based on our current strong liquidity position, our adjustment to deposit pricing has lagged the market in a rising interest rate environment. If our customers move money into higher yielding deposits or alternative investments, we may lose a relatively inexpensive source of funds, thus increasing our funding costs through more expensive wholesale funding sources, such as FHLB borrowings.
In addition, our loans and callable mortgage-backed securities are also subject to prepayment risk when interest rates fall, and the borrowers' credit risk may increase in rising rate or recessionary environments.
Decreases in the market value of investment securities available for sale negatively impact the Bank's tangible equity through accumulated other comprehensive losses. In addition, our loans and callable mortgage-backed securities are also subject to prepayment risk when interest rates fall, and the borrowers' credit risk may increase in rising rate or recessionary environments.
Rising CRE lending concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the CRE market. Concentration risk exists when financial institutions deploy too many assets to any one industry or segment. Concentration stemming from commercial real estate is one area of regulatory concern.
Concentration risk exists when financial institutions deploy too many assets to any one industry or segment. Concentration stemming from commercial real estate is one area of regulatory concern.
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 the evolving inflation risks, international political unrest, and oil and other supply chain disruptions.
Beginning in March 2022, the FOMC began successive increases to the federal funds rate due to the evolving inflation risks, complicated by international political unrest and supply chain disruptions.
If a material security breach were to occur, the Bank has policies and procedures in place to ensure timely disclosure. The Financial Services Industry is Undergoing Rapid Technological Changes and, As a Result, We Have a Continuing Need to Stay Current with Those Changes to Compete Effectively and Increase Our Efficiencies.
For additional information on cybersecurity management and governance, refer to ITEM-1C, Cybersecurity, in this report. The Financial Services Industry is Undergoing Rapid Technological Changes and, As a Result, We Have a Continuing Need to Stay Current with Those Changes to Compete Effectively and Increase Our Efficiencies.
Market, Interest Rate, and Liquidity Risks A Lack of Liquidity could Adversely Affect our Operations and Jeopardize our Business, Financial Condition and Results of Operations Liquidity is essential to our business.
Market, Interest Rate, and Liquidity Risks A Lack of Liquidity could Adversely Affect our Operations, Financial Condition and Results of Operations Liquidity is essential to our business and our ability to fund our operations, effectively manage the repayment and maturity schedules of our loans and investment securities, distribute dividends to our shareholders, and fulfill our debt obligations or deposit withdrawal demands.
As a result of five rate adjustments during 2022 and one rate increase so far in 2023, the federal funds target rate range increased to a range of 4.50% to 4.75%. Additional rate increases are anticipated in 2023, as Federal Reserve policymakers continue to monitor inflation and economic developments .
Additional rate increases are not widely anticipated in 2024, as Federal Reserve policymakers continue to monitor inflation and economic developments .
Factors such as inflation, productivity, oil prices, unemployment rates, and global demand play a role in the FOMC's consideration of future rate adjustments. 15 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.
Factors such as inflation, productivity, oil prices, unemployment rates, and global demand play a role in the FOMC's consideration of future rate adjustments. The federal funds rate range remained between 0.0% to 0.25% from March 2020 through the beginning of 2022, putting downward pressure on our asset yields and net interest margin.
Our portfolio of loans and securities will generally decline in value if market interest rates increase, and increase in value if market interest rates decline. Decreases in the market value of investment securities available for sale negatively impact the Bank's tangible equity through accumulated other comprehensive losses.
In fact, the FOMC’s aggressive interest rate increases, discussed more fully below, negatively affected each of these areas of our business recently. Our portfolio of loans and securities will generally decline in value if market interest rates increase, and increase in value if market interest rates decline.
Removed
Based on our current strong liquidity position, our adjustment to deposit pricing has lagged the market in a rising interest rate environment.
Added
We anticipate intense competition will continue for the coming year due to the market disruptions in banking in 2023, the continued consolidation of many financial institutions and more changes in legislation, regulation and technology.
Removed
In the aftermath, there has been substantial market disruption and indications that deposit outflows and other destabilizing results could spread within the banking industry. We maintain a well-diversified deposit base, with an estimated 44% of our deposits as of December 31, 2022 in excess of FDIC insurance limits.
Added
In addition, media and market coverage of the Bay Area economy and local financial institutions, have generated significant market volatility among publicly traded bank holding companies and, in particular, regional and community banks like the Company. These market developments have negatively impacted customer confidence in the safety and soundness of regional and community banks.
Removed
Such uninsured deposits were fully covered by the Bank's contingent liquidity at that time. Excluding zero balance accounts, the approximate average size of our consumer deposit accounts was less than $43 thousand, and the average size of our business deposit accounts was less than $139 thousand as of December 31, 2022.
Added
As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations.
Removed
We May Take Tax Filing Positions or Follow Tax Strategies That May Be Subject to Challenge We provide for current and deferred tax provision in our consolidated financial statements based on our results of operations, business activities and business combinations, legal structure and federal and state legislation and regulations.
Added
We maintain a well-diversified deposit base, with an estimated 28% of uninsured and/or uncollateralized deposits as of December 31, 2023.
Removed
We may take filing positions or follow tax strategies that are subject to interpretation of tax statutes. Our net income may be reduced if a federal, state or local authority were to assess charges for taxes that have not been provided for in our consolidated financial statements.
Added
Such uninsured deposits were fully covered by the Bank's available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and a total available borrowing capacity of $1.967 billion, or 60% of total deposits, and 213% of estimated uninsured and/or uncollateralized deposits as of December 31, 2023.
Removed
Taxing authorities could change applicable tax laws and interpretations, challenge filing positions, or assess new taxes and interest charges. If taxing authorities take any of these actions, our business, results of operations or financial condition could be significantly affected.
Added
Excluding zero balance accounts, 59% of deposit balances were held in business accounts with average balances of $120 thousand per account, with the remaining 41% in consumer accounts with average balances of $41 thousand per account as of December 31, 2023.
Removed
We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations.
Added
Our funding costs increased significantly in 2023 and may continue to increase if our deposits decline and we replace them with more expensive sources of funding, such as FHLB and FRB borrowings, and/or brokered deposits, if customers shift their deposits into higher cost products, or if we raise interest rates to avoid losing deposits.
Removed
An inability to raise funds through deposits, borrowings, securities sales, Federal Home Loan Bank advances, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our most important source of funding consists of deposits. Deposit balances can decrease when customers perceive alternative investments provide a better risk/return trade-off.
Added
In addition, adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources, constraining our financial flexibility, and ability to originate loans, invest in securities, and distribute dividends to our shareholders.
Removed
Based on experience, we believe that our deposit accounts are relatively stable sources of funds. If we increase interest rates paid to retain deposits, our earnings may be adversely affected, which could have an adverse effect on our business, financial condition and results of operations.
Added
Our most important source of funding consists of deposits, which is affected by external factors outside the Bank's control as well as customers' perceptions, business operations, and investment goals.
Removed
Significant declines in available funding could adversely affect our ability to originate loans, invest in securities, pay our expenses, distribute dividends to our shareholders, and fulfill our debt obligations or deposit withdrawal demands.
Added
As a result of seven rate adjustments during 2022, the federal funds target rate increased to a range of 4.25% to 4.50% at year-end 2022 and our net interest margin increased gradually over the course of the year.
Removed
In addition, a lack of liquidity could result in the sale of securities in an unrealized loss position and/or alter our ability to hold our held-to-maturity securities to their maturity dates. All of these factors could have a material adverse impact on our liquidity, business, financial condition and results of operations.
