UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022March 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number 001-33572
Bank of Marin Bancorp
(Exact name of Registrant as specified in its charter)
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California | | 20-8859754 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
504 Redwood Blvd. | Suite 100 | Novato | CA | | 94947 |
(Address of principal executive office) | | (Zip Code) |
Registrant’s telephone number, including area code: (415) 763-4520
Not Applicable
(Former name, former address and formal fiscal year, if changed since last report)
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Securities registered pursuant to 12(b) of the Act: |
Title of each class | Trading symbol | Name of each exchange on which registered |
Common stock, no par value and attached Share Purchase Rights | BMRC | The Nasdaq Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of July 31, 2022,April 30, 2023, there were 16,015,47416,115,082 shares of common stock outstanding.
TABLE OF CONTENTS
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PART I | | |
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ITEM 1. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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PART II | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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ITEM 5. | | |
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ITEM 6. | | |
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
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BANK OF MARIN BANCORP CONSOLIDATEDSTATEMENTS OFCONDITION |
| (in thousands, except share data; unaudited) | (in thousands, except share data; unaudited) | June 30, 2022 | December 31, 2021 | (in thousands, except share data; unaudited) | March 31, 2023 | December 31, 2022 |
Assets | Assets | | | Assets | | |
Cash, cash equivalents and restricted cash | Cash, cash equivalents and restricted cash | $ | 115,905 | | $ | 347,641 | | Cash, cash equivalents and restricted cash | $ | 37,993 | | $ | 45,424 | |
| Investment securities | | | |
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at June 30, 2022 and December 31, 2021) | 931,587 | | 342,222 | | |
Available-for-sale, at fair value (net of zero allowance for credit losses at June 30, 2022 and December 31, 2021) | 893,149 | | 1,167,568 | | |
Investment securities: | | Investment securities: | | |
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at March 31, 2023 and December 31, 2022) | | Held-to-maturity, at amortized cost (net of zero allowance for credit losses at March 31, 2023 and December 31, 2022) | 958,560 | | 972,207 | |
Available-for-sale, at fair value (net of zero allowance for credit losses at March 31, 2023 and December 31, 2022) | | Available-for-sale, at fair value (net of zero allowance for credit losses at March 31, 2023 and December 31, 2022) | 797,533 | | 802,096 | |
Total investment securities | Total investment securities | 1,824,736 | | 1,509,790 | | Total investment securities | 1,756,093 | | 1,774,303 | |
Loans, at amortized cost | Loans, at amortized cost | 2,162,632 | | 2,255,645 | | Loans, at amortized cost | 2,112,328 | | 2,092,546 | |
Allowance for credit losses on loans | Allowance for credit losses on loans | (22,539) | | (23,023) | | Allowance for credit losses on loans | (23,330) | | (22,983) | |
Loans, net of allowance for credit losses on loans | Loans, net of allowance for credit losses on loans | 2,140,093 | | 2,232,622 | | Loans, net of allowance for credit losses on loans | 2,088,998 | | 2,069,563 | |
Goodwill | Goodwill | 72,754 | | 72,754 | | Goodwill | 72,754 | | 72,754 | |
Bank-owned life insurance | Bank-owned life insurance | 61,834 | | 61,473 | | Bank-owned life insurance | 67,006 | | 67,066 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 22,353 | | 23,604 | | Operating lease right-of-use assets | 22,854 | | 24,821 | |
Bank premises and equipment, net | Bank premises and equipment, net | 7,067 | | 7,558 | | Bank premises and equipment, net | 8,690 | | 8,134 | |
Core deposit intangible, net | Core deposit intangible, net | 5,851 | | 6,605 | | Core deposit intangible, net | 4,771 | | 5,116 | |
Other real estate owned | Other real estate owned | 800 | | 800 | | Other real estate owned | 455 | | 455 | |
Interest receivable and other assets | Interest receivable and other assets | 75,511 | | 51,362 | | Interest receivable and other assets | 75,665 | | 79,828 | |
Total assets | Total assets | $ | 4,326,904 | | $ | 4,314,209 | | Total assets | $ | 4,135,279 | | $ | 4,147,464 | |
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | Liabilities and Stockholders' Equity | |
Liabilities | Liabilities | | Liabilities | |
Deposits | | |
Deposits: | | Deposits: | |
Non-interest bearing | Non-interest bearing | $ | 2,034,717 | | $ | 1,910,240 | | Non-interest bearing | $ | 1,636,651 | | $ | 1,839,114 | |
Interest bearing | Interest bearing | | | Interest bearing | | |
Transaction accounts | Transaction accounts | 297,871 | | 290,813 | | Transaction accounts | 251,716 | | 287,651 | |
Savings accounts | Savings accounts | 343,585 | | 340,959 | | Savings accounts | 306,951 | | 338,163 | |
Money market accounts | Money market accounts | 1,012,823 | | 1,116,303 | | Money market accounts | 911,189 | | 989,390 | |
Time accounts | Time accounts | 141,674 | | 150,235 | | Time accounts | 144,067 | | 119,030 | |
Total deposits | Total deposits | 3,830,670 | | 3,808,550 | | Total deposits | 3,250,574 | | 3,573,348 | |
Borrowings and other obligations | 356 | | 419 | | |
Short-term borrowings and other obligations | | Short-term borrowings and other obligations | 405,802 | | 112,439 | |
| Operating lease liabilities | Operating lease liabilities | 24,117 | | 25,429 | | Operating lease liabilities | 25,433 | | 26,639 | |
Interest payable and other liabilities | Interest payable and other liabilities | 62,188 | | 29,443 | | Interest payable and other liabilities | 23,296 | | 22,946 | |
Total liabilities | Total liabilities | 3,917,331 | | 3,863,841 | | Total liabilities | 3,705,105 | | 3,735,372 | |
Commitments and contingent liabilities (Note 8) | Commitments and contingent liabilities (Note 8) | 0 | Commitments and contingent liabilities (Note 8) | |
Stockholders' Equity | Stockholders' Equity | | Stockholders' Equity | |
Preferred stock, no par value, Authorized - 5,000,000 shares, none issued | Preferred stock, no par value, Authorized - 5,000,000 shares, none issued | — | | — | | Preferred stock, no par value, Authorized - 5,000,000 shares, none issued | — | | — | |
Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,009,600 and 15,929,243 at June 30, 2022 and December 31, 2021, respectively | 213,864 | | 212,524 | | |
Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,107,210 and 16,029,138 at March 31, 2023 and December 31, 2022, respectively | | Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,107,210 and 16,029,138 at March 31, 2023 and December 31, 2022, respectively | 215,965 | | 215,057 | |
Retained earnings | Retained earnings | 253,737 | | 239,868 | | Retained earnings | 276,209 | | 270,781 | |
Accumulated other comprehensive loss, net of taxes | Accumulated other comprehensive loss, net of taxes | (58,028) | | (2,024) | | Accumulated other comprehensive loss, net of taxes | (62,000) | | (73,746) | |
Total stockholders' equity | Total stockholders' equity | 409,573 | | 450,368 | | Total stockholders' equity | 430,174 | | 412,092 | |
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 4,326,904 | | $ | 4,314,209 | | Total liabilities and stockholders' equity | $ | 4,135,279 | | $ | 4,147,464 | |
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
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BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME |
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BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| Three months ended | | |
(in thousands, except per share amounts; unaudited) | March 31, 2023 | December 31, 2022 | March 31, 2022 | | | |
Interest income | | | | | | |
Interest and fees on loans | $ | 24,258 | | $ | 23,500 | | $ | 23,677 | | | | |
Interest on investment securities | 10,033 | | 10,126 | | 6,693 | | | | |
Interest on federal funds sold and due from banks | 56 | | 575 | | 106 | | | | |
Total interest income | 34,347 | | 34,201 | | 30,476 | | | | |
Interest expense | | | | | | |
Interest on interest-bearing transaction accounts | 254 | | 191 | | 56 | | | | |
Interest on savings accounts | 170 | | 32 | | 29 | | | | |
Interest on money market accounts | 1,085 | | 405 | | 478 | | | | |
Interest on time accounts | 223 | | 114 | | 14 | | | | |
Interest on borrowings and other obligations | 2,716 | | 89 | | 1 | | | | |
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Total interest expense | 4,448 | | 831 | | 578 | | | | |
Net interest income | 29,899 | | 33,370 | | 29,898 | | | | |
Provision for (reversal of) credit losses on loans | 350 | | — | | (485) | | | | |
Reversal of credit losses on unfunded loan commitments | (174) | | — | | (318) | | | | |
Net interest income after provision for (reversal of) credit losses | 29,723 | | 33,370 | | 30,701 | | | | |
Non-interest income | | | | | | |
Earnings on bank-owned life insurance, net | 705 | | 296 | | 413 | | | | |
Service charges on deposit accounts | 533 | | 519 | | 488 | | | | |
Wealth Management and Trust Services | 511 | | 490 | | 600 | | | | |
Debit card interchange fees, net | 447 | | 513 | | 505 | | | | |
Dividends on Federal Home Loan Bank stock | 302 | | 297 | | 259 | | | | |
Merchant interchange fees, net | 133 | | 119 | | 140 | | | | |
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Other income | 304 | | 353 | | 462 | | | | |
Total non-interest income | 2,935 | | 2,587 | | 2,867 | | | | |
Non-interest expense | | | | | | |
Salaries and related benefits | 10,930 | | 9,600 | | 11,548 | | | | |
Occupancy and equipment | 2,414 | | 2,084 | | 1,907 | | | | |
Professional services | 1,123 | | 985 | | 913 | | | | |
Data processing | 1,045 | | 1,080 | | 1,277 | | | | |
Depreciation and amortization | 882 | | 581 | | 452 | | | | |
Information technology | 370 | | 678 | | 478 | | | | |
Amortization of core deposit intangible | 345 | | 365 | | 380 | | | | |
Directors' expense | 321 | | 269 | | 311 | | | | |
Federal Deposit Insurance Corporation insurance | 289 | | 293 | | 290 | | | | |
Charitable contributions | 49 | | 104 | | 45 | | | | |
Other real estate owned | 4 | | 4 | | 2 | | | | |
Other expense | 2,008 | | 2,267 | | 1,772 | | | | |
Total non-interest expense | 19,780 | | 18,310 | | 19,375 | | | | |
Income before provision for income taxes | 12,878 | | 17,647 | | 14,193 | | | | |
Provision for income taxes | 3,438 | | 4,766 | | 3,728 | | | | |
Net income | $ | 9,440 | | $ | 12,881 | | $ | 10,465 | | | | |
Net income per common share: | | | | | | |
Basic | $ | 0.59 | | $ | 0.81 | | $ | 0.66 | | | | |
Diluted | $ | 0.59 | | $ | 0.81 | | $ | 0.66 | | | | |
Weighted average shares: | | | | | | |
Basic | 15,970 | | 15,948 | | 15,876 | | | | |
Diluted | 15,999 | | 16,001 | | 15,946 | | | | |
Comprehensive income (loss): | | | | | | |
Net income | $ | 9,440 | | $ | 12,881 | | $ | 10,465 | | | | |
Other comprehensive income (loss): | | | | | | |
Change in net unrealized gains or losses on available-for-sale securities | 16,213 | | 8,474 | | (38,228) | | | | |
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Net unrealized losses on securities transferred from available-for-sale to held-to-maturity | — | | — | | (14,847) | | | | |
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity | 463 | | 454 | | 144 | | | | |
Other comprehensive income (loss), before tax | 16,676 | | 8,928 | | (52,931) | | | | |
Deferred tax expense (benefit) | 4,930 | | 2,639 | | (15,648) | | | | |
Other comprehensive income (loss), net of tax | 11,746 | | 6,289 | | (37,283) | | | | |
Total comprehensive income (loss) | $ | 21,186 | | $ | 19,170 | | $ | (26,818) | | | | |
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| Three months ended | | Six months ended |
(in thousands, except per share amounts; unaudited) | June 30, 2022 | March 31, 2022 | June 30, 2021 | | June 30, 2022 | June 30, 2021 |
Interest income | | | | | | |
Interest and fees on loans | $ | 23,334 | | $ | 23,677 | | $ | 21,429 | | | $ | 47,011 | | $ | 42,090 | |
Interest on investment securities | 8,273 | | 6,693 | | 3,504 | | | 14,966 | | 6,633 | |
Interest on federal funds sold and due from banks | 180 | | 106 | | 54 | | | 286 | | 96 | |
Total interest income | 31,787 | | 30,476 | | 24,987 | | | 62,263 | | 48,819 | |
Interest expense | | | | | | |
Interest on interest-bearing transaction accounts | 53 | | 56 | | 39 | | | 109 | | 78 | |
Interest on savings accounts | 32 | | 29 | | 21 | | | 61 | | 40 | |
Interest on money market accounts | 438 | | 478 | | 312 | | | 916 | | 598 | |
Interest on time accounts | 67 | | 14 | | 81 | | | 81 | | 177 | |
Interest on borrowings and other obligations | — | | 1 | | — | | | 1 | | — | |
Interest on subordinated debenture | — | | — | | — | | | — | | 1,361 | |
Total interest expense | 590 | | 578 | | 453 | | | 1,168 | | 2,254 | |
Net interest income | 31,197 | | 29,898 | | 24,534 | | | 61,095 | | 46,565 | |
Reversal of credit losses on loans | — | | (485) | | (920) | | | (485) | | (3,849) | |
Reversal of credit losses on unfunded loan commitments | — | | (318) | | (612) | | | (318) | | (1,202) | |
Net interest income after reversal of credit losses | 31,197 | | 30,701 | | 26,066 | | | 61,898 | | 51,616 | |
Non-interest income | | | | | | |
Wealth Management and Trust Services | 630 | | 600 | | 530 | | | 1,230 | | 1,018 | |
Debit card interchange fees, net | 531 | | 505 | | 419 | | | 1,036 | | 785 | |
Service charges on deposit accounts | 465 | | 488 | | 317 | | | 953 | | 598 | |
Earnings on bank-owned life insurance, net | 298 | | 413 | | 233 | | | 711 | | 490 | |
Dividends on Federal Home Loan Bank stock | 249 | | 259 | | 177 | | | 508 | | 326 | |
Merchant interchange fees, net | 149 | | 140 | | 61 | | | 289 | | 118 | |
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Other income | 406 | | 462 | | 285 | | | 868 | | 513 | |
Total non-interest income | 2,728 | | 2,867 | | 2,022 | | | 5,595 | | 3,848 | |
Non-interest expense | | | | | | |
Salaries and related benefits | 10,341 | | 11,548 | | 8,888 | | | 21,889 | | 18,096 | |
Occupancy and equipment | 1,894 | | 1,909 | | 1,751 | | | 3,803 | | 3,502 | |
Data processing | 1,199 | | 1,277 | | 820 | | | 2,476 | | 1,639 | |
Professional services | 665 | | 913 | | 986 | | | 1,578 | | 1,849 | |
Information technology | 468 | | 478 | | 296 | | | 946 | | 609 | |
Depreciation and amortization | 393 | | 452 | | 389 | | | 845 | | 848 | |
Amortization of core deposit intangible | 374 | | 380 | | 204 | | | 754 | | 408 | |
Directors' expense | 294 | | 311 | | 230 | | | 605 | | 405 | |
Federal Deposit Insurance Corporation insurance | 296 | | 290 | | 182 | | | 586 | | 361 | |
Charitable contributions | 511 | | 45 | | 462 | | | 556 | | 493 | |
Other expense | 2,471 | | 1,772 | | 1,348 | | | 4,243 | | 2,758 | |
Total non-interest expense | 18,906 | | 19,375 | | 15,556 | | | 38,281 | | 30,968 | |
Income before provision for income taxes | 15,019 | | 14,193 | | 12,532 | | | 29,212 | | 24,496 | |
Provision for income taxes | 3,953 | | 3,728 | | 3,247 | | | 7,681 | | 6,264 | |
Net income | $ | 11,066 | | $ | 10,465 | | $ | 9,285 | | | $ | 21,531 | | $ | 18,232 | |
Net income per common share: | | | | | | |
Basic | $ | 0.70 | | $ | 0.66 | | $ | 0.71 | | | $ | 1.35 | | $ | 1.38 | |
Diluted | $ | 0.69 | | $ | 0.66 | | $ | 0.71 | | | $ | 1.35 | | $ | 1.37 | |
Weighted average shares: | | | | | | |
Basic | 15,921 | | 15,876 | | 13,092 | | | 15,898 | | 13,227 | |
Diluted | 15,955 | | 15,946 | | 13,164 | | | 15,950 | | 13,316 | |
Comprehensive (loss) income: | | | | | | |
Net income | $ | 11,066 | | $ | 10,465 | | $ | 9,285 | | | $ | 21,531 | | $ | 18,232 | |
Other comprehensive (loss) income: | | | | | | |
Change in net unrealized (losses) gains on available-for-sale securities | (27,050) | | (38,228) | | 2,798 | | | (65,278) | | (6,284) | |
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Net unrealized losses on securities transferred from available-for-sale to held-to-maturity | — | | (14,847) | | — | | | (14,847) | | — | |
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity | 472 | | 144 | | 138 | | | 616 | | 281 | |
Other comprehensive (loss) income, before tax | (26,578) | | (52,931) | | 2,936 | | | (79,509) | | (6,003) | |
Deferred tax (benefit) expense | (7,857) | | (15,648) | | 864 | | | (23,505) | | (1,780) | |
Other comprehensive (loss) income, net of tax | (18,721) | | (37,283) | | 2,072 | | | (56,004) | | (4,223) | |
Total comprehensive (loss) income | $ | (7,655) | | $ | (26,818) | | $ | 11,357 | | | $ | (34,473) | | $ | 14,009 | |
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
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BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY |
For the three months ended June 30,March 31, 2023 and 2022 and 2021 |
| (in thousands, except share data; unaudited) | (in thousands, except share data; unaudited) | Common Stock | Retained Earnings | Accumulated Other Comprehensive (Loss) Income, Net of Taxes | Total | (in thousands, except share data; unaudited) | Common Stock | Retained Earnings | Accumulated Other Comprehensive (Loss) Income, Net of Taxes | Total |
Shares | Amount | Shares | Amount |
| | Three months ended June 30, 2022 | | Three months ended March 31, 2023 |
Balance at April 1, 2022 | 16,003,847 | | $ | 213,204 | | $ | 246,511 | | $ | (39,307) | | $ | 420,408 | | |
Net income | — | | — | | 11,066 | | — | | 11,066 | | |
Other comprehensive loss, net of tax | — | | — | | — | | (18,721) | | (18,721) | | |
| Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 4,768 | | 81 | | — | | — | | 81 | | |
Stock issued under employee stock purchase plan | 936 | | 30 | | — | | — | | 30 | | |
Stock issued under employee stock ownership plan | 13,000 | | 412 | | — | | — | | 412 | | |
| Restricted stock surrendered for tax withholdings upon vesting | (333) | | (11) | | — | | — | | (11) | | |
Restricted stock forfeited / cancelled | (12,618) | | — | | — | | — | | — | | |
Stock-based compensation - stock options | — | | 29 | | — | | — | | 29 | | |
Stock-based compensation - restricted stock | — | | 119 | | — | | — | | 119 | | |
Cash dividends paid on common stock ($0.24 per share) | — | | — | | (3,840) | | — | | (3,840) | | |
| Balance at June 30, 2022 | 16,009,600 | | $ | 213,864 | | $ | 253,737 | | $ | (58,028) | | $ | 409,573 | | |
| Three months ended June 30, 2021 | |
Balance at April 1, 2021 | 13,326,509 | | $ | 118,386 | | $ | 225,600 | | $ | 6,306 | | $ | 350,292 | | |
Balance at January 1, 2023 | | Balance at January 1, 2023 | 16,029,138 | | $ | 215,057 | | $ | 270,781 | | $ | (73,746) | | $ | 412,092 | |
Net income | Net income | — | | — | | 9,285 | | — | | 9,285 | | Net income | — | | — | | 9,440 | | — | | 9,440 | |
Other comprehensive income, net of tax | Other comprehensive income, net of tax | — | | — | | — | | 2,072 | | 2,072 | | Other comprehensive income, net of tax | — | | — | | — | | 11,746 | | 11,746 | |
| Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 14,000 | | 314 | | — | | — | | 314 | | Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 11,530 | | 230 | | — | | — | | 230 | |
Stock issued under employee stock purchase plan | Stock issued under employee stock purchase plan | 831 | | 25 | | — | | — | | 25 | | Stock issued under employee stock purchase plan | 415 | | 9 | | — | | — | | 9 | |
Stock issued under employee stock ownership plan | Stock issued under employee stock ownership plan | 9,300 | | 336 | | — | | — | | 336 | | Stock issued under employee stock ownership plan | 14,300 | | 423 | | — | | — | | 423 | |
Restricted stock granted | Restricted stock granted | 2,400 | | — | | — | | — | | — | | Restricted stock granted | 49,428 | | — | | — | | — | | — | |
| Restricted stock surrendered for tax withholdings upon vesting | | Restricted stock surrendered for tax withholdings upon vesting | (2,213) | | (65) | | — | | — | | (65) | |
| Stock-based compensation - stock options | Stock-based compensation - stock options | — | | 28 | | — | | — | | 28 | | Stock-based compensation - stock options | — | | 116 | | — | | — | | 116 | |
Stock-based compensation - restricted stock | Stock-based compensation - restricted stock | — | | 95 | | — | | — | | 95 | | Stock-based compensation - restricted stock | — | | 45 | | — | | — | | 45 | |
Cash dividends paid on common stock ($0.23 per share) | — | | — | | (3,044) | | — | | (3,044) | | |
Cash dividends paid on common stock ($0.25 per share) | | Cash dividends paid on common stock ($0.25 per share) | — | | — | | (4,012) | | — | | (4,012) | |
| Stock issued in payment of director fees | | Stock issued in payment of director fees | 4,612 | | 150 | | — | | — | | 150 | |
| Balance at March 31, 2023 | | Balance at March 31, 2023 | 16,107,210 | | $ | 215,965 | | $ | 276,209 | | $ | (62,000) | | $ | 430,174 | |
| | | Three months ended March 31, 2022 |
Balance at January 1, 2022 | | Balance at January 1, 2022 | 15,929,243 | | $ | 212,524 | | $ | 239,868 | | $ | (2,024) | | $ | 450,368 | |
Net income | | Net income | — | | — | | 10,465 | | — | | 10,465 | |
Other comprehensive loss, net of tax | | Other comprehensive loss, net of tax | — | | — | | — | | (37,283) | | (37,283) | |
| Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | | Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 35,543 | | 739 | | — | | — | | 739 | |
| Stock issued under employee stock ownership plan | | Stock issued under employee stock ownership plan | 12,000 | | 417 | | — | | — | | 417 | |
Restricted stock granted | | Restricted stock granted | 46,672 | | — | | — | | — | | — | |
Restricted stock surrendered for tax withholdings upon vesting | | Restricted stock surrendered for tax withholdings upon vesting | (836) | | (29) | | — | | — | | (29) | |
Restricted stock forfeited / cancelled | | Restricted stock forfeited / cancelled | (649) | | — | | — | | — | | — | |
Stock-based compensation - stock options | | Stock-based compensation - stock options | — | | 86 | | — | | — | | 86 | |
Stock-based compensation - restricted stock | | Stock-based compensation - restricted stock | — | | 151 | | — | | — | | 151 | |
Cash dividends paid on common stock ($0.24 per share) | | Cash dividends paid on common stock ($0.24 per share) | — | | — | | (3,822) | | — | | (3,822) | |
| Stock issued in payment of director fees | | Stock issued in payment of director fees | 5,149 | | 193 | | — | | — | | 193 | |
| Stock repurchased, including commissions | Stock repurchased, including commissions | (297,935) | | (10,754) | | — | | — | | (10,754) | | Stock repurchased, including commissions | (23,275) | | (877) | | — | | — | | (877) | |
Balance at June 30, 2021 | 13,055,105 | | $ | 108,430 | | $ | 231,841 | | $ | 8,378 | | $ | 348,649 | | |
Balance at March 31, 2022 | | Balance at March 31, 2022 | 16,003,847 | | $ | 213,204 | | $ | 246,511 | | $ | (39,307) | | $ | 420,408 | |
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
| | | | | | | | | | | | | | | | | |
BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY |
For the six months ended June 30, 2022 and 2021 |
| | | | | |
(in thousands, except share data; unaudited) | Common Stock | Retained Earnings | Accumulated Other Comprehensive (Loss) Income, Net of Taxes | Total |
Shares | Amount |
| Six months ended June 30, 2022 |
Balance at January 1, 2022 | 15,929,243 | | $ | 212,524 | | $ | 239,868 | | $ | (2,024) | | $ | 450,368 | |
Net income | — | | — | | 21,531 | | — | | 21,531 | |
Other comprehensive loss, net of tax | — | | — | | — | | (56,004) | | (56,004) | |
| | | | | |
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 40,311 | | 820 | | — | | — | | 820 | |
Stock issued under employee stock purchase plan | 936 | | 30 | | — | | — | | 30 | |
Stock issued under employee stock ownership plan | 25,000 | | 829 | | — | | — | | 829 | |
Restricted stock granted | 46,672 | | — | | — | | — | | — | |
Restricted stock surrendered for tax withholdings upon vesting | (1,169) | | (40) | | — | | — | | (40) | |
Restricted stock forfeited / cancelled | (13,267) | | — | | — | | — | | — | |
Stock-based compensation - stock options | — | | 115 | | — | | — | | 115 | |
Stock-based compensation - restricted stock | — | | 270 | | — | | — | | 270 | |
Cash dividends paid on common stock ($0.48 per share) | — | | — | | (7,662) | | — | | (7,662) | |
| | | | | |
Stock issued in payment of director fees | 5,149 | | 193 | | — | | — | | 193 | |
| | | | | |
Stock repurchased, net of commissions | (23,275) | | (877) | | — | | — | | (877) | |
Balance at June 30, 2022 | 16,009,600 | | $ | 213,864 | | $ | 253,737 | | $ | (58,028) | | $ | 409,573 | |
| Six months ended June 30, 2021 |
Balance at January 1, 2021 | 13,500,453 | | $ | 125,905 | | $ | 219,747 | | $ | 12,601 | | $ | 358,253 | |
Net income | — | | — | | 18,232 | | — | | 18,232 | |
Other comprehensive loss, net of tax | — | | — | | — | | (4,223) | | (4,223) | |
| | | | | |
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 31,180 | | 351 | | — | | — | | 351 | |
Stock issued under employee stock purchase plan | 1,609 | | 53 | | — | | — | | 53 | |
Stock issued under employee stock ownership plan | 18,300 | | 668 | | — | | — | | 668 | |
Restricted stock granted | 29,454 | | — | | — | | — | | — | |
Restricted stock surrendered for tax withholdings upon vesting | (3,961) | | (156) | | — | | — | | (156) | |
Restricted stock forfeited / cancelled | (3,848) | | — | | — | | — | | — | |
Stock-based compensation - stock options | — | | 200 | | — | | — | | 200 | |
Stock-based compensation - restricted stock | — | | 538 | | — | | — | | 538 | |
Cash dividends paid on common stock ($0.46 per share) | — | | — | | (6,138) | | — | | (6,138) | |
Stock purchased by directors under director stock plan | 519 | | 18 | | — | | — | | 18 | |
| | | | | |
Stock issued in payment of director fees | 3,347 | | 117 | | — | | — | | 117 | |
Stock repurchased, net of commissions | (521,948) | | (19,264) | | — | | — | | (19,264) | |
Balance at June 30, 2021 | 13,055,105 | | $ | 108,430 | | $ | 231,841 | | $ | 8,378 | | $ | 348,649 | |
The accompanying notes are an integral part of these consolidated financial statements (unaudited). |
| | | | | |
| | |
BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS |
For the sixthree months ended June 30,March 31, 2023 and 2022 and 2021 |
| (in thousands; unaudited) | (in thousands; unaudited) | June 30, 2022 | June 30, 2021 | (in thousands; unaudited) | 2023 | 2022 |
Cash Flows from Operating Activities: | Cash Flows from Operating Activities: | | Cash Flows from Operating Activities: | |
Net income | Net income | $ | 21,531 | | $ | 18,232 | | Net income | $ | 9,440 | | $ | 10,465 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | | |
Reversal of credit losses on loans | (485) | | (3,849) | | |
Provision for (reversal of) credit losses on loans | | Provision for (reversal of) credit losses on loans | 350 | | (485) | |
Reversal of credit losses on unfunded loan commitments | Reversal of credit losses on unfunded loan commitments | (318) | | (1,202) | | Reversal of credit losses on unfunded loan commitments | (174) | | (318) | |
| Noncash contribution expense to employee stock ownership plan | Noncash contribution expense to employee stock ownership plan | 829 | | 668 | | Noncash contribution expense to employee stock ownership plan | 423 | | 417 | |
Noncash director compensation expense | Noncash director compensation expense | 193 | | 117 | | Noncash director compensation expense | 150 | | 193 | |
Stock-based compensation expense | Stock-based compensation expense | 385 | | 738 | | Stock-based compensation expense | 161 | | 237 | |
Amortization of core deposit intangible | Amortization of core deposit intangible | 754 | | 408 | | Amortization of core deposit intangible | 345 | | 380 | |
Amortization of investment security premiums, net of accretion of discounts | Amortization of investment security premiums, net of accretion of discounts | 4,963 | | 1,753 | | Amortization of investment security premiums, net of accretion of discounts | 1,964 | | 2,497 | |
Accretion of premiums (discounts) on acquired loans | 281 | | (78) | | |
Accretion of discount on subordinated debenture | — | | 1,347 | | |
(Accretion of discounts) amortization of premiums on acquired loans, net | | (Accretion of discounts) amortization of premiums on acquired loans, net | (168) | | 115 | |
| Net change in deferred loan origination costs/fees | Net change in deferred loan origination costs/fees | (2,322) | | 1,146 | | Net change in deferred loan origination costs/fees | (324) | | (1,591) | |
| Depreciation and amortization | Depreciation and amortization | 845 | | 848 | | Depreciation and amortization | 882 | | 452 | |
| Earnings on bank-owned life insurance policies | Earnings on bank-owned life insurance policies | (711) | | (490) | | Earnings on bank-owned life insurance policies | (705) | | (413) | |
| Net changes in interest receivable and other assets | Net changes in interest receivable and other assets | (443) | | 952 | | Net changes in interest receivable and other assets | (203) | | 4,648 | |
Net changes in interest payable and other liabilities | Net changes in interest payable and other liabilities | (5,894) | | (821) | | Net changes in interest payable and other liabilities | 1,303 | | (5,118) | |
Total adjustments | Total adjustments | (1,923) | | 1,537 | | Total adjustments | 4,004 | | 1,014 | |
Net cash provided by operating activities | Net cash provided by operating activities | 19,608 | | 19,769 | | Net cash provided by operating activities | 13,444 | | 11,479 | |
Cash Flows from Investing Activities: | Cash Flows from Investing Activities: | | Cash Flows from Investing Activities: | |
| Purchase of held-to-maturity securities | Purchase of held-to-maturity securities | (208,784) | | (74,521) | | Purchase of held-to-maturity securities | — | | (95,932) | |
Purchase of available-for-sale securities | Purchase of available-for-sale securities | (243,459) | | (170,161) | | Purchase of available-for-sale securities | — | | (243,459) | |
| Proceeds from paydowns/maturities of held-to-maturity securities | Proceeds from paydowns/maturities of held-to-maturity securities | 16,827 | | 14,376 | | Proceeds from paydowns/maturities of held-to-maturity securities | 13,634 | | 5,067 | |
Proceeds from paydowns/maturities of available-for-sale securities | Proceeds from paydowns/maturities of available-for-sale securities | 76,276 | | 36,936 | | Proceeds from paydowns/maturities of available-for-sale securities | 19,288 | | 42,966 | |
| Loan principal collected, net of originations | 93,875 | | 84,259 | | |
Purchase of bank-owned life insurance policies | — | | (1,943) | | |
Cash receipts from bank-owned life insurance policies | 350 | | — | | |
(Increase) decrease in loans receivable, net | | (Increase) decrease in loans receivable, net | (19,072) | | 54,524 | |
| Proceeds from bank-owned life insurance policies | | Proceeds from bank-owned life insurance policies | — | | 350 | |
Purchase of premises and equipment | Purchase of premises and equipment | (354) | | (765) | | Purchase of premises and equipment | (1,438) | | (130) | |
| Cash paid for low income housing tax credit investment | Cash paid for low income housing tax credit investment | (30) | | (346) | | Cash paid for low income housing tax credit investment | (38) | | (4) | |
Net cash used in investing activities | (265,299) | | (112,165) | | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 12,374 | | (236,618) | |
Cash Flows from Financing Activities: | Cash Flows from Financing Activities: | | Cash Flows from Financing Activities: | |
Net increase in deposits | 22,120 | | 179,326 | | |
Net (decrease) increase in deposits | | Net (decrease) increase in deposits | (322,774) | | 52,792 | |
Proceeds from short-term Federal Home Loan Bank borrowings, net | | Proceeds from short-term Federal Home Loan Bank borrowings, net | 293,400 | | — | |
Repayment of finance lease obligations | | Repayment of finance lease obligations | (37) | | (31) | |
Proceeds from stock options exercised | Proceeds from stock options exercised | 820 | | 351 | | Proceeds from stock options exercised | 230 | | 739 | |
Restricted stock surrendered for tax withholdings upon vesting | | Restricted stock surrendered for tax withholdings upon vesting | (65) | | (29) | |
Cash dividends paid on common stock | | Cash dividends paid on common stock | (4,012) | | (3,822) | |
Stock repurchased, including commissions | | Stock repurchased, including commissions | — | | (1,250) | |
Proceeds from stock issued under employee and director stock purchase plans | | Proceeds from stock issued under employee and director stock purchase plans | 9 | | — | |
| Restricted stock surrendered for tax withholdings upon vesting | (40) | | (156) | | |
Proceeds from stock issued under employee and director stock purchase plans | 30 | | 71 | | |
Stock repurchased, including commissions | (1,250) | | (19,677) | | |
Repayment of subordinated debenture including execution costs | — | | (4,126) | | |
| Repayment of finance lease obligations | (63) | | (32) | | |
Cash dividends paid on common stock | (7,662) | | (6,138) | | |
| Net cash provided by financing activities | 13,955 | | 149,619 | | |
Net (decrease) increase in cash, cash equivalents and restricted cash | (231,736) | | 57,223 | | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (33,249) | | 48,399 | |
Net decrease in cash, cash equivalents and restricted cash | | Net decrease in cash, cash equivalents and restricted cash | (7,431) | | (176,740) | |
Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | 347,641 | | 200,320 | | Cash, cash equivalents and restricted cash at beginning of period | 45,424 | | 347,641 | |
Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 115,905 | | $ | 257,543 | | Cash, cash equivalents and restricted cash at end of period | $ | 37,993 | | $ | 170,901 | |
Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | Supplemental disclosure of cash flow information: | |
Cash paid in interest | Cash paid in interest | $ | 1,175 | | $ | 951 | | Cash paid in interest | $ | 4,290 | | $ | 588 | |
Cash paid in income taxes | Cash paid in income taxes | $ | 8,450 | | $ | 6,000 | | Cash paid in income taxes | $ | — | | $ | — | |
Supplemental disclosure of noncash investing and financing activities: | Supplemental disclosure of noncash investing and financing activities: | | Supplemental disclosure of noncash investing and financing activities: | |
| Change in net unrealized gain or (loss) on available-for-sale securities | $ | (65,278) | | $ | (6,284) | | |
Change in net unrealized gains or losses on available-for-sale securities | | Change in net unrealized gains or losses on available-for-sale securities | $ | 16,213 | | $ | (38,228) | |
| Securities transferred from available-for-sale to held-to-maturity, at fair value | Securities transferred from available-for-sale to held-to-maturity, at fair value | $ | 357,482 | | $ | — | | Securities transferred from available-for-sale to held-to-maturity, at fair value | $ | — | | $ | 357,482 | |
Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity | Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity | $ | 616 | | $ | 281 | | Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity | $ | 463 | | $ | 144 | |
Purchase of investment securities not yet settled | $ | 40,278 | | $ | — | | |
| Bank-owned life insurance benefit receivable | | Bank-owned life insurance benefit receivable | $ | 765 | | $ | — | |
| Stock issued to employee stock ownership plan | | Stock issued to employee stock ownership plan | $ | 423 | | $ | 417 | |
| Stock issued to employee stock ownership plan | $ | 829 | | $ | 668 | | |
Stock issued in payment of director fees | $ | 193 | | $ | 117 | | |
| Restricted cash1 | Restricted cash1 | $ | 930 | | $ | 1,930 | | Restricted cash1 | $ | — | | $ | 930 | |
1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco and other cash pledged. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020.
