3 unchanged sentences
Forward-Looking Statements
−Removed: 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").
+Added: The discussion of financial results in this Form 10-Q 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.
3 unchanged sentences
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.
−Removed: 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 the war between Russia and Ukraine and more recently the war between Israel and Hamas, 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;
+Added: 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, wars or other conflicts, impacts from inflation, supply chain 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;
7 unchanged sentences
and successful integration of acquisitions.
−Removed: 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 2022 Form 10-K as filed with the SEC, and ITEM 1A Risk Factors herein, copies of which are available from us at no charge.
+Added: Important factors that could cause results or performance to differ materially from those expressed in our prior forward-looking statements are detailed in ITEM 1A, Risk Factors section of our 2023 Form 10-K as filed with the SEC, and ITEM 1A Risk Factors herein.
Forward-looking statements speak only as of the date they are made.
−Removed: 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.
+Added: Bancorp undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.
Critical Accounting Estimates
2 unchanged sentences
Our critical estimates include:
−Removed: Allowance for Credit Losses on Loans and Unfunded Commitments, Income Taxes, Fair Value Measurements, and Business Combinations.
−Removed: For a detailed discussion, refer to the Critical Accounting Estimates section of our 2022 Form 10-K filed with the SEC on March 16, 2023.
+Added: Allowance for Credit Losses on Loans and Unfunded Commitments, Fair Value Measurements, and Goodwill.
+Added: Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.
+Added: Our annual impairment assessment is performed in the fourth quarter.
+Added: However, with triggering events occurring in the first quarter of 2024, including a persistent depressed stock price as a result of changes in macroeconomic conditions, market volatility resulting from rising interest rates and the failure of several regional banks in 2023, coupled with a revised five-year strategic forecast for the Bank, we performed a quantitative assessment in the first quarter of 2024, similar to the analysis performed in fourth quarter 2023.
+Added: The results of this assessment indicated the value of goodwill was not impaired as of March 31, 2024.
+Added: For a detailed discussion of goodwill accounting and impairment assessment methodology, refer to Note 1, Summary of Significant Accounting Policies, and the Critical Accounting Estimates section of our 2023 Form 10-K filed with the SEC on March 14, 2024.
Executive Summary
−Removed: We generated earnings of $5.3 million for the third quarter of 2023, compared to $4.6 million for the second quarter of 2023.
−Removed: Diluted earnings per share were $0.33 for the third quarter of 2023, compared to $0.28 for the preceding quarter.
−Removed: Earnings for the first nine months of 2023 totaled $19.3 million, compared to $33.7 million for the same period in 2022.
−Removed: Diluted earnings per share were $1.20 and $2.11 for the first nine months of 2023 and 2022, respectively.
−Removed: The 2023 earnings were impacted by the increased cost of interest bearing deposits catching up to market interest rates and higher average balances on borrowings.
+Added: We generated earnings of $2.9 million for the first quarter of 2024, compared to $610 thousand for the fourth quarter of 2023 and $9.4 million for the first quarter of 2023.
+Added: Diluted earnings per share were $0.18 for the first quarter of 2024, compared to $0.04 for the preceding quarter and $0.59 for the same quarter a year ago.
+Added: Net interest margin compression due to the rapid rise in interest rates this cycle is clearly evident in the comparison of 2024 and 2023 first quarter earnings.
+Added: In addition, prior quarter results reflected a $5.9 million pretax loss from balance sheet restructuring.
The following are highlights of our operating and financial performance for the periods presented.
Additional performance details can be found in the pages that follow.
−Removed: • The third quarter tax-equi valent net interest margin increased 3 basis points to 2.48% from 2.45% in the previous quarter due primarily to higher rates on interest-bearing cash balances generated from securities sales.
−Removed: The tax-equivalent net interest margin for the nine months ended September 30, 2023 of 2.66% decreased 40 basis points fr om 3.06% for the same period in 2022, primarily due to higher deposit and borrowing costs, partially offset by higher interest rates on loans and investment securities.
−Removed: We continue to manage our balance sheet and interest rate risk position to the current interest rate environment, and sold an additional $55.0 million in available-for-sale securities in late October.
−Removed: The sales generated an after-tax loss of $1.5 million, which is expected to be earned back through incremental interest income and improvements to the net interest margin in less than one year.
−Removed: • Deposits totaled $3.444 billion as of September 30, 2023, a decrease of $129.7 million f rom $3.573 billion at December 31, 2022 .
−Removed: However, deposits increased $118.5 million over the prior quarter.
−Removed: Our experienced team of bankers continued to build upon our strong deposit franchise with consistent growth from proactive outreach to both existing and prospective customers in all of our markets.
−Removed: Average cost of deposits increased 25 basis points over the second quarter, from 0.69% to 0.94%.
−Removed: Average cost of deposits increased 55 basis points for the first nine months of 2023, compared to the same period in 2022, from 0.06% to 0.61%.
−Removed: We believe we are competitively aligned in regard to deposit pricing, helping to maintain deposit levels.
−Removed: • Non-interest bearing deposits made up 47.7% of total deposits at September 30, 2023, compared to 51.5% at December 31, 2022.
−Removed: We have successfully maintained non-interest bearing deposit percentages consistent with pre-pandemic levels, despite market and industry turbulence.
−Removed: Customer participation in the reciprocal deposit network program grew to $483.3 million maintaining estimated uninsured and/or uncollateralized deposits at 29% of total deposits as of September 30, 2023 .
−Removed: Our largest depositor represented 2.7% of total deposits as of September 30, 2023.
−Removed: • Borrowings totaled $120.0 million as of September 30, 2023, an $8.0 million increase from $112.0 million at December 31, 2022.
−Removed: However, total borrowings declined $52.2 million quarter-over-quarter from $172.2 million as a result of deposit growth and cash flows from investments and loans.
−Removed: Net available funding sources of $2.1 billion provided 211% coverage of an estimated $989.8 million in uninsured deposits at September 30, 2023.
−Removed: • Our loan portfolio continues to perform well with classified loans at 1.90% of total loans.
−Removed: Non-owner-occupied commercial real estate loans made up $23.6 million or 59% of total classified loans as of September 30, 2023, compared to $22.0 million or 78% at December 31, 2022.
−Removed: Shortly after quarter-end three unsecured commercial substandard loans to one borrower totaling approximately $4.6 million paid off.
−Removed: • Non-accrual loans were 0.27% of total loans, or $5.7 million, at September 30, 2023, compared to 0.12%, or $2.4 million, at December 31, 2022.
−Removed: Of the seven loans totaling $5.3 million moved to non-accrual status during the year, one legacy acquired-bank agricultural loan totaling $3.8 million became current on outstanding payments shortly after quarter-end.
−Removed: Offsetting the additions were payoffs and paydowns of $1.8 million and two loans for $314 thousand that were moved to accrual status in the first quarter.
−Removed: All of the non-accrual loans are collateralized by real estate with no expected credit loss as of September 30, 2023.
−Removed: • A $425 thousand provision for credit losses on loans in the third quarter brought the allowance for credit losses to 1.16% of total loans as of September 31, 2023.
−Removed: The provision was due primarily to qualitative risk factor adjustments as discussed further below and compared to a provision of $500 thousand in the previous quarter.
−Removed: For nine months ended September 30, 2023, we recorded a provision for credit losses on loans of $1.3 million , compared to a rev ersal of $63 thousand for the same period in 2022.