Added
In 2023, on each of February 1 st , March 22 nd , May 3 rd , and July 26 th the FOMC increased the target rate by 25 basis points to a range of 5.25% to 5.50%.
Removed
We are Subject to Uncertainty from the Transition of London Interbank Offered Rate (' LIBOR") as a Reference Rate LIBOR has been one of the most widely used global interest rate benchmark deeply embedded in global financial products.
Added
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 net interest margin starting in the second quarter of 2023.
Removed
The long-term viability of LIBOR has been undermined due to cases of rate manipulation, low volumes for underlying interbank transactions and the reluctance of panel banks to submit quotes used to calculate LIBOR.
Added
Rising Interest Rates Have Decreased the Value of the Company’s Held-To-Maturity and Available-for-Sale Securities Portfolio, and the Company Would Realize Losses if It Were Required to Sell Such Securities to Meet Liquidity Needs Because of inflationary pressures and the resulting rapid increases in the federal funds target rate since March 2022, the market value of previously issued government and other fixed income securities has declined significantly.
Removed
As a result, the Financial Conduct Authority of the United Kingdom (the “FCA”) announced that the most commonly used LIBOR rates will cease to be published or cease to be representative after June 30, 2023. The publication of all other LIBOR settings ceased to be published as of December 31, 2021.
Added
These securities make up a majority of the securities portfolio of most banks in the U.S., including the Company’s, resulting in unrealized losses embedded in the held-to-maturity portion of U.S. banks’ securities portfolios and unrealized losses on available-for-sale securities reflected in the Company’s accumulated other comprehensive 16 income (loss).
Removed
The Alternative Reference Rates Committee (“ARRC”), a steering committee comprised of U.S. financial market participants selected by the Federal Reserve Bank of New York, published recommended fall-back language for LIBOR-linked financial instruments and recommended alternatives for certain LIBOR rates (e.g., Secured Overnight Financing Rate (“SOFR”), a broad measure of the cost of overnight borrowings collateralized by Treasury securities, for USD LIBOR). 16 As of December 31, 2022, we had twenty-six investment securities with book values totaling $30.0 milli on, seven loans totaling $12.8 million, and four interest rate swap contracts with notional values of $12.0 million indexed to LIBOR.
Added
We maintain an investment securities portfolio to provide liquidity and to generate earnings on funds that have not been loaned to customers while managing our liquidity and interest rate position, seeking a reasonable yield balanced with risk exposure.
Removed
Almost all of our LIBOR-indexed investment securities were issued by GSEs who are members of ARRC and have transit ion strategies and timelines for their legacy LIBOR-indexed investment products, including fall-back rates tied to 30-day average SOFR or Term SOFR. We discontinued originating or purchasing LIBOR-based loans and investment securities effective December 31, 2021.
Added
While it is neither our intention to sell securities at a net loss in the normal course of business, nor were we required to, we did so for strategic purposes in the third and fourth quarters of 2023 as a source of liquidity and to reposition the balance sheet to bolster net interest margin.
Removed
Loans currently indexed to LIBOR either have contractual fall-back rates or will be negotiated using replacement indices such as SOFR or Bloomberg Short-Term Bank Yield Index ("BSBY"), a benchmark developed by Bloomberg Professional Services.
Added
If the Company were to sell additional securities in an unrealized loss position, it may incur losses that could impair the Company’s capital, financial condition, and results of operations and may require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability and potentially causing shareholder dilution.
Removed
In addition, our interest rate swap agreements can either be subject to the fall-back index rate stipulated by the ISDA protocol or modified to other reference rates such as Prime or SOFR as mutually agreed by us and our counterparty .
Added
Negative Conditions Affecting Real Estate May Harm Our Business and Our Commercial Real Estate Concentration May Heighten Such Risk Concentration of our lending activities in the California real estate sector could negatively affect our results of operations if adverse changes in our lending area occur.
Removed
While management has identified financial instruments indexed to LIBOR and evaluated contracts and index alternatives, we cannot predict any favorable or unfavorable effects the chosen alternative index may have on financial instruments that are currently indexed to LIBOR after its termination date.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe lease branch and office facilities within our primary market areas in the cities of Corte Madera, San Rafael, Novato, Sausalito, Mill Valley, Tiburon, Greenbrae, Petaluma, Santa Rosa, Healdsburg, Sonoma, Napa, San Francisco, Alameda, Oakland, Walnut Creek, San Mateo, Gold River, Jackson, Pioneer, Roseville, and Sacramento.
Biggest changeWe lease branch and office facilities within our primary market areas in the cities of Corte Madera, San Rafael, Novato, Sausalito, Mill Valley, Greenbrae, Petaluma, Santa Rosa, Healdsburg, Sonoma, Napa, San Francisco, Alameda, Oakland, Walnut Creek, San Mateo, Gold River, Jackson, Roseville, and Sacramento.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

7 edited+1 added−2 removed0 unchanged
Biggest changePurchases of Equity Securities by the Issuer and Affiliated Purchasers On July 16, 2021, Bancorp Board of Directors approved a share repurchase program under which Bancorp could repurchase up to $25.0 million of its outstanding common stock through July 31, 2023.
Biggest changeA total of $34.7 million remained available to repurchase under the program that expired on July 31, 2023. On July 21, 2023, the Board of Directors approved the adoption of Bancorp's new share repurchase program, which replaced the one expiring on July 31, 2023, for up to $25.0 million and expiring on July 31, 2025.
Five-Year Stock Price Performance Graph The following graph, compiled by S&P Global Market Intelligence of New York, New York, shows a comparison of cumulative total shareholder return on our common stock during the five fiscal years ended December 31, 2022 compared to the Russell 2000 Stock index and the S&P Regional Banks Select Industry Index.
Five-Year Stock Price Performance Graph The following graph, compiled by S&P Global Market Intelligence of New York, New York, shows a comparison of cumulative total shareholder return on our common stock during the five fiscal years ended December 31, 2023 compared to the Russell 2000 Stock index and the S&P Regional Banks Select Industry Index.
The comparison assumes the investment of $100 in our common stock on December 31, 2017 and the reinvestment of all dividends. The graph represents past performance and does not indicate future performance.
The comparison assumes the investment of $100 in our common stock on December 31, 2018 and the reinvestment of all dividends. The graph represents past performance and does not indicate future performance.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information and Holders Bancorp's common stock trades on the Nasdaq Capital Market under the symbol BMRC. At February 28, 2023, 16,056,334 shares of Bancorp's common stock, no par value, were outstanding and held by approximately 7,150 holders of record and beneficial owners.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information and Holders Bancorp's common stock trades on the Nasdaq Capital Market under the symbol BMRC. At February 29, 2024, 16,193,342 shares of Bancorp's common stock, no par value, were outstanding and held by approximately 7,860 holders of record and beneficial owners.
In January 2022, the last activity under the program, Bancorp repurchased 23,275 shares at an average price of $37.64 per share for a total cost of $877 thousand. Cumulative repurchases under the current program totaled 618,991 shares at an average price of $36.04 per share.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers In January 2022, the last activity under the share repurchase program approved in 2021, Bancorp repurchased 23,275 shares at an average price of $37.64 per share for a total cost of $877 thousand. Cumulative repurchases totaled 618,991 shares at an average price of $36.04 per share.