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Bancorp, a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin, a California state-chartered commercial bank. References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes. The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations.
Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our 20212022 Annual Report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in stockholders’ equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period.
The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in the quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period under the treasury stock method. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, the difference in EPS is nominal for these participating securities.
| | | Three months ended | | Six months ended | | Three months ended | |
(in thousands, except per share data) | (in thousands, except per share data) | June 30, 2022 | June 30, 2021 | | June 30, 2022 | June 30, 2021 | (in thousands, except per share data) | March 31, 2023 | March 31, 2022 | |
Weighted average basic common shares outstanding | Weighted average basic common shares outstanding | 15,921 | | 13,092 | | | 15,898 | | 13,227 | | Weighted average basic common shares outstanding | 15,970 | | 15,876 | | |
Potentially dilutive common shares related to: | Potentially dilutive common shares related to: | | Potentially dilutive common shares related to: | | |
Stock options | Stock options | 24 | | 54 | | | 38 | | 67 | | Stock options | 14 | | 52 | | |
Unvested restricted stock awards | Unvested restricted stock awards | 10 | | 18 | | | 14 | | 22 | | Unvested restricted stock awards | 15 | | 18 | | |
Weighted average diluted shares outstanding | 15,955 | | 13,164 | | | 15,950 | | 13,316 | | |
Weighted average diluted common shares outstanding | | Weighted average diluted common shares outstanding | 15,999 | | 15,946 | | |
Net income | Net income | $ | 11,066 | | $ | 9,285 | | | $ | 21,531 | | $ | 18,232 | | Net income | $ | 9,440 | | $ | 10,465 | | |
Basic EPS | Basic EPS | $ | 0.70 | | $ | 0.71 | | | $ | 1.35 | | $ | 1.38 | | Basic EPS | $ | 0.59 | | $ | 0.66 | | |
Diluted EPS | Diluted EPS | $ | 0.69 | | $ | 0.71 | | | $ | 1.35 | | $ | 1.37 | | Diluted EPS | $ | 0.59 | | $ | 0.66 | | |
Weighted average anti-dilutive common shares not included in the calculation of diluted EPS | Weighted average anti-dilutive common shares not included in the calculation of diluted EPS | 230 | | 111 | | | 167 | | 88 | | Weighted average anti-dilutive common shares not included in the calculation of diluted EPS | 250 | | 125 | | |
Note 2: Recently Adopted and Issued Accounting Standards
Accounting Standards Adopted in 2023
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendment eliminated the recognition measurement guidance for troubled debt restructured ("TDR") loans and instead enhanced disclosure requirements for certain loan modifications when a borrower is experiencing financial difficulty. In addition, the amendment required that an entity include in its vintage disclosures the current period gross loan charge-offs by year of origination. We early adopted the current period charge-off disclosures in the first quarter of 2022. We adopted the loan modification provisions as of January 1, 2023 using a modified retrospective method. The cumulative-effect adjustment to retained earnings was considered immaterial. Refer to Note 5, Loans and Allowance for Credit Losses on Loans, for additional information.
In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. Among other things, the ASU renamed the "last-of-layer" method to the "portfolio layer" method and made fair value hedging more accessible for hedge accounting of interest rate risk for portfolios and financial assets. For example, the guidance permits an entity to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby providing for consistency between accounting for similar hedges. We adopted the amendments on January 1, 2023, which had no effect on our existing hedge accounting, disclosures, financial condition or results of operations.
Accounting Standards Not Yet Effective
In March 2020, the FASB issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden of accounting for, or recognizing the effects of reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of
reference rate reform. The amendments in this ASU may be elected as of March 12, 2020 through December 31, 2022. 2024 (as amended by ASU No. 2022-06 discussed below).An entity may choose to elect the amendments in this update at an interim period subsequent to March 12, 2020 with adoption methods varying based on transaction type. We have not elected not to apply amendments at this time and towill assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU intend to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. As of June 30, 2022,March 31, 2023, we had 4four interest rate swap contracts with notional values totaling $12.5$11.8 million indexed to LIBOR that will either be subject to the fall-back index rate stipulated by the ISDA protocol or modified to other reference rates such as Prime or SOFR as mutually agreed by our counterparty anand us. We have not elected to apply the amendments at this time and will continue to assess the applicability of this ASU to us as we monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.
In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities From Contracts With Customers (Topic 805). The amendments address diversity in accounting practices and require acquiring companies to apply ASC 606, Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination, as opposed to other methods such as fair value. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination. The amendments are to be applied prospectively to business combinations occurring on or after December 15, 2022 and early adoption is permitted. In the event of a future business combination, we will assess the impact of the ASU on our financial condition and results of operations.
In March 2022, the FASB issued ASU No. 2022-02,2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The objective of the guidance in Topic 848 was to provide temporary relief during the transition period, as noted in the discussion of ASU 2020-04 above, under which the sunset provision was based on an expectation that LIBOR would cease being published after December 31, 2021. In March 2021, the UK Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendment eliminatesConduct Authority ("FCA") announced that the recognition measurement guidance for troubled debt restructured ("TDR") loans, and instead requires an entity to evaluate whether a modification represents a new loan or a continuationintended cessation date of an existing loan in accordance with ASC Topic 310-20, Receivables - Nonrefundable Fees and Other Costs. In addition, the amendment requires that an entity include in its vintage disclosurescertain tenors of USD LIBOR would be June 30, 2023, which is beyond the current period-gross loan charge-offs by yearsunset date of origination. The amendments are effective for years beginning afterTopic 848. Therefore, this amendment deferred the sunset date of Topic 848 from December 15,31, 2022 and should be applied prospectively, except that an entity has the option to apply a modified retrospective method for TDR loans, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. An entity may elect to early adopt each of the amendments separately. As such, we early adopted the current period charge-off disclosures in the first quarter of 2022 and intend to adopt the loan modification amendments when effective in the first quarter of 2023. Neither the early adoption of the amendments related to gross charge-off disclosures nor the future adoption of the TDR amendments had or will have a material impact on our financial condition or results of operations.
In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. Among other things, the ASU renames the "last-of-layer" method to the "portfolio layer" method and makes fair value hedging more accessible for hedge accounting of interest rate risk for portfolios and financial assets. For example, the guidance permits an entity to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby providing for consistency between accounting for similar hedges. The amendments are effective for years beginning after December 15, 2022. The adoption of the amendments will not affect our existing hedge accounting, disclosures, financial condition or results of operations.31, 2024.
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendment reduces diversity in practice by clarifying that a separate contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. In addition, this ASU provided amended examples to illustrate that a restriction that is a characteristic of the equity security, which market participants would take into account when pricing them, would be considered in measuring fair value. This ASU also introduces new disclosure requirements. The amendments are effective prospectively for years beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements. As discussed in Note 4, Investment Securities, we hold Visa Inc. Class B common stock that is legally restricted from resale to non-member banks of Visa U.S.A. until the covered litigation against Visa Inc. is settled. While the adoption of the amendments may require additional disclosures, we do not anticipate that it will impact our financial condition or results of operations.
In March 2023, the FASB issued ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements. For public companies, the amendment requires entities to amortize leasehold improvements associated with common control lease arrangements over the useful life of the improvements to the common control group, as opposed to the shorter of the remaining lease term and the useful life of the improvements for all other operating leases. The amendments are effective for years beginning after December 15, 2023, and may be adopted either prospectively or retrospectively. Early adoption is permitted for both interim and annual financial statements. We currently do not
have common control lease arrangements, and therefore do not anticipate that the amendments will impact our financial condition and results of operations.
In March 2023, the FASB issued ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. Under current GAAP, an entity can only elect to apply the proportional amortization method to investments in low-income housing tax credit ("LIHTC") structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the consolidated statements of income as a component of income tax expense (benefit). The amendments will allow entities to elect to account for all other equity investments made primarily for the purpose of receiving income tax credits to using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, when certain conditions are met. The amendments are effective for fiscal years beginning after December 15, 2023, and may be adopted either on a modified retrospective basis or retrospectively. Other than investments in LIHTC funds, as disclosed in Note 4, Investment Securities, we currently have no other equity investments made primarily for the purpose of receiving income tax credits, and therefore do not anticipate that the amendments will impact our financial condition and results of operations.
Note 3: Fair Value of Assets and Liabilities
Fair Value Hierarchy and Fair Value Measurement
We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant management judgment and estimation.
Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation process in the reporting period during which the event or circumstances that caused the transfer occurred. No such transfers occurred in the years presented.
The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.
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(in thousands) Description of Financial Instruments | Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Measurement Categories: Changes in Fair Value Recorded In1 |
June 30, 2022 | | | | | |
Securities available-for-sale: | | | | | |
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies | $ | 539,991 | | $ | — | | $ | 539,991 | | $ | — | | OCI |
SBA-backed securities | $ | 53,168 | | $ | — | | $ | 53,168 | | $ | — | | OCI |
Debentures of government sponsored agencies | $ | 139,340 | | $ | — | | $ | 139,340 | | $ | — | | OCI |
U.S. Treasury securities | $ | 10,644 | | $ | 10,644 | | $ | — | | $ | — | | OCI |
| | | | | |
Obligations of state and political subdivisions | $ | 114,263 | | $ | — | | $ | 114,263 | | $ | — | | OCI |
Corporate bonds | $ | 34,092 | | $ | — | | $ | 34,092 | | $ | — | | OCI |
Asset-backed securities | $ | 1,651 | | $ | — | | $ | 1,651 | | $ | — | | OCI |
Derivative financial assets (interest rate contracts) | $ | 206 | | $ | — | | $ | 206 | | $ | — | | NI |
Derivative financial liabilities (interest rate contracts) | $ | 104 | | $ | — | | $ | 104 | | $ | — | | NI |
December 31, 2021 | | | | | |
Securities available-for-sale: | | | | | |
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies | $ | 759,576 | | $ | — | | $ | 759,576 | | $ | — | | OCI |
SBA-backed securities | $ | 33,478 | | $ | — | | $ | 33,478 | | $ | — | | OCI |
Debentures of government sponsored agencies | $ | 188,527 | | $ | — | | $ | 188,527 | | $ | — | | OCI |
U.S. Treasury securities | $ | 11,630 | | $ | 11,630 | | $ | — | | $ | — | | OCI |
| | | | | |
Obligations of state and political subdivisions | $ | 134,000 | | $ | — | | $ | 134,000 | | $ | — | | OCI |
Corporate bonds | $ | 38,495 | | $ | — | | $ | 38,495 | | $ | — | | OCI |
Asset-backed securities | $ | 1,862 | | $ | — | | $ | 1,862 | | $ | — | | OCI |
| | | | | |
Derivative financial liabilities (interest rate contracts) | $ | 1,085 | | $ | — | | $ | 1,085 | | $ | — | | NI |
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(in thousands) Description of Financial Instruments | Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Measurement Categories: Changes in Fair Value Recorded In1 |
March 31, 2023 | | | | | |
Securities available-for-sale: | | | | | |
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies | $ | 471,458 | | $ | — | | $ | 471,458 | | $ | — | | OCI |
SBA-backed securities | $ | 37,971 | | $ | — | | $ | 37,971 | | $ | — | | OCI |
Debentures of government sponsored agencies | $ | 137,121 | | $ | — | | $ | 137,121 | | $ | — | | OCI |
U.S. Treasury securities | $ | 10,524 | | $ | 10,524 | | $ | — | | $ | — | | OCI |
| | | | | |
Obligations of state and political subdivisions | $ | 105,136 | | $ | — | | $ | 105,136 | | $ | — | | OCI |
Corporate bonds | $ | 33,961 | | $ | — | | $ | 33,961 | | $ | — | | OCI |
Asset-backed securities | $ | 1,362 | | $ | — | | $ | 1,362 | | $ | — | | OCI |
Derivative financial assets (interest rate contracts) | $ | 404 | | $ | — | | $ | 404 | | $ | — | | NI |
Derivative financial liabilities (interest rate contracts) | $ | 23 | | $ | — | | $ | 23 | | $ | — | | NI |
December 31, 2022 | | | | | |
Securities available-for-sale: | | | | | |
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies | $ | 475,505 | | $ | — | | $ | 475,505 | | $ | — | | OCI |
SBA-backed securities | $ | 44,355 | | $ | — | | $ | 44,355 | | $ | — | | OCI |
Debentures of government sponsored agencies | $ | 135,106 | | $ | — | | $ | 135,106 | | $ | — | | OCI |
U.S. Treasury securities | $ | 10,269 | | $ | 10,269 | | $ | — | | $ | — | | OCI |
| | | | | |
Obligations of state and political subdivisions | $ | 102,123 | | $ | — | | $ | 102,123 | | $ | — | | OCI |
Corporate bonds | $ | 33,276 | | $ | — | | $ | 33,276 | | $ | — | | OCI |
Asset-backed securities | $ | 1,462 | | $ | — | | $ | 1,462 | | $ | — | | OCI |
Derivative financial assets (interest rate contracts) | $ | 602 | | $ | — | | $ | 602 | | $ | — | | NI |
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1 Other comprehensive income ("OCI") or net income ("NI").
Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2). Level 2 securities include asset-backed securities, obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, and corporate bonds. As of June 30, 2022March 31, 2023 and December 31, 2021,2022, there were no Level 3 securities.
Held-to-maturity securities may be written down to fair value as a result of an other-than-temporary impairment,credit losses or other factors, and we did not record any write-downs during the sixthree months ended June 30, 2022March 31, 2023 or June 30, 2021.March 31, 2022. Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities.
On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. These unobservable inputs are not considered significant inputs to the fair value measurement overall. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as
of the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties. We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities.
Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as individually analyzed loans that are collateral dependent and other real estate owned ("OREO").
OREO represents collateral acquired through foreclosure and is initially recorded at fair value as established by a current appraisal of the collateral. Subsequent to foreclosure, OREO is carried at the lower of cost or fair value, less estimated costs to sell. OREO values are reviewed on an ongoing basis and any subsequent decline in fair value is recorded as a foreclosed asset expense in the current period. The value of OREO is classified as Level 3. Our current OREO resulted from the American River Bankshares ("ARB"AMRB") merger in 2021.
The following table presents the carrying value of assets measured at fair value on a non-recurring basis and that were held in the consolidated statements of condition at each respective period end, by level within the fair value hierarchy as of June 30, 2022March 31, 2023 and December 31, 2021.2022.
| (in thousands) | (in thousands) | Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | (in thousands) | Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
June 30, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
Other real estate owned | Other real estate owned | $ | 800 | | $ | — | | $ | — | | $ | 800 | | Other real estate owned | $ | 455 | | $ | — | | $ | — | | $ | 455 | |
December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
Other real estate owned | Other real estate owned | $ | 800 | | $ | — | | $ | — | | $ | 800 | | Other real estate owned | $ | 455 | | $ | — | | $ | — | | $ | 455 | |
Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments as of June 30, 2022March 31, 2023 and December 31, 2021,2022, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI"), lease obligations and non-maturity deposit liabilities. Additionally, we held shares of Federal Home Loan Bank ("FHLB") of San Francisco stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of June 30, 2022March 31, 2023 or December 31, 2021.2022. The values are discussed in Note 4, Investment Securities.
| | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
(in thousands) | (in thousands) | Carrying Amounts | Fair Value | Fair Value Hierarchy | | Carrying Amounts | Fair Value | Fair Value Hierarchy | (in thousands) | Carrying Amounts | Fair Value | Fair Value Hierarchy | | Carrying Amounts | Fair Value | Fair Value Hierarchy |
Financial assets (recorded at amortized cost): | Financial assets (recorded at amortized cost): | | | | | | | Financial assets (recorded at amortized cost): | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 115,905 | | $ | 115,905 | | Level 1 | | $ | 347,641 | | $ | 347,641 | | Level 1 | Cash and cash equivalents | $ | 37,993 | | $ | 37,993 | | Level 1 | | $ | 45,424 | | $ | 45,424 | | Level 1 |
Investment securities held-to-maturity | Investment securities held-to-maturity | 931,587 | | 847,386 | | Level 2 | | 342,222 | | 342,755 | | Level 2 | Investment securities held-to-maturity | 958,560 | | 850,125 | | Level 2 | | 972,207 | | 845,239 | | Level 2 |
Loans, net | Loans, net | 2,140,093 | | 2,123,254 | | Level 3 | | 2,232,622 | | 2,234,430 | | Level 3 | Loans, net | 2,088,998 | | 1,999,187 | | Level 3 | | 2,069,563 | | 1,993,866 | | Level 3 |
Interest receivable | Interest receivable | 12,248 | | 12,248 | | Level 2 | | 11,889 | | 11,889 | | Level 2 | Interest receivable | 11,791 | | 11,791 | | Level 2 | | 13,069 | | 13,069 | | Level 2 |
Financial liabilities (recorded at amortized cost): | Financial liabilities (recorded at amortized cost): | | | | | Financial liabilities (recorded at amortized cost): | | | | |
Time deposits | Time deposits | 141,674 | | 141,857 | | Level 2 | | 150,235 | | 150,475 | | Level 2 | Time deposits | 144,067 | | 144,071 | | Level 2 | | 119,030 | | 118,333 | | Level 2 |
| Federal Home Loan Bank short-term borrowings | | Federal Home Loan Bank short-term borrowings | 405,400 | | 405,400 | | Level 2 | | 112,000 | | 112,000 | | Level 2 |
| Interest payable | Interest payable | 74 | | 74 | | Level 2 | | 81 | | 81 | | Level 2 | Interest payable | 234 | | 234 | | Level 2 | | 75 | | 75 | | Level 2 |
Fair value of loans is based on exit price techniques and obtained from an independent third-party that uses its proprietary valuation model and methodology and may differ from actual price from a prospective buyer. The discounted cash flow valuation approach reflects key inputs and assumptions that are unobservable, such as loan probability of default, loss given default, prepayment speed, and market discount rates.
Fair value of fixed-rate time deposits is estimated by discounting future contractual cash flows using discount rates that reflect the current observable market rates offered for time deposits of similar remaining maturities.
Due to the short-term nature of the FHLB borrowings, the carrying value approximates fair value.
The value of off-balance-sheet financial instruments is estimated based on the fee income associated with the commitments, which in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material as of June 30, 2022March 31, 2023 or December 31, 2021.2022.
Note 4: Investment Securities
Our investment securities portfolio consists of U.S. Treasury securities, obligations of state and political subdivisions, U.S. federal government agencies such as Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), U.S. government-sponsored enterprises ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB, U.S. Corporations and one asset-backed security collateralized by student loan pools. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, as reflected in the following table.
A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of June 30, 2022March 31, 2023 and December 31, 20212022 is presented below.
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Held-to-maturity: | Amortized Cost 1 | Allowance for Credit Losses | Net Carrying Amount | Gross Unrealized | Fair Value | |
(in thousands) | Gains | (Losses) | |
March 31, 2023 | | | | | | | |
Securities of U.S. government-sponsored enterprises: | | | | | | | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 322,691 | | $ | — | | $ | 322,691 | | $ | — | | $ | (45,007) | | $ | 277,684 | | |
CMOs issued by FHLMC | 233,796 | | — | | 233,796 | | 139 | | (24,973) | | 208,962 | | |
CMOs issued by FNMA | 109,694 | | — | | 109,694 | | 176 | | (3,729) | | 106,141 | | |
CMOs issued by GNMA | 52,120 | | — | | 52,120 | | 164 | | (3,020) | | 49,264 | | |
SBA-backed securities | 1,977 | | — | | 1,977 | | — | | (99) | | 1,878 | | |
Debentures of government-sponsored agencies | 145,898 | | — | | 145,898 | | — | | (22,149) | | 123,749 | | |
Obligations of state and political subdivisions | 62,384 | | — | | 62,384 | | 24 | | (8,728) | | 53,680 | | |
Corporate bonds | 30,000 | | — | | 30,000 | | — | | (1,233) | | 28,767 | | |
Total held-to-maturity | $ | 958,560 | | $ | — | | $ | 958,560 | | $ | 503 | | $ | (108,938) | | $ | 850,125 | | |
December 31, 2022 | | | | | | | |
| | | | | | | |
Securities of U.S. government-sponsored enterprises: | | | | | | | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 331,281 | | $ | — | | $ | 331,281 | | $ | — | | $ | (50,147) | | $ | 281,134 | | |
CMOs issued by FHLMC | 235,971 | | — | | 235,971 | | 59 | | (29,503) | | 206,527 | | |
CMOs issued by FNMA | 111,904 | | — | | 111,904 | | — | | (5,419) | | 106,485 | | |
CMOs issued by GNMA | 52,356 | | — | | 52,356 | | 11 | | (3,076) | | 49,291 | | |
SBA-backed securities | 2,372 | | — | | 2,372 | | — | | (133) | | 2,239 | | |
Debentures of government-sponsored agencies | 145,823 | | — | | 145,823 | | — | | (26,467) | | 119,356 | | |
Obligations of state and political subdivisions | 62,500 | | — | | 62,500 | | — | | (10,741) | | 51,759 | | |
Corporate bonds | 30,000 | | — | | 30,000 | | — | | (1,552) | | 28,448 | | |
Total held-to-maturity | $ | 972,207 | | $ | — | | $ | 972,207 | | $ | 70 | | $ | (127,038) | | $ | 845,239 | | |
1 Amortized cost and fair values exclude accrued interest receivable of $2.6 million and $3.7 million at March 31, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. | |
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Held-to-maturity: | Amortized Cost 1 | Allowance for Credit Losses | Net Carrying Amount | Gross Unrealized | Fair Value | |
(in thousands) | Gains | (Losses) | |
June 30, 2022 | | | | | | | |
Securities of U.S. government-sponsored enterprises: | | | | | | | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 337,998 | | $ | — | | $ | 337,998 | | $ | 4 | | $ | (34,731) | | $ | 303,271 | | |
CMOs issued by FHLMC | 230,553 | | — | | 230,553 | | 172 | | (20,766) | | 209,959 | | |
CMOs issued by FNMA | 118,956 | | — | | 118,956 | | 853 | | (2,574) | | 117,235 | | |
CMOs issued by GNMA | 12,329 | | — | | 12,329 | | — | | (982) | | 11,347 | | |
SBA-backed securities | 3,244 | | — | | 3,244 | | — | | (66) | | 3,178 | | |
Debentures of government-sponsored agencies | 135,678 | | — | | 135,678 | | — | | (17,457) | | 118,221 | | |
Obligations of state and political subdivisions | 62,829 | | — | | 62,829 | | 19 | | (8,304) | | 54,544 | | |
Corporate bonds | 30,000 | | — | | 30,000 | | — | | (369) | | 29,631 | | |
Total held-to-maturity | $ | 931,587 | | $ | — | | $ | 931,587 | | $ | 1,048 | | $ | (85,249) | | $ | 847,386 | | |
December 31, 2021 | | | | | | | |
| | | | | | | |
Securities of U.S. government-sponsored enterprises: | | | | | | | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 126,990 | | $ | — | | $ | 126,990 | | $ | 2,110 | | $ | (712) | | $ | 128,388 | | |
CMOs issued by FHLMC | 106,851 | | — | | 106,851 | | 668 | | (1,045) | | 106,474 | | |
CMOs issued by FNMA | 4,866 | | — | | 4,866 | | 128 | | — | | 4,994 | | |
| | | | | | | |
SBA-backed securities | 4,840 | | — | | 4,840 | | 198 | | — | | 5,038 | | |
Debentures of government-sponsored agencies | 51,472 | | — | | 51,472 | | — | | (901) | | 50,571 | | |
Obligations of state and political subdivisions | 47,203 | | — | | 47,203 | | 296 | | (209) | | 47,290 | | |
Total held-to-maturity | $ | 342,222 | | $ | — | | $ | 342,222 | | $ | 3,400 | | $ | (2,867) | | $ | 342,755 | | |
1 Amortized cost and fair values exclude accrued interest receivable of $3.1 million and $1.1 million at June 30, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. | |
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Management measures expected credit losses on held-to-maturity securities collectively by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued or
guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions and corporate bonds, management considers: (i) issuer and/or guarantor credit ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. Based on the comprehensive analysis, no credit losses are expected.