−Removed: • Loans totaled $2.087 billion at September 30, 2023, a decrease of $5.6 million from $2.093 billion at December 31, 2022 reflecting originations of $90.3 million and payoffs of $59.5 million (including PPP payoffs).
−Removed: L oan amortization from scheduled repayments totaling $60.6 million was partially offset by a $24.2 million net increase in utilization of credit lines in the nine months ended September 30, 2023.
−Removed: • Return on average assets ("ROA") was 0.52% for the third quarter of 2023, compared to 0.44% for the second quarter of 2023.
−Removed: Return on average equity ("ROE") was 4.94% for the third quarter of 2023 , compared to 4.25% for the prior quarter.
−Removed: ROA was 0.63% for the nine months ended September 30, 2023, compared to 1.04% in the same period in 2022.
−Removed: ROE was 6.07% for the nine months ended September 30, 2023, compared to 10.65% in the same period in 2022.
−Removed: The efficiency ratio for the third quarter of 2023 was 72.96% , compared to 76.91% for the prior quarter.
−Removed: The efficiency ratio was 69.37% for the nine months ended September 30, 2023, compared to 55.60% in the same period in 2022 .
−Removed: • All capital ratios were above well-capitalized regulatory requirements.
−Removed: The total risk-based capital ratios at September 30, 2023 for Bancorp and the Bank were 16.6% and 16.1%, respectively.
−Removed: Bancorp's tangible common equity to tangible assets ("TCE ratio") was 8.6% at September 30, 2023, compared to 8.2% as of December 31, 2022.
−Removed: As of September 30, 2023, Bancorp's TCE ratio, net of after tax unrealized losses on held-to-maturity securities, was 6.1%, compared to 6.2% at December 31, 2022 (ref er to page 46 for a dis cussion and reconciliation of this non-GAAP financial measure).
−Removed: • The Board of Directors declared a cash dividend of $0.25 per share on October 20, 2023, which represents the 74 th consecutive quarterly dividend paid by Bancorp.
−Removed: The dividend is payable on November 10, 2023, to shareholders of record at the close of business on November 3, 2023.
−Removed: • As previously announced, David Bloom, Executive Vice President and Head of Commercial Banking, joined the Bank on July 31 and is responsible for the direction, vision, growth, and performance of the Bank’s commercial banking division, including its eight regional offices located throughout northern California and its specialty wine business.
−Removed: He previously served as senior managing director of business banking in northern California and the Pacific Northwest at First Republic Ban k.
−Removed: Under David's direction we have alre ady approved for fu nding loan amounts exceeding third quarter originations since quarter end.
−Removed: • Also as previously announced, effective October 20, 2023, the Board of Directors for Bank of Marin Bancorp appointed Cigdem Gencer to its board, increasing its membership to thirteen directors.
−Removed: Gencer brings extensive leadership and financial services experience to the Board.
−Removed: Throughout her career, she has developed and executed transformative growth, expansion, and investment strategies for organizations, including international expansion efforts.
−Removed: For nearly two decades, Gencer served as executive vice president at a Fortune 500 financial institution where she served as head of international human resources, head of enterprise data strategy and analytics in the Chief Data Office, and chief financial officer, chief operating officer, and regional sales director for its Private Wealth division.
−Removed: Her experience also includes serving as a management consultant in the financial services sector and chief financial officer at Intrax, Inc.
−Removed: In 2021, she established Fazilet Consulting—an executive coaching and organizational consulting firm—in which she also serves as an executive coach.
+Added: • The first quarter ta x-equivalent net interest margin stabilized at 2.50% from 2.53% the previous quarter.
+Added: Climbing deposit rates continued to put pressure on the margin this quarter.
+Added: While the average cost of deposits increas ed 23 basis points to 1.38% in the first quarter c ompared to a 21 basis point increase in the prior quarter, monthly trends since January show a clear slow down in the pace of increase.
+Added: Although we reduced borrowings to zero and gained ground in higher yields on loans, the overall average earning asset balances decreased, limiting the positive impact on the margin.
+Added: • A $350 thousand provision for credit losses on loans in the first quarter, compared to a provision of $1.3 million in the previous quarter, brought the allowance for credit losses to 1.24% of total loans, compared to 1.21% as of December 31, 2023.
+Added: • Non-accrual loans declined to 0.31% of total loans at quarter end, from 0.39% at December 31, 2023, and net charge-offs were minimal.
+Added: Classified loans increased to 2.67% of total loans from 1.56% last quarter, which we believe evidences our diligent monitoring of customers impacted by current economic conditions.
+Added: • Loan balances of $2.055 billion as of March 31, 2024, were relatively stable from $2.074 billion as of December 31, 2023, reflecting originations of $12.4 million and payoffs of $21.8 million.
+Added: During the quarter, interest rates on loan originations averaged approximately 266 basis points above those that paid off.
+Added: Loan amortization from scheduled repayments, partially offset by a net increase in utilization of credit lines was $9.4 million during the quarter.
+Added: • Total deposits of $3.284 billion as of March 31, 2024, were essentially flat, compared to $3.290 billion as of December 31, 2023 .
+Added: Non-interest bearing depo sits increased $2.5 million representing 44.0% of total deposits as of March 31, 2024, compared to 43.8% as of December 31, 2023.
+Added: • Total borrowings was reduced to zero representing a $26.0 million decrease from December 31, 2023 and a $97.5 million quarter-over-quarter decrease in average balances, resulting in a $1.3 million decline in interest expense.
+Added: Net available funding sources of $1.905 billion provided 208% coverage of an estimated $915.4 million in uninsured deposits, representing only 28% of total deposits at March 31, 2024.
+Added: • Return on average assets ("ROA") was 0.31% for the first quarter of 2024, compared to 0.06% for the fourth quarter of 2023, and return on average equity ("ROE") was 2.70% , compared to 0.57% for the prior quarter.
+Added: The efficiency ratio for the first quarter of 2024 was 83.18% , compared to 91.94% for the prior quarter.
+Added: • Bancorp's and the Bank's total risk-based capital ratios increased during the quarter to 17.05% and 16.71%, respectively, as of March 31, 2024, well above regulatory requirements.
+Added: Bancorp's tangible common equity to tangible assets ("TCE ratio") increased to 9.76% as of March 31, 2024, and the Bank's TCE ratio was 9.53%, consistent with prior quarter.
+Added: While we do not intend to sell our held-to-maturity securities, the TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized was 7.67% a s of March 31, 2024, compared to 7.80% as of December 31, 2023 (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures ).
+Added: • The Bank optimized its facilities by consolidating two commercial banking offices, closing the San Mateo office in April 2024.
+Added: We expect the combination of both personnel and facilities pre-tax savings to total approximately $650 thousand in 2024 and $800 thousand in 2025.
+Added: These savings will be deployed to self-fund talent acquisition aimed at loan growth initiatives.
+Added: • The Board of Directors declared a cash dividend of $0.25 per share on April 25, 2024, which represents the 76 th consecutive quarterly dividend paid by Bancorp.
+Added: The dividend is payable on May 16, 2024, to shareholders of record at the close of business on May 9, 2024.