Shares to be issued upon exercise of outstanding options 1 Weighted average exercise price of outstanding options Shares remaining available for future issuance 2 Equity compensation plans approved by shareholders 287,228 $ 32.81 1,047,491 1 Represents shares of common stock issuable upon exercise of outstanding options under the Bank of Marin Bancorp 2017 Equity Plan and 2007 Equity Plan. 2 Represents remaining shares of common stock availab le for future grants under the 2017 Equity Plan and the 2020 Director Stock Plan, excluding 287,228 shares to be issued upon exercise of outstanding options and 375,450 shares available to be issued under the Employee Stock Purchase Plan.
Shares to be issued upon exercise of outstanding options 1 Weighted average exercise price of outstanding options Shares remaining available for future issuance 2 Equity compensation plans approved by shareholders 283,578 $ 33.46 999,843 1 Represents shares of common stock issuable upon exercise of outstanding options under the Bank of Marin Bancorp 2017 Equity Plan and 2007 Equity Plan. 2 Represents remaining shares of common stock available for future grants under the 2017 Equity Plan and the 2020 Director Stock Plan, excluding 283,578 shares to be issued upon exercise of outstanding options and 372,923 shares available to be issued under the Employee Stock Purchase Plan.
In addition, total return performance results vary depending on the length of the performance period. 2017 2018 2019 2020 2021 2022 Bank of Marin Bancorp (BMRC) 100.00 123.25 137.19 107.42 119.51 108.62 Russell 2000 Index 100.00 88.99 111.70 134.00 153.85 122.41 S&P Regional Banks Select Industry Index 1 100.00 81.23 103.68 96.33 134.76 114.88 Source: S&P Global Market Intelligence 1 The index comprises stocks in the S&P Total Market Index that are classified in the Global Industry Classification Standard regional banks sub-industry. 22 Securities Authorized for Issuance under Equity Compensation Plans The following table summarizes information as of December 31, 2022, with respect to equity compensation plans.
In addition, total return performance results vary depending on the length of the performance period. 2018 2019 2020 2021 2022 2023 Bank of Marin Bancorp (BMRC) 100.00 111.31 87.16 96.97 88.13 62.13 Russell 2000 Index 100.00 125.53 150.58 172.90 137.56 160.85 S&P Regional Banks Select Industry Index 1 100.00 127.64 118.58 165.90 141.42 130.91 Source: S&P Global Market Intelligence 1 The index comprises stocks in the S&P Total Market Index that are classified in the Global Industry Classification Standard regional banks sub-industry. 24 Securities Authorized for Issuance under Equity Compensation Plans The following table summarizes information as of December 31, 2023, with respect to equity compensation plans.
Removed
On October 22, 2021, Bancorp's Board of Directors approved an amendment to the current share repurchase program, which increased the total authorization from $25.0 million to $57.0 million and left the expiration date unchanged.
Added
There were no repurchases under this program in 2023. ITEM 6. [RESERVED]
Removed
A total of $34.7 million remained available to repurchase under the program as of December 31, 2022. ITEM 6. [RESERVED]

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page- 48 Report of Independent Registered Public Accounting Firm Page- 48 Management's Report on Internal Control over Financial Reporting Page- 51 Consolidated Statements of Condition Page- 52 Consolidated Statements of Comprehensive (Loss) Income Page- 53 Consolidated Statements of Changes in Stockholders' Equity Page- 54 Consolidated Statements of Cash Flows Page- 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page- 56 Note 1: Summary of Significant Accounting Policies Page- 56 Note 2: Investment Securities Page- 69 Note 3: Loans and Allowance for Credit Losses Page- 74 2 Note 4: Bank Premises and Equipment Page- 82 Note 5: Bank Owned Life Insurance Page- 82 Note 6: Deposits Page- 83 Note 7: Borrowings Page- 83 Note 8: Stockholders' Equity and Stock Plans Page- 84 Note 9: Fair Value of Assets and Liabilities Page- 88 Note 10: Benefit Plans Page- 91 Note 11: Income Taxes Page- 92 Note 12: Commitments and Contingencies Page- 93 Note 13: Concentrations of Credit Risk Page- 96 Note 14: Derivative Financial Instruments and Hedging Activities Page- 96 Note 15: Regulatory Matters Page- 97 Note 16: Financial Instruments with Off-Balance Sheet Risk Page- 98 Note 17: Condensed Bank of Marin Bancorp Parent Only Financial Statements Page- 100 Note 18: Merger Page- 101
Biggest changeFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page- 51 Report of Independent Registered Public Accounting Firm Page- 51 Management's Report on Internal Control over Financial Reporting Page- 54 Consolidated Statements of Condition Page- 55 Consolidated Statements of Comprehensive Income (Loss) Page- 56 Consolidated Statements of Changes in Stockholders' Equity Page- 57 Consolidated Statements of Cash Flows Page- 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page- 59 Note 1: Summary of Significant Accounting Policies Page- 59 2 Note 2: Investment Securities Page- 71 Note 3: Loans and Allowance for Credit Losses Page- 77 Note 4: Bank Premises and Equipment Page- 84 Note 5: Bank Owned Life Insurance Page- 84 Note 6: Deposits Page- 85 Note 7: Borrowings Page- 85 Note 8: Stockholders' Equity and Stock Plans Page- 86 Note 9: Fair Value of Assets and Liabilities Page- 90 Note 10: Benefit Plans Page- 92 Note 11: Income Taxes Page- 93 Note 12: Commitments and Contingencies Page- 95 Note 13: Concentrations of Credit Risk Page- 96 Note 14: Derivative Financial Instruments and Hedging Activities Page- 97 Note 15: Regulatory Matters Page- 99 Note 16: Financial Instruments with Off-Balance Sheet Risk Page- 100 Note 17: Condensed Bank of Marin Bancorp Parent Only Financial Statements Page- 101 Note 18: Merger Page- 102
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Page- 46 ITEM 8.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Page- 50 ITEM 8.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page- 23 Forward-Looking Statements Page- 23 Critical Accounting Estimates Page- 23 RESULTS OF OPERATIONS Financial Highlights Page- 26 Executive Summary Page- 27 Net Interest Income Page- 30 Provision for Credit Losses Page- 32 Non-Interest Income Page- 32 Non-Interest Expense Page- 33 Provision for Income Taxes Page- 34 FINANCIAL CONDITION Page- 34 Investment Securities Page- 34 Loans Page- 37 Allowance for Credit Losses Page- 40 Other Assets Page- 43 Deposits Page- 44 Borrowings Page- 44 Deferred Compensation Obligations Page- 45 Capital Adequacy Page- 45 Liquidity and Capital Resources Page- 45 ITEM 7A.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page- 25 Forward-Looking Statements Page- 25 Critical Accounting Estimates Page- 25 RESULTS OF OPERATIONS Financial Highlights Page- 28 Executive Summary Page- 29 Net Interest Income Page- 31 Provision for Credit Losses Page- 33 Non-Interest Income Page- 34 Non-Interest Expense Page- 35 Provision for Income Taxes Page- 36 FINANCIAL CONDITION Page- 37 Investment Securities Page- 37 Loans Page- 39 Allowance for Credit Losses Page- 42 Other Assets Page- 45 Deposits Page- 45 Borrowings Page- 46 Deferred Compensation Obligations Page- 47 Capital Adequacy Page- 47 Liquidity and Capital Resources Page- 48 Non-GAAP Financial Measures Page- 49 ITEM 7A.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

107 edited+98 added−86 removed23 unchanged
Biggest changeAt December 31, (dollars in thousands, except per share data) 2022 2021 Selected financial condition data: Total assets $ 4,147,464 $ 4,314,209 Investment securities $ 1,774,303 $ 1,509,790 Loans, net of allowance for credit losses on loans 1 $ 2,069,563 $ 2,232,622 Deposits $ 3,573,348 $ 3,808,550 Borrowings and other obligations $ 112,439 $ 419 Stockholders' equity $ 412,092 $ 450,368 Asset quality ratios: Allowance for credit losses to total loans 1.10 % 1.02 % Allowance for credit losses to total loans, excluding SBA PPP loans 2 1.10 % 1.07 % Allowance for credit losses to non-accrual loans 9.45x 2.75x Non-accrual loans to total loans 0.12 % 0.37 % Capital ratios: Tangible common equity to tangible assets 8.21 % 8.76 % Total capital (to risk-weighted assets) 15.90 % 14.58 % Tier 1 capital (to risk-weighted assets) 15.02 % 13.70 % Tier 1 capital (to average assets) 9.60 % 8.85 % Common equity Tier 1 capital (to risk-weighted assets) 15.02 % 13.70 % Other data: Loan-to-deposit ratio 58.56 % 59.23 % Number of branches 31 31 Full-time equivalent employees 313 328 For the Years Ended December 31, (dollars in thousands, except per share data) 2022 2021 2020 Selected operating data: Net interest income $ 127,492 $ 104,951 $ 96,659 (Reversals of) provision for credit losses on loans and unfunded loan commitments, net (381) (2,441) 6,164 Non-interest income 10,905 10,132 8,550 Non-interest expense 3 75,269 72,638 58,458 Net income 3 46,586 33,228 30,242 Net income per common share: Basic $ 2.93 $ 2.32 $ 2.24 Diluted $ 2.92 $ 2.30 $ 2.22 Performance and other financial ratios: Return on average assets 1.08 % 0.94 % 1.04 % Return on average equity 11.16 % 8.43 % 8.60 % Tax-equivalent net interest margin 3.11 % 3.17 % 3.55 % Cost of deposits 0.06 % 0.07 % 0.11 % Efficiency ratio 54.39 % 63.12 % 55.56 % Cash dividend payout ratio on common stock 4 33.45 % 40.52 % 41.07 % Cash dividends per common share $ 0.98 $ 0.94 $ 0.92 1 Includes SBA PPP loans of $3.5 million at December 31, 2022 and $111.2 million at December 31, 2021. 2 The allowance for credit losses to total loans, excluding SBA-guaranteed PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for credit losses.