The following table summarizes the amortized cost of our portfolio of held-to-maturity securities issued by states and political subdivisions and corporate bonds by Moody's and/or Standard & Poor's bond ratings as of June 30, 2022.March 31, 2023.
| | | Obligations of state and political subdivisions | Corporate bonds | | | Obligations of state and political subdivisions | Corporate bonds | |
(in thousands) | (in thousands) | June 30, 2022 | December 31, 2021 | June 30, 2022 | December 31, 2021 | | (in thousands) | March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | |
AAA / Aaa | AAA / Aaa | $ | 43,188 | | $ | 34,229 | | $ | — | | $ | — | | | AAA / Aaa | $ | 42,884 | | $ | 42,986 | | $ | — | | $ | — | | |
AA / Aa | AA / Aa | 19,541 | | 12,873 | | — | | — | | | AA / Aa | 19,500 | | 19,514 | | — | | — | | |
A2 / A | A2 / A | 100 | | 101 | | 30,000 | | — | | | A2 / A | — | | — | | 30,000 | | 30,000 | | |
Total | Total | $ | 62,829 | | $ | 47,203 | | $ | 30,000 | | $ | — | | | Total | $ | 62,384 | | $ | 62,500 | | $ | 30,000 | | $ | 30,000 | | |
A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of June 30, 2022March 31, 2023 and December 31, 20212022 is presented below.
| Available-for-sale: | Available-for-sale: | Amortized Cost 1 | Gross Unrealized | Allowance for Credit Losses | Fair Value | Available-for-sale: | Amortized Cost 1 | Gross Unrealized | Allowance for Credit Losses | Fair Value |
(in thousands) | (in thousands) | Gains | (Losses) | (in thousands) | Gains | (Losses) |
June 30, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
Securities of U.S. government-sponsored enterprises: | Securities of U.S. government-sponsored enterprises: | | Securities of U.S. government-sponsored enterprises: | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 127,526 | | $ | 23 | | $ | (8,784) | | $ | — | | $ | 118,765 | | MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 106,151 | | $ | 4 | | $ | (10,423) | | $ | — | | $ | 95,732 | |
CMOs issued by FHLMC | CMOs issued by FHLMC | 370,610 | | 1 | | (23,017) | | — | | 347,594 | | CMOs issued by FHLMC | 340,647 | | — | | (27,514) | | — | | 313,133 | |
CMOs issued by FNMA | CMOs issued by FNMA | 40,375 | | 1 | | (2,960) | | — | | 37,416 | | CMOs issued by FNMA | 34,782 | | — | | (3,182) | | — | | 31,600 | |
CMOs issued by GNMA | CMOs issued by GNMA | 38,629 | | 1 | | (2,414) | | — | | 36,216 | | CMOs issued by GNMA | 33,714 | | 22 | | (2,743) | | — | | 30,993 | |
SBA-backed securities | SBA-backed securities | 55,297 | | 4 | | (2,133) | | — | | 53,168 | | SBA-backed securities | 40,547 | | 2 | | (2,578) | | — | | 37,971 | |
Debentures of government- sponsored agencies | Debentures of government- sponsored agencies | 149,099 | | — | | (9,759) | | — | | 139,340 | | Debentures of government- sponsored agencies | 149,121 | | — | | (12,000) | | — | | 137,121 | |
| U.S. Treasury securities | U.S. Treasury securities | 11,895 | | — | | (1,251) | | — | | 10,644 | | U.S. Treasury securities | 11,909 | | — | | (1,385) | | — | | 10,524 | |
Obligations of state and political subdivisions | Obligations of state and political subdivisions | 128,238 | | 50 | | (14,025) | | — | | 114,263 | | Obligations of state and political subdivisions | 116,549 | | 84 | | (11,497) | | — | | 105,136 | |
Corporate bonds | Corporate bonds | 36,989 | | — | | (2,897) | | — | | 34,092 | | Corporate bonds | 36,990 | | — | | (3,029) | | — | | 33,961 | |
Asset-backed securities | Asset-backed securities | 1,721 | | — | | (70) | | — | | 1,651 | | Asset-backed securities | 1,419 | | — | | (57) | | — | | 1,362 | |
Total available-for-sale | Total available-for-sale | $ | 960,379 | | $ | 80 | | $ | (67,310) | | $ | — | | $ | 893,149 | | Total available-for-sale | $ | 871,829 | | $ | 112 | | $ | (74,408) | | $ | — | | $ | 797,533 | |
December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
Securities of U.S. government-sponsored enterprises: | Securities of U.S. government-sponsored enterprises: | | Securities of U.S. government-sponsored enterprises: | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 316,090 | | $ | 1,224 | | $ | (2,784) | | $ | — | | $ | 314,530 | | MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 109,736 | | $ | 3 | | $ | (12,133) | | $ | — | | $ | 97,606 | |
CMOs issued by FHLMC | CMOs issued by FHLMC | 343,047 | | 3,209 | | (4,829) | | — | | 341,427 | | CMOs issued by FHLMC | 347,437 | | — | | (33,682) | | — | | 313,755 | |
CMOs issued by FNMA | CMOs issued by FNMA | 48,187 | | 152 | | (611) | | — | | 47,728 | | CMOs issued by FNMA | 36,172 | | — | | (3,852) | | — | | 32,320 | |
CMOs issued by GNMA | CMOs issued by GNMA | 56,345 | | 99 | | (553) | | — | | 55,891 | | CMOs issued by GNMA | 35,120 | | — | | (3,296) | | — | | 31,824 | |
SBA-backed securities | SBA-backed securities | 32,640 | | 993 | | (155) | | — | | 33,478 | | SBA-backed securities | 47,724 | | 2 | | (3,371) | | — | | 44,355 | |
Debentures of government- sponsored agencies | Debentures of government- sponsored agencies | 191,449 | | 25 | | (2,947) | | — | | 188,527 | | Debentures of government- sponsored agencies | 149,114 | | — | | (14,008) | | — | | 135,106 | |
| U.S. Treasury securities | U.S. Treasury securities | 11,886 | | — | | (256) | | 0 | 11,630 | | U.S. Treasury securities | 11,904 | | — | | (1,635) | | | 10,269 | |
Obligations of state and political subdivisions | Obligations of state and political subdivisions | 129,009 | | 5,372 | | (381) | | — | | 134,000 | | Obligations of state and political subdivisions | 116,855 | | 29 | | (14,761) | | — | | 102,123 | |
Corporate bonds | Corporate bonds | 39,001 | | — | | (506) | | — | | 38,495 | | Corporate bonds | 36,990 | | — | | (3,714) | | — | | 33,276 | |
Asset-backed securities | Asset-backed securities | 1,866 | | — | | (4) | | — | | 1,862 | | Asset-backed securities | 1,553 | | — | | (91) | | — | | 1,462 | |
Total available-for-sale | Total available-for-sale | $ | 1,169,520 | | $ | 11,074 | | $ | (13,026) | | $ | — | | $ | 1,167,568 | | Total available-for-sale | $ | 892,605 | | $ | 34 | | $ | (90,543) | | $ | — | | $ | 802,096 | |
1 Amortized cost and fair value exclude accrued interest receivable of $3.4 million and $3.7 million at June 30, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. | |
1 Amortized cost and fair value exclude accrued interest receivable of $3.1 million and $3.2 million at March 31, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. | | 1 Amortized cost and fair value exclude accrued interest receivable of $3.1 million and $3.2 million at March 31, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. |
As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies. In March 2022, we transferred $357.5 million of these securities from available-for-sale to held-to-maturity at fair value. We intend and have the ability to hold these securities to maturity. The net unrealized pre-tax loss of $14.8 million that remained inand the related accumulated other comprehensive loss isare accreted to interest income over the remaining lives of the securities. Because these entries offset each other, there is no impact to net income.
The amortized cost and fair value of investment debt securities by contractual maturity at June 30, 2022March 31, 2023 and December 31, 20212022 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.
| | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | Held-to-Maturity | | Available-for-Sale | | Held-to-Maturity | | Available-for-Sale | | Held-to-Maturity | | Available-for-Sale | | Held-to-Maturity | | Available-for-Sale |
(in thousands) | (in thousands) | Amortized Cost | Fair Value | | Amortized Cost | Fair Value | | Amortized Cost | Fair Value | | Amortized Cost | Fair Value | (in thousands) | Amortized Cost | Fair Value | | Amortized Cost | Fair Value | | Amortized Cost | Fair Value | | Amortized Cost | Fair Value |
Within one year | Within one year | $ | 100 | | $ | 100 | | | $ | 3,369 | | $ | 3,366 | | | $ | 101 | | $ | 103 | | | $ | 10,785 | | $ | 10,841 | | Within one year | $ | 52 | | $ | 51 | | | $ | 1,132 | | $ | 1,124 | | | $ | 450 | | $ | 446 | | | $ | 1,254 | | $ | 1,239 | |
After one but within five years | After one but within five years | 83,024 | | 81,968 | | | 260,444 | | 247,749 | | | 25,666 | | 26,559 | | | 219,474 | | 219,957 | | After one but within five years | 85,323 | | 82,266 | | | 362,588 | | 336,054 | | | 87,418 | | 83,663 | | | 335,813 | | 307,843 | |
After five years through ten years | After five years through ten years | 255,978 | | 228,380 | | | 300,994 | | 280,179 | | | 182,604 | | 182,303 | | | 299,937 | | 300,187 | | After five years through ten years | 268,433 | | 232,936 | | | 154,572 | | 141,260 | | | 262,072 | | 222,280 | | | 185,997 | | 166,273 | |
After ten years | After ten years | 592,485 | | 536,938 | | | 395,572 | | 361,855 | | | 133,851 | | 133,790 | | | 639,324 | | 636,583 | | After ten years | 604,752 | | 534,872 | | | 353,537 | | 319,095 | | | 622,267 | | 538,850 | | | 369,541 | | 326,741 | |
Total | Total | $ | 931,587 | | $ | 847,386 | | | $ | 960,379 | | $ | 893,149 | | | $ | 342,222 | | $ | 342,755 | | | $ | 1,169,520 | | $ | 1,167,568 | | Total | $ | 958,560 | | $ | 850,125 | | | $ | 871,829 | | $ | 797,533 | | | $ | 972,207 | | $ | 845,239 | | | $ | 892,605 | | $ | 802,096 | |
There were no sales of investment securities in the first halfquarter of 20222023 or 2021.
PledgedThe carrying values of pledged investment securities are shown in the following table:
| (in thousands) | (in thousands) | June 30, 2022 | December 31, 2021 | (in thousands) | March 31, 2023 | December 31, 2022 |
Pledged to the State of California: | Pledged to the State of California: | | Pledged to the State of California: | |
Secure public deposits in compliance with the Local Agency Security Program | Secure public deposits in compliance with the Local Agency Security Program | $ | 217,143 | | $ | 213,861 | | Secure public deposits in compliance with the Local Agency Security Program | $ | 228,970 | | $ | 235,587 | |
Collateral for trust deposits | Collateral for trust deposits | 676 | | 729 | | Collateral for trust deposits | 674 | | 677 | |
Collateral for Wealth Management and Trust Services checking account | Collateral for Wealth Management and Trust Services checking account | 568 | | 614 | | Collateral for Wealth Management and Trust Services checking account | 567 | | 569 | |
Total investment securities pledged to the State of California | Total investment securities pledged to the State of California | 218,387 | | 215,204 | | Total investment securities pledged to the State of California | 230,211 | | 236,833 | |
Bankruptcy trustee deposits pledged with Federal Reserve Bank | Bankruptcy trustee deposits pledged with Federal Reserve Bank | 1,905 | | 2,645 | | Bankruptcy trustee deposits pledged with Federal Reserve Bank | 1,700 | | 1,737 | |
Pledged to FHLB Securities-Backed Credit Program | | Pledged to FHLB Securities-Backed Credit Program | 395,780 | | — | |
Pledged to the Federal Reserve Bank Term Funding Program ("BTFP") | | Pledged to the Federal Reserve Bank Term Funding Program ("BTFP") | 278,638 | | — | |
Total pledged investment securities | Total pledged investment securities | $ | 220,292 | | $ | 217,849 | | Total pledged investment securities | $ | 906,329 | | $ | 238,570 | |
There were 409397 and 217407 securities in unrealized loss positions at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | < 12 continuous months | | ≥ 12 continuous months | | Total securities in a loss position |
(in thousands) | Fair value | Unrealized loss | | Fair value | Unrealized loss | | Fair value | Unrealized loss |
Held-to-maturity: | | | | | | | | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 302,998 | | $ | (34,731) | | | $ | — | | $ | — | | | $ | 302,998 | | $ | (34,731) | |
CMOs issued by FHLMC | 194,163 | | (20,136) | | | 4,018 | | (630) | | | 198,181 | | (20,766) | |
CMOs issued by FNMA | 67,069 | | (2,574) | | | — | | — | | | 67,069 | | (2,574) | |
CMOs issued by GNMA | 11,347 | | (982) | | | — | | — | | | 11,347 | | (982) | |
SBA-backed securities | 3,178 | | (66) | | | — | | — | | | 3,178 | | (66) | |
Debentures of government-sponsored agencies | 61,339 | | (11,007) | | | 36,881 | | (6,450) | | | 98,220 | | (17,457) | |
Obligations of state and political subdivisions | 51,313 | | (8,304) | | | — | | — | | | 51,313 | | (8,304) | |
Corporate bonds | 29,631 | | (369) | | | — | | — | | | 29,631 | | (369) | |
Total held-to-maturity | 721,038 | | (78,169) | | | 40,899 | | (7,080) | | | 761,937 | | (85,249) | |
Available-for-sale: | | | | | | | | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | 113,127 | | (8,784) | | | — | | — | | | 113,127 | | (8,784) | |
CMOs issued by FHLMC | 343,897 | | (22,540) | | | 3,538 | | (477) | | | 347,435 | | (23,017) | |
CMOs issued by FNMA | 33,201 | | (2,674) | | | 4,156 | | (286) | | | 37,357 | | (2,960) | |
CMOs issued by GNMA | 34,696 | | (2,414) | | | — | | — | | | 34,696 | | (2,414) | |
SBA-backed securities | 51,556 | | (2,091) | | | 1,059 | | (42) | | | 52,615 | | (2,133) | |
Debentures of government- sponsored agencies | 132,004 | | (8,126) | | | 7,336 | | (1,633) | | | 139,340 | | (9,759) | |
U.S. Treasury securities | 10,644 | | (1,251) | | | — | | — | | | 10,644 | | (1,251) | |
| | | | | | | | |
Obligations of state and political subdivisions | 101,078 | | (13,425) | | | 2,001 | | (600) | | | 103,079 | | (14,025) | |
Corporate bonds | 28,833 | | (2,167) | | | 5,259 | | (730) | | | 34,092 | | (2,897) | |
Asset-backed securities | 1,651 | | (70) | | | — | | — | | | 1,651 | | (70) | |
Total available-for-sale | 850,687 | | (63,542) | | | 23,349 | | (3,768) | | | 874,036 | | (67,310) | |
Total securities at loss position | $ | 1,571,725 | | $ | (141,711) | | | $ | 64,248 | | $ | (10,848) | | | $ | 1,635,973 | | $ | (152,559) | |
| December 31, 2021 | < 12 continuous months | | ≥ 12 continuous months | | Total securities in a loss position | |
March 31, 2023 | | March 31, 2023 | < 12 continuous months | | ≥ 12 continuous months | | Total securities in a loss position |
(in thousands) | (in thousands) | Fair value | Unrealized loss | | Fair value | Unrealized loss | | Fair value | Unrealized loss | (in thousands) | Fair value | Unrealized loss | | Fair value | Unrealized loss | | Fair value | Unrealized loss |
Held-to-maturity: | Held-to-maturity: | | | | | | Held-to-maturity: | | | | | |
MBS pass-through securities issued by FHLMC and FNMA | $ | 76,619 | | $ | (712) | | | $ | — | | $ | — | | | $ | 76,619 | | $ | (712) | | |
| MBS pass-through securities issued by FHLMC, FNMA and GNMA | | MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 9,107 | | $ | (316) | | | $ | 268,577 | | $ | (44,691) | | | $ | 277,684 | | $ | (45,007) | |
CMOs issued by FHLMC | CMOs issued by FHLMC | 54,811 | | (1,045) | | | — | | — | | | 54,811 | | (1,045) | | CMOs issued by FHLMC | 44,217 | | (1,091) | | | 150,466 | | (23,882) | | | 194,683 | | (24,973) | |
CMOs issued by FNMA | | CMOs issued by FNMA | 37,106 | | (353) | | | 41,538 | | (3,376) | | | 78,644 | | (3,729) | |
CMOs issued by GNMA | | CMOs issued by GNMA | 27,285 | | (1,802) | | | 10,467 | | (1,218) | | | 37,752 | | (3,020) | |
SBA-backed securities | | SBA-backed securities | — | | — | | | 1,878 | | (99) | | | 1,878 | | (99) | |
Debentures of government-sponsored agencies | | Debentures of government-sponsored agencies | 29,433 | | (561) | | | 94,316 | | (21,588) | | | 123,749 | | (22,149) | |
Obligations of state and political subdivisions | Obligations of state and political subdivisions | 19,203 | | (209) | | | — | | — | | | 19,203 | | (209) | | Obligations of state and political subdivisions | 9,000 | | (74) | | | 41,565 | | (8,654) | | | 50,565 | | (8,728) | |
Debentures of government-sponsored agencies | 50,571 | | (901) | | | — | | — | | | 50,571 | | (901) | | |
Corporate bonds | | Corporate bonds | — | | — | | | 28,767 | | (1,233) | | | 28,767 | | (1,233) | |
Total held-to-maturity | Total held-to-maturity | 201,204 | | (2,867) | | | — | | — | | | 201,204 | | (2,867) | | Total held-to-maturity | 156,148 | | (4,197) | | | 637,574 | | (104,741) | | | 793,722 | | (108,938) | |
Available-for-sale: | Available-for-sale: | | | | | | Available-for-sale: | | | | | |
MBS pass-through securities issued by FHLMC and FNMA | 263,474 | | (2,784) | | | — | | — | | | 263,474 | | (2,784) | | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | | MBS pass-through securities issued by FHLMC, FNMA and GNMA | 7,729 | | (233) | | | 87,173 | | (10,190) | | | 94,902 | | (10,423) | |
CMOs issued by FHLMC | | CMOs issued by FHLMC | 13,194 | | (263) | | | 299,939 | | (27,251) | | | 313,133 | | (27,514) | |
CMOs issued by FNMA | | CMOs issued by FNMA | 279 | | (4) | | | 31,321 | | (3,178) | | | 31,600 | | (3,182) | |
CMOs issued by GNMA | | CMOs issued by GNMA | 71 | | (1) | | | 27,014 | | (2,742) | | | 27,085 | | (2,743) | |
SBA-backed securities | SBA-backed securities | 7,478 | | (112) | | | 1,209 | | (43) | | | 8,687 | | (155) | | SBA-backed securities | 30 | | — | | | 37,580 | | (2,578) | | | 37,610 | | (2,578) | |
CMOs issued by FHLMC | 226,175 | | (4,677) | | | 4,415 | | (152) | | | 230,590 | | (4,829) | | |
CMOs issued by GNMA | 44,790 | | (553) | | | — | | — | | | 44,790 | | (553) | | |
CMOs issued by FNMA | 37,348 | | (611) | | | — | | — | | | 37,348 | | (611) | | |
Debentures of government- sponsored agencies | Debentures of government- sponsored agencies | 148,979 | | (2,527) | | | 8,549 | | (420) | | | 157,528 | | (2,947) | | Debentures of government- sponsored agencies | — | | — | | | 137,121 | | (12,000) | | | 137,121 | | (12,000) | |
U.S. Treasury securities | U.S. Treasury securities | 11,629 | | (256) | | | — | | — | | | 11,629 | | (256) | | U.S. Treasury securities | — | | — | | | 10,523 | | (1,385) | | | 10,523 | | (1,385) | |
| Obligations of state and political subdivisions | Obligations of state and political subdivisions | 17,552 | | (381) | | | — | | — | | | 17,552 | | (381) | | Obligations of state and political subdivisions | 4,486 | | (11) | | | 92,776 | | (11,486) | | | 97,262 | | (11,497) | |
Corporate Bonds | 38,495 | | (506) | | | — | | — | | | 38,495 | | (506) | | |
| Corporate bonds | | Corporate bonds | — | | — | | | 33,962 | | (3,029) | | | 33,962 | | (3,029) | |
Asset-backed securities | Asset-backed securities | 1,861 | | (4) | | | — | | — | | | 1,861 | | (4) | | Asset-backed securities | — | | — | | | 1,361 | | (57) | | | 1,361 | | (57) | |
Total available-for-sale | Total available-for-sale | 797,781 | | (12,411) | | | 14,173 | | (615) | | | 811,954 | | (13,026) | | Total available-for-sale | 25,789 | | (512) | | | 758,770 | | (73,896) | | | 784,559 | | (74,408) | |
Total securities at loss position | Total securities at loss position | $ | 998,985 | | $ | (15,278) | | | $ | 14,173 | | $ | (615) | | | $ | 1,013,158 | | $ | (15,893) | | Total securities at loss position | $ | 181,937 | | $ | (4,709) | | | $ | 1,396,344 | | $ | (178,637) | | | $ | 1,578,281 | | $ | (183,346) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | < 12 continuous months | | ≥ 12 continuous months | | Total securities in a loss position |
(in thousands) | Fair value | Unrealized loss | | Fair value | Unrealized loss | | Fair value | Unrealized loss |
Held-to-maturity: | | | | | | | | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 62,627 | | $ | (5,960) | | | $ | 218,507 | | $ | (44,187) | | | $ | 281,134 | | $ | (50,147) | |
CMOs issued by FHLMC | 78,144 | | (5,874) | | | 113,796 | | (23,629) | | | 191,940 | | (29,503) | |
CMOs issued by FNMA | 106,485 | | (5,419) | | | — | | — | | | 106,485 | | (5,419) | |
CMOs issued by GNMA | 27,570 | | (1,676) | | | 10,331 | | (1,400) | | | 37,901 | | (3,076) | |
SBA-backed securities | 2,239 | | (133) | | | — | | — | | | 2,239 | | (133) | |
Debentures of government- sponsored agencies | 38,645 | | (2,530) | | | 80,711 | | (23,937) | | | 119,356 | | (26,467) | |
Obligations of state and political subdivisions | 15,155 | | (589) | | | 36,603 | | (10,152) | | | 51,758 | | (10,741) | |
Corporate Bonds | 28,448 | | (1,552) | | | — | | — | | | 28,448 | | (1,552) | |
Total held-to-maturity | 359,313 | | (23,733) | | | 459,948 | | (103,305) | | | 819,261 | | (127,038) | |
Available-for-sale: | | | | | | | | |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | 44,630 | | (4,501) | | | 52,235 | | (7,632) | | | 96,865 | | (12,133) | |
CMOs issued by FHLMC | 169,760 | | (15,144) | | | 143,995 | | (18,538) | | | 313,755 | | (33,682) | |
CMOs issued by FNMA | 4,790 | | (235) | | | 27,529 | | (3,617) | | | 32,319 | | (3,852) | |
CMOs issued by GNMA | 8,214 | | (374) | | | 23,612 | | (2,922) | | | 31,826 | | (3,296) | |
SBA-backed securities | 37,845 | | (3,228) | | | 6,133 | | (143) | | | 43,978 | | (3,371) | |
Debentures of government- sponsored agencies | 19,054 | | (946) | | | 116,052 | | (13,062) | | | 135,106 | | (14,008) | |
U.S. Treasury securities | — | | — | | | 10,269 | | (1,635) | | | 10,269 | | (1,635) | |
Obligations of state and political subdivisions | 70,402 | | (9,459) | | | 28,711 | | (5,302) | | | 99,113 | | (14,761) | |
Corporate Bonds | — | | — | | | 33,276 | | (3,714) | | | 33,276 | | (3,714) | |
| | | | | | | | |
Asset-backed securities | — | | — | | | 1,462 | | (91) | | | 1,462 | | (91) | |
Total available-for-sale | 354,695 | | (33,887) | | | 443,274 | | (56,656) | | | 797,969 | | (90,543) | |
Total securities at loss position | $ | 714,008 | | $ | (57,620) | | | $ | 903,222 | | $ | (159,961) | | | $ | 1,617,230 | | $ | (217,581) | |
As of June 30, 2022,March 31, 2023, the investment portfolio included 18353 investment securities that had been in a continuous loss position for twelve months or more and 39144 investment securities that had been in a loss position for less than twelve months.
Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities.
Our investment in obligations of state and political subdivisions bonds are deemed credit worthy after our comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or credit enhancements.
At June 30, 2022,March 31, 2023, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost. No allowances for credit losses have been recognized on available-for-sale securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality at June 30, 2022.March 31, 2023.
Non-Marketable Securities Included in Other Assets
FHLB Capital Stock
As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $100 per share par value. We held $16.7 million of FHLB stock included in other assets on the consolidated statements of condition at both June 30, 2022March 31, 2023 and December 31, 2021.2022. The carrying amounts of
these investments are reasonable estimates of fair value because the securities are restricted to member banks and they do not have a readily determinable market value. Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at June 30, 2022March 31, 2023 and December 31, 2021.2022. On July 28, 2022,April 27, 2023, FHLB announced a cash dividend for the first quarter of 20222023 at an annualized dividend rate of 6.00%7.00% to be distributed in mid-August 2022.on May 11, 2023. Cash dividends paid on FHLB capital stock are recorded as non-interest income.
VISA Inc. Class B Common Stock
As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at June 30, 2022March 31, 2023 and December 31, 2021.2022. These shares have a carrying value of zero and are restricted from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction and the uncertainty on the conversion rate to Class A shares, these shares lack a readily determinable fair value. When converting this Class B common stock to Class A common stock based on the estimated conversion rate of 1.6059 and 1.61811.5991 at June 30, 2022March 31, 2023 and December 31, 2021,2022, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $3.3$3.8 million and $3.7$3.5 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The conversion rate is subject to further adjustment upon the final settlement of the covered litigation against Visa Inc. and its member banks. As such, the fair value of these Class B shares can differ significantly from their converted values. For further information, refer to Note 8, Commitments and Contingencies.
Low Income Housing Tax Credits
We invest in low-income housing tax credit funds as a limited partner, which totaled $2.7$2.4 million and $3.0$2.5 million recorded in other assets as of June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. In the first sixthree months of 2022,2023, we recognized $317$151 thousand of low-income housing tax credits and other tax benefits, offset by $267$127 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of June 30, 2022,March 31, 2023, our unfunded commitments for these low-income housing tax credit funds totaled $392$347 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first sixthree months of 20222023 or 2021,2022, as the value of the future tax benefits exceeds the carrying value of the investments.
Note 5: Loans and Allowance for Credit Losses on Loans
The following table presents the amortized cost of loans by class as of June 30, 2022March 31, 2023 and December 31, 2021.2022.
| (in thousands) | (in thousands) | June 30, 2022 | December 31, 2021 | (in thousands) | March 31, 2023 | December 31, 2022 |
Commercial and industrial | Commercial and industrial | $ | 213,122 | | $ | 301,602 | | Commercial and industrial | $ | 195,964 | | $ | 173,547 | |
Real estate: | Real estate: | | Real estate: | |
Commercial owner-occupied | Commercial owner-occupied | 382,897 | | 392,345 | | Commercial owner-occupied | 352,529 | | 354,877 | |
Commercial investor-owned | 1,190,419 | | 1,189,021 | | |
Commercial non-owner occupied | | Commercial non-owner occupied | 1,189,962 | | 1,191,889 | |
Construction | Construction | 118,147 | | 119,840 | | Construction | 110,386 | | 114,373 | |
Home equity | Home equity | 90,629 | | 88,746 | | Home equity | 86,572 | | 88,748 | |
Other residential | Other residential | 113,361 | | 114,558 | | Other residential | 116,447 | | 112,123 | |
Installment and other consumer loans | Installment and other consumer loans | 54,057 | | 49,533 | | Installment and other consumer loans | 60,468 | | 56,989 | |
Total loans, at amortized cost 1 | Total loans, at amortized cost 1 | 2,162,632 | | 2,255,645 | | Total loans, at amortized cost 1 | 2,112,328 | | 2,092,546 | |
Allowance for credit losses on loans | Allowance for credit losses on loans | (22,539) | | (23,023) | | Allowance for credit losses on loans | (23,330) | | (22,983) | |
Total loans, net of allowance for credit losses on loans | Total loans, net of allowance for credit losses on loans | $ | 2,140,093 | | $ | 2,232,622 | | Total loans, net of allowance for credit losses on loans | $ | 2,088,998 | | $ | 2,069,563 | |
1 Amortized cost includes net deferred loan origination costs (fees) of $1.4$2.1 million and $(901) thousand$1.8 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Amounts are also net of unrecognized purchase discounts of $2.7$2.4 million and $2.5$2.6 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Amortized cost excludes accrued interest, which totaled $5.8 million and $7.1$6.1 million at June 30, 2022both March 31, 2023 and December 31, 2021, respectively,2022, and is included in interest receivable and other assets in the consolidated statements of condition.
Lending Risks
Commercial and Industrial Loans - Commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers,
however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable and inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress. A weakened economy, and resultant decreased consumer and/or business spending, may have an effect on the credit quality of commercial loans.
Pursuant to the 2020 CARES Act, Bank of Marin originated 2,876 guaranteed loans totaling $444.1 million in 2 rounds of the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). Additionally in 2021, Bank of Marin assumed 113 PPP loans totaling $18.6 million from ARB as of the merger date. As of June 30, 2022, there were 112 PPP loans outstanding totaling $17.0 million (net of $420 thousand in unrecognized fees and costs), compared to 368 loans outstanding at December 31, 2021 totaling $111.2 million (net of $2.5 million in unrecognized fees and costs) included in commercial and industrial loan balances. PPP loans have terms of two to five years and earn interest at 1%. In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was netted with loan origination costs and accreted/amortized into interest income using the effective yield method over the contractual life of each loan. The recognition of fees and costs is accelerated when the SBA forgives the loan and/or the loan is paid off prior to maturity. PPP loans are fully guaranteed by the SBA if they meet the requirements of the program. As expected, the vast majority of the PPP loans have been fully forgiven by the SBA and we expect the majority of remaining loans to be forgiven as well.
Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow from either the business or investment property and supported by real property collateral. Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios. Furthermore, a large majority of our loans are guaranteed by the owners of the properties. Conditions in the real estate markets or downturn in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio.
Construction Loans - Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loans include interest reserves that are used for the payment of interest during the development and marketing periods and are capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes.
Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project.
Consumer Loans - Consumer loans primarily consist of home equity lines of credit, other residential loans, floating homes, and indirect luxury auto loans, along with a small number of installment loans. Our other residential loans include tenancy-in-common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores or collateral with high loan-to-value ratios.
Credit Quality Indicators
We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of “Special Mention” risk graded loans, or worse, are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows:
Pass and Watch - Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt-service-coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period.
Special Mention - Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification.
Substandard - Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies.
Doubtful - Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent.
We regularly review our credits for accuracy of risk grades whenever we receive new information.information and at each quarterly and year-end reporting period. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.
The following tables present the loan portfolio by loan class, origination year and internal risk rating as of June 30, 2022March 31, 2023 and December 31, 2021. We early adopted the vintage disclosure requirements of ASU 2022-02 prospectively as described in Note 2 beginning with the first quarter of 2022. Accordingly, the 2022The current year vintage table reflects gross charge-offs by loan class and year of origination. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination.