RESULTS OF OPERATIONS
Highlights of the financial results are presented in the following tables:
−Removed: Three months ended Nine months ended
−Removed: (dollars in thousands, except per share data) September 30, 2023 June 30, 2023 September 30, 2023 September 30, 2022
+Added: Three months ended
+Added: (dollars in thousands, except per share data) March 31, 2024 December 31, 2023 March 31, 2023
Selected operating data:
Net interest income $ 22,694 $ 24,264 $ 29,899
−Removed: Provision for (reversal of) credit losses on loans 425 500 1,275 (63)
−Removed: Reversal of credit losses on unfunded loan commitments
+Added: Provision for credit losses on loans
350 1,300 350
+Added: Reversal of credit losses on unfunded loan commitments
Non-interest income 2,754 (3,283) 2,935
9 unchanged sentences
Cost of deposits 1.38 % 1.15 % 0.20 %
+Added: Cost of funds
+Added: 1.38 % 1.27 % 0.49 %
Efficiency ratio 83.18 % 91.94 % 60.24 %
−Removed: Net (recoveries) charge-offs $ (3) $ (2) $ (2) $ (3)
+Added: Net charge-offs (recoveries) $ 21 $ 387 $ 3
Cash dividend payout ratio on common stock 1
138.89 % 625.00 % 42.37 %
−Removed: (dollars in thousands, except per share data) September 30, 2023 December 31, 2022
+Added: (dollars in thousands, except per share data) March 31, 2024 December 31, 2023
Selected financial condition data:
30 unchanged sentences
Average Statements of Condition and Analysis of Net Interest Income
−Removed: The following tables compare interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented.
+Added: The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented.
The tables also present net interest income, net interest margin and net interest rate spread for each period reported.
−Removed: Three months ended Three months ended
−Removed: September 30, 2023 June 30, 2023
−Removed: Interest Interest
−Removed: Average Income/ Yield/ Average Income/ Yield/
−Removed: (dollars in thousands) Balance Expense Rate Balance Expense Rate
−Removed: Interest-earning deposits with banks 1
−Removed: $ 76,896 $ 1,055 5.37 % $ 3,578 $ 48 5.35 %
−Removed: Investment securities 2, 3
−Removed: 1,721,367 9,436 2.19 % 1,819,486 10,103 2.22 %
−Removed: Loans 1, 3, 4
−Removed: 2,096,814 24,823 4.63 % 2,108,260 24,700 4.63 %
−Removed: Total interest-earning assets 1
−Removed: 3,895,077 35,314 3.55 % 3,931,324 34,851 3.51 %
−Removed: Cash and non-interest-bearing due from banks 37,964 38,154
−Removed: Bank premises and equipment, net 8,428 8,546
−Removed: Interest receivable and other assets, net 134,075 141,130
−Removed: Total assets $ 4,075,544 $ 4,119,154
−Removed: Liabilities and Stockholders' Equity
−Removed: Interest-bearing transaction accounts $ 230,085 $ 270 0.47 % $ 232,090 $ 234 0.41 %
−Removed: Savings accounts 266,770 229 0.34 % 285,745 146 0.20 %
−Removed: Money market accounts 1,046,011 5,988 2.27 % 948,670 4,292 1.81 %
−Removed: Time accounts including CDARS 217,467 1,555 2.84 % 174,471 946 2.18 %
−Removed: Short-term borrowings and other obligations 1
−Removed: 188,415 2,593 5.39 % 372,308 4,873 5.18 %
−Removed: Total interest-bearing liabilities 1,948,748 10,635 2.17 % 2,013,284 10,491 2.09 %
−Removed: Demand accounts 1,649,691 1,627,730
−Removed: Interest payable and other liabilities 52,067 49,116
−Removed: Stockholders' equity 425,038 429,024
−Removed: Total liabilities & stockholders' equity $ 4,075,544 $ 4,119,154
−Removed: Tax-equivalent net interest income/margin 1
−Removed: $ 24,679 2.48 % $ 24,360 2.45 %
−Removed: Reported net interest income/margin 1
−Removed: $ 24,469 2.46 % $ 24,130 2.43 %
−Removed: Tax-equivalent net interest rate spread 1.38 % 1.42 %
−Removed: Nine months ended Nine months ended
−Removed: September 30, 2023 September 30, 2022
−Removed: Interest Interest
−Removed: Average Income/ Yield/ Average Income/ Yield/
−Removed: (in thousands) Balance Expense Rate Balance Expense Rate
+Added: Three months ended Three months ended Three months ended
+Added: March 31, 2024 December 31, 2023 March 31, 2023
+Added: Interest Interest Interest
+Added: Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
+Added: (dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
Interest-earning deposits with banks 1
15 unchanged sentences
Time accounts including CDARS 264,594 2,280 3.47 % 244,661 1,991 3.23 % 126,030 223 0.72 %
−Removed: Short-term borrowings and other obligations 1
+Added: Borrowings and other obligations 1
7,323 91 4.93 % 104,855 1,380 5.15 % 222,571 2,716 4.88 %
12 unchanged sentences
Investment security interest is earned on 30/360 day basis monthly.
−Removed: 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.
+Added: 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.
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.
+Added: 5 Net loan origination costs in interest income totaled $375 thousand, $324 thousand, and $190 thousand for the three months ended March 31, 2024, December 31, 2023 and March 31, 2023, respectively.
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.
−Removed: Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates.
+Added: Volume variances are equal to the increase or
+Added: 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.
−Removed: Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one more day in the three months ended September 30, 2023, compared to the three months ended June 30, 2023.
−Removed: Three months ended September 30, 2023 compared to three months ended
−Removed: June 30, 2023
−Removed: Nine months ended September 30, 2023 compared to nine months ended
−Removed: September 30, 2022
+Added: Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one day less in the three months ended March 31, 2024, compared to the three months ended December 31, 2023 and one day more in the three months ended March 31, 2024, compared to the same period in 2023.
+Added: Three months ended March 31, 2024 compared to three months ended
+Added: December 31, 2023
+Added: Three months ended March 31, 2024 compared to three months ended
+Added: March 31, 2023
(in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total
8 unchanged sentences
Time accounts, including CDARS 162 141 (14) 289 245 851 961 2,057
−Removed: Short-term borrowings and other obligations (2,407) 195 (68) (2,280) 1,416 12 8,752 10,180
+Added: Borrowings and other obligations
+Added: (1,284) (63) 58 (1,289) (2,627) 20 (18) (2,625)
Total interest-bearing liabilities (863) 1,176 (20) 293 (2,260) 7,131 2,133 7,004
1 unchanged sentence
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%.
−Removed: Third Quarter of 2023 Compared to the Second Quarter of 2023
−Removed: Net interest income totaled $24.5 million for the third quarter of 2023, compared to $24.1 million for the prior quarter.
−Removed: The $339 thousand increase from the prior quarter was primarily related to an increase of approximately $358 thousand in interest income from the investment of securities sales proceeds into interest-bearing cash.
−Removed: The $2.3 million reduction in borrowing cost for the quarter was offset by rising deposit rates and higher average deposit balances that resulted in an additional $2.4 million in interest expense.
−Removed: The tax-equivalent net interest margin was 2.48% for the third quarter of 2023, compared to 2.45% for the prior quarter.
−Removed: The increase from prior quarter was primarily due to a $73.3 million increase in avera ge interest-bearing cash balances with an average yield of 5.37% from securities sales proceeds.
−Removed: During the third quarter n ew loans were originated at rates approximately 150 basis points above the rates on loans paid off, which will positively impact the margin in future periods.
−Removed: Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
−Removed: Net interest income totaled $78.5 million for the nine months ended September 30, 2023, compared to $94.1 million for the same period in the prior year.