Biggest changeAt 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.
The allowance for losses on unfunded loan commitments is based on estimates of probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity and loss rates as determined for pooled funded loans. The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities.
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.
When observable market prices and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement.
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.
The $22.5 million increase from the prior year was primarily due to higher balances in the investment and commercial real estate loan portfolios, which added $18.4 million and $6.1 million, respectively, to net interest income. Additionally, 2022 incorporated a full year of net interest income from acquired earning assets of AMRB, compared to five months in 2021.
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.
The large majority of the variable-rate loans are tied to independent indices (such as the Prime Rate or a Treasury Constant Maturity Rate). Most loans with original terms of more than five years have provisions for the fixed rates to reset, or convert to variable rates, after three, five or seven years. These loans are included in variable-rate balances below.
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.
The net reversal of the provision in 2022 was largely due to a $55.4 million decrease in applicable loan balances (excludes the $107.7 million decrease in PPP loans for which there was no allowance) and improvements in the Moody's Analytics' Baseline Forecast of California unemployment rates since December 31, 2021, which decreased the quantitative "modeled" allowance for credit losses.
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.
Non-Accrual and TDR 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.
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.
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 42 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 .
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 .
The classification of assets and liabilities 24 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 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.
Our Asset Liability Management Committee 45 ("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.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of financial condition as of December 31, 2022 and 2021 and results of operations for each of the years in the three-year period ended December 31, 2022 should be read in conjunction with our consolidated financial statements and related notes thereto, included in Part II ITEM 8 of this report.
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.
Management estimates these allowances quarterly using relevant available information, from 23 internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Credit loss experience among the Bank and peer groups provides the basis for the estimation of expected credit losses.
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. 25 Credit loss experience among the Bank and peer groups provides the basis for the estimation of expected credit losses.
The net provision reversal in 2021 was primarily due to continued improvements in Moody's Analytics' Baseline Forecast of California unemployment rates and adjustments to qualitative risk factors due to a decline in the volume of loans downgraded to substandard classification, fewer delinquencies, and the elimination of an allowance related to a commercial real estate loan that had been individually analyzed for potential credit losses in the previous periods and paid off in 2021.
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.
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 2023.
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.
The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength. 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.
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.
Therefore, no valuation allowance was established as of December 31, 2022 or 2021. For additional information, refer to Note 11 to the Consolidated Financial Statements in ITEM 8 of this report. We held $16.7 million of FHLB stock recorded at cost in other assets at December 31, 2022 and 2021.
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.
This impact does not consider other assumption changes to either the quantitative factors, such as probability of default, loss given default, loan mix or cash flows, prepayment/curtailment rates, and individually analyzed loans, or qualitative factors as discussed in Note 1 - Summary of Significant Accounting Policies.
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.
Our anticipated sources of capital in 2023 include future earnings and shares issued under the stock-based compensation program. Liquidity and Capital Resources The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals.
Our anticipated sources of capital in 2024 include future earnings and shares issued under the stock-based compensation program. 47 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.
Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to temporary differences such as the allowances for credit losses and unfunded loan commitments, net operating loss carryforwards, and deferred compensation and salary continuation plans.
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.
Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank.
Because Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank.
Net interest income is affected by changes in general market interest rates and by changes in the amounts and composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in net interest income and/or margin due to an imbalance in the timing of repricing or maturity of assets or liabilities.
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.
Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).
Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, bank-owned life insurance ("BOLI"), low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).
Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which decreased to 4.1% at December 31, 2022 from 5.8% at December 31, 2021. 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.
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.
Decreases in both the deferred compensation plan and SERP liabilities in 2022 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.
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.
We manage interest rate risk exposure with the goal of optimizing the effect 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.
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.
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. 30 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.
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. 31 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.
The increase was primarily due to higher fees on deposit balances held in off-balance sheet deposit networks contributing $504 thousand in additional income, $414 thousand more service charges on deposit accounts, $296 thousand higher FHLB dividends, and a combination of smaller increases.
The increase was primarily due to higher fees on deposit balances held in off-balance sheet deposit networks, contributing $504 thousand in additional income, $414 thousand more service charges on deposit accounts, a $366 thousand increase in debit card and merchant interchange fees, $296 thousand higher FHLB dividends, and a combination of smaller increases.
These decreas es were partially offset by adjustments to qualitative risk factors to account for the ongoing deterioration in the economic outlook that management believes is not captured in the quantitative portion of the allowance.
These decreas es were partially offset by adjustments to qualitative risk factors to account for the ongoing deterioration in the economic outlook that management believed was not captured in the quantitative portion of the allowance calculation.
For additional information on our allowance for credit losses methodology, refer to Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report. The allowance for credit losses to loans was 1.10% at December 31, 2022 and 1.02% at December 31, 2021.
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.
ALCO has adopted a contingency funding plan that provides early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis. Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs.
Our c on tingency funding plan provides for early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a liquidity crisis. Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs.
Based on the current conditions of the loan portfolio and reasonable and supportable forecasts, management believes that the $23.0 million allowance for credit losses at December 31, 2022 was adequate to absorb expected credit losses in our loan portfolio.
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.
The primary uses of funds for Bancorp are shareholder dividends, ordinary operating expenses and stock repurchases. Bancorp held $4.5 million of cash at December 31, 2022 . Manag ement anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.