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(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost | |
June 30, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total |
Commercial and industrial: | | | | | | | | |
Pass and Watch | $ | 9,586 | | $ | 21,160 | | $ | 9,230 | | $ | 24,730 | | $ | 6,988 | | $ | 28,168 | | $ | 102,567 | | $ | 202,429 | |
Special Mention | — | | — | | — | | 503 | | 4,248 | | — | | 123 | | 4,874 | |
Substandard | — | | — | | 1,469 | | — | | — | | — | | 4,350 | | 5,819 | |
Total commercial and industrial | $ | 9,586 | | $ | 21,160 | | $ | 10,699 | | $ | 25,233 | | $ | 11,236 | | $ | 28,168 | | $ | 107,040 | | $ | 213,122 | |
| | | | | | | | |
| | | | | | | | |
Commercial real estate, owner-occupied: | | | | | | | | |
Pass and Watch | $ | 55,263 | | $ | 53,245 | | $ | 41,565 | | $ | 45,948 | | $ | 30,419 | | $ | 116,659 | | $ | — | | $ | 343,099 | |
Special Mention | — | | 16,471 | | — | | 317 | | 5,386 | | 4,567 | | — | | 26,741 | |
Substandard | — | | — | | 7,142 | | 1,754 | | — | | 4,055 | | — | | 12,951 | |
Doubtful | — | | — | | 106 | | — | | — | | — | | — | | 106 | |
Total commercial real estate, owner-occupied | $ | 55,263 | | $ | 69,716 | | $ | 48,813 | | $ | 48,019 | | $ | 35,805 | | $ | 125,281 | | $ | — | | $ | 382,897 | |
| | | | | | | | |
Commercial real estate, investor-owned: | | | | | | | | |
Pass and Watch | $ | 118,868 | | $ | 221,908 | | $ | 164,765 | | $ | 171,674 | | $ | 125,646 | | $ | 343,000 | | $ | 73 | | $ | 1,145,934 | |
Special Mention | — | | — | | 4,531 | | 2,714 | | 9,729 | | 9,980 | | — | | 26,954 | |
Substandard | — | | — | | — | | — | | — | | 17,531 | | — | | 17,531 | |
| | | | | | | | |
Total commercial real estate, investor-owned | $ | 118,868 | | $ | 221,908 | | $ | 169,296 | | $ | 174,388 | | $ | 135,375 | | $ | 370,511 | | $ | 73 | | $ | 1,190,419 | |
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(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost | |
June 30, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total |
Construction: | | | | | | | | |
Pass and Watch | $ | 33,184 | | $ | 24,274 | | $ | 42,658 | | $ | 8,921 | | $ | 9,110 | | $ | — | | $ | — | | $ | 118,147 | |
| | | | | | | | |
| | | | | | | | |
Total construction | $ | 33,184 | | $ | 24,274 | | $ | 42,658 | | $ | 8,921 | | $ | 9,110 | | $ | — | | $ | — | | $ | 118,147 | |
| | | | | | | | |
| | | | | | | | |
Home equity: | | | | | | | | |
Pass and Watch | $ | — | | $ | 24 | | $ | — | | $ | — | | $ | — | | $ | 600 | | $ | 89,369 | | $ | 89,993 | |
| | | | | | | | |
Substandard | — | | — | | — | | — | | — | | 433 | | 203 | | 636 | |
Total home equity | $ | — | | $ | 24 | | $ | — | | $ | — | | $ | — | | $ | 1,033 | | $ | 89,572 | | $ | 90,629 | |
| | | | | | | | |
Other residential: | | | | | | | | |
Pass and Watch | $ | 11,504 | | $ | 15,575 | | $ | 30,158 | | $ | 22,869 | | $ | 13,186 | | $ | 20,069 | | $ | — | | $ | 113,361 | |
| | | | | | | | |
| | | | | | | | |
Total other residential | $ | 11,504 | | $ | 15,575 | | $ | 30,158 | | $ | 22,869 | | $ | 13,186 | | $ | 20,069 | | $ | — | | $ | 113,361 | |
| | | | | | | | |
Installment and other consumer: | | | | | | | | |
Pass and Watch | $ | 10,938 | | $ | 15,523 | | $ | 6,850 | | $ | 7,441 | | $ | 4,696 | | $ | 6,888 | | $ | 1,721 | | $ | 54,057 | |
| | | | | | | | |
| | | | | | | | |
Total installment and other consumer | $ | 10,938 | | $ | 15,523 | | $ | 6,850 | | $ | 7,441 | | $ | 4,696 | | $ | 6,888 | | $ | 1,721 | | $ | 54,057 | |
Gross current period charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (18) | | $ | (4) | | $ | (22) | |
Total loans: | | | | | | | | |
Pass and Watch | $ | 239,343 | | $ | 351,709 | | $ | 295,226 | | $ | 281,583 | | $ | 190,045 | | $ | 515,384 | | $ | 193,730 | | $ | 2,067,020 | |
Total Special Mention | $ | — | | $ | 16,471 | | $ | 4,531 | | $ | 3,534 | | $ | 19,363 | | $ | 14,547 | | $ | 123 | | $ | 58,569 | |
Total Substandard | $ | — | | $ | — | | $ | 8,611 | | $ | 1,754 | | $ | — | | $ | 22,019 | | $ | 4,553 | | $ | 36,937 | |
Total Doubtful | $ | — | | $ | — | | $ | 106 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 106 | |
Totals | $ | 239,343 | | $ | 368,180 | | $ | 308,474 | | $ | 286,871 | | $ | 209,408 | | $ | 551,950 | | $ | 198,406 | | $ | 2,162,632 | |
Total gross current period charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (18) | | $ | (4) | | $ | (22) | |
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(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost | |
December 31, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total |
Commercial and industrial: | | | | | | | | |
Pass and Watch | $ | 96,643 | | $ | 35,967 | | $ | 25,754 | | $ | 12,763 | | $ | 2,729 | | $ | 31,280 | | $ | 90,744 | | $ | 295,880 | |
Special Mention | — | | 1,700 | | 584 | | 273 | | — | | — | | 2,088 | | 4,645 | |
Substandard | — | | — | | — | | — | | — | | — | | 1,077 | | 1,077 | |
Total commercial and industrial | $ | 96,643 | | $ | 37,667 | | $ | 26,338 | | $ | 13,036 | | $ | 2,729 | | $ | 31,280 | | $ | 93,909 | | $ | 301,602 | |
Commercial real estate, owner-occupied: | | | | | | | | |
Pass and Watch | $ | 58,395 | | $ | 43,216 | | $ | 49,485 | | $ | 36,174 | | $ | 42,430 | | $ | 104,898 | | $ | — | | $ | 334,598 | |
Special Mention | 16,748 | | — | | — | | 7,846 | | — | | 16,996 | | — | | 41,590 | |
Substandard | — | | 7,155 | | 285 | | — | | — | | 8,603 | | — | | 16,043 | |
Doubtful | — | | 114 | | — | | — | | — | | — | | — | | 114 | |
Total commercial real estate, owner-occupied | $ | 75,143 | | $ | 50,485 | | $ | 49,770 | | $ | 44,020 | | $ | 42,430 | | $ | 130,497 | | $ | — | | $ | 392,345 | |
Commercial real estate, investor-owned: | | | | | | | | |
Pass and Watch | $ | 225,722 | | $ | 186,214 | | $ | 187,418 | | $ | 143,028 | | $ | 75,419 | | $ | 325,882 | | $ | 84 | | $ | 1,143,767 | |
Special Mention | — | | 1,214 | | 2,714 | | 11,773 | | 1,787 | | 9,540 | | — | | 27,028 | |
Substandard | — | | — | | — | | 695 | | — | | 17,531 | | — | | 18,226 | |
Total commercial real estate, investor-owned | $ | 225,722 | | $ | 187,428 | | $ | 190,132 | | $ | 155,496 | | $ | 77,206 | | $ | 352,953 | | $ | 84 | | $ | 1,189,021 | |
Construction: | | | | | | | | |
Pass and Watch | $ | 31,269 | | $ | 70,528 | | $ | 8,935 | | $ | 9,108 | | $ | — | | $ | — | | $ | — | | $ | 119,840 | |
| | | | | | | | |
| | | | | | | | |
Total construction | $ | 31,269 | | $ | 70,528 | | $ | 8,935 | | $ | 9,108 | | $ | — | | $ | — | | $ | — | | $ | 119,840 | |
Home equity: | | | | | | | | |
Pass and Watch | $ | — | | $ | — | | $ | — | | $ | — | | $ | 10 | | $ | 268 | | $ | 87,693 | | $ | 87,971 | |
| | | | | | | | |
Substandard | — | | — | | — | | — | | — | | 377 | | 398 | | 775 | |
Total home equity | $ | — | | $ | — | | $ | — | | $ | — | | $ | 10 | | $ | 645 | | $ | 88,091 | | $ | 88,746 | |
Other residential: | | | | | | | | |
Pass and Watch | $ | 15,800 | | $ | 31,981 | | $ | 25,529 | | $ | 15,411 | | $ | 7,964 | | $ | 17,873 | | $ | — | | $ | 114,558 | |
| | | | | | | | |
| | | | | | | | |
Total other residential | $ | 15,800 | | $ | 31,981 | | $ | 25,529 | | $ | 15,411 | | $ | 7,964 | | $ | 17,873 | | $ | — | | $ | 114,558 | |
Installment and other consumer: | | | | | | | | |
Pass and Watch | $ | 17,207 | | $ | 7,748 | | $ | 9,436 | | $ | 5,633 | | $ | 1,123 | | $ | 6,620 | | $ | 1,766 | | $ | 49,533 | |
| | | | | | | | |
| | | | | | | | |
Total installment and other consumer | $ | 17,207 | | $ | 7,748 | | $ | 9,436 | | $ | 5,633 | | $ | 1,123 | | $ | 6,620 | | $ | 1,766 | | $ | 49,533 | |
Total loans: | | | | | | | | |
Pass and Watch | $ | 445,036 | | $ | 375,654 | | $ | 306,557 | | $ | 222,117 | | $ | 129,675 | | $ | 486,821 | | $ | 180,287 | | $ | 2,146,147 | |
Total Special Mention | $ | 16,748 | | $ | 2,914 | | $ | 3,298 | | $ | 19,892 | | $ | 1,787 | | $ | 26,536 | | $ | 2,088 | | $ | 73,263 | |
Total Substandard | $ | — | | $ | 7,155 | | $ | 285 | | $ | 695 | | $ | — | | $ | 26,511 | | $ | 1,475 | | $ | 36,121 | |
Doubtful | $ | — | | $ | 114 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 114 | |
Totals | $ | 461,784 | | $ | 385,837 | | $ | 310,140 | | $ | 242,704 | | $ | 131,462 | | $ | 539,868 | | $ | 183,850 | | $ | 2,255,645 | |
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(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost | |
March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
Commercial and industrial: | | | | | | | | |
Pass and Watch | $ | 25,074 | | $ | 13,349 | | $ | 5,414 | | $ | 6,732 | | $ | 17,105 | | $ | 27,065 | | $ | 87,069 | | $ | 181,808 | |
Special Mention | 3 | | 275 | | — | | — | | 2,743 | | 4,395 | | 1,089 | | 8,505 | |
Substandard | — | | — | | — | | 1,141 | | — | | 585 | | 3,925 | | 5,651 | |
Total commercial and industrial | $ | 25,077 | | $ | 13,624 | | $ | 5,414 | | $ | 7,873 | | $ | 19,848 | | $ | 32,045 | | $ | 92,083 | | $ | 195,964 | |
Gross current period charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | (3) | | $ | — | | $ | — | | $ | (3) | |
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Commercial real estate, owner-occupied: | | | | | | | | |
Pass and Watch | $ | 371 | | $ | 55,727 | | $ | 51,067 | | $ | 39,903 | | $ | 47,400 | | $ | 130,314 | | $ | — | | $ | 324,782 | |
Special Mention | — | | — | | 16,058 | | — | | 298 | | 9,680 | | — | | 26,036 | |
Substandard | — | | — | | — | | — | | — | | 1,711 | | — | | 1,711 | |
| | | | | | | | |
Total commercial real estate, owner-occupied | $ | 371 | | $ | 55,727 | | $ | 67,125 | | $ | 39,903 | | $ | 47,698 | | $ | 141,705 | | $ | — | | $ | 352,529 | |
| | | | | | | | |
Commercial real estate, non-owner occupied: | | | | | | | | |
Pass and Watch | $ | 5,456 | | $ | 179,181 | | $ | 210,546 | | $ | 154,342 | | $ | 162,111 | | $ | 426,972 | | $ | 48 | | $ | 1,138,656 | |
Special Mention | — | | — | | 1,166 | | 11,998 | | 3,907 | | 11,466 | | — | | 28,537 | |
Substandard | — | | — | | 2,246 | | — | | — | | 20,523 | | — | | 22,769 | |
| | | | | | | | |
Total commercial real estate, non-owner occupied | $ | 5,456 | | $ | 179,181 | | $ | 213,958 | | $ | 166,340 | | $ | 166,018 | | $ | 458,961 | | $ | 48 | | $ | 1,189,962 | |
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Construction: | | | | | | | | |
Pass and Watch | $ | 4,578 | | $ | 44,693 | | $ | 24,804 | | $ | 27,198 | | $ | — | | $ | 9,113 | | $ | — | | $ | 110,386 | |
| | | | | | | | |
| | | | | | | | |
Total construction | $ | 4,578 | | $ | 44,693 | | $ | 24,804 | | $ | 27,198 | | $ | — | | $ | 9,113 | | $ | — | | $ | 110,386 | |
| | | | | | | | |
Home equity: | | | | | | | | |
Pass and Watch | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 966 | | $ | 84,723 | | $ | 85,689 | |
| | | | | | | | |
Substandard | — | | — | | — | | — | | — | | 228 | | 655 | | 883 | |
Total home equity | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,194 | | $ | 85,378 | | $ | 86,572 | |
| | | | | | | | |
Other residential: | | | | | | | | |
Pass and Watch | $ | 6,223 | | $ | 21,047 | | $ | 14,386 | | $ | 28,542 | | $ | 21,750 | | $ | 24,499 | | $ | — | | $ | 116,447 | |
| | | | | | | | |
| | | | | | | | |
Total other residential | $ | 6,223 | | $ | 21,047 | | $ | 14,386 | | $ | 28,542 | | $ | 21,750 | | $ | 24,499 | | $ | — | | $ | 116,447 | |
| | | | | | | | |
Installment and other consumer: | | | | | | | | |
Pass and Watch | $ | 6,591 | | $ | 18,531 | | $ | 12,501 | | $ | 5,443 | | $ | 5,951 | | $ | 10,501 | | $ | 950 | | $ | 60,468 | |
| | | | | | | | |
| | | | | | | | |
Total installment and other consumer | $ | 6,591 | | $ | 18,531 | | $ | 12,501 | | $ | 5,443 | | $ | 5,951 | | $ | 10,501 | | $ | 950 | | $ | 60,468 | |
Gross current period charge-offs | $ | — | | $ | (5) | | $ | — | | $ | (3) | | $ | — | | $ | (1) | | $ | (2) | | $ | (11) | |
Total loans: | | | | | | | | |
Pass and Watch | $ | 48,293 | | $ | 332,528 | | $ | 318,718 | | $ | 262,160 | | $ | 254,317 | | $ | 629,430 | | $ | 172,790 | | $ | 2,018,236 | |
Total Special Mention | $ | 3 | | $ | 275 | | $ | 17,224 | | $ | 11,998 | | $ | 6,948 | | $ | 25,541 | | $ | 1,089 | | $ | 63,078 | |
Total Substandard | $ | — | | $ | — | | $ | 2,246 | | $ | 1,141 | | $ | — | | $ | 23,047 | | $ | 4,580 | | $ | 31,014 | |
Total Doubtful | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Totals | $ | 48,296 | | $ | 332,803 | | $ | 338,188 | | $ | 275,299 | | $ | 261,265 | | $ | 678,018 | | $ | 178,459 | | $ | 2,112,328 | |
Total gross current period charge-offs | $ | — | | $ | (5) | | $ | — | | $ | (3) | | $ | (3) | | $ | (1) | | $ | (2) | | $ | (14) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost | |
December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total |
Commercial and industrial: | | | | | | | | |
Pass and Watch | $ | 15,349 | | $ | 6,679 | | $ | 7,603 | | $ | 19,982 | | $ | 5,362 | | $ | 24,954 | | $ | 84,655 | | $ | 164,584 | |
Special Mention | 275 | | — | | — | | 2,272 | | 3,836 | | — | | 402 | | 6,785 | |
Substandard | — | | — | | 1,252 | | — | | — | | 625 | | 301 | | 2,178 | |
Total commercial and industrial | $ | 15,624 | | $ | 6,679 | | $ | 8,855 | | $ | 22,254 | | $ | 9,198 | | $ | 25,579 | | $ | 85,358 | | $ | 173,547 | |
| | | | | | | | |
Commercial real estate, owner-occupied: | | | | | | | | |
Pass and Watch | $ | 54,188 | | $ | 52,080 | | $ | 40,369 | | $ | 44,798 | | $ | 29,856 | | $ | 104,377 | | $ | — | | $ | 325,668 | |
Special Mention | — | | 16,199 | | — | | 304 | | 5,255 | | 4,493 | | — | | 26,251 | |
Substandard | — | | — | | — | | 1,160 | | — | | 1,699 | | — | | 2,859 | |
Doubtful | — | | — | | 99 | | — | | — | | — | | — | | 99 | |
Total commercial real estate, owner-occupied | $ | 54,188 | | $ | 68,279 | | $ | 40,468 | | $ | 46,262 | | $ | 35,111 | | $ | 110,569 | | $ | — | | $ | 354,877 | |
Commercial real estate, non-owner occupied: | | | | | | | | |
Pass and Watch | $ | 177,822 | | $ | 211,228 | | $ | 155,278 | | $ | 160,670 | | $ | 129,166 | | $ | 308,509 | | $ | 57 | | $ | 1,142,730 | |
Special Mention | — | | 1,172 | | 12,097 | | 3,934 | | 678 | | 9,290 | | — | | 27,171 | |
Substandard | — | | 2,264 | | — | | — | | — | | 19,724 | | — | | 21,988 | |
Total commercial real estate, non-owner occupied | $ | 177,822 | | $ | 214,664 | | $ | 167,375 | | $ | 164,604 | | $ | 129,844 | | $ | 337,523 | | $ | 57 | | $ | 1,191,889 | |
Construction: | | | | | | | | |
Pass and Watch | $ | 49,262 | | $ | 19,393 | | $ | 28,861 | | $ | 7,745 | | $ | 9,112 | | $ | — | | $ | — | | $ | 114,373 | |
| | | | | | | | |
| | | | | | | | |
Total construction | $ | 49,262 | | $ | 19,393 | | $ | 28,861 | | $ | 7,745 | | $ | 9,112 | | $ | — | | $ | — | | $ | 114,373 | |
Home equity: | | | | | | | | |
Pass and Watch | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 883 | | $ | 86,971 | | $ | 87,854 | |
| | | | | | | | |
Substandard | — | | — | | — | | — | | — | | 480 | | 414 | | 894 | |
Total home equity | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,363 | | $ | 87,385 | | $ | 88,748 | |
Other residential: | | | | | | | | |
Pass and Watch | $ | 21,154 | | $ | 14,547 | | $ | 29,018 | | $ | 21,890 | | $ | 11,064 | | $ | 14,450 | | $ | — | | $ | 112,123 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost | |
December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total |
Total other residential | $ | 21,154 | | $ | 14,547 | | $ | 29,018 | | $ | 21,890 | | $ | 11,064 | | $ | 14,450 | | $ | — | | $ | 112,123 | |
Installment and other consumer: | | | | | | | | |
Pass and Watch | $ | 20,054 | | $ | 13,022 | | $ | 5,727 | | $ | 6,492 | | $ | 4,181 | | $ | 6,478 | | $ | 944 | | $ | 56,898 | |
| | | | | | | | |
Substandard | — | | — | | — | | — | | — | | 91 | | — | | 91 | |
Total installment and other consumer | $ | 20,054 | | $ | 13,022 | | $ | 5,727 | | $ | 6,492 | | $ | 4,181 | | $ | 6,569 | | $ | 944 | | $ | 56,989 | |
| | | | | | | | |
Total loans: | | | | | | | | |
Pass and Watch | $ | 337,829 | | $ | 316,949 | | $ | 266,856 | | $ | 261,577 | | $ | 188,741 | | $ | 459,651 | | $ | 172,627 | | $ | 2,004,230 | |
Total Special Mention | $ | 275 | | $ | 17,371 | | $ | 12,097 | | $ | 6,510 | | $ | 9,769 | | $ | 13,783 | | $ | 402 | | $ | 60,207 | |
Total Substandard | $ | — | | $ | 2,264 | | $ | 1,252 | | $ | 1,160 | | $ | — | | $ | 22,619 | | $ | 715 | | $ | 28,010 | |
Total Doubtful | $ | — | | $ | — | | $ | 99 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 99 | |
Totals | $ | 338,104 | | $ | 336,584 | | $ | 280,304 | | $ | 269,247 | | $ | 198,510 | | $ | 496,053 | | $ | 173,744 | | $ | 2,092,546 | |
| | | | | | | | |
The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of June 30, 2022March 31, 2023 and December 31, 2021.2022.
| Loan Aging Analysis by Class | Loan Aging Analysis by Class | Loan Aging Analysis by Class |
(in thousands) | (in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, investor-owned | Construction | Home equity | Other residential | Installment and other consumer | Total | (in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, non-owner occupied | Construction | Home equity | Other residential | Installment and other consumer | Total |
June 30, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
30-59 days past due | 30-59 days past due | $ | 1,065 | | $ | 660 | | $ | — | | $ | — | | $ | 100 | | $ | — | | $ | 166 | | $ | 1,991 | | 30-59 days past due | $ | 822 | | $ | — | | $ | 924 | | $ | — | | $ | 399 | | $ | — | | $ | 1 | | $ | 2,146 | |
60-89 days past due | 60-89 days past due | 589 | | 545 | | — | | — | | — | | — | | 28 | | 1,162 | | 60-89 days past due | — | | — | | — | | — | | — | | — | | — | | — | |
90 days or more past due | 90 days or more past due | 202 | | — | | — | | — | | 54 | | — | | — | | 256 | | 90 days or more past due | — | | 33 | | — | | — | | 598 | | — | | 3 | | 634 | |
Total past due | Total past due | 1,856 | | 1,205 | | — | | — | | 154 | | — | | 194 | | 3,409 | | Total past due | 822 | | 33 | | 924 | | — | | 997 | | — | | 4 | | 2,780 | |
Current | Current | 211,266 | | 381,692 | | 1,190,419 | | 118,147 | | 90,475 | | 113,361 | | 53,863 | | 2,159,223 | | Current | 195,142 | | 352,496 | | 1,189,038 | | 110,386 | | 85,575 | | 116,447 | | 60,464 | | 2,109,548 | |
Total loans 1 | Total loans 1 | $ | 213,122 | | $ | 382,897 | | $ | 1,190,419 | | $ | 118,147 | | $ | 90,629 | | $ | 113,361 | | $ | 54,057 | | $ | 2,162,632 | | Total loans 1 | $ | 195,964 | | $ | 352,529 | | $ | 1,189,962 | | $ | 110,386 | | $ | 86,572 | | $ | 116,447 | | $ | 60,468 | | $ | 2,112,328 | |
Non-accrual loans 2 | Non-accrual loans 2 | $ | — | | $ | 7,564 | | $ | — | | $ | — | | $ | 454 | | $ | — | | $ | — | | $ | 8,018 | | Non-accrual loans 2 | $ | — | | $ | 331 | | $ | 924 | | $ | — | | $ | 768 | | $ | — | | $ | 3 | | $ | 2,026 | |
Non-accrual loans with no allowance | Non-accrual loans with no allowance | $ | — | | $ | 7,564 | | $ | — | | $ | — | | $ | 454 | | $ | — | | $ | — | | $ | 8,018 | | Non-accrual loans with no allowance | $ | — | | $ | 331 | | $ | 924 | | $ | — | | $ | 768 | | $ | — | | $ | — | | $ | 2,023 | |
December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
30-59 days past due | 30-59 days past due | $ | 2 | | $ | — | | $ | — | | $ | — | | $ | 498 | | $ | — | | $ | 1,036 | | $ | 1,536 | | 30-59 days past due | $ | 3 | | $ | — | | $ | — | | $ | — | | $ | 319 | | $ | 93 | | $ | 5 | | $ | 420 | |
60-89 days past due | 60-89 days past due | 394 | | — | | — | | — | | 67 | | — | | — | | 461 | | 60-89 days past due | — | | — | | — | | — | | 244 | | — | | — | | 244 | |
90 days or more past due | 90 days or more past due | 229 | | — | | — | | — | | 88 | | — | | — | | 317 | | 90 days or more past due | 264 | | — | | — | | — | | 414 | | — | | — | | 678 | |
Total past due | Total past due | 625 | | — | | — | | — | | 653 | | — | | 1,036 | | 2,314 | | Total past due | 267 | | — | | — | | — | | 977 | | 93 | | 5 | | 1,342 | |
Current | Current | 300,977 | | 392,345 | | 1,189,021 | | 119,840 | | 88,093 | | 114,558 | | 48,497 | | 2,253,331 | | Current | 173,280 | | 354,877 | | 1,191,889 | | 114,373 | | 87,771 | | 112,030 | | 56,984 | | 2,091,204 | |
Total loans 1 | Total loans 1 | $ | 301,602 | | $ | 392,345 | | $ | 1,189,021 | | $ | 119,840 | | $ | 88,746 | | $ | 114,558 | | $ | 49,533 | | $ | 2,255,645 | | Total loans 1 | $ | 173,547 | | $ | 354,877 | | $ | 1,191,889 | | $ | 114,373 | | $ | 88,748 | | $ | 112,123 | | $ | 56,989 | | $ | 2,092,546 | |
Non-accrual loans 2 | Non-accrual loans 2 | $ | — | | $ | 7,269 | | $ | 694 | | $ | — | | $ | 413 | | $ | — | | $ | — | | $ | 8,376 | | Non-accrual loans 2 | $ | — | | $ | 1,563 | | $ | — | | $ | — | | $ | 778 | | $ | — | | $ | 91 | | $ | 2,432 | |
Non-accrual loans with no allowance | Non-accrual loans with no allowance | $ | — | | $ | 7,269 | | $ | 694 | | $ | — | | $ | 413 | | $ | — | | $ | — | | $ | 8,376 | | Non-accrual loans with no allowance | $ | — | | $ | 1,563 | | $ | — | | $ | — | | $ | 778 | | $ | — | | $ | 91 | | $ | 2,432 | |
1 There were 0no non-performing loans past due more than ninety days and accruing interest as of June 30, 2022March 31, 2023 and December 31, 2021.2022.2 None of the non-accrual loans as of June 30, 2022March 31, 2023 or December 31, 20212022 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the three and six months ended June 30, 2022March 31, 2023 and 2021. There were 32022. We reversed interest income totaling $16 thousand and less than one thousand for loans totaling $397 thousand placed on non-accrual status during the sixthree months ended June 30,March 31, 2023 and March 31, 2022, for which we reversed $8 thousand in interest income at the time of change in status, 1 of which for $16 thousand was subsequently charged off in the second quarter.respectively.
Collateral Dependent Loans
The following table presents the amortized cost basis of individually analyzed collateral-dependent loans, which are all on non-accrual status, by class at June 30, 2022March 31, 2023 and December 31, 2021.2022.
| | | Amortized Cost by Collateral Type | | | Amortized Cost by Collateral Type | |
(in thousands) | (in thousands) | Commercial Real Estate | Residential Real Estate | | Other | Total 1 | Allowance for Credit Losses | (in thousands) | Commercial Real Estate | Residential Real Estate | | Other | Total 1 | Allowance for Credit Losses |
| June 30, 2022 | | | | |
March 31, 2023 | | March 31, 2023 | | | |
Commercial real estate, owner-occupied | Commercial real estate, owner-occupied | $ | 7,564 | | $ | — | | | $ | — | | $ | 7,564 | | $ | — | | Commercial real estate, owner-occupied | $ | 331 | | $ | — | | | $ | — | | $ | 331 | | $ | — | |
| Commercial real estate, non-owner occupied | | Commercial real estate, non-owner occupied | 924 | | — | | | — | | 924 | | — | |
| Home equity | Home equity | — | | 454 | | | — | | 454 | | — | | Home equity | — | | 768 | | | — | | 768 | | — | |
| Installment and other consumer | | Installment and other consumer | — | | — | | | 3 | | 3 | | 3 | |
Total | | Total | $ | 1,255 | | $ | 768 | | | $ | 3 | | $ | 2,026 | | $ | 3 | |
December 31, 2022 | | December 31, 2022 | | | |
Commercial real estate, owner-occupied | | Commercial real estate, owner-occupied | $ | 1,563 | | $ | — | | | $ | — | | $ | 1,563 | | $ | — | |
Home equity | | Home equity | — | | 778 | | | — | | 778 | | — | |
| Total | $ | 7,564 | | $ | 454 | | | $ | — | | $ | 8,018 | | $ | — | | |
December 31, 2021 | | | | |
Commercial real estate, owner-occupied | $ | 7,269 | | $ | — | | | $ | — | | $ | 7,269 | | $ | — | | |
Commercial real estate, investor-owned | 694 | | — | | | — | | 694 | | — | | |
| Home equity | — | | 413 | | | — | | 413 | | — | | |
Installment and other consumer | | Installment and other consumer | — | | — | | | 91 | | 91 | | — | |
| Total | Total | $ | 7,963 | | $ | 413 | | | $ | — | | $ | 8,376 | | $ | — | | Total | $ | 1,563 | | $ | 778 | | | $ | 91 | | $ | 2,432 | | $ | — | |
1 There were no collateral-dependent residential real estate mortgage loans in process of foreclosure or in substance repossessed at June 30, 2022March 31, 2023 or December 31, 2021.2022. The weighted average loan-to-value of collateral dependent loans was approximately 67%42% at both June 30, 2022March 31, 2023 and December 31, 2021.
Troubled Debt Restructuring
Our loan portfolio includes certain loans modified in a troubled debt restructuring (“TDR”), where we have granted economic concessions to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to accruing status after management considers the borrower’s sustained repayment performance for a reasonable period, generally nine months, and obtains reasonable assurance of repayment and performance.
We may remove a loan from TDR designation if it meets all of the following conditions:
•The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards;2022.
Loan Modifications
•The borrower is no longer considered to be in financial difficulty;
•We adopted ASU No. 2022-02, PerformanceFinancial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023, as described in Note 2, Recently Adopted and Issued Accounting Standards. The amendments enhanced disclosures related to certain types of loan modifications for borrowers experiencing financial difficulty, including principal forgiveness, interest rate reductions, other-than-insignificant payment delays, and/or term extensions. There were no such modifications during the loan is reasonably assured; and
•Existing loan did not have any forgiveness of principal or interest.three months ended March 31, 2023 requiring disclosure.
There were no loans removed from TDR designation during the six months ended June 30, 2022 and 2021.
In accordance with section 4013Allocation of the CARES Act, subsequently amended by section 541 of the 2020 Economic Aid Act, we elected to apply the temporary accounting relief provisionsAllowance for loan modifications that met certain criteria, which would otherwise be designated as TDRs under existing GAAP. As of June 30, 2022, 2 borrowing relationships with 3 loans totaling $23.6 million were continuing to benefit from payment relief. The weighted average loan-to-value ratio of the remaining payment relief loans was approximately 44%. We accrue and recognize interest incomeCredit Losses on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued interest is fully paid. We will continue to work closely with both of these clients and monitor their performance.Loans
The following table summarizespresents the amortized costdetails of TDRthe allowance for credit losses on loans segregated by loan classportfolio segments as of June 30, 2022March 31, 2023 and December 31, 2021.
| | | | | | | | |
(in thousands) | June 30, 2022 | December 31, 2021 |
Commercial and industrial | $ | 1,178 | | $ | 1,183 | |
Commercial real estate, owner-occupied | 7,141 | | 7,155 | |
Commercial real estate, investor-owned | 170 | | 179 | |
| | |
Home equity | 479 | | 386 | |
| | |
Installment and other consumer | 571 | | 607 | |
Total 1 | $ | 9,539 | | $ | 9,510 | |
2022.1 TDR loans on non-accrual status totaled $7.4 million at both June 30, 2022 and December 31, 2021. Unfunded commitments for TDR loans totaled $241 thousand and $441 thousand as of June 30, 2022 and December 31, 2021, respectively.