−Removed: The $15.6 million decrease from prior year was primarily due to higher funding costs of $23.9 million, partially offset by higher average yields on earning assets.
−Removed: The tax-equivalent net interest margin was 2.66% for the nine months ended September 30, 2023, compared to 3.06% for the same period in the prior year.
−Removed: The decrease was primarily attributed to higher deposit and borrowing costs, partially offset by higher interest rates on loans and investment securities.
−Removed: Average interest-bearing deposits balances decreased by $164.2 million while the average cost increased by 55 basis points, mainly for money market and time deposit account types, decreasing the margin by 46 basis points.
−Removed: Average borrowings and other obligations increased by $260.6 million at an average cost of 5.14%, an increase of 4.43%, decreasing the margin by 34 basis points.
−Removed: Average loan balances decreased by $87.3 million while the average yield increased by 36 basis points, increasing the margin by 20 basis points.
−Removed: Average investment securities increased $26.2 million and their average yield increased 31 basis points, increasing the margin by 19 basis points.
+Added: First Quarter of 2024 Compared to the Fourth Quarter of 2023
+Added: Net interest income totaled $22.7 million for the first quarter of 2024, compared to $24.3 million for the prior quarter.
+Added: The $1.6 million decrease from the prior quarter was primarily related to an increase of $1.6 million in interest expense on deposits and a decrease of $1.3 million in interest on cash and investments.
+Added: These were partially offset by a $1.3 million decrease in borrowing costs.
+Added: Quarter-over-quarter, average interest-bearing deposit balances increased by $36.5 million to $1.860 billion, raising the cost of total deposits by 23 basis points to 1.38%.
+Added: Average borrowings and other obligations decreased by $97.5 million to $7.3 million, and average investment security balances were down a similar amount.
+Added: The tax-equivalent net interest margin was 2.50% for the first quarter of 2024, compared to 2.53% for the prior quarter.
+Added: The higher cost of deposits reduced the margin by 23 basis points, while higher loan yields added 15 basis points.
+Added: The effect of low er wholesale borrowing balances, partially offset by lower interest-earning deposits with banks, added 5 basis points.
+Added: First Quarter of 2024 Compared to the First Quarter of 2023
+Added: Net interest income totaled $22.7 million for the three months ended March 31, 2024, compared to $29.9 million for the same period in the prior year.
+Added: The $7.2 million decrease from the prior year was primarily due to a higher cost of deposits totaling $9.6 million, partially offset by lower borrowing costs of $2.6 million.
+Added: The tax-equivalent net interest margin was 2.50% for the three months ended March 31, 2024, compared to 3.04% for the same period in the prior year.
+Added: The decrease was primarily attributed to higher deposit costs, reducing the margin by 107 basis points, partially offset by higher yields on loans, adding 29 basis points, and decreases in borrowings contributing 26 basis points.
Market Interest Rates
2 unchanged sentences
In response to the evolving risks to economic activity caused by the COVID-19 pandemic, the FOMC made two emergency federal funds rate cuts totaling 150 basis points in March 2020.
−Removed: The federal funds rate range remained between 0.0% to 0.25% through the beginning of 2022, putting downward pressure on our asset yields and net interest margin.
−Removed: Beginning in March 2022, the FOMC began successive increases to the federal funds rate due to the evolving inflation risks, complicated by international political unrest and supply chain disruptions.
−Removed: As a result of seven rate adjustments during 2022, the federal funds target rate increased to a range of 4.25% to 4.50% at year-end 2022 and our net interest margin increased gradually over the course of the year.
+Added: The federal funds rate range remained between 0.0% and 0.25% through the beginning of 2022, putting downward pressure on our asset yields and net interest margin.
+Added: Beginning in March 2022, the FOMC began successive increases to the federal funds rate due to evolving inflation risks, international political unrest, and oil and other supply chain disruptions.
+Added: As a result of seven
+Added: rate adjustments during 2022, the federal funds target rate range increased to between 4.25% and 4.50% at year-end 2022 and our net interest margin increased gradually over the course of the year.
In 2023, on each of February 1 st , March 22 nd , May 3 rd , and July 26 th , the FOMC increased the target rate by 25 basis points to a range of 5.25% to 5.50%.
−Removed: Rising interest rates and first quarter disruptions in the banking industry resulted in rapid increases in the cost of funds through rising deposit costs and increased borrowings, putting pressure on net interest margin in the second and third quarters.
−Removed: Federal Reserve policymakers continue to monitor inflation and economic developments throughout 2023.
+Added: Rising interest rates resulted in rapid increases in the cost of funds through rising deposit costs and increased average borrowings, putting pressure on the net interest margin.
+Added: Federal Reserve policymakers continue to monitor inflation and economic developments and are considering rate changes during the balance of 2024.
Quantitative and Qualitative Disclosure about Market Risk for further information.
3 unchanged sentences
The following table shows the activity for the periods presented.
−Removed: Three months ended Nine months ended
−Removed: (dollars in thousands) September 30, 2023 June 30, 2023 September 30, 2023 September 30, 2022
−Removed: Provision for (reversal of) credit losses on loans $ 425 $ 500 $ 1,275 $ (63)
−Removed: We recorded a $425 thousand provision for credit losses on loans in the third quarter.
−Removed: The provision was due primarily to increases in qualitative factors related to trends in adversely graded, non-owner-occupied commercial real estate loans and the potential impact of rapidly increasing interest rates and other external factors on both our non-owner-occupied commercial real estate and construction portfolios.
−Removed: These increases were partially offset by the impact of the decrease in loan balances.
−Removed: We recorded a $500 thousand provision for credit losses on loans in the second quarter.
−Removed: The provision was due primarily to increases in qualitative risk factors from continued negative trends in adversely graded loans and/or collateral values on our non-owner occupied commercial real estate office and multi-family real estate portfolios.
−Removed: These increases were partially offset by the impact of a decrease in loan balances.
−Removed: The provision totaling $1.3 million for the nine months ended September 30, 2023 primarily resulted from increases in qualitative risk factors from continued trends in adversely graded loans and/or collateral values not believed to be captured in the quantitative risk factors.
−Removed: The net provision reversal for the nine months ended September 30, 2022 primarily resulted from a provision reversal in the first quarter due to improvements in the economic forecasts, partially offset by the provision in the third quarter due primarily to an increase in qualitative factors to account for the ongoing deterioration in the economic outlook not captured in the quantitative portion of the allowance.
+Added: Three months ended
+Added: (dollars in thousands) March 31, 2024 December 31, 2023 March 31, 2023
+Added: Provision for credit losses on loans $ 350 $ 1,300 $ 350
+Added: We recorded a $350 thousand provision for credit losses on loans in the first quarter.
+Added: The provision was due primaril y to adjustments to certain qualitative risk factors to account for continued negative trends in adversely graded loans for our non-owner occupied commercial real estate and commercial and industrial portfolios, adjustments to the discounted cash flow modeling assumptions related to estimated default timing, and a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rates, partially offset by the impact of a decrease in pooled loans and changes in loan mix.
+Added: We recorded a $1.3 million provision for credit losses on loans in the fourth quarter.
+Added: The provision was due primari ly to an increase in specific allowances re lated to a few loans that exhibited certain credit risk characteristics over time that were not indicative of pooled loans.
+Added: Of the specific allowances, a portion was related to two loans with existing substandard risk ratings and collateral valuation issues caused by persistently higher than average vacancy rates.