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 . Manag ement anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.
Over 96% of the non-accrual loans as of December 31, 2022 were well-secured by either commercial or residential real estate.
Over 66% of the non-accrual loans as of December 31, 2023 were well-secured by either commercial or residential real estate.
Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, and dividends to common stockholders. T he most significant component of our daily liquidity position is customer deposits.
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 tax-equivalent net interest margin decreased six basis points to 3.11% in 2022, from 3.17% in 2021, as the proportion of average investment securities to average total interest-earning assets grew from 26% in 2021 to 44% in 2022 and fee income from PPP loans declined. 2021 Compared to 2020 Net interest income totaled $105.0 million and $96.7 million in 2021 and 2020, respectively.
The 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.
Loans classified substandard decreased by $8.1 million in 2022, primarily due to $16.1 million in paydowns and payoffs and $871 thousand in upgrades to special mention or pass, partially offset by downgrades totaling $8.8 million. Of the downgraded loans, $4.7 million (or 53%) was secured by commercial real estate and $3.6 million (or 41%) was to commercial borrowers.
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.
Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for up to fifteen years commencing upon retirement, death, disability or termination of employment. The participating employee may elect to receive payments over periods not to exceed fifteen years.
Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for up to, but not exceeding, fifteen years commencing upon retirement, death, disability or termination of employment.
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.
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.
Distribution of Average Deposits The table below shows the relative composition of our average deposits for 2022 and 2021. For average rates paid on deposits, refer to Average Statements of Condition and Analysis of Net Interest Income table in ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations.
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.
December 31, 2022 Within 1 Year 1-5 Years 5-10 Years After 10 Years Total (dollars in thousands; unaudited) AmortizedCost 1 Average Yield 2 AmortizedCost 1 Average Yield 2 AmortizedCost 1 Average Yield 2 AmortizedCost 1 Average Yield 2 Amortized Cost 1 Fair Value Average Yield 2 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 — — 2,372 3.17 — — — — 2,372 2,239 3.17 Debentures of government-sponsored agencies — — 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-exempt 3 — — — — 5,515 3.72 26,600 2.74 32,115 28,846 2.90 Obligations of state and political subdivisions - taxable — — — — 4,708 1.84 25,677 2.28 30,385 22,913 2.21 Corporate bonds — — 30,000 3.63 — — — — 30,000 28,448 3.63 Total held-to-maturity 463 0.63 210,182 3.50 477,062 2.20 284,500 2.22 972,207 845,239 2.49 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 — — 493 5.03 47,724 44,355 2.68 Debentures of government sponsored agencies — — 140,145 1.29 6,977 1.35 1,992 1.39 149,114 135,106 1.29 U.S.
Treasury securities — — 11,923 1.00 — — — — 11,923 10,623 1.00 Obligations of state and political subdivisions - tax-exempt 3 — — 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 — — 11,992 1.19 — — — — 11,992 10,718 1.19 Asset-backed securities — — — — — — — — — — — 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 % 37 December 31, 2022 Within 1 Year 1-5 Years 5-10 Years After 10 Years Total (dollars in thousands; unaudited) AmortizedCost 1 Average Yield 2 AmortizedCost 1 Average Yield 2 AmortizedCost 1 Average Yield 2 AmortizedCost 1 Average Yield 2 Amortized Cost 1 Fair Value Average Yield 2 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 — — 2,372 3.17 — — — — 2,372 2,239 3.17 Debentures of government-sponsored agencies — — 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-exempt 3 — — — — 5,515 3.72 26,600 2.74 32,115 28,846 2.90 Obligations of state and political subdivisions - taxable — — — — 4,708 1.84 25,677 2.28 30,385 22,913 2.21 Corporate bonds — — 30,000 3.63 — — — — 30,000 28,448 3.63 Total held-to-maturity 463 0.63 210,182 3.50 477,062 2.20 284,500 2.22 972,207 845,239 2.49 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 — — 493 5.03 47,724 44,355 2.68 Debentures of government sponsored agencies — — 140,145 1.29 6,977 1.35 1,992 1.39 149,114 135,106 1.29 U.S.
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.
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.
Key considerations include: • The soundness of a municipality’s budgetary position and stability of its tax revenues • Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer • Local demographics/economics including unemployment data, largest local taxpayers and employers, income indices and home values • For revenue bonds, the source and strength of revenue for municipal authorities including obligors' financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer’s strength) • Credit ratings by major credit rating agencies Loans Loans Outstanding by Class and Percent of Total December 31, 2022 December 31, 2021 (in thousands; unaudited) Amortized Cost Percent of Total Amortized Cost Percent of Total Commercial and industrial $ 173,547 8.3 % $ 301,602 13.4 % Real estate Commercial owner-occupied 354,877 17.0 392,345 17.4 Commercial investor-owned 1,191,889 56.9 1,189,021 52.7 Construction 114,373 5.5 119,840 5.3 Home equity 88,748 4.2 88,746 3.9 Other residential 112,123 5.4 114,558 5.1 Installment and other consumer 56,989 2.7 49,533 2.2 Total loans, at amortized cost 2,092,546 100.0 % 2,255,645 100.0 % Allowance for credit losses on loans (22,983) (23,023) Total loans, net of allowance for credit losses $ 2,069,563 $ 2,232,622 37 Loans decreased by $163.1 million in 2022, or 7%, to $2.093 billion as of December 31, 2022, from $2.256 billion as of December 31, 2021.
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 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 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.
We performed a sensitivity analysis as of December 31, 2022 and determined that a 1% change (e.g., 4.5% to 5.5%) in the forecasted quarterly unemployment rates over the next four quarters resulted in a 6% change to our allowance for credit losses on loans.
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.
At December 31, 2022 and 2021, our liability under the SERP was $4.7 million and $5.3 million, respectively, and is recorded in interest payable and other liabilities in the Consolidated Statements of Condition. The Plan is unfunded and non-qualified for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974.
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.
The decrease in 2022 was primarily due to $46.6 million in payoffs and $3.6 million in conversions to commercial real estate financing. These decreases were partially offset by $37.5 million advanced on existing construction loans and $7.2 million in new financing.
T he decrease in 2023 was primarily du e to $22.2 million in payoffs and $16.9 million in conversions to commercial real estate financing. These decreases were partially offset by $24.5 million in advances on existing construction loans. The decrease in 2022 was primarily due to $46.6 million in payoffs and $3.6 million in conversions to commercial real estate financing.
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.
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.
The provision for income taxes totaled $16.9 million at an effective tax rate of 26.6% in 2022, compared to $11.7 million at an effective tax rate of 26.0% in 2021 and $10.3 million at an effective tax rate of 25.5% in 2020. The increase in the provision in 2022 compared to 2021 reflected higher pre-tax income.
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.