There was 1 loan modified in a TDR during the three and six months ended June 30, 2022 with a pre- and post-modification and end of period amortized cost of $100 thousand, and no loans modified in a TDR during the three and six months ended June 30, 2021. The modification in the second quarter of 2022 included a maturity date extension and interest rate concession. During the three and six months ended June 30, 2022 and 2021, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition of more than ninety days past due. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allocation of the Allowance for Credit Losses on Loans |
(in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, non-owner occupied | Construction | Home equity | Other residential | Installment and other consumer | Unallocated | Total |
March 31, 2023 | | | | | | | | | |
Modeled expected credit losses | $ | 1,137 | | $ | 1,349 | | $ | 7,409 | | $ | 239 | | $ | 459 | | $ | 535 | | $ | 574 | | $ | — | | $ | 11,702 | |
Qualitative adjustments | 784 | | 1,291 | | 5,292 | | 1,780 | | 79 | | 42 | | 305 | | 2,032 | | 11,605 | |
Specific allocations | 20 | | — | | — | | — | | — | | — | | 3 | | — | | 23 | |
Total | $ | 1,941 | | $ | 2,640 | | $ | 12,701 | | $ | 2,019 | | $ | 538 | | $ | 577 | | $ | 882 | | $ | 2,032 | | $ | 23,330 | |
December 31, 2022 | | | | | | | | | |
Modeled expected credit losses | $ | 1,079 | | $ | 1,497 | | $ | 7,937 | | $ | 453 | | $ | 504 | | $ | 571 | | $ | 610 | | $ | — | | $ | 12,651 | |
Qualitative adjustments | 706 | | 990 | | 4,739 | | 1,484 | | 54 | | 24 | | 258 | | 2,068 | | 10,323 | |
Specific allocations | 9 | | — | | — | | — | | — | | — | | — | | — | | 9 | |
Total | $ | 1,794 | | $ | 2,487 | | $ | 12,676 | | $ | 1,937 | | $ | 558 | | $ | 595 | | $ | 868 | | $ | 2,068 | | $ | 22,983 | |
Allowance for Credit Losses on Loans Rollforward
The following table discloses activity in the allowance for credit losses on loans for the periods presented.
| Allowance for Credit Losses on Loans Rollforward | Allowance for Credit Losses on Loans Rollforward | Allowance for Credit Losses on Loans Rollforward |
(in thousands) | (in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, investor-owned | Construction | Home equity | Other residential | Installment and other consumer | Unallocated | Total | (in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, non-owner occupied | Construction | Home equity | Other residential | Installment and other consumer | Unallocated | Total |
Three months ended June 30, 2022 | | |
Three months ended March 31, 2023 | | Three months ended March 31, 2023 | |
Beginning balance | Beginning balance | $ | 1,784 | | $ | 2,622 | | $ | 12,301 | | $ | 1,717 | | $ | 549 | | $ | 628 | | $ | 641 | | $ | 2,305 | | $ | 22,547 | | Beginning balance | $ | 1,794 | | $ | 2,487 | | $ | 12,676 | | $ | 1,937 | | $ | 558 | | $ | 595 | | $ | 868 | | $ | 2,068 | | $ | 22,983 | |
(Reversal) Provision | (89) | | (5) | | 138 | | 12 | | (19) | | (43) | | 112 | | (106) | | — | | |
Charge-offs | — | | — | | — | | — | | — | | — | | (20) | | — | | (20) | | |
Provision (reversal) | | Provision (reversal) | 147 | | 153 | | 25 | | 74 | | (20) | | (18) | | 25 | | (36) | | 350 | |
(Charge-offs) | | (Charge-offs) | (3) | | — | | — | | — | | — | | — | | (11) | | — | | (14) | |
Recoveries | Recoveries | 4 | | — | | — | | 8 | | — | | — | | — | | — | | 12 | | Recoveries | 3 | | — | | — | | 8 | | — | | — | | — | | — | | 11 | |
Ending balance | Ending balance | $ | 1,699 | | $ | 2,617 | | $ | 12,439 | | $ | 1,737 | | $ | 530 | | $ | 585 | | $ | 733 | | $ | 2,199 | | $ | 22,539 | | Ending balance | $ | 1,941 | | $ | 2,640 | | $ | 12,701 | | $ | 2,019 | | $ | 538 | | $ | 577 | | $ | 882 | | $ | 2,032 | | $ | 23,330 | |
Three months ended June 30, 2021 | | |
Three months ended March 31, 2022 | | Three months ended March 31, 2022 | |
Beginning balance | Beginning balance | $ | 1,654 | | $ | 2,304 | | $ | 10,856 | | $ | 1,312 | | $ | 520 | | $ | 757 | | $ | 255 | | $ | 2,300 | | $ | 19,958 | | Beginning balance | $ | 1,709 | | $ | 2,776 | | $ | 12,739 | | $ | 1,653 | | $ | 595 | | $ | 644 | | $ | 621 | | $ | 2,286 | | $ | 23,023 | |
(Reversal) Provision | (68) | | (267) | | (95) | | (178) | | (158) | | (144) | | (17) | | 7 | | (920) | | |
Charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | | |
Provision (reversal) | | Provision (reversal) | 72 | | (154) | | (438) | | 56 | | (46) | | (16) | | 22 | | 19 | | (485) | |
| (Charge-offs) | | (Charge-offs) | — | | — | | — | | — | | — | | — | | (2) | | — | | (2) | |
Recoveries | Recoveries | 4 | | — | | — | | 8 | | 50 | | — | | — | | — | | 62 | | Recoveries | 3 | | — | | — | | 8 | | — | | — | | — | | — | | 11 | |
Ending balance | Ending balance | $ | 1,590 | | $ | 2,037 | | $ | 10,761 | | $ | 1,142 | | $ | 412 | | $ | 613 | | $ | 238 | | $ | 2,307 | | $ | 19,100 | | Ending balance | $ | 1,784 | | $ | 2,622 | | $ | 12,301 | | $ | 1,717 | | $ | 549 | | $ | 628 | | $ | 641 | | $ | 2,305 | | $ | 22,547 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Allowance for Credit Losses on Loans Rollforward |
(in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, investor | Construction | Home equity | Other residential | Installment and other consumer | Unallocated | Total |
Six months ended June 30, 2022 | | | | | | | |
Beginning balance | $ | 1,709 | | $ | 2,776 | | $ | 12,739 | | $ | 1,653 | | $ | 595 | | $ | 644 | | $ | 621 | | $ | 2,286 | | $ | 23,023 | |
(Reversal) Provision | (17) | | (159) | | (300) | | 68 | | (65) | | (59) | | 134 | | (87) | | (485) | |
| | | | | | | | | |
Charge-offs | — | | — | | — | | — | | — | | — | | (22) | | — | | (22) | |
Recoveries | 7 | | — | | — | | 16 | | — | | — | | — | | — | | 23 | |
Ending balance | $ | 1,699 | | $ | 2,617 | | $ | 12,439 | | $ | 1,737 | | $ | 530 | | $ | 585 | | $ | 733 | | $ | 2,199 | | $ | 22,539 | |
Six months ended June 30, 2021 | | | | | | | |
Beginning balance | $ | 2,530 | | $ | 2,778 | | $ | 12,682 | | $ | 1,557 | | $ | 738 | | $ | 998 | | $ | 291 | | $ | 1,300 | | $ | 22,874 | |
(Reversal) Provision | (947) | | (741) | | (1,921) | | (433) | | (376) | | (385) | | (53) | | 1,007 | | (3,849) | |
Charge-offs | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Recoveries | 7 | | — | | — | | 18 | | 50 | | — | | — | | — | | 75 | |
Ending balance | $ | 1,590 | | $ | 2,037 | | $ | 10,761 | | $ | 1,142 | | $ | 412 | | $ | 613 | | $ | 238 | | $ | 2,307 | | $ | 19,100 | |
Pledged Loans
Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $1.293$1.308 billion and $1.330$1.298 billion at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. In addition, we pledge eligible TIC loans, which totaled $102.6$106.2 million and $106.2$105.0 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). For additional information, see Note 6, Borrowings.
Related Party Loans
The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These transactions, including loans, are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Related party loans totaled $6.6$6.4 million at June 30, 2022March 31, 2023 and $7.9 million at December 31, 2021.2022. In addition, undisbursed commitments to related parties totaled $562 thousand at June 30, 2022both March 31, 2023 and $8.6 million at December 31, 2021. The decreases in both the outstanding amount and undisbursed commitment as of June 30, 2022 were primarily due to a Director retirement in the first quarter.2022.
Note 6: Short-Term Borrowings and Other Obligations
Federal Home Loan Bank – As of March 31, 2023 and December 31, 2022, the Bank had total lines of credit with the FHLB totaling $1.037 billion and $711.6 million, respectively, based on eligible collateral of certain loans and investment securities.
Federal Funds PurchasedLines of Credit – The Bank had unsecured available lines of credit with correspondent banks for overnight borrowings totaling $150.0 million at June 30, 2022March 31, 2023 and December 31, 2021.2022. In general, interest rates on these lines approximate the federal funds target rate. We had no overnight borrowings under these credit facilities at June 30, 2022 or December 31, 2021.
Federal Home Loan Bank Borrowings – As of June 30, 2022 and December 31, 2021, the Bank had available lines of credit with the FHLB totaling $762.6 million and $820.5 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at June 30, 2022 or December 31, 2021.
Federal Reserve Line of CreditBank – The Bank has an availablea line of credit with the Federal Reserve Bank of San Francisco ("FRBSF") secured by certain residential loans. At June 30, 2022March 31, 2023 and December 31, 2021,2022, the Bank had total borrowing capacity under this line totaling $57.3of $60.6 million and $70.8$58.7 million, respectively, and had no outstanding borrowings withrespectively. In addition, under the FRBSF.Federal Reserve’s new BTFP facility, the Bank could borrow up to an additional $283.6 million based on the par value of pledged investment securities as of March 31, 2023.
Subordinated Debenture – As part of an acquisition in 2013, Bancorp assumed a subordinated debenture with a contractual balance of $4.1 million due to NorCal Community Bancorp Trust II (the "Trust"), established for the sole purpose of issuing trust preferred securities. On March 15, 2021, Bancorp redeemed in full the $2.8 million (book value) subordinated debenture due to the Trust, which had a 251.5% effective rate for the first six months of 2021, and included accelerated accretion of the $1.3 million remaining purchase discount due to the early redemption.
Other Obligations – Finance lease liabilities totaling $356$402 thousand and $419$439 thousand at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, are included in short-term borrowings and other obligations in the consolidated statements of condition. See Note 8, Commitments and Contingencies, for additional information.
Outstanding balances and weighted average interest rates on short-term borrowings and other obligations as of March 31, 2023 and December 31, 2022 are summarized in the following table.
| | | | | | | | | | | | | | |
| March 31, 2023 | December 31, 2022 |
(dollars in thousands) | Outstanding Balance | Weighted Average Rate | Outstanding Balance | Weighted Average Rate |
FHLB - short-term borrowings | $ | 405,400 | | 5.17 | % | $ | 112,000 | | 4.65 | % |
Federal funds lines of credit | — | | — | % | — | | — | % |
FRBSF - federal funds purchased | — | | — | % | — | | — | % |
FRBSF - short-term borrowings under the BTFP | — | | — | % | — | | — | % |
Other obligations (finance leases) | 402 | | 1.89 | % | 439 | | 1.86 | % |
Total short-term borrowings and other obligations | $ | 405,802 | | 5.17 | % | $ | 112,439 | | 4.64 | % |
| | | | |
Note 7: Stockholders' Equity
Dividends
On July 22, 2022,January 20, 2023, Bancorp declared a $0.25 per share cash dividend, paid February 10, 2023 to shareholders of record at the close of business on February 3, 2023. Subsequent to quarter end on April 21, 2023, Bancorp declared a $0.25 per share cash dividend, payable on AugustMay 12, 20222023 to shareholders of record at the close of business on AugustMay 5, 2022.2023.
Share-Based Payments
The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period, which is generally the vesting period, with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards,
which equals the grant date price, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate the recording of stock-based compensation when the award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the exercisability of the stock options, which are based on the scheduled vesting period.
Performance-based stock awards (restricted stock) are issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0% to 200% of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.
We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable.
The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense.
Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements. During the sixthree months ended June 30, 2022,March 31, 2023, we withheld 10,2082,847 shares totaling $351$82 thousand at a weighted-average price of $34.38$28.74 for cashless exercises. During the sixthree months ended June 30, 2021,March 31, 2022, we withheld 27,5478,003 shares totaling $1.1 million$278 thousand at a weighted-average price of $38.87$34.76 for cashless exercises. Shares withheld under net settlement arrangements are available for future grants.
Share Repurchase Program
Bancorp has an approved share repurchase program with $34.7 million outstanding. The last activity under the program wasoutstanding at March 31, 2023. There have been no repurchases in the first quarter of 2022. Bancorp repurchased 23,275 shares totaling $877 thousand in the first half of 2022.2023. Cumulative shares repurchased under the current program totaled 618,991 shares as of June 30, 2022March 31, 2023 at an average price of $36.04 per share. Bancorp continues to evaluate the resumption of share repurchases in the context of other capital and strategic initiatives.
Note 8: Commitments and Contingent Liabilities
Financial Instruments with Off-Balance Sheet Risk
We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements.
Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property.
The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:
| (in thousands) | (in thousands) | June 30, 2022 | December 31, 2021 | (in thousands) | March 31, 2023 | December 31, 2022 |
Commercial lines of credit | Commercial lines of credit | $ | 318,400 | | $ | 330,234 | | Commercial lines of credit | $ | 266,082 | | $ | 292,204 | |
Revolving home equity lines | Revolving home equity lines | 212,208 | | 210,938 | | Revolving home equity lines | 218,353 | | 218,907 | |
Undisbursed construction loans | Undisbursed construction loans | 48,671 | | 78,381 | | Undisbursed construction loans | 32,471 | | 43,179 | |
Personal and other lines of credit | Personal and other lines of credit | 11,044 | | 11,001 | | Personal and other lines of credit | 10,851 | | 10,842 | |
Standby letters of credit | Standby letters of credit | 2,150 | | 3,657 | | Standby letters of credit | 1,720 | | 1,738 | |
Total commitments and standby letters of credit | $ | 592,473 | | $ | 634,211 | | |
Total unfunded loan commitments and standby letters of credit | | Total unfunded loan commitments and standby letters of credit | $ | 529,477 | | $ | 566,870 | |
We record an allowance for credit losses on unfunded loan commitments at the balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and expected loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments totaled $1.5$1.3 million and $1.8$1.5 million as of June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition. There was no adjustment toThe $174 thousand reversal of the allowanceprovision for credit losses on unfunded loan commitments forin the secondfirst quarter of 2023 was due primarily to a $37.4 million decrease in total unfunded commitments, compared to a $318 thousand provision reversal in the first quarter of 2022, compareddue mainly to a reversal of $612 thousand for the second quarter of 2021. This compares to year-to-date reversals of $318 thousand and $1.2 millionan improvement in the six months ended June 30, 2022 and 2021 respectively, due to improvedunderlying economic forecasts at the time.
Leases
We lease premises under long-term non-cancelable operating leases with remaining terms of 54 months to 1019 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised.
We lease certain equipment under finance leases with initial terms of 3 years to 5 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees.
The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities.
| (in thousands) | (in thousands) | June 30, 2022 | December 31, 2021 | (in thousands) | March 31, 2023 | December 31, 2022 |
Operating leases: | Operating leases: | | Operating leases: | |
Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 22,353 | | $ | 23,604 | | Operating lease right-of-use assets | $ | 22,854 | | $ | 24,821 | |
Operating lease liabilities | Operating lease liabilities | $ | 24,117 | | $ | 25,429 | | Operating lease liabilities | $ | 25,433 | | $ | 26,639 | |
Finance leases: | Finance leases: | | Finance leases: | |
Finance lease right-of-use assets | Finance lease right-of-use assets | $ | 499 | | $ | 499 | | Finance lease right-of-use assets | $ | 606 | | $ | 616 | |
Accumulated amortization | Accumulated amortization | (155) | | (93) | | Accumulated amortization | (214) | | (187) | |
Finance lease right-of-use assets, net1 | Finance lease right-of-use assets, net1 | $ | 344 | | $ | 406 | | Finance lease right-of-use assets, net1 | $ | 392 | | $ | 429 | |
Finance lease liabilities2 | Finance lease liabilities2 | $ | 356 | | $ | 419 | | Finance lease liabilities2 | $ | 402 | | $ | 439 | |
1 Included in premises and equipment in the consolidated statements of condition. | 1 Included in premises and equipment in the consolidated statements of condition. | | 1 Included in premises and equipment in the consolidated statements of condition. | |
2 Included in borrowings and other obligations in the consolidated statements of condition. | 2 Included in borrowings and other obligations in the consolidated statements of condition. | | 2 Included in borrowings and other obligations in the consolidated statements of condition. | |
The following table shows supplemental disclosures of noncash investing and financing activities for the periods presented. | | | | | | | | |
| SixThree months ended |
(in thousands) | June 30, 2022March 31, 2023 | June 30, 2021March 31, 2022 |
Right-of-use assets obtained in exchange for operating lease liabilities | $ | 1,124 | | $ | — | |
Right-of-use assets obtained in exchange for finance lease liabilities | $ | — | | $ | 4121,120 | |
| | |
| | |
The following table shows components of operating and finance lease cost.
| | | Three months ended | | Six months ended | | Three months ended | |
(in thousands) | (in thousands) | June 30, 2022 | June 30, 2021 | | June 30, 2022 | June 30, 2021 | (in thousands) | March 31, 2023 | March 31, 2022 | |
Operating lease cost | Operating lease cost | $ | 1,295 | | $ | 1,164 | | | $ | 2,579 | | $ | 2,328 | | Operating lease cost | $ | 1,610 | | $ | 1,284 | | |
Variable lease cost | Variable lease cost | — | | — | | | — | | — | | Variable lease cost | — | | — | | |
Total operating lease cost1 | Total operating lease cost1 | $ | 1,295 | | $ | 1,164 | | | $ | 2,579 | | $ | 2,328 | | Total operating lease cost1 | $ | 1,610 | | $ | 1,284 | | |
Finance lease cost: | Finance lease cost: | | | | Finance lease cost: | | |
Amortization of right-of-use assets2 | Amortization of right-of-use assets2 | $ | 31 | | $ | 7 | | | $ | 62 | | $ | 34 | | Amortization of right-of-use assets2 | $ | 37 | | $ | 31 | | |
Interest on finance lease liabilities3 | Interest on finance lease liabilities3 | — | | — | | | 1 | | — | | Interest on finance lease liabilities3 | 2 | | 1 | | |
Total finance lease cost | Total finance lease cost | $ | 31 | | $ | 7 | | | $ | 63 | | $ | 34 | | Total finance lease cost | $ | 39 | | $ | 32 | | |
Total lease cost | Total lease cost | $ | 1,326 | | $ | 1,171 | | | $ | 2,642 | | $ | 2,362 | | Total lease cost | $ | 1,649 | | $ | 1,316 | | |
1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income. | 1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income. | 1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income. |
2 Included in depreciation and amortization in the consolidated statements of comprehensive income. | 2 Included in depreciation and amortization in the consolidated statements of comprehensive income. | 2 Included in depreciation and amortization in the consolidated statements of comprehensive income. |
3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income. | 3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income. | 3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income. |
The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of June 30, 2022. Total minimum lease payments do not include obligations of approximately $1.7 million for an operating lease agreement related to a retail branch location that is expected to commence in the third quarter of 2022.March 31, 2023. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standards or lease commencement date.
| (in thousands) | (in thousands) | June 30, 2022 | (in thousands) | March 31, 2023 |
Year | Year | Operating Leases | Finance Leases | Year | Operating Leases | Finance Leases |
2022 | $ | 2,701 | | $ | 62 | | |
2023 | 2023 | 4,745 | | 117 | | 2023 | $ | 3,997 | | $ | 115 | |
2024 | 2024 | 3,837 | | 113 | | 2024 | 4,585 | | 153 | |
2025 | 2025 | 3,327 | | 67 | | 2025 | 3,875 | | 106 | |
2026 | 2026 | 2,535 | | — | | 2026 | 3,129 | | 36 | |
2027 | | 2027 | 2,845 | | 5 | |
Thereafter | Thereafter | 8,467 | | — | | Thereafter | 9,693 | | — | |
Total minimum lease payments | Total minimum lease payments | 25,612 | | 359 | | Total minimum lease payments | 28,124 | | 415 | |
Amounts representing interest (present value discount) | Amounts representing interest (present value discount) | (1,495) | | (3) | | Amounts representing interest (present value discount) | (2,691) | | (13) | |
Present value of net minimum lease payments (lease liability) | Present value of net minimum lease payments (lease liability) | $ | 24,117 | | $ | 356 | | Present value of net minimum lease payments (lease liability) | $ | 25,433 | | $ | 402 | |
Weighted average remaining term (in years) | Weighted average remaining term (in years) | 6.7 | 3.0 | Weighted average remaining term (in years) | 7.6 | 2.9 |
Weighted average discount rate | Weighted average discount rate | 1.68 | % | 0.59 | % | Weighted average discount rate | 2.27 | % | 1.89 | % |
Litigation Matters
Bancorp may be party to legal actions that arise from time to time in the normal course of business. Bancorp's management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has recently been a party that will have a material adverse effect on the financial condition or results of operations of Bancorp or the Bank.
The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us.
In 2012, Visa reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. During the three monthsits six month fiscal reporting period ended June 30, 2022,March 31, 2023, Visa deposited an additional $600$350 million into the litigation escrow account to address claims of certain merchants who opted out of the Amended Settlement Agreement for a balance of $1.5$1.6 billion. Combined with funds previously deposited with the court, these funds are expected to cover the settlement payment obligations.
The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities. The final conversion rate is subject to change depending on the final settlement payments, and the full effect on member banks is still uncertain. Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims as contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote.
Note 9: Derivative Financial Instruments and Hedging Activities
We entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates.
Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.
As of June 30, 2022,March 31, 2023, we had 4four interest rate swap agreements, which are scheduled to mature inat various dates ranging from June 2031 October 2031, July 2032, andto October 2037. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest receivable on the swaps totaled $5$6 thousand at June 30, 2022March 31, 2023 and $11$5 thousand at December 31, 2021.2022. Information on our derivatives follows:
| | | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
(in thousands) | (in thousands) | June 30, 2022 | December 31, 2021 | | June 30, 2022 | December 31, 2021 | (in thousands) | March 31, 2023 | December 31, 2022 | | March 31, 2023 | December 31, 2022 |
Fair value hedges: | Fair value hedges: | | | | Fair value hedges: | | | |
Interest rate contracts notional amount | Interest rate contracts notional amount | $ | 5,616 | | $ | — | | | $ | 6,929 | | $ | 13,037 | | Interest rate contracts notional amount | $ | 9,450 | | $ | 12,046 | | | $ | 2,340 | | $ | — | |
Interest rate contracts fair value1 | Interest rate contracts fair value1 | $ | 206 | | $ | — | | | $ | 104 | | $ | 1,085 | | Interest rate contracts fair value1 | $ | 404 | | $ | 602 | | | $ | 23 | | $ | — | |
1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology.
The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of June 30, 2022March 31, 2023 and December 31, 2021.2022.
| | | Carrying Amounts of Hedged Assets | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans | | Carrying Amounts of Hedged Assets | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans |
(in thousands) | (in thousands) | June 30, 2022 | December 31, 2021 | | June 30, 2022 | December 31, 2021 | (in thousands) | March 31, 2023 | December 31, 2022 | | March 31, 2023 | December 31, 2022 |
Loans | Loans | $ | 12,305 | | $ | 13,976 | | | $ | (241) | | $ | 939 | | Loans | $ | 11,284 | | $ | 11,319 | | | $ | (506) | | $ | (726) | |
The following table presents the net losses recognized in interest income on loans on the consolidated statements of comprehensive income related to our derivatives designated as fair value hedges.
| | | | | | | | | | | | | | |
| Three months ended | Six months ended |
(in thousands) | June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 |
Interest and fees on loans 1 | $ | 23,334 | | $ | 21,429 | | $ | 47,011 | | $ | 42,090 | |
Increase (decrease) in fair value of designated interest rate swaps due to LIBOR interest rate movements | $ | 430 | | $ | (170) | | $ | 1,187 | | $ | 549 | |
Payment on interest rate swaps | (65) | | (93) | | (150) | | (185) | |
Decrease (increase) in fair value hedging adjustment of hedged loans | (428) | | 177 | | (1,180) | | (537) | |
Decrease in value of yield maintenance agreement | (2) | | (2) | | (5) | | (6) | |
Net losses on fair value hedging relationships recognized in interest income | $ | (65) | | $ | (88) | | $ | (148) | | $ | (179) | |
| | | | | | | | | | |
| Three months ended | |
(in thousands) | March 31, 2023 | March 31, 2022 | | |
Interest and fees on loans 1 | $ | 24,258 | | $ | 23,677 | | | |
(Decrease) increase in fair value of designated interest rate swaps due to LIBOR interest rate movements | $ | (221) | | $ | 757 | | | |
Receivable (payment) on interest rate swaps | 51 | | (85) | | | |
Increase (decrease) in fair value hedging adjustment of hedged loans | 221 | | (752) | | | |
Decrease in value of yield maintenance agreement | (2) | | (3) | | | |
Net gain (losses) on fair value hedging relationships recognized in interest income | $ | 49 | | $ | (83) | | | |
1 Represents the income line item in the statement of comprehensive income in which the effects of fair value hedges are recorded.
Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes. Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Offsetting of Financial Assets and Derivative Assets |
| | Gross Amounts | Net Amounts of | Gross Amounts Not Offset in | |
| Gross Amounts | Offset in the | Assets Presented | the Statements of Condition | |
| of Recognized | Statements of | in the Statements | Financial | Cash Collateral | |
(in thousands) | Assets | Condition | of Condition | Instruments | Received | Net Amount |
June 30, 2022 | | | | | | |
Derivatives by Counterparty: | | | | | | |
Counterparty A | $ | 206 | | $ | — | | $ | 206 | | $ | (206) | | $ | — | | $ | — | |
| | | | | | |
| | | | | | |
December 31, 2021 | | | | | | |
Derivatives by Counterparty: | | | | | | |
Counterparty A | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Offsetting of Financial Assets and Derivative Assets |
| | Gross Amounts | Net Amounts of | Gross Amounts Not Offset in | |
| Gross Amounts | Offset in the | Assets Presented | the Statements of Condition | |
| of Recognized | Statements of | in the Statements | Financial | Cash Collateral | |
(in thousands) | Assets | Condition | of Condition | Instruments | Received | Net Amount |
March 31, 2023 | | | | | | |
| | | | | | |
Counterparty | $ | 404 | | $ | — | | $ | 404 | | $ | (23) | | $ | — | | $ | 381 | |
| | | | | | |
| | | | | | |
December 31, 2022 | | | | | | |
| | | | | | |
Counterparty | $ | 602 | | $ | — | | $ | 602 | | $ | — | | $ | — | | $ | 602 | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Offsetting of Financial Liabilities and Derivative Liabilities |
| | Gross Amounts | Net Amounts of | Gross Amounts Not Offset in | |
| Gross Amounts | Offset in the | Liabilities Presented | the Statements of Condition | |
| of Recognized | Statements of | in the Statements | Financial | Cash Collateral | |
(in thousands) | Liabilities1 | Condition | of Condition1 | Instruments | Pledged | Net Amount |
June 30, 2022 | | | | | | |
Derivatives by Counterparty: | | | | | | |
Counterparty A | $ | 104 | | $ | — | | $ | 104 | | $ | (206) | | $ | 102 | | $ | — | |
| | | | | | |
| | | | | | |
December 31, 2021 | | | | | | |
Derivatives by Counterparty: | | | | | | |
Counterparty A | $ | 1,085 | | $ | — | | $ | 1,085 | | $ | — | | $ | (1,085) | | $ | — | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Offsetting of Financial Liabilities and Derivative Liabilities |
| | Gross Amounts | Net Amounts of | Gross Amounts Not Offset in | |
| Gross Amounts | Offset in the | Liabilities Presented | the Statements of Condition | |
| of Recognized | Statements of | in the Statements | Financial | Cash Collateral | |
(in thousands) | Liabilities1 | Condition | of Condition1 | Instruments | Pledged | Net Amount |
March 31, 2023 | | | | | | |
| | | | | | |
Counterparty | $ | 23 | | $ | — | | $ | 23 | | $ | (23) | | $ | — | | $ | — | |
| | | | | | |
| | | | | | |
December 31, 2022 | | | | | | |
| | | | | | |
Counterparty | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | |
| | | | | | |
1 Amounts exclude accrued interest on swaps.
For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 20212022 Form 10-K filed with the SEC on March 15, 2022.16, 2023.
Note 10: Merger
Bancorp completed its merger and acquired all assets and assumed all liabilities of American River Bankshares on August 6, 2021. The Merger expanded Bank of Marin's presence throughout the Greater Sacramento, Amador and Sonoma County Regions where ARB had ten branches. The Merger added $297.8 million in investment securities, $419.4 million in loans and $790.0 million in deposits to Bank of Marin as of the merger date. Bancorp accounted for the Merger as a business combination under the acquisition method of accounting. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the merger date in accordance with ASC 805, Business Combinations.
AMRB shareholders received 0.575 shares of Bancorp's common stock for each share of AMRB common stock outstanding immediately prior to the Merger resulting in the issuance of 3,441,235 shares of Bancorp common stock. In addition, merger consideration included cash paid for outstanding stock options and cash paid in lieu of fractional shares, as summarized in the following table.
| | | | | |
(in thousands) | Merger Consideration
|
Value of common stock consideration paid to shareholders (0.575 fixed exchange ratio, stock price $36.15) | $ | 124,401 | |
Cash consideration for stock options | 63 |
Cash paid in lieu of fractional shares | 13 |
Total merger consideration | $ | 124,477 | |
We recorded $42.6 million in goodwill, which represents the excess of the total merger consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. Goodwill mainly reflects expected value created through the combined operations of AMRB and Bancorp and is evaluated for impairment annually.
The core deposit intangible ("CDI") represents the estimated future benefits of acquired deposits and is recorded separately from the related deposits. We recorded a core deposit intangible asset of $3.9 million related to the ARB merger, of which $179 thousand and $363 thousand, respectively, were amortized in the three and six month periods ended June 30, 2022. No amortization was recognized in the comparable periods of 2021. The CDI is amortized on an accelerated basis over an estimated ten-year life and is evaluated periodically for impairment. No impairment loss was recognized as of June 30, 2022.
Merger-related one time and conversion costs are recognized as incurred and continue until all systems have been converted and operational functions are fully integrated. Bancorp's merger-related costs reflected in the consolidated statements of comprehensive income are summarized in the following table.
| | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in thousands, unaudited) | June 30, 2022 | June 30, 2021 | | June 30, 2022 | June 30, 2021 |
Personnel and severance | $ | 58 | | $ | — | | | $ | 393 | | $ | — | |
Professional services | — | | 201 | | | 67 | | 201 | |
Data processing | 29 | | — | | | 77 | | — | |
Other expense | 224 | | 16 | | | 321 | | 16 | |
Total merger-related one-time and conversion costs | $ | 311 | | $ | 217 | | | $ | 858 | | $ | 217 | |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our 20212022 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.
In November 2020, the SEC issued Final Rule 33-10890, Management’s Discussion and Analysis, Selected Financial Data and Supplementary Financial Information, which modernized and simplified certain disclosure requirements of Regulation S-K. The update to Item 303 of Regulation S-K related to interim period disclosures beginning with the first quarter of 2022 allows registrants to compare the results of the most recently completed quarter to the results of either the immediately preceding quarter or the corresponding quarter of the preceding year. Management believes that comparing current quarter results to those of the immediately preceding quarter is more useful in identifying current business trends and provides a more meaningful comparison. Accordingly, we have compared the results for the three months ended June 30, 2022 and March 31, 2022 throughout the Management's Discussion and Analysis sections, where applicable.
Forward-Looking Statements
This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "1934 Act"). Those sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.
Our forward-looking statements include descriptions of plans or objectives of management for future operations, products or services, and forecasts of revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs preceded by "will," "would," "should," "could" or "may."
Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues that may impact Bancorp's earnings in future periods. Factors that could cause future results to vary materially from current management expectations include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including economic or other disruptions to financial markets caused by acts of terrorism, war or other conflicts such as Russia's military action in Ukraine, impacts from inflation, supply change disruptions, changes in interest rates (including the actions taken by the Federal Reserve to control inflation), California's unemployment rate, deposit flows, real estate values, and expected future cash flows on loans and securities; the impact of adverse developments at other banks, including bank failures, that impact general sentiment regarding the stability and liquidity of banks; costs or effects of acquisitions; competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; natural disasters (such as wildfires and earthquakes in our area); adverse weather conditions; interruptions of utility service in our markets for sustained periods; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting our operations, pricing, products and services; and successful integration of acquisitions.