+Added: In addition, a portion was related to two loans that were placed on non-accrual status during the fourth quarter, where the estimated credit losses were derived using either discounted expected cash flows or adjusted collateral values and loss rates.
+Added: A large p ortion of these specific allowances was previously recognized in the quantitative and qualitative estimated credit losses for pooled loans and shifted to the allowance for individually evaluated loans in the fourth quarter.
+Added: Other elements of the provision included a $406 thousand loss on the note sale of a loan to an unrelated third party that was charged to the allowance concurrent with the sale, a decrease in loans, and a stable California unemployment rate forecast for the next four quarters.
+Added: Net adjustments to qualitative factors in the fourth quarter did not materially affect the provision.
+Added: The provision totaling $350 thousand for the three months ended March 31, 2023 was due primarily to increases in qualitative risk factors to account for continued uncertainty about inflation and recession risks.
+Added: 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 economic conditions at that time.
+Added: In addition, a $19.8 million increase in loans contributed modestly to the provision.
+Added: These increases were partially offset by the quantitative impact of an improvement in Moody's Analytics' baseline California unemployment rate forecasts at the time.
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.
1 unchanged sentence
The following table details the components of non-interest income.
−Removed: Three months ended
−Removed: (dollars in thousands) September 30, 2023 June 30, 2023 Amount Change Percent Change
+Added: Three months ended Quarter over quarter Year over year
+Added: (dollars in thousands) March 31, 2024 December 31, 2023 March 31, 2023 Amount Change Percent Change Amount Change Percent Change
Wealth management and trust services $ 553 $ 560 511 $ (7) (1.3) % $ 42 8.2 %
Service charges on deposit accounts 529 522 533 7 1.3 % (4) (0.8) %
−Removed: Debit card interchange fees, net 456 555 (99) (17.8) %
Earnings on bank-owned life insurance, net 435 $ 364 $ 705 71 19.5 % (270) (38.3) %
−Removed: Dividends on Federal Home Loan Bank stock 324 290 34 11.7 %
−Removed: Merchant interchange fees, net 117 127 (10) (7.9) %
−Removed: Other income 293 326 (33) (10.1) %
−Removed: Total non-interest income $ 2,598 $ 2,739 $ (141) (5.1) %
−Removed: Nine months ended Amount Change Percent Change
−Removed: (dollars in thousands) September 30, 2023 September 30, 2022
−Removed: Wealth Management and Trust Services $ 1,585 $ 1,737 $ (152) (8.8) %
−Removed: Service charges on deposit accounts 1,561 1,488 73 4.9 %
Debit card interchange fees, net 408 373 447 35 9.4 % (39) (8.7) %
−Removed: Earnings on bank-owned life insurance, net 1,438 933 505 54.1 %
Dividends on Federal Home Loan Bank stock 377 349 302 28 8.0 % 75 24.8 %
Merchant interchange fees, net 167 119 133 48 40.3 % 34 25.6 %
−Removed: Gains (losses) on sale of investment securities, net 14 (63) 77 NM
+Added: Losses on sale of investment securities, net — (5,907) — 5,907 — % — — %
Other income 285 337 304 (52) (15.4) % (19) (6.3) %
Total non-interest income $ 2,754 $ (3,283) $ 2,935 $ 6,037 (183.9) % $ (181) (6.2) %
−Removed: Third Quarter of 2023 Compared to the Second Quarter of 2023
−Removed: Non-interest income totaled $2.6 million for the third quarter of 2023, compared to $2.7 million for the prior quarter.
−Removed: The $141 thousand decrease from the prior quarter was primarily related to the decrease in debit card interchange income.
−Removed: Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
−Removed: Non-interest income totaled $8.3 million for the nine months ended September 30, 2023, materially unchanged from the same period of the prior year.
−Removed: The $46 thousand decrease from the prior year period was mostly attributable to decreases in other income including one-way deposit and cash management fees and in wealth management and trust services income, partially offset by higher bank-owned life insurance benefit payments and balances and dividends on Federal Home Loan Bank stock.
+Added: First Quarter of 2024 Compared to the Fourth Quarter of 2023
+Added: Non-interest income totaled $2.8 million for the first quarter of 2024, compared to a loss of $3.3 million for the prior quarter.
+Added: The $6.0 million increase from the prior quarter was primarily attributed to a $5.9 million net loss on sale of available-for-sale investment securities in the prior quarter.
+Added: First Quarter of 2024 Compared to the First Quarter of 2023
+Added: Non-interest income totaled $2.8 million for the first quarter of 2024, materially unchanged from the same period of the prior year.
+Added: The $181 thousand decrease from the prior year period was mostly attributable to a decrease in bank-owned life insurance benefit payments due to the recognition of a death benefit in 2023, partially offset by higher dividend rates paid on Federal Home Loan Bank stock and higher wealth management and trust services income in 2024.
Non-interest Expense
The following table details the components of non-interest expense.
−Removed: Three months ended
−Removed: (dollars in thousands) September 30, 2023 June 30, 2023 Amount Change Percent Change
+Added: Three months ended Quarter over quarter Year over year
+Added: (dollars in thousands) March 31, 2024 December 31, 2023 March 31, 2023 Amount Change Percent Change Amount Change Percent Change
Salaries and related benefits $ 12,084 $ 10,361 $ 10,930 $ 1,723 16.6 % $ 1,154 10.6 %
Occupancy and equipment 1,969 1,939 2,414 30 1.5 % (445) (18.4) %
−Removed: Data processing 1,009 922 87 9.4 %
Professional services 1,078 921 1,123 157 17.0 % (45) (4.0) %
−Removed: Federal Deposit Insurance Corporation insurance 469 666 (197) (29.6) %
−Removed: Depreciation and amortization 423 400 23 5.8 %
−Removed: Information technology 411 357 54 15.1 %
−Removed: Amortization of core deposit intangible 335 340 (5) (1.5) %
−Removed: Directors' expense 272 300 (28) (9.3) %
−Removed: Charitable contributions 20 638 (618) (96.9) %
−Removed: Other real estate owned — 44 (44) (100.0) %
−Removed: Other non-interest expense
−Removed: Advertising 319 300 19 6.3 %
−Removed: Other expense 3,018 2,505 513 20.5 %
−Removed: Total other non-interest expense 3,337 2,805 532 19.0 %
−Removed: Total non-interest expense $ 19,747 $ 20,665 $ (918) (4.4) %
−Removed: Nine months ended Amount Change Percent Change
−Removed: (dollars in thousands) September 30, 2023 September 30, 2022
−Removed: Salaries and related benefits $ 33,087 $ 32,446 $ 641 2.0 %
−Removed: Occupancy and equipment 6,367 5,739 628 10.9 %
Data processing 1,070 1,081 1,045 (11) (1.0) % 25 2.4 %
−Removed: Professional services 2,677 2,314 363 15.7 %
−Removed: Depreciation and amortization 1,705 1,259 446 35.4 %
+Added: Deposit network fees 845 940 96 (95) (10.1) % 749 780.2 %
Federal Deposit Insurance Corporation insurance 435 454 289 (19) (4.2) % 146 50.5 %
Information technology 402 431 370 (29) (6.7) % 32 8.6 %
−Removed: Amortization of core deposit intangible 1,020 1,124 (104) (9.3) %
+Added: Depreciation and amortization 388 393 882 (5) (1.3) % (494) (56.0) %
Directors' expense 317 319 321 (2) (0.6) % (4) (1.2) %
−Removed: Charitable contributions 707 605 102 16.9 %
−Removed: Other real estate owned 48 355 (307) NM
+Added: Amortization of core deposit intangible 251 330 345 (79) (23.9) % (94) (27.2) %
+Added: Other real estate owned — — 4 — N/A (4) (100.0) %
Other non-interest expense
3 unchanged sentences
Total non-interest expense $ 21,169 $ 19,289 $ 19,780 $ 1,880 9.7 % $ 1,389 7.0 %
−Removed: NM - Not Meaningful
−Removed: Third Quarter of 2023 Compared to the Second Quarter of 2023
−Removed: Non-interest expense totaled $19.7 million for the third quarter of 2023, compared to $20.7 million for the prior quarter.