Average Statements of Condition and Analysis of Net Interest Income Year ended Year ended Year ended December 31, 2022 December 31, 2021 December 31, 2020 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 $ 120,395 $ 1,407 1.15 % $ 287,626 $ 399 0.14 % $ 153,794 $ 461 0.29 % Investment securities 2, 3 1,796,628 35,534 1.98 % 866,790 16,999 1.96 % 533,186 15,025 2.82 % Loans 1, 3, 4 2,175,259 94,614 4.29 % 2,155,982 92,376 4.23 % 2,023,203 85,398 4.15 % Total interest-earning assets 1 4,092,282 131,555 3.17 % 3,310,398 109,774 3.27 % 2,710,183 100,884 3.66 % Cash and non-interest-bearing due from banks 53,534 61,299 49,676 Bank premises and equipment, net 7,400 5,964 5,526 Interest receivable and other assets, net 151,295 159,502 131,780 Total assets $ 4,304,511 $ 3,537,163 $ 2,897,165 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 294,682 $ 421 0.14 % $ 217,924 $ 172 0.08 % $ 148,817 $ 186 0.13 % Savings accounts 341,710 125 0.04 % 268,397 94 0.04 % 184,146 68 0.04 % Money market accounts 1,065,104 1,589 0.15 % 864,625 1,520 0.18 % 763,689 2,009 0.26 % Time accounts, including CDARS 140,547 323 0.23 % 115,393 246 0.21 % 96,558 554 0.57 % Borrowings and other obligations 1, 6 2,295 91 3.90 % 892 9 1.08 % 174 4 2.16 % Subordinated debenture 1, 5 — — — % 534 1,361 251.54 % 2,741 158 5.68 % Total interest-bearing liabilities 1,844,338 2,549 0.14 % 1,467,765 3,402 0.23 % 1,196,125 2,979 0.25 % Demand accounts 1,993,373 1,628,289 1,308,199 Interest payable and other liabilities 49,456 46,746 41,347 Stockholders' equity 417,344 394,363 351,494 Total liabilities & stockholders' equity $ 4,304,511 $ 3,537,163 $ 2,897,165 Tax-equivalent net interest income/margin 1 $ 129,006 3.11 % $ 106,372 3.17 % $ 97,905 3.55 % Reported net interest income/margin 1 $ 127,492 3.07 % $ 104,951 3.13 % $ 96,659 3.51 % Tax-equivalent net interest rate spread 3.03 % 3.04 % 3.41 % 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.
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 — — — % — — — % 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.
See the discussion in the section captioned “Securities May Lose Value due to Credit Quality of the Issuers” in ITEM 1A Risk Factors above. 36 At December 31, 2022 and 2021, distribution of our investment in obligations of state and political subdivisions was as follows: December 31, 2022 December 31, 2021 (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 $ 25,806 $ 20,768 14.4 % $ 25,036 $ 25,020 14.2 % Revenue bonds 3,719 2,987 2.1 5,249 5,185 3.0 Tax allocation bonds — — — 503 510 0.3 Total within California 29,525 23,755 16.5 30,788 30,715 17.5 Outside California: General obligation bonds 121,908 106,375 68.0 117,278 121,303 66.5 Revenue bonds 27,922 23,752 15.5 28,146 29,272 16.0 Total outside California 149,830 130,127 83.5 145,424 150,575 82.5 Total obligations of state and political subdivisions $ 179,355 $ 153,882 100.0 % $ 176,212 $ 181,290 100.0 % Percent of investment portfolio 9.6% 9.3% 11.7% 12.0% The portion of the portfolio outside the state of California is distributed among twelve states.
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: 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 — — — 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% The portion of the portfolio outside the state of California is distributed among twelve states.
Undisbursed construction loan commitments at December 31, 2022 and 2021 were $43.2 million and $77.8 million, respectively. The following table presents the amortized costs and maturity distribution of our loans by class as of December 31, 2022 based on their contractual maturity dates. Maturities do not include scheduled payments or potential prepayments.
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.
Interest receivable and other assets totaled $79.8 million and $51.4 million at December 31, 2022 and 2021, respectively. The $28.4 million increase was primarily due to a $30.5 million increase in net deferred tax assets as discussed below. Net deferred tax assets totaled $43.9 million and $13.3 million at December 31, 2022 and 2021, respectively.
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.
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, 2022 and 2021.
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.
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.
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.
Allowance for Credit Losses Rollforward (dollars in thousands; unaudited) 2022 2021 2020 Beginning balance $ 23,023 $ 22,874 $ 16,677 Impact of CECL adoption — — 1,604 (Reversal of) provision for credit losses (63) (1,449) 4,594 Initial allowance for PCD loans — 1,505 — Loans charged-off: Commercial and industrial (9) — (30) Installment and other consumer (23) (5) (1) Total loans charged-off (32) (5) (31) Loans recovered: Commercial and industrial 22 14 27 Real estate: Construction 33 34 3 Home equity — 50 — Total loans recovered 55 98 30 Net loans (charged-off) recovered 23 93 (1) Ending balance $ 22,983 $ 23,023 $ 22,874 Total loans, at amortized cost $ 2,092,546 $ 2,255,645 $ 2,088,556 Average total loans outstanding during year $ 2,175,259 $ 2,155,982 $ 2,023,203 Ratio of allowance for credit losses to total loans at end of year 1.10 % 1.02 % 1.10 % Net recoveries (charge-offs) to average loans NM NM NM NM - Not meaningful.
Allowance for Credit Losses on Loans Rollforward (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 — — 1,505 Loans charged-off: Commercial and industrial (11) (9) — Real estate: Commercial real estate, owner-occupied (406) — — 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 — — 50 Installment and other consumer 1 — — 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 NM - Not meaningful. 43 The following table shows non-performing assets as of December 31, 2023 and 2022.
These increases to net deferred tax assets were partially offset by a $430 thousand decrease in deferred tax assets related to the decrease in deferred compensation and salary continuation plans. Management believes deferred tax assets will be realizable due to our consistent record of earnings and the expectation that earnings will continue at a level adequate to realize such benefits.
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.
Refer to the Consolidated Statement of Cash Flows in this Form 10-K for additional information on our sources and uses of liquidity. Management anticipates that our current liquidity position and core deposit base are adequate to fund our operations.
Refer to the Consolidated Statement of Cash Flows in this Form 10-K for additional information on our sources and uses of liquidity.
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. 38 The following table shows an analysis of construction loans by type and county as of December 31, 2022 and 2021.
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.
The $30.5 million increase in 2022 was primarily due to a $30.2 million increase in deferred tax assets related to changes in unrealized losses on available-for-sale investment securities, a $466 thousand increase in deferred tax assets related to state franchise tax and a $441 thousand decrease in deferred tax liabilities related to core deposit intangibles.
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.
The most significant sources of liquidity during 2022 were proceeds from loans collected net of originations totaling $164.0 million, proceeds from principal paydowns, maturities and sales of investment securities totaled $187.9 million and Federal Home Loan Bank borrowings of $112.0 million. In addition, $55.3 million in net cash was provided by operating activities.
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.
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, Income Taxes We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate.
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.
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 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.
Construction Loans Outstanding by Type and County (dollars in thousands; unaudited) December 31, 2022 December 31, 2021 Loan Type Amount Percent of Construction Loans Amount Percent of Construction Loans Apartments and multifamily $ 60,347 52.7 % $ 45,978 38.4 % Commercial real estate 33,746 29.5 49,131 41.0 1-4 Single family residential 19,171 16.8 19,564 16.3 Land - unimproved 1,109 1.0 1,201 1.0 Land - improved — — 3,966 3.3 Total $ 114,373 100.0 % $ 119,840 100.0 % (dollars in thousands; unaudited) December 31, 2022 December 31, 2021 County Amount Percent of Construction Loans Amount Percent of Construction Loans San Francisco $ 45,271 39.6 % $ 55,826 46.6 % Alameda 20,163 17.6 12,908 10.8 Solano 18,873 16.5 16,367 13.7 Sonoma 17,843 15.6 13,640 11.4 Marin 7,784 6.8 6,074 5.1 Other 4,439 3.9 15,025 12.4 Total $ 114,373 100.0 % $ 119,840 100.0 % Cons truction loans decreased by $5.5 million in 2022, compared to an increase of $46.8 million in 2021.