Important factors that could cause results or performance to materially differ from those expressed in our prior forward-looking statements are detailed in ITEM 1A, Risk Factors section of our 20212022 Form 10-K as filed with the SEC, and ITEM 1A Risk Factors herein, copies of which are available from us at no charge. Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation and uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. We consider accounting estimates to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. Our critical estimates include: Allowance for Credit Losses on Loans and Unfunded Commitments, Income Taxes, and Fair Value Measurements, and Business Combinations. . For a detailed discussion, refer to the Critical Accounting Estimates section of our 20212022 Form 10-K filed with the SEC on March 15, 2022.16, 2023.
Executive Summary
We generated record net incomeearnings of $9.4 million for the secondfirst quarter of 2023, compared to $12.9 million for the fourth quarter of 2022 totaled $11.1 million, compared toand $10.5 million in the first quarter of 2022. Diluted earnings per share were $0.69 in$0.59 for the secondfirst quarter of 2022,2023, compared to $0.81 for the preceding quarter and $0.66 in the immediately preceding quarter.same quarter a year ago. Earnings for the first six months of 2022 totaled $21.5 million, compared to $18.2 million in the same period last year. Diluted earnings per share were $1.35 and $1.37declined in the first six monthsquarter of 2022 and 2021, respectively. All periods of earnings presented were impacted by the costs associated with our most recent acquisition, the details of which are discussed throughout this report. In particular, diluted earnings per share for the first half of 2022 would have increased by one cent per share over 2021 without those costs.2023, as an increase in interest expense reflected market interest rate increases on a lagged basis.
The following are highlights of our operating and financial performance for the periods presented:
•ReturnFollowing recent industry events, our deposit franchise remained strong at $3.251 billion on assetsMarch 31, 2023, a decrease of 1.03% and return on equity of 10.74% for the three months ended June 30, 2022, would$322.8 million from $3.573 billion at December 31, 2022. While there have been 1.05%some outflows related to industry concerns in March and 10.95%, respectively, without one-time and conversion costspandemic surge deposits redeploying to money market funds, the largest transactions were related to the 2021 merger with American River Bankshares ("ARB"). That comparesnormal operating activities of our customers. Those activities include vendor payments, taxes, payroll and singular events such as disbursement of proceeds from the sale of a business, real property acquisitions for cash, trust distributions or estate settlements. The cost of deposits increased 12 basis points quarter over quarter due to 0.98% and 9.61% (GAAP) and 1.01% and 9.96% (non-GAAP), respectively, for the three months endedtargeted relationship-based pricing adjustments. Non-interest bearing deposits made up 50.3% of total deposits at March 31, 2022. As shown in the reconciliation2023, compared to 51.5% at December 31, 2022, and we estimated that 67% of GAAP to non-GAAP financial measures on page 35, merger-related costs reduced net incometotal deposits were fully covered by $219 thousand, netFDIC insurance as of taxes, or $0.02 per share in the second quarter.March 31, 2023.
•Liquidity is strong, providing 181% coverage of estimated uninsured deposits. The second quarter tax-equivalent net interest margin improved 9 basis points overBank has long followed liquidity management practices similar to larger banks with robust liquidity requirements and regular liquidity stress testing. While the preceding quarter despiteBank has the 7 basis point drag of declining PPP loan fee recognition. Rising interest rates had a positive impact onability to utilize the Bank's asset sensitive portfolio, as didFederal Reserve Bank Term Funding Program ("BTFP") and has tested it for contingency planning purposes, there has been no need to utilize the deployment of excess cash into securities and flat deposit costs.
•Deposits increased by $22.1 million to $3.831 billionfacility at June 30, 2022, compared to $3.809 billion at December 31, 2021. Non-interest bearing deposits made up 53% of total deposits as of June 30, 2022 versus 50% as of December 31, 2021, representing one of the strongest deposit franchises among peers. The cost of average deposits in the second quarter of 2022 was 0.06%, unchanged from the preceding quarter. The cost of average deposits in the first half of 2022 was 0.06%, a decrease from 0.07% in the first half of prior year.this time.
•Loan balances of $2.163$2.112 billion at June 30,March 31, 2023, increased $19.8 million from $2.093 billion at December 31, 2022 reflected record second quarterreflecting originations of $102.2$44.9 million and first halfpayoffs of $22.2 million. Utilization of credit lines was offset by loan amortization from scheduled repayments during the year originations of $152.0 million. While our production was strongquarter and more than double the first half of 2021, total loans decreased modestlyunfunded commitments declined $37.4 million from December 31, 2021 balances driven by payoffs including expected construction project completions, borrowers' sales2022 to $529.5 million at March 31, 2023.
•Non-accrual loans were only 0.10% of underlying real estatetotal loans as of March 31, 2023, compared to 0.12% at December 31, 2022. We recorded a $350 thousand provision for credit losses on loans in the first quarter, compared to no provision in the previous quarter and business assets, PPP loan payoffs, and third-party refinancinga $485 thousand provision reversal in the same quarter of acquired loans outside2022. The provision in the Bank's creditfirst quarter of 2023 was due primarily to qualitative risk appetite.factor adjustments.
•Credit quality remains strong,sound notwithstanding the trends in the commercial real estate market. Our loan portfolio continues to perform well, with non-accrualclassified loans representing 0.37%at only 1.47% of total loans and manageable delinquencies. Non-owner occupied commercial real estate loans made up 73% of total classified loans as of June 30,March 31, 2023, compared to 76% at December 31, 2022, and December 31, 2021. There was not a significant change in classified loans. There was no provision madeall are currently paying as agreed. We continue to the allowance for credit losses on loans or to the allowance for credit losses on unfunded loan commitments this quarter as an improvementmaintain diversity among property types and within our geographic footprint. In particular, our office commercial real estate portfolio in the California unemployment rate forecastCity of San Francisco represents just 3% of our total loan portfolio and 6% of our total non-owner occupied commercial real estate portfolio. As of the last measurement period, the average loan-to-value and debt-service coverage for the entire non-owner occupied office portfolio were 55% and 1.67x, respectively. For the eleven non-owner occupied office loans in the City of San Francisco, the average loan-to-value and debt-service coverage were 60% and 1.20x, respectively. More details are available in the supplementary earnings presentation filed as Exhibit 99.2 to our 8-K on April 24, 2023, and also available on our website.
•The first quarter tax-equivalent net interest margin decreased 22 basis points to 3.04% from 3.26% for the quantitative portion of estimated credit losses while ongoing supply chain issues, inflation and recession risks increased qualitative factors. The preceding quarter's provision reversals wereprevious quarter due primarily to increased deposit costs and average borrowing balances, partially offset by higher loan yields. The margin was up from 2.96% in the improved economic forecast at the time.same period of 2022.
•Return on average assets ("ROA") was 0.92% for the first quarter of 2023, compared to 1.21% for the fourth quarter of 2022 and 0.98% for the first quarter of 2022, and return on average equity ("ROE") was 9.12%, compared to 12.77% for the prior quarter and 9.61% for the first quarter in the prior year. The efficiency
•Our declining efficiency ratios quarter-over-quarter and year-over-year are a testament to the improved operating leverage attained through the ARB acquisition. The efficiency ratios of 55.73% for the second quarter and 57.40% year-to-date compare to 59.13% and 61.43%ratio for the first quarter of 2022 and year2023 was 60.24%, compared to date 2021, respectively. Changes from50.92% for the prior quarter and 59.13% for the first quarter of 2022. The sequential declines in ROA and ROE and increase in the efficiency ratio were due primarily visibleto the $3.6 million increase in salaries, benefitsinterest expense.
•The Bank finalized the closure of four branch locations which were announced in January 2023. The acquisition of American River Bank ("ARB") resulted in an overlap in the Bank’s branch network in Santa Rosa and professional services expenses.Healdsburg, prompting branch consolidations within Northern Sonoma County. In addition, our Tiburon and Buckhorn branches in Marin and Amador counties were in close proximity to other branches fully able to meet our customers' needs. These closures represented the remaining expense savings anticipated from the acquisition, optimizing efficiency and our ability to fund strategic initiatives going forward. The pre-tax savings in 2023 from the branch closures, net of accelerated costs, is expected to be approximately $470 thousand, and future annual pre-tax savings are expected to be approximately $1.4 million.
•All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratioratios at March 31, 2023 for Bancorp was 14.7% at June 30, 2022, compared to 14.6% at December 31, 2021.and the Bank were 16.2% and 15.6%, respectively. Bancorp's tangible common equity to tangible assets ("TCE ratio") was 7.8%8.7% at June 30, 2022, compared to 8.8% at DecemberMarch 31, 2021 (refer to footnote 4 on page 36 for a discussion of this non-GAAP financial measure). The total risk-based capital ratio for the Bank was 14.2% at June 30, 2022, compared to 14.4% at December 31, 2021. The Bank's tangible common equity to tangible assets was 7.5% at June 30, 2022, compared to 8.6% at December 31, 2021. Declines in2023, and the Bank's and Bancorp's tangible common equity and book value per share were primarily related to an increase in after-tax unrealized losses on available-for-sale securities associated with interest rate increases during 2022.TCE ratio was 8.3%.
•Given the strength and durability of the Bank's financial performance, the Board of Directors declared a cash dividend of $0.25 per share an increase from $0.24 per share in the prior quarter, on July 22, 2022,April 21, 2023, which represents the 6972thnd consecutive quarterly dividend paid by Bancorp. The dividend is payable on AugustMay 12, 2022,2023, to shareholders of record at the close of business on AugustMay 5, 2022.2023.
Statement Regarding use of Non-GAAP Financial Measures
In this Form 10-Q, Bancorp's financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures. Management believes that presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of Bancorp's operating results and comparison of operating results across reporting periods. Management also uses non-GAAP financial measures to establish budgets and manage Bancorp's business. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below.
Reconciliation of GAAP and Non-GAAP Financial Measures
| | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
(in thousands, unaudited) | June 30, 2022 | March 31, 2022 | | | June 30, 2022 | June 30, 2021 |
Net income | | | | | | |
Net income (GAAP) | $ | 11,066 | | $ | 10,465 | | | | $ | 21,531 | | $ | 18,232 | |
Merger-related one-time and conversion costs: | | | | | | |
Personnel and severance | 58 | | 335 | | | | 393 | | — | |
Professional services | — | | 67 | | | | 67 | | 201 | |
Data processing | 29 | | 48 | | | | 77 | | — | |
Other | 224 | | 97 | | | | 321 | | 16 | |
Total merger costs before tax benefits | 311 | | 547 | | | | 858 | | 217 | |
Income tax benefit of merger-related expenses | (92) | | (162) | | | | (254) | | (17) | |
Total merger-related one-time and conversion costs, net of tax benefits | 219 | | 385 | | | | 604 | | 200 | |
Comparable net income (non-GAAP) | $ | 11,285 | | $ | 10,850 | | | | $ | 22,135 | | $ | 18,432 | |
Diluted earnings per share | | | | | | |
Weighted average diluted shares | 15,955 | | 15,946 | | | | 15,950 | | 13,316 | |
Diluted earnings per share (GAAP) | $ | 0.69 | | $ | 0.66 | | | | $ | 1.35 | | $ | 1.37 | |
Merger-related one-time and conversion costs, net of tax benefits | 0.02 | | 0.02 | | | | 0.04 | | 0.01 | |
Comparable diluted earnings per share (non-GAAP) | $ | 0.71 | | $ | 0.68 | | | | $ | 1.39 | | $ | 1.38 | |
Return on average assets | | | | | | |
Average assets | $ | 4,312,919 | | $ | 4,345,258 | | | | $ | 4,328,999 | | $ | 3,044,933 | |
Return on average assets (GAAP) | 1.03 | % | 0.98 | % | | | 1.00 | % | 1.21 | % |
Comparable return on average assets (non-GAAP) | 1.05 | % | 1.01 | % | | | 1.03 | % | 1.22 | % |
Return on average equity | | | | | | |
Average stockholders' equity | $ | 413,271 | | $ | 441,626 | | | | $ | 427,370 | | $ | 351,227 | |
Return on average equity (GAAP) | 10.74 | % | 9.61 | % | | | 10.16 | % | 10.47 | % |
Comparable return on average equity (non-GAAP) | 10.95 | % | 9.96 | % | | | 10.44 | % | 10.58 | % |
Efficiency ratio | | | | | | |
Non-interest expense (GAAP) | $ | 18,906 | | $ | 19,375 | | | | $ | 38,281 | | $ | 30,968 | |
Merger-related expenses | (311) | | (547) | | | | (858) | | (217) | |
Non-interest expense (non-GAAP) | $ | 18,595 | | $ | 18,828 | | | | $ | 37,423 | | $ | 30,751 | |
Net interest income | $ | 31,197 | | $ | 29,898 | | | | $ | 61,095 | | $ | 46,565 | |
Non-interest income | $ | 2,728 | | $ | 2,867 | | | | $ | 5,595 | | $ | 3,848 | |
Efficiency ratio (GAAP) | 55.73 | % | 59.13 | % | | | 57.40 | % | 61.43 | % |
Comparable efficiency ratio (non-GAAP) | 54.81 | % | 57.46 | % | | | 56.11 | % | 61.00 | % |
RESULTS OF OPERATIONS
Highlights of the financial results are presented in the following tables:
| | | Three months ended | Six months ended | | Three months ended | |
(dollars in thousands, except per share data) | (dollars in thousands, except per share data) | June 30, 2022 | March 31, 2022 | | | June 30, 2022 | June 30, 2021 | (dollars in thousands, except per share data) | March 31, 2023 | December 31, 2022 | March 31, 2022 | |
Selected operating data: | Selected operating data: | | | | | Selected operating data: | | |
Net interest income | Net interest income | $ | 31,197 | | $ | 29,898 | | | | $ | 61,095 | | $ | 46,565 | | Net interest income | $ | 29,899 | | $ | 33,370 | | $ | 29,898 | | |
Reversal of credit losses on loans | — | | (485) | | | | (485) | | (3,849) | | |
Provision for (reversal of) credit losses on loans | | Provision for (reversal of) credit losses on loans | 350 | | — | | (485) | | |
Reversal of credit losses on unfunded loan commitments | Reversal of credit losses on unfunded loan commitments | — | | (318) | | | | (318) | | (1,202) | | Reversal of credit losses on unfunded loan commitments | (174) | | — | | (318) | | |
Non-interest income | Non-interest income | 2,728 | | 2,867 | | | | 5,595 | | 3,848 | | Non-interest income | 2,935 | | 2,587 | | 2,867 | | |
Non-interest expense | Non-interest expense | 18,906 | | 19,375 | | | | 38,281 | | 30,968 | | Non-interest expense | 19,780 | | 18,310 | | 19,375 | | |
Net income | Net income | 11,066 | | 10,465 | | | | 21,531 | | 18,232 | | Net income | 9,440 | | 12,881 | | 10,465 | | |
Net income per common share: | Net income per common share: | | | | Net income per common share: | | |
Basic | Basic | $ | 0.70 | | $ | 0.66 | | | | $ | 1.35 | | $ | 1.38 | | Basic | $ | 0.59 | | $ | 0.81 | | $ | 0.66 | | |
Diluted | Diluted | $ | 0.69 | | $ | 0.66 | | | | $ | 1.35 | | $ | 1.37 | | Diluted | $ | 0.59 | | $ | 0.81 | | $ | 0.66 | | |
Performance and other financial ratios: | Performance and other financial ratios: | | | | Performance and other financial ratios: | | |
Return on average assets | Return on average assets | 1.03 | % | 0.98 | % | | | 1.00 | % | 1.21 | % | Return on average assets | 0.92 | % | 1.21 | % | 0.98 | % | |
Return on average equity | Return on average equity | 10.74 | % | 9.61 | % | | | 10.16 | % | 10.47 | % | Return on average equity | 9.12 | % | 12.77 | % | 9.61 | % | |
Tax-equivalent net interest margin 1 | 3.05 | % | 2.96 | % | | | 3.01 | % | 3.28 | % | |
Tax-equivalent net interest margin | | Tax-equivalent net interest margin | 3.04 | % | 3.26 | % | 2.96 | % | |
Cost of deposits | Cost of deposits | 0.06 | % | 0.06 | % | | | 0.06 | % | 0.07 | % | Cost of deposits | 0.20 | % | 0.08 | % | 0.06 | % | |
Efficiency ratio | Efficiency ratio | 55.73 | % | 59.13 | % | | | 57.40 | % | 61.43 | % | Efficiency ratio | 60.24 | % | 50.92 | % | 59.13 | % | |
Net charge-offs (recoveries) | $ | 8 | | $ | (9) | | | | $ | (1) | | $ | (75) | | |
Cash dividend payout ratio on common stock 2 | 34.29 | % | 36.36 | % | | | 35.56 | % | 33.33 | % | |
Net (recoveries) charge-offs | | Net (recoveries) charge-offs | $ | 3 | | $ | (20) | | $ | (9) | | |
Cash dividend payout ratio on common stock 1 | | Cash dividend payout ratio on common stock 1 | 42.37 | % | 30.86 | % | 36.36 | % | |
| (dollars in thousands, except per share data) | (dollars in thousands, except per share data) | June 30, 2022 | December 31, 2021 | (dollars in thousands, except per share data) | March 31, 2023 | December 31, 2022 |
Selected financial condition data: | Selected financial condition data: | | Selected financial condition data: | |
Total assets | Total assets | $ | 4,326,904 | | $ | 4,314,209 | | Total assets | $ | 4,135,279 | | $ | 4,147,464 | |
Investment securities | | Investment securities | 1,756,093 | | 1,774,303 | |
Loans, net | Loans, net | 2,140,093 | | 2,232,622 | | Loans, net | 2,088,998 | | 2,069,563 | |
Deposits | Deposits | 3,830,670 | | 3,808,550 | | Deposits | 3,250,574 | | 3,573,348 | |
Borrowings and other obligations | 356 | | 419 | | |
Short-term borrowings and other obligations | | Short-term borrowings and other obligations | 405,802 | | 112,439 | |
| Stockholders' equity | Stockholders' equity | 409,573 | | 450,368 | | Stockholders' equity | 430,174 | | 412,092 | |
Book value per share | Book value per share | 25.58 | | 28.27 | | Book value per share | 26.71 | | 25.71 | |
Asset quality ratios: | Asset quality ratios: | | Asset quality ratios: | |
Allowance for credit losses on loans to total loans | Allowance for credit losses on loans to total loans | 1.04 | % | 1.02 | % | Allowance for credit losses on loans to total loans | 1.10 | % | 1.10 | % |
Allowance for credit losses on loans to total loans, excluding SBA PPP loans 3 | 1.05 | % | 1.07 | % | |
| Allowance for credit losses on loans to non-performing loans | Allowance for credit losses on loans to non-performing loans | 2.81x | 2.75x | Allowance for credit losses on loans to non-performing loans | 11.52x | 9.45x |
Non-accrual loans to total loans | Non-accrual loans to total loans | 0.37 | % | 0.37 | % | Non-accrual loans to total loans | 0.10 | % | 0.12 | % |
Capital ratios: | Capital ratios: | | Capital ratios: | |
Equity to total assets ratio | Equity to total assets ratio | 9.47 | % | 10.44 | % | Equity to total assets ratio | 10.40 | % | 9.94 | % |
Tangible common equity to tangible assets 4 | 7.79 | % | 8.76 | % | |
Tangible common equity to tangible assets | | Tangible common equity to tangible assets | 8.69 | % | 8.21 | % |
Total capital (to risk-weighted assets) | Total capital (to risk-weighted assets) | 14.67 | % | 14.58 | % | Total capital (to risk-weighted assets) | 16.15 | % | 15.90 | % |
Tier 1 capital (to risk-weighted assets) | Tier 1 capital (to risk-weighted assets) | 13.84 | % | 13.70 | % | Tier 1 capital (to risk-weighted assets) | 15.27 | % | 15.02 | % |
Tier 1 capital (to average assets) | Tier 1 capital (to average assets) | 9.07 | % | 8.85 | % | Tier 1 capital (to average assets) | 9.94 | % | 9.60 | % |
Common equity Tier 1 capital (to risk weighted assets) | Common equity Tier 1 capital (to risk weighted assets) | 13.84 | % | 13.70 | % | Common equity Tier 1 capital (to risk weighted assets) | 15.27 | % | 15.02 | % |
1 Tax-equivalent net interest margin is computed by dividing taxable equivalent net interest income, which is adjusted for taxable equivalent income on tax-exempt loans and securities based on Federal statutory rate of 21 percent, by total average interest-earning assets. | |
2 Calculated as dividends on common shares divided by basic net income per common share. | |
3 The allowance for credit losses on loans 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 on loans. SBA PPP loans at June 30, 2022 and December 31, 2021 totaled $17.0 million and $111.2 million, respectively. | |
4 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses. Tangible common equity of $331 million and $371 million at June 30, 2022 and December 31, 2021, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets. Tangible assets exclude goodwill and intangible assets of $78.6 million and $79.4 million at June 30, 2022 and December 31, 2021, respectively. | |
1 Calculated as dividends on common shares divided by basic net income per common share. | | 1 Calculated as dividends on common shares divided by basic net income per common share. |
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Net Interest Income
Net interest income is the interest earned on loans, investmentinvestments and other interest-earning assets minus the interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in the net interest income and/or margin due to an imbalance in the timing of repricing and maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income. For more information, refer to Item 3. Quantitative and Qualitative Disclosure about Market Risk in this Form 10-Q.
Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders’ equity.
Average Statements of Condition and Analysis of Net Interest Income
The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for each period reported.
| | | Three months ended | Three months ended | | | Three months ended | Three months ended |
| | June 30, 2022 | March 31, 2022 | | | March 31, 2023 | December 31, 2022 | March 31, 2022 |
| | | Interest | | Interest | | | | | Interest | | Interest | | Interest | |
| | Average | Income/ | Yield/ | Average | Income/ | Yield/ | | | Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ |
(dollars in thousands) | (dollars in thousands) | Balance | Expense | Rate | Balance | Expense | Rate | | (dollars in thousands) | Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate |
Assets | Assets | | | Assets | |
| | Interest-earning deposits with banks 1 | $ | 95,326 | | $ | 180 | | 0.75 | % | $ | 231,555 | | $ | 106 | | 0.18 | % | | | Interest-earning deposits with banks 1 | $ | 4,863 | | $ | 56 | | 4.58 | % | $ | 61,878 | | $ | 575 | | 3.64 | % | $ | 231,555 | | $ | 106 | | 0.18 | % |
| | Investment securities 2, 3 | 1,807,710 | | 8,469 | | 1.87 | % | 1,626,537 | | 6,871 | | 1.69 | % | | | Investment securities 2, 3 | 1,851,743 | | 10,194 | | 2.20 | % | 1,873,028 | | 10,319 | | 2.20 | % | 1,626,537 | | 6,871 | | 1.69 | % |
| | Loans 1, 3, 4 | 2,194,810 | | 23,522 | | 4.24 | % | 2,227,495 | | 23,881 | | 4.29 | % | | | Loans 1, 3, 4 | 2,121,718 | | 24,415 | | 4.60 | % | 2,113,201 | | 23,670 | | 4.38 | % | 2,227,495 | | 23,881 | | 4.29 | % |
| | Total interest-earning assets 1 | 4,097,846 | | 32,171 | | 3.11 | % | 4,085,587 | | 30,858 | | 3.09 | % | | | Total interest-earning assets 1 | 3,978,324 | | 34,665 | | 3.49 | % | 4,048,107 | | 34,564 | | 3.34 | % | 4,085,587 | | 30,858 | | 3.02 | % |
| | Cash and non-interest-bearing due from banks | 56,408 | | | 69,019 | | | | | Cash and non-interest-bearing due from banks | 39,826 | | | 44,480 | | | 69,019 | | |
| | Bank premises and equipment, net | 7,182 | | | 7,430 | | | | | Bank premises and equipment, net | 8,396 | | | 7,933 | | | 7,430 | | |
| | Interest receivable and other assets, net | 151,483 | | | 183,222 | | | | | Interest receivable and other assets, net | 137,114 | | | 125,483 | | | 183,222 | | |
Total assets | Total assets | $ | 4,312,919 | | | $ | 4,345,258 | | | | Total assets | $ | 4,163,660 | | | $ | 4,226,003 | | | $ | 4,345,258 | | |
Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | | Liabilities and Stockholders' Equity | |
| | Interest-bearing transaction accounts | $ | 300,258 | | $ | 53 | | 0.07 | % | $ | 295,183 | | $ | 56 | | 0.08 | % | | | Interest-bearing transaction accounts | $ | 272,353 | | $ | 254 | | 0.38 | % | $ | 290,064 | | $ | 191 | | 0.26 | % | $ | 295,183 | | $ | 56 | | 0.08 | % |
| | Savings accounts | 343,338 | | 32 | | 0.04 | % | 343,327 | | 29 | | 0.03 | % | | | Savings accounts | 329,299 | | 170 | | 0.21 | % | 338,760 | | 32 | | 0.04 | % | 343,327 | | 29 | | 0.03 | % |
| | Money market accounts | 1,076,912 | | 438 | | 0.16 | % | 1,122,215 | | 478 | | 0.17 | % | | | Money market accounts | 952,479 | | 1,085 | | 0.46 | % | 1,036,932 | | 405 | | 0.15 | % | 1,122,215 | | 478 | | 0.17 | % |
| | Time accounts including CDARS | 144,432 | | 67 | | 0.19 | % | 147,707 | | 14 | | 0.04 | % | | | Time accounts including CDARS | 126,030 | | 223 | | 0.72 | % | 127,906 | | 114 | | 0.35 | % | 147,707 | | 14 | | 0.04 | % |
| | Borrowings and other obligations 1 | 370 | | — | | 0.61 | % | 399 | | 1 | | 0.62 | % | | | Short-term borrowings and other obligations 1 | 222,571 | | 2,716 | | 4.88 | % | 8,014 | | 89 | | 4.34 | % | 399 | | 1 | | 0.62 | % |
| | Subordinated debenture 1, 5 | — | | — | | — | % | — | | — | | — | % | | |
| | Total interest-bearing liabilities | 1,865,310 | | 590 | | 0.13 | % | 1,908,831 | | 578 | | 0.12 | % | | | Total interest-bearing liabilities | 1,902,732 | | 4,448 | | 0.95 | % | 1,801,676 | | 831 | | 0.18 | % | 1,908,831 | | 578 | | 0.12 | % |
| | Demand accounts | 1,984,629 | | | 1,942,804 | | | | | Demand accounts | 1,792,998 | | | 1,975,390 | | | 1,942,804 | | |
| | Interest payable and other liabilities | 49,709 | | | 51,997 | | | | | Interest payable and other liabilities | 48,233 | | | 48,592 | | | 51,997 | | |
| | Stockholders' equity | 413,271 | | | 441,626 | | | | | Stockholders' equity | 419,697 | | | 400,345 | | | 441,626 | | |
Total liabilities & stockholders' equity | Total liabilities & stockholders' equity | $ | 4,312,919 | | | $ | 4,345,258 | | | | Total liabilities & stockholders' equity | $ | 4,163,660 | | | $ | 4,226,003 | | | $ | 4,345,258 | | |
Tax-equivalent net interest income/margin 1 | Tax-equivalent net interest income/margin 1 | | $ | 31,581 | | 3.05 | % | | $ | 30,280 | | 2.96 | % | | Tax-equivalent net interest income/margin 1 | | $ | 30,217 | | 3.04 | % | | $ | 33,733 | | 3.26 | % | | $ | 30,280 | | 2.96 | % |
Reported net interest income/margin 1 | Reported net interest income/margin 1 | | $ | 31,197 | | 3.01 | % | | $ | 29,898 | | 2.93 | % | | Reported net interest income/margin 1 | | $ | 29,899 | | 3.01 | % | | $ | 33,370 | | 3.23 | % | | $ | 29,898 | | 2.93 | % |
Tax-equivalent net interest rate spread | Tax-equivalent net interest rate spread | | 2.98 | % | | 2.90 | % | | Tax-equivalent net interest rate spread | | 2.54 | % | | 3.16 | % | | 2.90 | % |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Six months ended | | Six months ended | | | | | | June 30, 2022 | | June 30, 2021 | | | | | | | Interest | | | | Interest | | | | | | | Average | Income/ | Yield/ | | Average | Income/ | Yield/ | | | | (in thousands) | Balance | Expense | Rate | | Balance | Expense | Rate | | | | Assets | | | | | | | | | | | | Interest-earning deposits with banks 1 | $ | 163,064 | | $ | 286 | | 0.35 | % | | $ | 179,846 | | $ | 96 | | 0.11 | % | | | | | Investment securities 2, 3 | 1,717,624 | | 15,340 | | 1.79 | % | | 601,498 | | 6,948 | | 2.31 | % | | | | | Loans 1, 3, 4 | 2,211,062 | | 47,403 | | 4.26 | % | | 2,081,069 | | 42,437 | | 4.06 | % | | | | | Total interest-earning assets 1 | 4,091,750 | | 63,029 | | 3.06 | % | | 2,862,413 | | 49,481 | | 3.44 | % | | | | | Cash and non-interest-bearing due from banks | 62,679 | | | | | 45,059 | | | | | | | | Bank premises and equipment, net | 7,305 | | | | | 4,786 | | | | | | | | Interest receivable and other assets, net | 167,265 | | | | | 132,675 | | | | | | | Total assets | $ | 4,328,999 | | | | | $ | 3,044,933 | | | | | | | Liabilities and Stockholders' Equity | | | | | | | | | | | | Interest-bearing transaction accounts | $ | 297,734 | | $ | 109 | | 0.07 | % | | $ | 170,943 | | $ | 78 | | 0.09 | % | | | | | Savings accounts | 343,333 | | 61 | | 0.04 | % | | 220,946 | | 40 | | 0.04 | % | | | | | Money market accounts | 1,099,439 | | 916 | | 0.17 | % | | 719,769 | | 598 | | 0.17 | % | | | | | Time accounts including CDARS | 146,061 | | 81 | | 0.11 | % | | 95,849 | | 177 | | 0.37 | % | | | | | Borrowings and other obligations 1 | 384 | | 1 | | 0.62 | % | | 50 | | — | | 1.46 | % | | | | | Subordinated debenture 1, 5 | — | | — | | — | % | | 1,076 | | 1,361 | | 251.54 | % | | | | | Total interest-bearing liabilities | 1,886,951 | | 1,168 | | 0.12 | % | | 1,208,633 | | 2,254 | | 0.38 | % | | | | | Demand accounts | 1,963,832 | | | | | 1,442,320 | | | | | | | | Interest payable and other liabilities | 50,846 | | | | | 42,753 | | | | | | | | Stockholders' equity | 427,370 | | | | | 351,227 | | | | | | | Total liabilities & stockholders' equity | $ | 4,328,999 | | | | | $ | 3,044,933 | | | | | | | Tax-equivalent net interest income/margin 1 | | $ | 61,861 | | 3.01 | % | | | $ | 47,227 | | 3.28 | % | | | | Reported net interest income/margin 1 | | $ | 61,095 | | 2.97 | % | | | $ | 46,565 | | 3.24 | % | | | | Tax-equivalent net interest rate spread | | | 2.94 | % | | | | 3.06 | % | | | | 1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable. | | 2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly. | | 3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21 percent in 2022 and 2021. | | 4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield. | | 5 2021 interest on subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021. | | | |
Analysis of Changes in Net Interest Income1 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.