−Removed: Th e $918 thousand decrease from the prior quarter primarily resulted from a $675 thousand decrease in salaries and related benefits mainly due to decreases in accrued incentive and profit sharing expenses and 401(k) contributio ns, $ 618 thousand less in charitable contributions as our annual grant program normally occurs in the second quarter, and a $197 thousand decrease related to a catch-up adjustment in the second quarter for increased FDIC assessments to strengthen the Deposit Insurance Fund.
−Removed: These decreases were partially offset by a $532 thousand net increase in other expense, primarily due to a $688 thousand increase in expenses and fees associated with our customers' participation in reciprocal deposit networks to bolster their FDIC insured balances.
−Removed: Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
−Removed: Non-interest expense totaled $60.2 million for the nine months ended September 30, 2023 , compared to $57.0 million for the nine months ended September 30, 2022, an increase of $3.2 million.
−Removed: Other expense increased by $1.8 million primarily due to a $1.5 million increase in expenses and fees associated with reciprocal deposits placed into deposit networks.
−Removed: Salaries and related benefits increased by $641 thousand primarily due to regularly scheduled annual merit and other increases, the hiring of several key employees and officers, and lower deferred loan origination costs, partially offset by a reduction in accrued incentive and profit sharing expenses.
−Removed: Occupancy and equipment and depreciation and amortization expenses rose $628 thousand and $446 thousand, respectively, mainly from the acceleration of lease-related costs for branch closures in the first quarter of 2 0 23.
+Added: First Quarter of 2024 Compared to the Fourth Quarter of 2023
+Added: Non-interest expense totaled $21.2 million for the first quarter of 2024, compared to $19.3 million for the prior quarter, an increase of $1.9 million.
+Added: Salaries and related benefits increased $1.7 million largely due to various factors, both in prior and current quarter.
+Added: Last quarter, profit sharing, supplemental executive retirement plan and stock-based compensation accrual adjustments reduced expenses.
+Added: In the first quarter of 2024, there were lower deferred loan origination costs, an increase to the 401(k) contribution matching associated with the usual reset and bonus payments at the beginning of the year, and increased salary costs due to new talent acquisition, partially offset by incentive adjustments.
+Added: In addition, professional services expenses from certain legal, accounting, and consulting costs increased by $157 thousand.
+Added: First Quarter of 2024 Compared to the First Quarter of 2023
+Added: Non-interest expense totaled $21.2 million for the first quarter of 2024 , compared to $19.8 million for the first quarter of 2023, an increase of $1.4 million.
+Added: Significant fluctuations were as follows:
+Added: • Salaries and related benefits increased by $1.2 million largely due to the increase in full time equivalent employees to 330 from 311 at the same time in prior year.
+Added: • Deposit network fees increased by $749 thousand as customers sought additional FDIC insurance protection through reciprocal deposit networks.
+Added: • These increases were partially offset by decreases in occupancy and equipment and depreciation and amortization expenses of $445 thousand and $494 thousand, respectively, mainly from the acceleration of lease-related costs for branch closures in the first quarter of 2 0 23.
Beginning in 2024, the estimated annual pre-tax savings from branch closures are expected to be approximately $1.4 million.
−Removed: I n addition, the FDIC insurance assessment rose by $538 thousand due to the increased statutory rate.
−Removed: These increases were partially offset by a $593 thousand decrease in data processing expenses due to our core system contract renegotiation for the current period and because the prior year included data processing expenses largely eliminated after the systems conversion associated with the American River Bankshares merger.
−Removed: In addition, other real estate owned expenses decreased by $307 thousand due the write-down in the prior year of the asset that was sold in the third quarter of 2023.
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.
−Removed: Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, bank-owned life insurance ("BOLI") income, 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).
−Removed: The provision for income taxes for the third quarter of 2023 totaled $1.6 million at an effective tax rate of 23.2%, compared to $1.3 million at an effective tax rate of 22.5% in the prior quarter.
−Removed: The increase in the provision for income taxes in the third quarter of 2023 reflected higher pre-tax income as compared to the prior quarter.
−Removed: The 70 basis point increase in the effective tax rate in the third quarter of 2023 was primarily due to the smaller proportional effect of permanent tax differences on higher pretax income.
−Removed: The provision for income taxes for the first nine months of 2023 totaled $6.4 million at an effective tax rate of 24.8%, compared to $12.2 million at an effective tax rate of 26.5% for the first nine months of 2022.
−Removed: The 170 basis point decrease in the effective tax rate in the first nine months of 2023, as compared to the same period a year ago, was primarily due to the larger proportional effect of permanent tax differences on lower pretax income and higher tax-exempt BOLI income.
+Added: Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, bank-owned life insurance ("BOLI"), low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).
+Added: The provision for income taxes for the first quarter of 2024 totaled $1.0 million at an effective tax rate of 25.6%, compared to provision reversal of $218 thousand at a negative effective tax rate of (55.6)% in the prior quarter and $3.4 million at an effective tax rate of 26.7% in the same quarter last year.
+Added: The increase in the p rovision for income taxes in the first quarter of 2024 reflected higher pre-tax income as compared to the prior quarter.
+Added: The increase in the effective tax rate in the first quarter of 2024 was primarily due to the tax provision reversal recorded in the prior quarter that primarily resulted from a $5.9 million pre-tax loss on the sale of available-for-sale investment securities.
+Added: The 110 basis point decrease in the effective tax rate in the first quarter of 2024, as compared to the same quarter a year ago, was primarily due to the larger proportional effect of permanent tax differences on lower pretax income.
This decrease was partially offset by a reduction in the tax-exempt interest exclusion (due to a larger IRC Section 291(e) interest expense disallowance), compared to the prior period.
1 unchanged sentence
federal tax jurisdiction and a combined return in the state of California tax jurisdiction.
−Removed: There were no ongoing federal or state income tax examinations at the issuance of this report.
−Removed: At September 30, 2023, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits.
+Added: There were no ongoing federal or state income tax examinations at the time of the issuance of this report.
+Added: As of March 31, 2024, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits.
FINANCIAL CONDITION SUMMARY
Cash, Cash Equivalents and Restricted Cash
−Removed: Total cash, cash equivalents and restricted cash were $123.1 million at September 30, 2023, compared to $45.4 million at December 31, 2022.
−Removed: The $77.7 million increase was due primarily to the sale of $82.7 million of available-for-sale securities in the third quarter, which resulted in 3 basis points of net interest margin expansion due to the higher interest rate earned on cash and provided diversification to our liquidity profile.
+Added: Total cash, cash equivalents and restricted cash were $36.3 million at March 31, 2024, an increase of $5.9 million compared to $30.5 million at December 31, 2023.