Construction Loans Outstanding by Type and County (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 % (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 % Cons truction loans decreased by $15.2 million in 2023, compared to a decrease of $5.5 million in 2022.
Commercial Real Estate Loans Outstanding by County (dollars in thousands; unaudited) December 31, 2022 December 31, 2021 County Amount Percent of Commercial Real Estate Loans Amount Percent of Commercial Real Estate Loans Marin $ 339,805 22.0 % $ 349,445 22.1 % Sonoma 245,883 15.9 230,740 14.6 Napa 186,477 12.1 188,643 11.9 San Francisco 173,511 11.2 172,120 10.9 Alameda 163,381 10.6 176,871 11.2 Sacramento 120,146 7.8 113,120 7.2 Contra Costa 67,356 4.4 69,656 4.4 San Mateo 37,681 2.4 28,119 1.8 Solano 32,235 2.1 40,837 2.6 Placer 28,928 1.9 28,477 1.8 Santa Clara 21,091 1.4 20,070 1.3 San Joaquin 15,585 1.0 8,829 0.6 El Dorado 12,822 0.8 14,708 0.9 Other 101,865 6.4 139,731 8.7 Total $ 1,546,766 100.0 % $ 1,581,366 100.0 % Commercial real estate loans decreased $34.6 million in 2022, compared to a $315.2 million increase in 2021.
Commercial Real Estate Loans Outstanding by County (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 % Commercial real estate loans increased by $5.8 million in 2023, compared to a $34.6 million decrease in 2022.
A similar Deferred Director Fee Plan entitles participating members of the Board of Directors to receive payments as elected by the participant upon separation from service, death, disability or termination of service. At December 31, 2022 and 2021, our aggregate payment obligations under both plans totaled $7.1 million and $7.9 million, respectively.
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.
For further information, refer to the Provision for Credit Losses section above, and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report. Due to the high credit quality of our loan portfolio experienced to date, net charge-offs have been minimal for the past several years.
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.
Mix variances are attributable to the change in yields or rates multiplied by the change in average balances. 2022 compared to 2021 2021 compared to 2020 (in thousands, unaudited) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total Interest-earning deposits with banks $ (233) $ 2,961 $ (1,720) $ 1,008 $ 401 $ (247) $ (216) $ (62) Investment securities 1 18,233 146 156 18,535 9,400 (4,568) (2,858) 1,974 Loans 1 826 1,401 11 2,238 5,605 1,526 (153) 6,978 Total interest-earning assets 18,826 4,508 (1,553) 21,781 15,406 (3,289) (3,227) 8,890 Interest-bearing transaction accounts 61 139 49 249 90 (75) (29) (14) Savings accounts 26 5 — 31 31 (3) (2) 26 Money market accounts 352 (229) (54) 69 266 (663) (92) (489) Time accounts, including CDARS 54 19 4 77 108 (348) (68) (308) Borrowings and other obligations 16 25 41 82 16 (2) (9) 5 Subordinated debenture — (1,361) — (1,361) (127) 6,851 (5,521) 1,203 Total interest-bearing liabilities 509 (1,402) 40 (853) 384 5,760 (5,721) 423 Tax-equivalent net interest income $ 18,317 $ 5,910 $ (1,593) $ 22,634 $ 15,022 $ (9,049) $ 2,494 $ 8,467 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%. 2022 Compared to 2021 Net interest income totaled $127.5 million in 2022, compared to $105.0 million in 2021.
Mix variances are attributable to the change in yields or rates multiplied by the change in average balances. 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 — 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 — — — — (1,361) — (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%. 2023 Compared to 2022 Net interest income totaled $102.8 million in 2023, compared to $127.5 million in 2022.
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.
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.
As of December 31, 2022 2021 (in thousands; unaudited) Average Amount Percent of Total Average Amount Percent of Total Non-interest bearing $ 1,993,374 52.0 % $ 1,628,289 52.7 % Interest-bearing transaction 294,682 7.7 217,924 7.0 Savings 341,710 8.9 268,397 8.7 Money market 1 1,065,103 27.8 864,625 27.9 Time deposits, including CDARS: 140,547 3.6 115,393 3.7 Total average deposits $ 3,835,416 100.0 % $ 3,094,628 100.0 % 1 Money market balances include Insured Cash Sweep ® ("ICS") in both 2022 and 2021.
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 % 1 Money market balances include Insured Cash Sweep ® ("ICS") in both 2023 and 2022.
Non-interest Income The table below details the components of non-interest income. 2022 compared to 2021 2021 compared to 2020 Years ended December 31, Amount Increase (Decrease) Percent Increase (Decrease) Amount Increase (Decrease) Percent Increase (Decrease) (dollars in thousands; unaudited) 2022 2021 2020 Wealth Management and Trust Services $ 2,227 $ 2,222 $ 1,851 $ 5 0.2 % $ 371 20.0 % Earnings on bank-owned life insurance, net 1,229 2,194 973 (965) (44.0) % 1,221 125.5 % Debit card interchange fees, net 2,051 1,812 1,438 239 13.2 % 374 26.0 % Service charges on deposit accounts 2,007 1,593 1,314 414 26.0 % 279 21.2 % Dividends on Federal Home Loan Bank stock 1,056 760 654 296 38.9 % 106 16.2 % Merchant interchange fees, net 549 422 239 127 30.1 % 183 76.6 % (Losses) gains on investment securities, net (63) (16) 915 (47) 293.8 % (931) (101.7) % Other income 1,849 1,145 1,166 704 61.5 % (21) (1.8) % Total non-interest income $ 10,905 $ 10,132 $ 8,550 $ 773 7.6 % $ 1,582 18.5 % 32 2022 Compared to 2021 Non-interest income totaled $10.9 million in 2022, a $773 thousand increase from $10.1 million 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. 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 % 2023 Compared to 2022 Non-interest income totaled $5.0 million in 2023, a $5.9 million decrease from $10.9 million in 2022.
We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth and liquid assets. Over the next twelve months, $87.0 million of time deposits will mature. We expect to replace these funds with new deposits. Our emphasis on local deposits, combined with our liquid investment portfolio, provides a very stable funding base.
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.
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").
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"). 32 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 FHLB paid $1.0 million, $760 thousand and $654 thousand in cash dividends in 2022, 2021 and 2020, respectively. For additional information, refer to Note 2 to the Consolidated Financial Statements in ITEM 8 of this report. Accrued interest on investment securities totaled $6.9 million and $4.8 million at December 31, 2022 and 2021, respectively.
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.
Loans designated as special mention decreased by $13.6 million in 2021, primarily due to $33.1 million in upgrades to a pass risk rating, $ 18.9 million in paydowns and payo ffs, and two loans that were downgraded from special mention to substandard totaling $5.4 million.
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.
In addition, of the $16.1 million in paydowns and payoffs, $2.7 million was from loans downgraded in 2022. Loans classified substandard increased by $13.3 million in 2021, prim arily due to downgrades totaling $25.4 million and $2.3 million in substandard loans assumed in the AMRB acquisition. Of the downgraded loans, $24.2 million were secured by commercial real estate.
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.
For further discussion of bank capital requirements, refer to the SUPERVISION AND REGULATION section in ITEM 1 of this report.
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.
The Bank's total risk-based capital ratio increased from 14.4% at December 31, 2021 to 15.7% at December 31, 2022, primarily due to capital creation from net income, partially offset by a $16.2 million dividend to the Holding Company to cover dividends to shareholders and Holding Company operating costs.
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.
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, 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.