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| 2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly. | | | |
| 3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21 percent in 2023 and 2022. | | | |
| 4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield. | | | |
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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 periods indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or
decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one more daytwo fewer days in the three months ended June 30, 2022March 31, 2023 compared to MarchDecember 31, 2022.
| | | Three Months Ended June 30, 2022 Compared to Three Months Ended March 31, 2022 | | Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 | | Three Months Ended March 31, 2023 Compared to Three Months Ended December 31, 2022 | | Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 |
(in thousands) | (in thousands) | Volume | Yield/Rate | Mix | Total | | Volume | Yield/Rate | Mix | Total | (in thousands) | Volume | Yield/Rate | Mix | Total | | Volume | Yield/Rate | Mix | Total |
Interest-earning deposits with banks | Interest-earning deposits with banks | $ | (63) | | $ | 325 | | $ | (188) | | $ | 74 | | | $ | (9) | | $ | 221 | | $ | (22) | | $ | 190 | | Interest-earning deposits with banks | $ | (530) | | $ | 153 | | $ | (142) | | $ | (519) | | | $ | (105) | | $ | 2,559 | | $ | (2,504) | | $ | (50) | |
Investment securities 1 | Investment securities 1 | 765 | | 749 | | 84 | | 1,598 | | | 12,893 | | (1,576) | | (2,925) | | 8,392 | | Investment securities 1 | (117) | | (8) | | — | | (125) | | | 951 | | 2,083 | | 289 | | 3,323 | |
Loans 1 | Loans 1 | (350) | | (271) | | 262 | | (359) | | | 2,651 | | 2,179 | | 136 | | 4,966 | | Loans 1 | 95 | | 1,187 | | (537) | | 745 | | | (1,134) | | 1,751 | | (83) | | 534 | |
Total interest-earning assets | Total interest-earning assets | 352 | | 803 | | 158 | | 1,313 | | | 15,535 | | 824 | | (2,811) | | 13,548 | | Total interest-earning assets | (552) | | 1,332 | | (679) | | 101 | | | (288) | | 6,393 | | (2,298) | | 3,807 | |
Interest-bearing transaction accounts | Interest-bearing transaction accounts | 1 | | (4) | | — | | (3) | | | 58 | | (15) | | (12) | | 31 | | Interest-bearing transaction accounts | (12) | | 86 | | (11) | | 63 | | | (4) | | 219 | | (17) | | 198 | |
Savings accounts | Savings accounts | — | | 3 | | — | | 3 | | | 22 | | (1) | | — | | 21 | | Savings accounts | (1) | | 147 | | (8) | | 138 | | | (1) | | 148 | | (6) | | 141 | |
Money market accounts | Money market accounts | (19) | | (27) | | 6 | | (40) | | | 315 | | 2 | | 1 | | 318 | | Money market accounts | (33) | | 802 | | (89) | | 680 | | | (72) | | 800 | | (121) | | 607 | |
Time accounts, including CDARS | Time accounts, including CDARS | — | | 54 | | (1) | | 53 | | | 93 | | (124) | | (65) | | (96) | | Time accounts, including CDARS | (2) | | 117 | | (6) | | 109 | | | (2) | | 247 | | (36) | | 209 | |
Borrowings and other obligations | — | | — | | (1) | | (1) | | | — | | — | | 1 | | 1 | | |
Subordinated debenture 2 | — | | — | | — | | — | | | — | | (1,361) | | — | | (1,361) | | |
Short-term borrowings and other obligations | | Short-term borrowings and other obligations | 2,383 | | 11 | | 233 | | 2,627 | | | 557 | | 4 | | 2,154 | | 2,715 | |
| Total interest-bearing liabilities | Total interest-bearing liabilities | (18) | | 26 | | 4 | | 12 | | | 488 | | (1,499) | | (75) | | (1,086) | | Total interest-bearing liabilities | 2,335 | | 1,163 | | 119 | | 3,617 | | | 478 | | 1,418 | | 1,974 | | 3,870 | |
Changes in tax-equivalent net interest income | Changes in tax-equivalent net interest income | $ | 370 | | $ | 777 | | $ | 154 | | $ | 1,301 | | | $ | 15,047 | | $ | 2,323 | | $ | (2,736) | | $ | 14,634 | | Changes in tax-equivalent net interest income | $ | (2,887) | | $ | 169 | | $ | (798) | | $ | (3,516) | | | $ | (766) | | $ | 4,975 | | $ | (4,272) | | $ | (63) | |
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%. | 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%. | 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%. |
2 Six months ended June 30, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021. | |
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SecondFirst Quarter of 20222023 Compared to the FirstFourth Quarter of 2022
Net interest income totaled $31.2 million in the second quarter of 2022, compared to $29.9 million in the first quarter of 2023, compared to $33.4 million in the fourth quarter of 2022. The $1.3$3.5 million increasedecrease from the prior quarter was primarily attributablerelated to an increase in the cost of deposits and higher average balances and yields on investment securities driving an increase of $1.6 million, quarter-over-quarter in investment interest income.borrowing balances.
The tax-equivalent net interest margin was 3.05% in the second quarter of 2022, compared to 2.96%3.04% in the first quarter of 2023, compared to 3.26% in the fourth quarter of 2022. The increasedecline from the prior quarter was primarily due to continued deployment of cash into higher yielding investment securitiesborrowing and deposit costs partially offset by higher interest rates on non-PPP loans, partially offset by lower interest and fee income loans. The tax-equivalent yield on PPP loans. Average yields on the investment portfolio increased from 1.69%interest-earning assets was 3.49% in the first quarter of 2022 to 1.87% in the second quarter reflecting recent increases in market interest rates, and the average rate on gross loans increased 102023, an increase of 15 basis points over the fourth quarter of 2022. For the first quarter of 2023, interest-bearing liabilities costs were 0.95%, which excludeswas a 77 basis point increase over the impactfourth quarter of loan origination fees/costs and purchase discounts/premiums.2022.
First Six MonthsQuarter of 20222023 Compared to the First Six MonthsQuarter of 20212022
Net interest income totaled $61.1$29.9 million for the six months ended June 30, 2022,first quarter of 2023, largely unchanged compared to $46.6 million for the same period infirst quarter of 2022, as the prior year. The $14.5 million increase from the prior year was primarily due to the larger investment portfolio generating an incremental $8.3 million, and $4.9 million related to higher balances and yields on the loan portfolio (net of a $3.7 million decrease in interest income on loans and feesinvestments offset the increases in interest expense on PPP loans). Additionally, 2021 included a $1.3 million accelerated discount from the early redemption of a subordinated debenture.deposits and borrowings.
The tax-equivalent net interest margin was 3.01%3.04% in the six months ended June 30, 2022,first quarter of 2023, compared to 3.28%2.96% in the same period in the prior year. The decreaseincrease over the same quarter last year was primarily attributeddue to a higher proportion of investment securities in the larger balance sheet associated with ARB's lower loan-to-deposit ratioyields on loans and other deposit growth over the period. The decrease wasinvestments partially offset by a shift to a higher percentage of non-PPP loans within the loan portfoliodeposit and the absence of trust preferred securities redemption that occurred in 2021.borrowing costs.
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").
In response to the evolving risks to economic risks posedactivity caused by the COVID-19 pandemic, the FOMC made two emergency federal funds rate cuts totaling 150 basis points to the federal funds rate in March 2020. The federal funds target rate range residedremained between 0.0% andto 0.25% after March 15, 2020 through the beginning of 2022, putting downward pressure on our asset yields and net interest margin through early 2022. In itsmargin. Beginning in March 16, 2022, meeting, the FOMC raisedbegan successive increases to the federal funds rate due to the evolving inflation risks, complicated by international political unrest and supply chain disruptions. As a result of five rate adjustments during 2022, the federal funds target rate increased to a range of 4.25% to 4.50% at year-end. In 2023, on both February 1st and March 2nd, the FOMC increased the target federal fundsrate by 25 basis points followed by a 50 basis point increase on May 4, 2022. Continued evolving economic risks exacerbated by global economic contraction and international political unrest, have resulted in shortages of oil, other supply
chain disruptions, and elevated inflation. In response, the FOMC increased the federal funds rate by 75 basis points twice effective June 16, 2022 and July 28, 2022 to a range of 2.25% - 2.50%4.75% to 5.00%. It is widely anticipated that additional increases in the target range will occur in 2022. Our net interest margin should benefit from a rising interest rate environment.Federal Reserve policymakers continue to monitor inflation and economic developments throughout 2023. See ITEM 3. Quantitative and Qualitative Disclosure about Market Risk for further information.
Provision for Credit Losses on Loans
Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors including growth of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans. The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off.
The following table shows the activity for the periods presented.
| | | Three months ended | | Six months ended | | Three months ended | |
(dollars in thousands) | (dollars in thousands) | June 30, 2022 | March 31, 2022 | | | June 30, 2022 | June 30, 2021 | (dollars in thousands) | March 31, 2023 | December 31, 2022 | March 31, 2022 | |
Reversal of credit losses on loans | $ | — | | $ | (485) | | | | $ | (485) | | $ | (3,849) | | |
Provision for (reversal of) credit losses on loans | | Provision for (reversal of) credit losses on loans | $ | 350 | | $ | — | | $ | (485) | | |
There was noWe recorded a $350 thousand provision made to the allowance for credit losses on loans in the secondfirst quarter. AnThe provision was due primarily to increases in qualitative risk factors to account for continued uncertainty about inflation and recession risks. Management believed that these risk factors were not adequately captured in the modeled quantitative portion of the allowance and took the more prudent approach to account for loan and collateral concentration risks, mainly in our construction and commercial real estate portfolios, and the need for heightened portfolio management in light of current economic conditions. In addition, the $19.8 million increase in loans contributed modestly to the provision. These increases were partially offset by the quantitative impact of an improvement in theMoody's Analytics' baseline California unemployment rate forecast decreasedforecasts over the quantitative portion of estimated credit losses while ongoing supply chain issues, inflation and recession risks increased qualitative factors. The reversal of the allowance for credit losses on loansnext four quarters.
There was no provision in the prior quarter and a $485 thousand provision reversal in the first quarter of 2022, due primarily resulted from improved forecastedto an improvement in underlying economic conditionsforecasts at the time. The provision reversals in the six months ended June 30, 2021 were primarily due to improvements in the forecasted California unemployment rates at the time and decrease in non-PPP loan balances.
Loans designated special mention, which are not considered adversely classified, decreased year-to-date by $14.7 million to $58.6 million at June 30, 2022 from $73.3 million at December 31, 2021. The decrease was largely due to $22.3 million in upgrades to pass risk ratings because of the borrowers' improved financial condition, which was offset by $11.5 million in downgrades from pass to special mention. Additionally, there were $3.6 million in downgrades from special mention to substandard, and $908 thousand in paydowns and payoffs.
Classified assets (loans with risk ratings of substandard or doubtful) totaled $36.9 million at June 30, 2022, compared to $36.2 million at December 31, 2021. The $815 thousand increase was primarily related to $5.1 million in commercial loans to one borrowing relationship that were downgraded from special mention to substandard (comprised of $3.6 million as of December 31, 2021 and $1.5 million in additional advances in 2022) and the downgrade of two well-secured owner occupied commercial real estate loans totaling $2.3 million and two home equity loans totaling $128 thousand. Additionally, there were $5.2 million in upgrades to pass and $832 thousand in paydowns and payoffs. Classified loans also included one $106 thousand loan acquired from ARB with a doubtful risk rating as of June 30, 2022 and December 31, 2021, which is well-secured by real estate collateral.
The ratio of allowance for credit losses on loans to total loans was 1.04% and 1.02% at June 30, 2022 and December 31, 2021, respectively. Non-accrual loans decreased $358 thousand to $8.0 million, or 0.37% of total loans at June 30, 2022 from $8.4 million, or 0.37% of total loans at December 31, 2021.
For more information, refer to Note 5,Loans and Allowance for Credit Losses on Loans, to the consolidated financial statements in this Form 10-Q.
Non-interest Income
The following table details the components of non-interest income.
| | | Three months ended | Amount Change | Percent Change | | | Three months ended | Quarter over quarter | Year over year |
(dollars in thousands) | (dollars in thousands) | June 30, 2022 | March 31, 2022 | | (dollars in thousands) | March 31, 2023 | December 31, 2022 | March 31, 2022 | Amount Change | Percent Change | Amount Change | Percent Change |
Earnings on bank-owned life insurance, net | | Earnings on bank-owned life insurance, net | $ | 705 | | $ | 296 | | $ | 413 | | $ | 409 | | 138.2 | % | $ | 292 | | 70.7 | % |
Service charges on deposit accounts | | Service charges on deposit accounts | 533 | | 519 | | 488 | | 14 | | 2.7 | % | 45 | | 9.2 | % |
Wealth Management and Trust Services | Wealth Management and Trust Services | $ | 630 | | $ | 600 | | | $ | 30 | | 5.0 | % | | Wealth Management and Trust Services | 511 | | $ | 490 | | 600 | | 21 | | 4.3 | % | (89) | | (14.8) | % |
Debit card interchange fees, net | Debit card interchange fees, net | 531 | | 505 | | | 26 | | 5.1 | % | | Debit card interchange fees, net | 447 | | 513 | | 505 | | (66) | | (12.9) | % | (58) | | (11.5) | % |
Service charges on deposit accounts | 465 | | 488 | | | (23) | | (4.7) | % | | |
Earnings on bank-owned life insurance, net | 298 | | 413 | | | (115) | | (27.8) | % | | |
Dividends on Federal Home Loan Bank stock | Dividends on Federal Home Loan Bank stock | 249 | | 259 | | | (10) | | (3.9) | % | | Dividends on Federal Home Loan Bank stock | 302 | | 297 | | 259 | | 5 | | 1.7 | % | 43 | | 16.6 | % |
Merchant interchange fees, net | Merchant interchange fees, net | 149 | | 140 | | | 9 | | 6.4 | % | | Merchant interchange fees, net | 133 | | 119 | | 140 | | 14 | | 11.8 | % | (7) | | (5.0) | % |
| Other income | Other income | 406 | | 462 | | | (56) | | (12.1) | % | | Other income | 304 | | 353 | | 462 | | (49) | | (13.9) | % | (158) | | (34.2) | % |
Total non-interest income | Total non-interest income | $ | 2,728 | | $ | 2,867 | | | $ | (139) | | (4.8) | % | | Total non-interest income | $ | 2,935 | | $ | 2,587 | | $ | 2,867 | | $ | 348 | | 13.5 | % | $ | 68 | | 2.4 | % |
|
| | | | | | | | | | | | | | |
| | | | |
| Six months ended | Amount Change | Percent Change |
(dollars in thousands) | June 30, 2022 | June 30, 2021 |
Wealth Management and Trust Services | $ | 1,230 | | $ | 1,018 | | $ | 212 | | 20.8 | % |
Debit card interchange fees, net | 1,036 | | 785 | | 251 | | 32.0 | % |
Service charges on deposit accounts | 953 | | 598 | | 355 | | 59.4 | % |
Earnings on bank-owned life insurance, net | 711 | | 490 | | 221 | | 45.1 | % |
Dividends on Federal Home Loan Bank stock | 508 | | 326 | | 182 | | 55.8 | % |
Merchant interchange fees, net | 289 | | 118 | | 171 | | 144.9 | % |
| | | | |
Other income | 868 | | 513 | | 355 | | 69.2 | % |
Total non-interest income | $ | 5,595 | | $ | 3,848 | | $ | 1,747 | | 45.4 | % |
First Quarter of 2023 Compared to the Fourth Quarter of 2022
SecondNon-interest income totaled $2.9 million in the first quarter of 2023, compared to $2.6 million in the prior quarter. The $348 thousand increase from the prior quarter was primarily related to the recognition of a death benefit on bank-owned life insurance, partially offset by decreases in debit card interchange fees and other income.
First Quarter of 20222023 Compared to the First Quarter of 2022
Non-interest income totaled $2.7 million in the second quarter of 2022, compared to $2.9 million in the preceding quarter. The $139.0 thousand decrease was primarily related to payments on bank-owned life insurance in the prior quarter.
First Six Monthsfirst quarter of 2022 Compared to the First Six Months of 2021
Non-interest income totaled $5.6 million in the six months ended June 30, 2022,2023, compared to $3.8$2.9 million in the same period of the prior year. The $1.7 million$68 thousand improvement from the prior year periodfirst quarter of 2022, was evidentprimary due to the death benefit, partially offset by decreases in all categorieswealth management and mostly attributable to increased activity associated with the ARB acquisitiontrust services income and higher Wealth Management and Trust Servicesother income.
Non-interest Expense
The following table details the components of non-interest expense.
| | | Three months ended | Amount Change | Percent Change | | | Three months ended | Quarter over quarter | Year over year |
(dollars in thousands) | (dollars in thousands) | June 30, 2022 | March 31, 2022 | | (dollars in thousands) | March 31, 2023 | December 31, 2022 | March 31, 2022 | Amount Change | Percent Change | Amount Change | Percent Change |
Salaries and related benefits | Salaries and related benefits | $ | 10,341 | | $ | 11,548 | | | $ | (1,207) | | (10.5) | % | | Salaries and related benefits | $ | 10,930 | | $ | 9,600 | | $ | 11,548 | | $ | 1,330 | | 13.9 | % | $ | (618) | | (5.4) | % |
Occupancy and equipment | Occupancy and equipment | 1,894 | | 1,909 | | | (15) | | (0.8) | % | | Occupancy and equipment | 2,414 | | 2,084 | | 1,907 | | 330 | | 15.8 | % | 507 | | 26.6 | % |
Professional services | | Professional services | 1,123 | | 985 | | 913 | | 138 | | 14.0 | % | 210 | | 23.0 | % |
Data processing | Data processing | 1,199 | | 1,277 | | | (78) | | (6.1) | % | | Data processing | 1,045 | | 1,080 | | 1,277 | | (35) | | (3.2) | % | (232) | | (18.2) | % |
Professional services | 665 | | 913 | | | (248) | | (27.2) | % | | |
Depreciation and amortization | | Depreciation and amortization | 882 | | 581 | | 452 | | 301 | | 51.8 | % | 430 | | 95.1 | % |
Information technology | Information technology | 468 | | 478 | | | (10) | | (2.1) | % | | Information technology | 370 | | 678 | | 478 | | (308) | | (45.4) | % | (108) | | (22.6) | % |
Depreciation and amortization | 393 | | 452 | | | (59) | | (13.1) | % | | |
Amortization of core deposit intangible | Amortization of core deposit intangible | 374 | | 380 | | | (6) | | (1.6) | % | | Amortization of core deposit intangible | 345 | | 365 | | 380 | | (20) | | (5.5) | % | (35) | | (9.2) | % |
Directors' expense | Directors' expense | 294 | | 311 | | | (17) | | (5.5) | % | | Directors' expense | 321 | | 269 | | 311 | | 52 | | 19.3 | % | 10 | | 3.2 | % |
Federal Deposit Insurance Corporation insurance | Federal Deposit Insurance Corporation insurance | 296 | | 290 | | | 6 | | 2.1 | % | | Federal Deposit Insurance Corporation insurance | 289 | | 293 | | 290 | | (4) | | (1.4) | % | (1) | | (0.3) | % |
Charitable contributions | Charitable contributions | 511 | | 45 | | | 466 | | 1,035.6 | % | | Charitable contributions | 49 | | 104 | | 45 | | (55) | | (52.9) | % | 4 | | 8.9 | % |
Other real estate owned | | Other real estate owned | 4 | 2 | | — | | — | % | 2 | | 100.0 | % |
Other non-interest expense | Other non-interest expense | | | | | Other non-interest expense | |
Advertising | Advertising | 221 | | 347 | | | (126) | | (36.3) | % | | Advertising | 278 | | 281 | | 347 | | (3) | | (1.1) | % | (69) | | (19.9) | % |
Other expense | Other expense | 2,250 | | 1,425 | | | 825 | | 57.9 | % | | Other expense | 1,730 | | 1,986 | | 1,425 | | (256) | | (12.9) | % | 305 | | 21.4 | % |
Total other non-interest expense | Total other non-interest expense | 2,471 | | 1,772 | | | 699 | | 39.4 | % | | Total other non-interest expense | 2,008 | | 2,267 | | 1,772 | | (259) | | (11.4) | % | 236 | | 13.3 | % |
Total non-interest expense | Total non-interest expense | $ | 18,906 | | $ | 19,375 | | | $ | (469) | | (2.4) | % | | Total non-interest expense | $ | 19,780 | | $ | 18,310 | | $ | 19,375 | | $ | 1,470 | | 8.0 | % | $ | 405 | | 2.1 | % |
|
| | | | | | | | | | | | | | |
| | | | |
| Six months ended | Amount Change | Percent Change |
(dollars in thousands) | June 30, 2022 | June 30, 2021 |
Salaries and related benefits | $ | 21,889 | | $ | 18,096 | | $ | 3,793 | | 21.0 | % |
Occupancy and equipment | 3,803 | | 3,502 | | 301 | | 8.6 | % |
Data processing | 2,476 | | 1,639 | | 837 | | 51.1 | % |
Professional services | 1,578 | | 1,849 | | (271) | | (14.7) | % |
Information technology | 946 | | 609 | | 337 | | 55.3 | % |
Depreciation and amortization | 845 | | 848 | | (3) | | (0.4) | % |
Amortization of core deposit intangible | 754 | | 408 | | 346 | | 84.8 | % |
Directors' expense | 605 | | 405 | | 200 | | 49.4 | % |
Federal Deposit Insurance Corporation insurance | 586 | | 361 | | 225 | | 62.3 | % |
Charitable contributions | 556 | | 493 | | 63 | | 12.8 | % |
Other non-interest expense | | | | |
Advertising | 568 | 414 | 154 | | 37.2 | % |
Other expense | 3,675 | | 2,344 | | 1,331 | | 56.8 | % |
Total other non-interest expense | 4,243 | | 2,758 | | 1,485 | | 53.8 | % |
Total non-interest expense | $ | 38,281 | | $ | 30,968 | | $ | 7,313 | | 23.6 | % |
First Quarter of 2023 Compared to the Fourth Quarter of 2022
SecondNon-interest expense totaled $19.8 million in the first quarter of 2023, compared to $18.3 million in the prior quarter. The $1.5 million increase from the prior quarter included $417 thousand in adjustments to estimated incentive and supplemental executive retirement plan accruals, and $432 thousand from accelerated amortization and lease costs associated with branch closures. Other increases to salaries and related benefits included $389 thousand in 401(k) matching contributions, which is typically higher in the first quarter, and $383 thousand of additional salaries, insurance and payroll taxes. Meaningful decreases in expenses included $343 thousand in information technology and data processing costs due largely to timing of purchases and the renegotiation of our data processing contract.
First Quarter of 20222023 Compared to the First Quarter of 2022
Non-interest expense totaled $18.9$19.8 million in the secondfirst quarter of 2022,2023, compared to $19.4 million in the prior quarter.first quarter of 2022. The decrease$405 thousand increase from the priorfirst quarter of 2022 was primarily duerelated to $646 thousand in accelerated amortization and lease costs for branches closed and a $1.2 million reduction$210 thousand increase in salaries and benefits afterprofessional services fees from the completion of the acquisition-related conversion in March 2022multiple internal audit and 22 fewer full-time equivalent employees. Decreasesconsulting engagements. These increases were partially offset by a $466 thousand increase in charitable contributions in the quarter duenet changes to the annual distribution of grant funding related to the Bank's corporate giving program.
First Six Months of 2022 Compared to the First Six Months of 2021
Non-interest expense totaled $38.3 million in the six months ended June 30, 2022, compared to $31.0 million in the same period of prior year. The largest increases over prior year expenses came fromestimated incentive, vacation and retirement plan accruals included within salaries and related benefits which rose $3.8 million due to increased numbers of employees in acquired branchexpense and loan offices, regularly scheduled annual merit and related increases, and lower deferred loan originationacquisition costs (the first six months of 2021 included PPP round two origination activity). Higher expenses across most other categories reflect the acquisition, including one-time and conversion costs of $858 thousand, an increase in otherwithin data processing of $762 thousand, and an additional $346 thousand in amortization associated with the ARB core deposit intangible asset in the first half of 2022.expense.
Provision for Income Taxes
Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).
The provision for income taxes for the secondfirst quarter of 20222023 totaled $4.0$3.4 million at an effective tax rate of 26.3%26.7%, compared to $4.8 million at an effective tax rate of 27.0% in the prior quarter and $3.7 million at an effective tax rate of 26.3% in the prior quarter.same quarter last year. The provision for income taxes for the first half of 2022 totaled $7.7 million at an effective tax rate of 26.3%, compared to $6.3 million at an effective tax rate of 25.6% for the first half of 2021. The increasedecrease in the provision in the secondfirst quarter of 20222023 reflected higherlower pre-tax income as compared to the prior quarter.quarter and the same quarter a year ago. The 7030 basis point decrease in the effective tax rate in the first quarter of 2023 as compared to the prior quarter was primarily due to higher nontaxable BOLI income in 2023. The 40 basis point increase in the effective tax rate in the first halfquarter of 20222023 as compared to the first half of 2021same quarter a year ago was primarily due to lower income from tax exempt loans and municipal securities
and a higher level of tax benefits in 20212022 from the exercise of stock options and disqualifying dispositions of incentive stock options.
We file a consolidated return in the U.S. Federal tax jurisdiction and a combined return in the State of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the issuance of this report. At June 30, 2022,March 31, 2023, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.
FINANCIAL CONDITION SUMMARY
Cash, Cash Equivalents and Restricted Cash
Total cash, cash equivalents and restricted cash were $115.9$38.0 million at June 30, 2022,March 31, 2023, compared to $347.6$45.4 million at December 31, 2021.2022. The $231.7$7.4 million decrease was due primarily due to the deployment of funds intoincreases in loans and decreases in deposits partially offset by cash flows from investment securities as noted below. Cash and cash equivalents do not include $152.4 million and $173.1 million in temporary one-way sale transfers of deposits to third-party deposit networks as part of our liquidity management at June 30, 2022 and December 31, 2021, respectively.increased borrowings.
Investment Securities
The investment securities portfolio totaled $1.825$1.756 billion at June 30, 2022, an increaseMarch 31, 2023, a decrease of $314.9$18.2 million from December 31, 2021.2022. The increasedecrease was primarily due to purchasesthe result of $492.5principal repayments totaling $32.9 million, to deploy excess cash into interest earning assets in a more favorable interest rate environment in 2022, partially offset by paydowns, maturities and calls of $93.1 million. Additionally, thea $16.2 million reduction in pre-tax unrealized losses on available-for-sale investment securities. The portfolio is comprised of high credit quality investments with average effective durations of approximately 3.8 on available-for-sale securities increased $80.1 million as a result of higherand 5.9 on held-to-maturity securities. Both portfolios generate cash flow monthly from interest, rates inprincipal amortization and payoffs, which supports the Bank's liquidity. In the first six months of 2022. In March 2022, we transferred $357.5 million securities at fair value from available-for-sale to held-to-maturity to reduce the effect of future rate increases on the available-for-sale portfolio mark-to-market, other comprehensive income and equity.quarter investment cash flows totaled $46.2 million. See Note 4, Investment Securities, for additional information.
The following table summarizes our investment in obligations of state and political subdivisions at June 30, 2022March 31, 2023 and December 31, 2021.2022.
| | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
(dollars in thousands) | (dollars in thousands) | Amortized Cost | Fair Value | % of Total State and Political Subdivisions | | Amortized Cost | Fair Value | % of Total State and Political Subdivisions | (dollars in thousands) | Amortized Cost | Fair Value | % of Total State and Political Subdivisions | | Amortized Cost | Fair Value | % of Total State and Political Subdivisions |
Within California: | Within California: | | | | Within California: | | | |
| | General obligation bonds | $ | 25,997 | | $ | 22,042 | | 13.6 | % | | $ | 25,036 | | $ | 25,020 | | 14.2 | % | | General obligation bonds | $ | 25,780 | | $ | 21,491 | | 14.4 | % | | $ | 25,806 | | $ | 20,768 | | 14.4 | % |
| | Revenue bonds | 5,055 | | 4,496 | | 2.6 | | | 5,249 | | 5,185 | | 3.0 | | | Revenue bonds | 3,716 | | 3,085 | | 2.1 | | | 3,719 | | 2,987 | | 2.1 | |
| | Tax allocation bonds | 501 | | 501 | | 0.3 | | | 503 | | 510 | | 0.3 | | |
Total within California | Total within California | 31,553 | | 27,039 | | 16.5 | | | 30,788 | | 30,715 | | 17.5 | | Total within California | 29,496 | | 24,576 | | 16.5 | | | 29,525 | | 23,755 | | 16.5 | |
Outside California: | Outside California: | | Outside California: | | | |
| | General obligation bonds | 131,479 | | 118,110 | | 68.8 | | | 117,278 | | 121,303 | | 66.5 | | | General obligation bonds | 121,571 | | 109,632 | | 67.9 | | | 121,908 | | 106,375 | | 68.0 | |
| | Revenue bonds | 28,035 | | 23,659 | | 14.7 | | | 28,146 | | 29,272 | | 16.0 | | | Revenue bonds | 27,865 | | 24,608 | | 15.6 | | | 27,922 | | 23,752 | | 15.5 | |
Total outside California | Total outside California | 159,514 | | 141,769 | | 83.5 | | | 145,424 | | 150,575 | | 82.5 | | Total outside California | 149,436 | | 134,240 | | 83.5 | | | 149,830 | | 130,127 | | 83.5 | |
Total obligations of state and political subdivisions | Total obligations of state and political subdivisions | $ | 191,067 | | $ | 168,808 | | 100.0 | % | | $ | 176,212 | | $ | 181,290 | | 100.0 | % | Total obligations of state and political subdivisions | $ | 178,932 | | $ | 158,816 | | 100.0 | % | | $ | 179,355 | | $ | 153,882 | | 100.0 | % |
Percent of investment portfolio | Percent of investment portfolio | 10.2 | % | 9.8 | % | | 11.7 | % | 12.0 | % | | Percent of investment portfolio | 9.8 | % | 9.6 | % | | | 9.6 | % | 9.3 | % | |
Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (38.2%(39.6%), Washington (15.0%(14.3%) and Wisconsin (9.7%(8.9%). Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). We have $6.0 million in obligations of Texas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from PSF.
Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring. Key considerations include:
•The soundness of a municipality’s budgetary position and stability of its tax revenues
•Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer
•Local demographics/economics including unemployment data, largest taxpayers and local employers, income indices and home values
•For revenue bonds, the source and strength of revenue for municipal authorities including the obligor’s financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer’s strength and collateral in escrow accounts)
•Credit ratings by major credit rating agencies
Loans and Credit Quality
During the first sixthree months of 2022,2023, loans decreasedincreased by $93.0$19.8 million and totaled $2.163$2.112 billion at June 30,March 31, 2023, compared to $2.093 billion at December 31, 2023. Loan originations for the first quarter of 2023 were $44.9 million, compared to $36.1 million for the fourth quarter of 2022 primarily dueand $49.8 million for the first quarter of 2022. Loan payoffs were $22.2 million for the first quarter, compared to $94.2$55.3 million for the fourth quarter of 2022 and $119.7 million for the first quarter of 2022, which included $70.4 million in PPP loan payoffs. First quarter 2023 loan payoffs were the lowest first quarter payoffs since 2017 and consisted mainly of a large construction project completed.
The ratio of allowance for credit losses on loans being forgivento total loans remained at 1.10% at March 31, 2023 and paid off. New non-PPP relatedDecember 31, 2022. Net charge-offs for the first quarter of 2023 totaled $3 thousand, compared to net recoveries of $20 thousand for the fourth quarter of 2022 and net recoveries of $9 thousand for the first quarter of 2022.