Investment Securities
−Removed: The investment securities portfolio totaled $1.594 billion at September 30, 2023, a decrease of $180.3 million from $1.774 billion at December 31, 2022.
−Removed: The decrease was primarily the result of principal repayments and maturities totaling $87.7 million, sales of $82.7 million available-for-sale securities, an increase of $5.7 million in pre-tax unrealized losses on available-for-sale investment securities, and $4.2 million in net amortization in the first nine months of 2023.
−Removed: The securities sales and $102 million fair value hedge reduced the impact of interest rate increases on tangible capital over the quarter by approximately 7 basis points.
−Removed: The $2.8 million net loss on the sale of securities was offset by a $2.8 million gain from the sale of our remaining investment in Visa Inc.
−Removed: Class B restricted common stock, which had a zero carrying value.
−Removed: B oth the available-for-sale and held-to-maturity portfolios are eligible for pledging to either the FHLB or the Federal Reserve as collateral for borrowing.
+Added: The investment securities portfolio totaled $1.451 billion at March 31, 2024, a decrease of $25.8 million from $1.477 billion at December 31, 2023.
+Added: The decrease was primarily the result of principal repayments totaling $20.3 million, a $4.6 million increase in pre-tax unrealized losses on available-for-sale investment securities, and $900 thousand in net amortization.
+Added: Both the available-for-sale and held-to-maturity portfolios are eligible for pledging to FHLB or the Federal Reserve as collateral for borrowings.
The portfolios are comprised of high credit quality investments with average effective durations of 4.41 on available-for-sale securities and 5.66 on held-to-maturity securities.
−Removed: Both portfolios generate cash inflows monthly from interest, principal amortization and payoffs, which supports the Bank's liquidity .
−Removed: Those cash inflows t otaled $123.9 million in the first nine months of 2023 .
−Removed: The following table summarizes our investment in obligations of state and political subdivisions at September 30, 2023 and December 31, 2022.
−Removed: September 30, 2023 December 31, 2022
+Added: Both portfolios generate cash flows monthly from interest, principal amortization and payoffs, which supports the Bank's liquidity.
+Added: Those cash flows totaled $31.3 million in the first quarter of 2024.
+Added: See Note 4, Investment Securities, for additional information.
+Added: The following table summarizes our investment in obligations of state and political subdivisions at March 31, 2024 and December 31, 2023.
+Added: March 31, 2024 December 31, 2023
(dollars in thousands) Amortized Cost Fair Value % of Total State and Political Subdivisions Amortized Cost Fair Value % of Total State and Political Subdivisions
19 unchanged sentences
Loans and Credit Quality
−Removed: During the first nine months of 2023, loans decreased by $5.6 million and totaled $2.087 billion at September 30, 2023, compared to $2.093 billion at December 31, 2022.
−Removed: During the same period in 2022, loans decreased $97.3 million to $2.158 billion at September 30, 2022 from $2.256 billion at December 31, 2021.
−Removed: Loan originations were $90.3 million for the nine months ended September 30, 2023, compared to $204.1 million for the first nine months of 2022.
−Removed: Excluding PPP loans, payoffs were $57.7 million for the nine months ended September 30, 2023, compared to $204.2 million for the same period in 2022.
−Removed: PPP loan payoffs during the nine months ended September 30, 2023 and 2022 were $1.8 million and $103.6 million, respectively.
−Removed: In addition, loan amortization from scheduled repayments totaling $60.6 million was partially offset by a $24.2 million net increase in utilization of credit lines for the nine months ended September 30, 2023.
−Removed: While Bank of Marin has continued its usual steadfast conservative underwriting practices and has not changed its credit standards or policies in reaction to current market conditions, our portfolio management and credit teams are exercising heightened awareness of the potential for credit quality deterioration.
−Removed: The Bank continues to focus on extending credit within the markets we know best and serving the needs of our existing clients while ensuring new opportunities present the appropriate levels of risk and return.
−Removed: The ratio of allowance for credit losses on loans to total loans was 1.16% at September 30, 2023, compared to 1.10% at December 31, 2022.
−Removed: Non-accrual loans increased $3.3 million to $5.7 million, or 0.27% of the loan portfolio at September 30, 2023 from $2.4 million, or 0.12% at December 31, 2022.
−Removed: All of the non-accrual loans are collateralized by real estate with no expected credit loss as of September 30, 2023.
−Removed: Accruing loans past due 30 to 89 days totaled $2.2 million at September 30, 2023, compared to $664 thousand at December 31, 2022.
−Removed: Classified loans with risk ratings of substandard or doubtful totaled $39.7 million at September 30, 2023, compared to $28.1 million at December 31, 2022.
−Removed: Increases in 2023 were primarily due to the addition of eleven loans to ten borrowers totaling $13.4 million, mostly within the commercial real estate (both owner-occupied and non-owner occupied) and the commercial and industrial portfolios.
−Removed: Partially offsetting the additions were $939 thousand in upgrades to pass risk rating and $905 thousand in payoffs and paydowns, net of balance increases of $3.4 million.
−Removed: Shortly after quarter-end three unsecured commercial substandard loans to one borrower totaling approximately $4.6 million paid off.
−Removed: Loans designated special mention, which are not considered adversely classified, increased by $52.2 million to $112.4 million at September 30, 2023 from $60.2 million at December 31, 2022.
−Removed: The increase was largely due to $66.0 million in downgrades from pass risk ratings, mostly concentrated in the commercial real estate non-owner-occupied portfolio, which were partially offset by $5.9 million in downgrades from special mention to substandard, $4.9 million in paydowns and payoffs and $3.1 million in upgrades to pass risk ratings.
−Removed: With the heightened market concern about non-owner-occupied commercial real estate, and in particular the office sector, we are providing the following additional information.
−Removed: We continue to maintain diversity among property types and within our geographic footprint.
−Removed: In particular, our office commercial real estate portfolio in the City of San Francisco represents just 3% of our total loan portfolio and 6% of our total non-owner occupied commercial real estate portfolio.
−Removed: As of the last measurement period (generally December 2022), the weighted average loan-to-value and weighted average debt-service coverage ratios for the entire non-owner-occupied office portfolio were 56% and 1.68x, respectively.
−Removed: For the eleven non-owner-occupied office loans in the City of San Francisco, the weighted average loan-to-value and debt-service coverage ratios were 66% (61% unweighted) and 1.07x (1.34x unweighted), respectively.
−Removed: During the quarter we conducted a review of the refinance risk in our non-owner-occupied commercial real estate portfolio.
−Removed: We evaluated 36 loans with commitments of $1.0 million or more totaling $97.4 million that mature or reprice in 2023 or 2024 and determined that the refina nce risk on these loans is expected to be manageable with weighted average debt service coverage ratios ranging from 1.28 to 2.01 times based on current interest rates.
+Added: During the first three months of 2024, loans decreased by $18.8 million and totaled $2.055 billion as of March 31, 2024, compared to $2.074 billion as of December 31, 2023.
+Added: Loan originations were $12.4 million for the three months ended March 31, 2024, compared to $53.8 million for the fourth quarter of 2023.
+Added: While originations were muted, the pipeline has grown, and key opportunistic hires and new compensation plans have already accelerated calling activity, pipeline growth and diversification.
+Added: Loan payoffs were $21.8 million for the three months ended March 31, 2024, compared to $50.3 million for the fourth quarter of 2023.
+Added: The largest portion of payoffs were the result of construction project completions, followed by refinances of loans not meeting our strategic and risk profile standards, and cash payoffs.