Non-interest Expense The table below details the components of non-interest expense. 2022 compared to 2021 2021 compared to 2020 Years ended December 31, Amount Increase (Decrease) Percent Increase (Decrease) Amount Increase (Decrease) Percent Increase (Decrease) (dollars in thousands; unaudited) 2022 2021 2020 Salaries and employee benefits $ 42,046 $ 41,939 $ 34,393 $ 107 0.3 % $ 7,546 21.9 % Occupancy and equipment 7,823 7,297 6,943 526 7.2 % 354 5.1 % Data processing 4,649 5,139 3,184 (490) (9.5) % 1,955 61.4 % Professional services 3,299 4,974 2,181 (1,675) (33.7) % 2,793 128.1 % Depreciation and amortization 1,840 1,740 2,149 100 5.7 % (409) (19.0) % Information technology 2,197 1,550 1,050 647 41.7 % 500 47.6 % Amortization of core deposit intangible 1,489 1,135 853 354 31.2 % 282 33.1 % Directors' expense 1,107 957 713 150 15.7 % 244 34.2 % Federal Deposit Insurance Corporation insurance 1,179 889 474 290 32.6 % 415 87.6 % Charitable contributions 709 587 1,034 122 20.8 % (447) (43.2) % Other real estate owned 359 5 — 354 7,080.0 % 5 N/A Other non-interest expense: Advertising 1,070 908 769 162 17.8 % 139 18.1 % Other expense 7,502 5,518 4,715 1,984 36.0 % 803 17.0 % Total other non-interest expense 8,572 6,426 5,484 2,146 33.4 % 942 17.2 % Total non-interest expense $ 75,269 $ 72,638 $ 58,458 $ 2,631 3.6 % $ 14,180 24.3 % 2022 Compared to 2021 Non-interest expense increased $2.6 million to $75.3 million in 2022 from $72.6 million in 2021.
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. 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 2023 Compared to 2022 Non-interest expenses increased $4.2 million to $79.5 million in 2023 from $75.3 million in 2022.
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. 33 Salaries and employee benefits expense was relatively flat year-over-year.
Significant fluctuations were as follows: • Information technology expenses increased by $647 thousand due to investments in software and equipment during 2022. • Total o ccupancy expenses, including depreciation and amortization, increased $626 thousand resulting primarily from merger growth and $212 thousand in accelerated costs related to planned branch closures. • Other increases in 2022 included core deposit intangible amortization and FDIC insurance, largely attributable to the 2021 AMRB acquisition, a $345 thousand valuation adjustment in other real estate owned expense, and a $490 thousand increase in employment recruiting costs included in other expense. • Salaries and employee benefits expense remained relatively flat year-over-year.
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.
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. 26 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.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeEffect of Interest Rate Change on Net Interest Income (NII) Immediate Changes in Interest Rates (in basis points) Estimated Change in NII in Year 1 (as percent of NII) Estimated Change in NII in Year 2 (as percent of NII) up 400 (10.2)% (0.6)% up 300 (7.7)% (0.5)% up 200 (5.1)% (0.4)% up 100 (2.4)% 0.3% down 100 (0.5)% (2.3)% down 200 (1.5)% (4.2)% Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities.
Biggest changeImmediate Changes in Interest Rates (in basis points) Estimated Change in Net Interest Income in Year 1, as Percent of Net Interest Income Estimated Change in Net Interest Income in Year 2, as Percent of Net Interest Income up 400 (10.8) % 0.7 % up 300 (7.9) % 0.7 % up 200 (5.1) % 0.7 % up 100 (2.3) % 0.6 % down 100 0.6 % (0.9) % down 200 2.5 % 0.9 % down 300 4.4 % 2.6 % down 400 7.0 % 4.6 % Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities.
The asset liability management policy sets limits on the acceptable amount of change to net interest income and economic value of equity in different interest rate environments.
The Asset/Liability Management Policy sets limits on the acceptable amount of change to net interest income and the economic value of equity in different interest rate environments.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Market risk is defined as the risk of loss arising from an adverse change in the market value (or prices) of financial instruments. A significant component of market risk is interest rate risk, which is inherent in our lending, investment, 46 borrowing, and deposit gathering activities.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Market risk is defined as the risk of loss arising from an adverse change in the market value (or prices) of financial instruments. A significant component of market risk is interest rate risk, which is inherent in our lending, investment, borrowing, and deposit gathering activities.
Interest rate changes can also affect the market value of our financial instruments, such as available-for-sale securities and the related unrealized gains or losses, which affects our equity value.
Interest rate changes can also affect the market value of our financial instruments, such as available-for-sale securities and the related unrealized gains or losses, which affect our equity value.
A simplified static statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs.
A simplified statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs.
From time to time, we enter into interest rate swap contracts to mitigate the changes in the fair value of specified long-term fixed-rate loans and firm commitments to enter into long-term fixed-rate loans caused by changes in interest rates. Refer to Note 14 to the Consolidated Financial Statements in ITEM 8 of this report.
From time to time, we enter into interest rate swap contracts to mitigate the changes in the fair value of selected investment securities and specified long-term fixed-rate loans and firm commitments to enter into long-term fixed-rate loans caused by changes in interest rates. Refer to Note 14 to the Consolidated Financial Statements in ITEM 8 of this report.
ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly. We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability.
ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly. We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability in the context of policy guidelines.
Additionally, assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements. Important deposit modeling assumptions include the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates change, otherwise known as the deposit beta.
Important deposit modeling assumptions include the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates change, otherwise known as the deposit beta.
Treasury rates that result in changes to the shape of the yield curve could produce different results from those presented in the table. Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates. 47
Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates.
Our most recent analysis of our interest rate sensitivity is provided in the following table as an example rather than an expectation of likely interest rate movements.
One set of interest rates modeled and evaluated against flat interest rates and a static balance sheet is a series of immediate parallel shifts in the yield curve. Our most recent analysis of our interest rate sensitivity is provided in the following table as an example rather than an expectation of likely interest rate movements.
We applied a n average deposit beta of 35% to rates paid on non-maturity interest-bearing deposits in rising rate scenarios, reflected in the table above. The actual rates and timing of prepayments on loans and investment securities could vary significantly from the assumptions applied in the various scenarios. Lastly, uneven changes in different tenors of U.S.
The actual rates 50 and timing of prepayments on loans and investment securities could vary significantly from the assumptions applied in the various scenarios. Lastly, uneven changes in different tenors of U.S. Treasury rates that result in changes to the shape of the yield curve could produce different results from those presented in the table.
Removed
At December 31, 2022, interest rate risk was within policy guidelines established by ALCO and the Board. One set of interest rates modeled and evaluated against flat interest rates and a static balance sheet is a series of immediate parallel shifts in the yield curve.
Added
Governing policies are subject to review by regulators and are updated to incorporate their observations and adapt to changes in idiosyncratic and systemic risks. As of December 31, 2023, interest rate risk was within the policy guidelines established by ALCO and the Board.
Removed
For example, if we choose to pay interest on certain business deposits that are currently non-interest bearing, causing those deposits to become rate sensitive in the future, we would become less asset sensitive than the model currently indicates.
Added
For example, lower deposit growth than modeled may cause the Bank to increase its borrowing position, thereby increasing its liability sensitivity. Additionally, assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements.
Added
The above tables reflect deposit betas of up to 68%, averaging 40%, to rates paid on non-maturity interest-bearing deposits in rising rate scenarios and deposit betas of up to 60%, averaging 34%, to rates paid on non-maturity interest-bearing deposits in falling rate scenarios.

Other BMRC 10-K year-over-year comparisons