Non-accrual loans decreased $406 thousand to $2.0 million, or 0.10% of the loan originations totaled $152.0portfolio at March 31, 2023 from $2.4 million, or 0.12% at December 31, 2022. Non-accrual loans at March 31, 2023 included the addition of six loans totaling $1.4 million in the first six monthsquarter, 68% of 2022. Non-PPP loanwhich were well-secured by commercial real estate, offset by decreases due to payoffs of $1.4 million, upgrades of $413 thousand, and paydowns of $27 thousand. Over 99% of the non-accrual loans were $159.1collateralized by real estate with no expected credit loss as of March 31, 2023. Accruing loans past due 30 to 89 days totaled $1.2 million at March 31, 2023, compared to $664 thousand at December 31, 2022.
Classified loans with risk ratings of substandard or doubtful totaled $31.0 million at March 31, 2023, compared to $28.1 million at December 31, 2022, increasing primarily due to higher usage of a revolving line of credit already graded substandard. Other increases included $1.4 million in downgrades, partially offset by $1.7 million in payoffs and paydowns and $314 thousand in upgrades to pass risk rating. All of the downgrades in the first six months of 2022, including construction project completions of $34.6 million. These payoffs also reflected borrowers' sales of underlyingquarter were for loans that are secured by real estate and business assets and third-party refinancing of acquired loans outside the Bank's credit risk appetite.collateral.
AsLoans designated special mention, which are not considered adversely classified, increased year-to-date by $2.9 million to $63.1 million at March 31, 2023 from $60.2 million at December 31, 2022. The increase was largely due to $3.0 million in downgrades from pass risk ratings and balance increases of June 30, 2022, there$550 thousand, which were 112 PPP loans outstanding totaling $17.0 million (net of $420partially offset by $630 thousand in unrecognized feespaydowns and costs) compared to 368 loans outstanding December 31, 2021 for a total of $111.2 million (net of $2.5 million in unrecognized fees and costs). In the first half of 2022, Bank of Marin recognized $2.1 million in PPP fees, net of costs, compared to $4.3 million in the same period of 2021.payoffs.
As of June 30, 2022, two borrowing relationships with three loans totaling $23.6 million were continuingFor more information, refer to benefit from payment relief underNote 5, Loans and Allowance for Credit Losses on Loans, to the provisions of the 2020 CARES Act. We will continue to work closely with both of these clients and monitor their performance.consolidated financial statements in this Form 10-Q.
Liabilities - Deposits and Borrowings
During the first sixthree months of 2022,2023, total liabilities increaseddecreased by $53.5$30.3 million to $3.917$3.705 billion. Deposits totaled $3.251 billion at March 31, 2023, a decrease of $322.8 million, compared to $3.573 billion at December 31, 2022. Federal Home Loan Bank borrowings increased $22.1$293.4 million to $405.4 million in the first six monthsquarter of 2023.
Up until the regulatory closures of Silicon Valley Bank on March 10, 2023 and Signature Bank on March 12, 2023, deposit fluctuations were fairly consistent with prior years' first quarter customer activity with some additional outflows to alternative investments observed. In 2022, the Bank maintained excess liquidity in anticipation of planned customer activities and expected outflows from pandemic surge deposits received in 2020 and 2021. As outflows materialized, our low cost of funds relative to $3.831 billion. the industry provided an opportunity to balance deposit levels against costs. Early in the first quarter of 2023, our bankers engaged in discussions with clients about account structure and pricing, which positioned the Bank well to navigate uncertainty in the marketplace later in the quarter. The Bank experienced a $203.6 million decline in deposits between March 10th and March 31st. Of the 100 relationships with the largest net outflows totaling approximately $206.4 million, 83% was attributed to normal business activities including vendor payments, taxes, payroll and singular events such as estate settlements and sales of businesses, 14% moved to outside brokerage firms or other financial institutions, and the remaining 3% moved to assets under management of our Wealth Management and Trust Services department. From March 31st
through May 5th deposits have been relatively stable. Daily balances have not fluctuated up or down more than 0.70% when compared to total deposits as of March 31st. We believe that our customer outreach has been effective, and it has resulted in a 48 basis point increase in the cost of our deposits to 56 basis points in the month of April from 8 basis points in the month of December, as we balanced the level of deposits against cost. Additionally, we opened over 1,000 accounts in the first quarter with $60 million in new deposits.
Non-interest bearing deposits increased $124.5decreased $202.5 million, while money market deposits decreased $103.5$78.2 million while time deposits increased $25.0 million in the first sixthree months of 2022, and was partially related to a large transfer to non-interest bearing deposits by a significant customer in preparation for withdrawals in early July consistent with that customer's normal business activity.2023. Non-interest bearing deposits represented 53.1%50.3% of total deposits at June 30, 2022,March 31, 2023, compared to 50.2%51.5% at December 31, 2021.2022. The average cost of deposits was 0.06%0.20% in the first halfquarter of 20222023 compared to 0.07%0.06% in the same period of 2021. Additionally, as part of our liquidity management,2022.
At March 31, 2023, the Bank maintained $152.4had $155.4 million outstanding in deposits off-balance sheet with deposit networksovernight borrowings and $250.0 million outstanding in short-term borrowings from the Federal Home Loan Bank at June 30, 2022,rates of 5.11% and 5.21%, respectively. This compared to $173.1$112.0 million in overnight borrowings at December 31, 2021.2022 at a rate of 4.65%. The Bank is actively evaluating strategies for reducing borrowings in the current environment and as market conditions change. Total immediate contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities, and remaining borrowing capacity was $1.932 billion, or 59% of total deposits and 181% of estimated uninsured deposits as of March 31, 2023.
Capital Adequacy
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank’s prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.
Management reviews capital ratios on a regular basis and produces a five-year capital plan semi-annually to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. Stress tests are performed on capital ratios and include scenarios such as additional unrealized losses on the investment portfolio, additional deposit growth and potential share repurchases. For all periods presented, the Bank’s ratios exceed the regulatory definition of “well capitalized” under the regulatory framework for prompt corrective action and Bancorp’s ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company. In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of June 30, 2022.March 31, 2023. There are no conditions or events since that notification that management believes have changed the Bank’s categories and we expect the Bank to remain well capitalized for prompt corrective action purposes.
Bancorp's tangible common equity to tangible assets was 8.7% at March 31, 2023, compared to 8.2% at December 31, 2022. The Bank's tangible common equity to tangible assets was 8.3% at March 31, 2023, compared to 8.1% at December 31, 2022 for the Bank. The pro forma TCE ratio if held-to-maturity securities were treated the same as available-for-sale securities at March 31, 2023 would have been 6.9% (refer to page 41 for a discussion and reconciliation of this non-GAAP financial measure). Management believes this non-GAAP measure is important because it reflects the level of capital available to withstand drastic changes in market conditions. Contingent funding sources, such as the Federal Home Loan Bank and the Federal Reserve BTFP facility, ensure that banks have immediate access to liquidity and alleviate the need to sell securities in an unrealized loss position.
The Bancorp’s and Bank’s capital adequacy ratios as of June 30, 2022March 31, 2023 and December 31, 20212022 are presented in the following tables.
| Capital Ratios for Bancorp
(dollars in thousands) | Actual Ratio | Adequately Capitalized Threshold | Ratio to be a Well Capitalized Bank Holding Company | |
June 30, 2022 | Amount | Ratio | Amount | Ratio | Amount | Ratio | |
Bancorp Capital Ratios
(dollars in thousands) | | Bancorp Capital Ratios
(dollars in thousands) | Actual | Adequately Capitalized Threshold 1 | Threshold to be a Well Capitalized Bank Holding Company |
March 31, 2023 | | March 31, 2023 | Amount | Ratio | Amount | Ratio | Amount | Ratio |
Total Capital (to risk-weighted assets) | Total Capital (to risk-weighted assets) | $ | 412,325 | | 14.67 | % | $ | 295,112 | | ≥ 10.50 | % | $ | 281,059 | | ≥ 10.00 | % | Total Capital (to risk-weighted assets) | $ | 438,510 | | 16.15 | % | $ | 285,095 | | 10.50 | % | $ | 271,519 | | 10.00 | % |
Tier 1 Capital (to risk-weighted assets) | Tier 1 Capital (to risk-weighted assets) | $ | 389,091 | | 13.84 | % | $ | 238,900 | | ≥ 8.50 | % | $ | 224,847 | | ≥ 8.00 | % | Tier 1 Capital (to risk-weighted assets) | $ | 414,524 | | 15.27 | % | $ | 230,791 | | 8.50 | % | $ | 217,215 | | 8.00 | % |
Tier 1 Capital (to average assets) | $ | 389,091 | | 9.07 | % | $ | 171,628 | | ≥ 4.00 | % | $ | 214,535 | | ≥ 5.00 | % | |
Tier 1 Leverage Capital (to average assets) | | Tier 1 Leverage Capital (to average assets) | $ | 414,524 | | 9.94 | % | $ | 166,844 | | 4.00 | % | $ | 208,555 | | 5.00 | % |
Common Equity Tier 1 (to risk-weighted assets) | Common Equity Tier 1 (to risk-weighted assets) | $ | 389,091 | | 13.84 | % | $ | 196,741 | | ≥ 7.00 | % | $ | 182,689 | | ≥ 6.50 | % | Common Equity Tier 1 (to risk-weighted assets) | $ | 414,524 | | 15.27 | % | $ | 190,063 | | 7.00 | % | $ | 176,487 | | 6.50 | % |
December 31, 2021 | | | | | |
December 31, 2022 | | December 31, 2022 | | | | |
Total Capital (to risk-weighted assets) | Total Capital (to risk-weighted assets) | $ | 397,101 | | 14.58 | % | ≥ $ | 286,035 | | ≥ 10.50 | % | ≥ $ | 272,414 | | ≥ 10.00 | % | Total Capital (to risk-weighted assets) | $ | 431,667 | | 15.90 | % | $ | 285,079 | | 10.50 | % | $ | 271,504 | | 10.00 | % |
Tier 1 Capital (to risk-weighted assets) | Tier 1 Capital (to risk-weighted assets) | $ | 373,286 | | 13.70 | % | ≥ $ | 231,552 | | ≥ 8.50 | % | ≥ $ | 217,931 | | ≥ 8.00 | % | Tier 1 Capital (to risk-weighted assets) | $ | 407,912 | | 15.02 | % | $ | 230,778 | | 8.50 | % | $ | 217,203 | | 8.00 | % |
Tier 1 Capital (to average assets) | $ | 373,286 | | 8.85 | % | ≥ $ | 168,750 | | ≥ 4.00 | % | ≥ $ | 210,937 | | ≥ 5.00 | % | |
Tier 1 Leverage Capital (to average assets) | | Tier 1 Leverage Capital (to average assets) | $ | 407,912 | | 9.60 | % | $ | 169,948 | | 4.00 | % | $ | 212,435 | | 5.00 | % |
Common Equity Tier 1 (to risk-weighted assets) | Common Equity Tier 1 (to risk-weighted assets) | $ | 373,286 | | 13.70 | % | ≥ $ | 190,690 | | ≥ 7.00 | % | ≥ $ | 177,069 | | ≥ 6.50 | % | Common Equity Tier 1 (to risk-weighted assets) | $ | 407,912 | | 15.02 | % | $ | 190,053 | | 7.00 | % | $ | 176,478 | | 6.50 | % |
| Capital Ratios for the Bank
(dollars in thousands) | Actual Ratio | Adequately Capitalized Threshold | Ratio to be Well Capitalized under Prompt Corrective Action Provisions | |
June 30, 2022 | Amount | Ratio | Amount | Ratio | Amount | Ratio | |
Bank Capital Ratios
(dollars in thousands) | | Bank Capital Ratios
(dollars in thousands) | Actual | Adequately Capitalized Threshold 1 | Threshold to be Well Capitalized under Prompt Corrective Action Provisions |
March 31, 2023 | | March 31, 2023 | Amount | Ratio | Amount | Ratio | Amount | Ratio |
Total Capital (to risk-weighted assets) | Total Capital (to risk-weighted assets) | $ | 399,228 | | 14.21 | % | $ | 295,078 | | ≥ 10.50 | % | $ | 281,027 | | ≥ 10.00 | % | Total Capital (to risk-weighted assets) | $ | 424,276 | | 15.63 | % | $ | 285,083 | | 10.50 | % | $ | 271,508 | | 10.00 | % |
Tier 1 Capital (to risk-weighted assets) | Tier 1 Capital (to risk-weighted assets) | $ | 375,994 | | 13.38 | % | $ | 238,873 | | ≥ 8.50 | % | $ | 224,822 | | ≥ 8.00 | % | Tier 1 Capital (to risk-weighted assets) | $ | 400,290 | | 14.74 | % | $ | 230,782 | | 8.50 | % | $ | 217,206 | | 8.00 | % |
Tier 1 Capital (to average assets) | $ | 375,994 | | 8.76 | % | $ | 171,618 | | ≥ 4.00 | % | $ | 214,523 | | ≥ 5.00 | % | |
Tier 1 Leverage Capital (to average assets) | | Tier 1 Leverage Capital (to average assets) | $ | 400,290 | | 9.60 | % | $ | 166,837 | | 4.00 | % | $ | 208,546 | | 5.00 | % |
Common Equity Tier 1 (to risk-weighted assets) | Common Equity Tier 1 (to risk-weighted assets) | $ | 375,994 | | 13.38 | % | $ | 196,719 | | ≥ 7.00 | % | $ | 182,667 | | ≥ 6.50 | % | Common Equity Tier 1 (to risk-weighted assets) | $ | 400,290 | | 14.74 | % | $ | 190,056 | | 7.00 | % | $ | 176,480 | | 6.50 | % |
December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
Total Capital (to risk-weighted assets) | Total Capital (to risk-weighted assets) | $ | 390,924 | | 14.35 | % | ≥ $ | 286,009 | | ≥ 10.50 | % | ≥ $ | 272,390 | | ≥ 10.00 | % | Total Capital (to risk-weighted assets) | $ | 427,108 | | 15.73 | % | $ | 285,052 | | 10.50 | % | $ | 271,478 | | 10.00 | % |
Tier 1 Capital (to risk-weighted assets) | Tier 1 Capital (to risk-weighted assets) | $ | 367,109 | | 13.48 | % | ≥ $ | 231,531 | | ≥ 8.50 | % | ≥ $ | 217,912 | | ≥ 8.00 | % | Tier 1 Capital (to risk-weighted assets) | $ | 403,352 | | 14.86 | % | $ | 230,757 | | 8.50 | % | $ | 217,183 | | 8.00 | % |
Tier 1 Capital (to average assets) | $ | 367,109 | | 8.70 | % | ≥ $ | 168,724 | | ≥ 4.00 | % | ≥ $ | 210,905 | | ≥ 5.00 | % | |
Tier 1 Leverage Capital (to average assets) | | Tier 1 Leverage Capital (to average assets) | $ | 403,352 | | 9.49 | % | $ | 169,940 | | 4.00 | % | $ | 212,425 | | 5.00 | % |
Common Equity Tier 1 (to risk-weighted assets) | Common Equity Tier 1 (to risk-weighted assets) | $ | 367,109 | | 13.48 | % | ≥ $ | 190,673 | | ≥ 7.00 | % | ≥ $ | 177,053 | | ≥ 6.50 | % | Common Equity Tier 1 (to risk-weighted assets) | $ | 403,352 | | 14.86 | % | $ | 190,035 | | 7.00 | % | $ | 176,461 | | 6.50 | % |
1 Except for Tier 1 Leverage Capital, the adequately capitalized thresholds reflect the regulatory minimum plus a 2.5% capital conservation buffer as required under the Basel III Capital Standards in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.
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. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as seen in the table below and discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report. Our Asset Liability Management Committee ("ALCO"), which is comprised of independent Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies, which are subjectstrategies. The Bank has long-established minimum liquidity and diversification requirements using tools similar to projectionlarger banks such as the Liquidity Coverage Ratio and multi-scenario, long-horizon stress testing over a two-year horizon. ALCO has adopted a contingencytesting. Our contingency funding plan that provides for 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. We also have relationships with third-party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash management strategy. We maintained $152.4$2.2 million in one-way-sale deposits off-balance sheet with deposit networks at June 30, 2022, compared to $173.1 million atMarch 31, 2023 and December 31, 2021.2022.
In February 2023, we enhanced our borrowing capacity at the FHLB by pledging certain held-to-maturity securities to the Securities-Backed Credit Program. In addition, under the Federal Reserve’s new BTFP facility, we added $283.6 million to our borrowing capacity. Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.932 billion, or 181% of estimated uninsured deposits as of March 31, 2023. The Federal Reserve BTFP facility offers borrowing capacity
based on par values of securities pledged and attractive borrowing rates. While the Bank has pledged securities and tested the facility, there has been no need to use it. The following table details the components of liquidity as of March 31, 2023.
| | | | | | | | | | | |
(in thousands) | Total Available | Amount Used | Net Availability |
Internal Sources | | | |
Unrestricted cash | $ | 37,993 | | N/A | $ | 37,993 | |
Unencumbered securities at market value | 767,724 | | N/A | 767,724 | |
External Sources | | | |
FHLB line of credit | 1,037,158 | | $ | (405,400) | | 631,758 | |
FRB line of credit and BTFP facility | 344,181 | | — | | 344,181 | |
Lines of credit at correspondent banks | 150,000 | | — | | 150,000 | |
Total Liquidity | $ | 2,337,056 | | $ | (405,400) | | $ | 1,931,656 | |
Note: Access to brokered deposit purchases through networks such as Intrafi and Reich & Tang and brokered CD sales is not included above.
We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations. Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, and dividends to common stockholders.
The mostCustomer deposits are a significant component of our daily liquidity position is customer deposits.position. 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.
Our cash and cash equivalents decreased $231.7$7.4 million in the first sixthree months of 2022.2023. Significant uses of liquidity during 20222023 were $452.2$322.8 million in investment securities purchased, $7.7withdrawals of deposits, $19.1 million in loan originations and advances, net of principal collected, and $4.0 million in cash dividends paid on common stock to our shareholders,shareholders.
The most significant sources of liquidity during the first three months of 2023 were increased Federal Home Loan Bank borrowings of $293.4 million, proceeds from principal paydowns of investment securities of $32.9 million, and $1.2$13.4 million in common stock repurchases.net cash provided by operating activities. Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position and core deposit base areas detailed in the table above is adequate to fund our operations.
The most significant source of liquidity during the first six months of 2022 was proceeds from loans collected (net of loan originations) of $93.9 million, principal paydowns, maturities and calls of investment securities of $93.1 million, a net increase in deposits of $22.1 million (primarily related to $25 million of one-way sell deposits that was previously placed in third-party deposit networks being brought back on balance sheet), and $19.6 million in net cash provided by operating activities.
Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $592.5$529.5 million at June 30, 2022.March 31, 2023. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growthprincipal paydowns of investment securities, and liquid assets. Over the next twelve months, $107.5$112.0 million of time deposits will mature. We expect to replace these funds with new deposits or excess liquidity. Our emphasis on local deposits, combined with our liquid investment portfolio,immediately available funding sources, provides a very stable funding base. While webase for our liquidity needs. We had no borrowings under our credit facilities of $405.4 million at June 30, 2022 orMarch 31, 2023, and $112.0 million at December 31, 2021,2022, as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report, the available credit lines with FHLB and FRB SF have declined by $71.4 million from December 30, 2021 to June 30, 2022, primarily because the rising market interest rates in the first half of 2022 have unfavorably affected the market value of the loans collateralizing these lines.report.
Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period. The primary uses of funds for Bancorp are shareholder dividends and ordinary operating expenses. Bancorp held $13.0$14.1 million in cash at June 30, 2022,March 31, 2023, which is expected to be sufficient to cover Bancorp's operational needs and cash dividends to shareholders through 2022.2023. Management anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.
Statement Regarding use of Non-GAAP Financial Measures
Our first quarter 2022 was impacted by costs associated with our acquisition of American River Bank ("ARB"), which we considered immaterial to discuss in this release. For additional information regarding the impact of non-GAAP adjustments to our first quarter 2022 performance measures, refer to Form 10-Q filed on May 9, 2022.
In this Form 10-Q, financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures. Management believes that, given recent industry turmoil, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after tax impact of unrealized losses on HTM securities provides useful supplemental information to investors because it reflects the level of capital available to withstand drastic changes in market conditions. Because there are limits to the usefulness of this measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the Securities and Exchange Commission, and not to rely on any single financial measure. A reconciliation of the non-GAAP TCE ratio is presented below.
Reconciliation of GAAP and Non-GAAP Financial Measures
| | | | | | | | | | | | |
(in thousands, unaudited) | | March 31, 2023 | | | | |
Tangible Common Equity - Bancorp | | | | | | |
Total stockholders' equity | | $ | 430,174 | | | | | |
Goodwill and core deposit intangible | | (77,525) | | | | | |
Total TCE | a | 352,649 | | | | | |
Unrealized losses on HTM securities, net of tax 1 | | (76,378) | | | | | |
TCE, net of unrealized losses on HTM securities (non-GAAP) | b | $ | 276,271 | | | | | |
Total assets | | $ | 4,135,279 | | | | | |
Goodwill and core deposit intangible | | (77,525) | | | | | |
Total tangible assets | d | 4,057,754 | | | | | |
Unrealized losses on HTM securities, net of tax 1 | | (76,378) | | | | | |
Total tangible assets, net of unrealized losses on HTM securities (non-GAAP) | e | $ | 3,981,376 | | | | | |
Bancorp TCE ratio | a / d | 8.7 | % | | | | |
Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP) | b / e | 6.9 | % | | | | |
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1 Net unrealized losses on held-to-maturity securities as of March 31, 2023 of $108.4 million, as shown in Note 4, net of an estimated $32.0 million in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%.
ITEM 3. Quantitative and Qualitative Disclosure about MarketRisk
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. The Bank manages interest rate sensitivity to minimize the exposure of our net interest margin, earnings, and capital to changes in interest rates. Interest rate changes can create fluctuations in the net interest margin due to an imbalance in the timing of repricing or maturity of assets or liabilities. 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.
To mitigate interest rate risk, the structure of our assets and liabilities is managed with the objective of correlating the effects of interest rate changes on loans and investments with those of deposits and borrowings. 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.
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. See Note 9 to the Consolidated Financial Statements in this Form 10-Q.
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.profitability in the context of policy guidelines. 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. If potential changes to net equity value and net interest income
resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions. Governing policies are subject to review by regulators and are updated to incorporate their observations and to adapt to changes in idiosyncratic and systemic risks. At June 30, 2022,March 31, 2023, 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. 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.
| Immediate and Parallel Shift in Interest Rates (in basis points) | Immediate and Parallel Shift 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 | Immediate and Parallel Shift 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 | up 400 | 6.9 | % | 16.3 | % | up 400 | (10.2) | % | (0.6) | % |
up 300 | up 300 | 2.5 | % | 9.8 | % | up 300 | (7.7) | % | (0.5) | % |
up 200 | up 200 | 1.8 | % | 6.8 | % | up 200 | (5.1) | % | (0.4) | % |
up 100 | up 100 | 1.2 | % | 4.0 | % | up 100 | (2.4) | % | 0.3 | % |
down 100 | down 100 | (4.6) | % | (8.1) | % | down 100 | (0.5) | % | (2.3) | % |
| down 200 | | down 200 | (1.5) | % | (4.2) | % |
Asset sensitivity increased over the quarter primarily due to a reduction in our deposit betas, floating rate loans repricing above their respective floors and fully-indexed rates on adjustable loans in position to move above floors at next repricing. Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. The Bank runs a combination of scenarios and sensitivities in its attempt to capture the range of interest rate risk including the simulations mentioned above. As with any simulation model or other method of measuring interest rate risk, limitations are inherent in the process and dependent on assumptions. For example, if we chooselower deposit growth than modeled may cause the Bank 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.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. 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. We lowered the averageapplied deposit betas up to 45%, averaging 35%, to rates paid on non-maturity interest-bearing deposit beta to 26% from last quarter's 58%deposits in rising rate scenarios, which is much closer to historical levels for Bank of Marin.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. 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.
ITEM 4. Controlsand Procedures
Evaluation of Disclosure Controls and Procedures
Bank of Marin Bancorp and its subsidiary (the "Company") conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the “Act”)) as of the end of the period covered by this report. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Act (15 U.S.C. 78a etseq. seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2022,March 31, 2023, there were no significant changes that materially affected, or arewere reasonably likely to affect, our internal control over financial reporting. The term internal control over financial
reporting, as defined by Rule 15d-15(f) of the Act, is a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
Refer to Note 12 to the Consolidated Financial Statements in Item 8 of our 20212022 Form 10-K and Note 8 to the Consolidated Financial Statements in this Form 10-Q.
ITEM 1A Risk Factors
Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. In evaluating an investment in Bancorp's common stock, investors should consider, among other things, the risks previously disclosed in Part I, Item 1A, "Risk Factors" of our 20212022 Form 10-K, and the information contained in this quarterly report on Form 10-Q and other reports and registration statements filed withwith the SEC, which are incorporated herein by reference. ThereOther than as noted below, there have been no material changes in the risk factors disclosed in our 20212022 Form 10-K.
Recent Negative Developments Affecting the Banking Industry and Resulting Media Coverage Have Eroded Customer and Investor Confidence in the Banking System
The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank, and First Republic Bank, as well as 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. 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. Additionally, these recent events have, and could continue to, adversely impact the market price and volatility of the Company’s common stock independent from the Company’s actual underlying financial performance.
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
As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly. 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 income. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which 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.
Any Regulatory Examination Scrutiny or New Regulatory Requirements Arising From the Recent Events in the Banking Industry Could Increase the Company’s Expenses and Affect the Company’s Operations
The Company also anticipates increased regulatory scrutiny – in the course of routine examinations and otherwise – and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. As primarily a commercial bank, the Bank has a higher percentage of uninsured deposits compared to primarily retail focused banks. As a result, the Bank could face increased scrutiny or be viewed as higher risk by regulators and the investor community.
ITEM 2 Unregistered Sales of Equity Securities and Use ofProceeds
There were no unregistered sales of equity securities during the period covered by this report.
Issuer Purchases of Equity Securities
On July 16, 2021, Bancorp Board of Directors approved a share repurchase program under which Bancorp could repurchase up to $25.0 million of its outstanding common stock through July 31, 2023. On October 22, 2021, Bancorp's Board of Directors approved an amendment to the current share repurchase program, which increased the total authorization from $25.0 million to $57.0 million and left the expiration date unchanged.
During the six months ended June 30, 2022, Bancorp repurchased 23,275 shares at an average price of $37.64 per share for a total cost of $877 thousand. The last activity under the program was in the first quarter of 2022. Cumulative shares repurchased under the current program totaledtotal 618,991 shares at an average price of $36.04 per share, with $34.7 million outstanding as of June 30, 2022. Bancorp continuesMarch 31, 2023. The Bank opted not to evaluate the resumption of share repurchasesrepurchase shares in the contextfirst quarter, exercising prudence given recent uncertainties in the marketplace and the importance of othermaintaining capital and strategic initiatives.liquidity reserves to absorb the impacts of external events the Bank cannot control.
ITEM 3 Defaults upon Senior Securities
None.
ITEM 4 Mine Safety Disclosures
Not applicable.
ITEM 5 Other Information
None.
ITEM 6 Exhibits
The following exhibits are filed as part of this report or hereby incorporated by references to filings previously made with the SEC.
| | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith |
2.01 | | 8-K | 001-33572 | 2.1 | April 19, 2021 | |
3.01 | | S-4 | 333-257025 | 3.01 | June 11, 2021 | |
3.02 | | S-4 | 333-257025 | 3.02 | June 11, 2021 | |
4.01 | | 8-A12B | 001-33572 | 4.1 | July 7, 2017 | |
4.02 | | 10-K | 001-33572 | 4.02 | March 13, 2020 | |
10.01 | | S-8 | 333-218274 | 4.1 | May 26, 2017 | |
10.02 | | S-8 | 333-221219 | 4.1 | October 30, 2017 | |
10.03 | | S-8 | 333-227840 | 4.1 | October 15, 2018 | |
10.04 | | S-8 | 333-239555 | 4.1 | June 30, 2020 | |
10.05 | | 10-Q | 001-33572 | 10.06 | November 7, 2007 | |
10.06 | | 10-K | 001-33572 | 10.07 | March 15, 2021 | |
10.07 | | 8-K | 001-33572 | 10.2 | November 4, 2014 | |
10.08 | | 8-K | 001-33572 | 10.3 | November 4, 2014 | |
10.09 | | 8-K | 001-33572 | 10.1 | October 31, 2007 | |
10.10 | | 10-Q | 001-33572 | 10.12 | November 6, 2020 | |
10.11 | | 10-K | 001-33572 | 10.13 | March 15, 2021 | |
10.12 | | 8-K | 001-33572 | 10.1 | September 24, 2021 | |
31.01 | | | | | | Filed |
31.02 | | | | | | Filed |
32.01 | | | | | | Filed |
101.INS | Inline XBRL Instance Document | | | | | Filed |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | | | | | Filed |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | Filed |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | Filed |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | Filed |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | Filed |
| | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith |
3.01 | | S-4 | 333-257025 | 3.01 | June 11, 2021 | |
3.02 | | S-4 | 333-257025 | 3.02 | June 11, 2021 | |
4.01 | | 10-K | 001-33572 | 4.01 | March 16, 2023 | |
10.01 | | S-8 | 333-218274 | 4.1 | May 26, 2017 | |
10.02 | | S-8 | 333-221219 | 4.1 | October 30, 2017 | |
10.03 | | S-8 | 333-227840 | 4.1 | October 15, 2018 | |
10.04 | | S-8 | 333-239555 | 4.1 | June 30, 2020 | |
10.05 | | 10-Q | 001-33572 | 10.06 | November 7, 2007 | |
10.06 | | 10-K | 001-33572 | 10.07 | March 15, 2021 | |
10.07 | | 8-K | 001-33572 | 10.2 | November 4, 2014 | |
10.08 | | 8-K | 001-33572 | 10.1 | October 31, 2007 | |
10.09 | | 10-K | 001-33572 | 10.13 | March 15, 2021 | |
10.10 | | 8-K | 001-33572 | 10.1 | September 24, 2021 | |
10.11 | | 8-K | 001-33572 | 10.1 | December 21, 2022 | |
10.12 | | 8-K | 001-33572 | 10.2 | December 21, 2022 | |
10.13 | | 8-K | 001-33572 | 10.3 | December 21, 2022 | |
10.14 | | 8-K | 001-33572 | 10.4 | December 21, 2022 | |
31.01 | | | | | | Filed |
31.02 | | | | | | Filed |
32.01 | | | | | | Filed |
101.INS | Inline XBRL Instance Document | | | | | Filed |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | | | | | Filed |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | Filed |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | Filed |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | Filed |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | Filed |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | |
| | | Bank of Marin Bancorp |
| | | (registrant) |
| | | |
| | | |
| August 8, 2022May 9, 2023 | | /s/ Timothy D. Myers |
| Date | | Timothy D. Myers |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| | | |
| | | |
| August 8, 2022May 9, 2023 | | /s/ Tani Girton |
| Date | | Tani Girton |
| | | Executive Vice President & |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
| | | |
| August 8, 2022May 9, 2023 | | /s/ David A. Merck |
| Date | | David A. Merck |
| | | First Vice President & Controller |
| | | (Principal Accounting Officer) |