+Added: There was no dominant overlying trend noted in the quarter.
+Added: Non-accrual loans totaled $6.3 million, or 0.31% of the loan portfolio, at March 31, 2024, compared to $8.0 million, or 0.39% at December 31, 2023.
+Added: The $1.7 million decrease resulted from various payoffs and paydowns.
+Added: Three loan relationships totaling $370 thousand moved to non-accrual status in the first quarter, partially offsetting the decrease.
+Added: Of the total non-accrual loans as of March 31, 2024 approximately 50% were paying as agreed, with the remaining 50% closely monitored for payments, and 63% were real estate secured.
+Added: While Bank of Marin has continued its steadfast conservative underwriting practices and has not changed its credit standards or policies in reaction to current market conditions, our portfolio management and credit teams are exercising heightened awareness of the potential for credit quality weakening.
+Added: Classified loans totaled $54.8 million as of March 31, 2024, compared to $32.3 million as of December 31, 2023.
+Added: The increase of $22.5 million was due primarily to a migration of $24.4 million in loans from special mention to substandard risk ratings.
+Added: The majority of these downgrades were due to protracted issues, therefore, these borrowers' financial conditions merit extra attention and proactive management.
+Added: The three significant relationships downgraded are of different types and geographies.
+Added: Two of these are commercial real estate loans that are fully secured and supported with owner-level personal guarantees that have ample liquidity, and we believe there is minimal loss potential in these credits.
+Added: Only 1% of the additions were on non-accrual status as of March 31, 2024, with 11% of all classified loans on non-accrual status.
+Added: Excluding the accruing loan over 90 days past due mentioned below, 98% of all classified loans were current on their payments as of March 31, 2024.
+Added: Additions to classified loans were offset by $2.9 million in payoffs and paydowns.
+Added: Accruing loans past due 30 to 89 days totaled $1.9 million as of March 31, 2024, compared to $1.0 million as of December 31, 2023.
+Added: We had one accruing non-owner-occupied commercial real estate loan over 90 days past due as of March 31, 2024 totaling $8.1 million that has been in extended renewal negotiations, but it is well-secured and expected to be restored to a current payment status in the near future.
+Added: Loans designated special mention, which are not considered adversely classified, decreased by $34.3 million to $100.9 million as of March 31, 2024, from $135.2 million as of December 31, 2023.
+Added: The decrease was largely due to $24.4 million in downgrades from special mention to substandard mentioned above, $10.5 million in upgrades to pass risk ratings, and $1.8 million in net paydowns and payoffs, partially offset by $2.0 million in downgrades from pass risk ratings and $443 thousand in balance increases.
+Added: Of the loans designated special mention, 98% were real estate secured.
+Added: All but one of the loans, outside of not-for-profits, are guaranteed by owners or sponsors.
+Added: Net charge-offs for the first quarter of 2024 totaled $21 thousand, compared to net charge-offs of $387 thousand for the fourth quarter of 2023.
+Added: The ratio of allowance for credit losses to total loans was 1.24% at March 31, 2024, compared to 1.21% at December 31, 2023.
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.
Liabilities - Deposits and Borrowings
−Removed: During the first nine months of 2023, total liabilities decreased by $118.4 million to $3.617 billion.
−Removed: Deposits totaled $3.444 billion at September 30, 2023, a decrease of $129.7 million compared to $3.573 billion at December 31, 2022.
−Removed: Borrowings increased $8.0 million to $120.0 million at September 30, 2023 from $112.0 million at December 31, 2022.
−Removed: We have seen stability in deposit trends since the first quarter, including the utilization of our available deposit networks.
−Removed: That stability extended to our mix in deposits, new account activity and overall growth.
−Removed: Non-interest bearing deposits made up 47.7% of total deposits at September 30, 2023, compared to 51.5% at year-end 2022, while money market deposits rose to 31.7% from 27.7%, and time deposits rose to 6.7% from 3.3% in the same period.
−Removed: Additionally, the Bank's competitive and balanced approach to relationship management and focused outreach supported the growth adding over 1,200 new accounts during the third quarter, 38% of which were new relationships, bringing the total to over 3,600 new accounts in 2023 (excluding new reciprocal accounts).
−Removed: As a result, we are closing the gap on the deposit outflows experienced in the first quarter of 2023 without accessing brokered deposit markets.
−Removed: As of September 30, 2023, 61% of deposit balances were held in business accounts with average balances of $130 thousand per account.
−Removed: The remaining 39% were consumer accounts with average balances of $41 thousand per account.
−Removed: The largest depositor represented 2.7% of total deposits and the four largest depositors combined represented 5.3% of total deposits.
−Removed: Our liquidity policies require that compensating cash or investment security balances be held against concentrations over a certain level.
−Removed: At September 30, 2023, the Bank had $120.0 million outstanding in short term borrowings from the Federal Reserve Bank's "BTFP" facility at a rate of 5.42%, an increase of $8.0 million, compared to $112.0 million in overnight borrowings at December 31, 2022 at a rate of 4.65%.
−Removed: The Bank is actively evaluating strategies for reducing borrowings in the current environment and as market conditions change.
−Removed: Total immediate contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities, and remaining borrowing capacity was $2.086 billion, or 61% of total deposits and 211% of estimated uninsured and/or uncollateralized deposits as of September 30, 2023.
+Added: During the first three months of 2024, total liabilities decreased by $34.3 million to $3.330 billion.
+Added: Deposits totaled $3.284 billion at March 31, 2024, a decrease of $6.0 million, compared to $3.290 billion at December 31, 2023.
+Added: The Bank had zero outstanding borrowings at March 31, 2024, compared to $26.0 million at December 31, 2023.
+Added: Non-interest bearing deposits made up 44.0% of total deposits at March 31, 2024 , compared to 43.8% at December 31, 2023 .
+Added: Money market balances remained constant at 34.6% and time deposits increased from 7.6% to 8.1% of total deposits with a weighted average rate of 3.17% and average term of six months.
+Added: Additionally, the Bank's competitive and balanced approach to relationship management and focused outreach supported the addition of nearly 1,200 new accounts during the first quarter , 34% of w hich were new relationships (excluding new reciprocal accounts).
+Added: During the first quarter of 2024, outstanding borrowings decreased by $26.0 million to zero at March 31, 2024, resulting from investment and loan cash flows.
+Added: Although available as a liquidity source, we have not utilized brokered deposits.
+Added: Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and remaining borrowing capacity was $1.905 billion, or 58% of total deposits and 208% of estimated uninsured and/or uncollateralized deposits as of March 31, 2024.
Capital Adequacy
6 unchanged sentences
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.
−Removed: 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 September 30, 2023.
+Added: 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 March 31, 2024.
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.
−Removed: Bancorp's TCE ratio was 8.6% at September 30, 2023, compared to 8.2% at December 31, 2022.
+Added: Bancorp's TCE ratio was 9.76% at March 31, 2024, compared to 9.73% at December 31, 2023.
Bancorp's TCE ratio, net of after tax unrealized losses on held-to-maturity securities, was 7.67%, compared to 7.80% at December 31, 2023.
−Removed: Management believes this non-GAAP measure is important because it reflects the level of capital available to withstand drastic changes in market conditions (ref er to page 46 for a dis cussion and reconciliation of this non-GAAP financial measure).
−Removed: The Bancorp’s and Bank’s capital adequacy ratios as of September 30, 2023 and December 31, 2022 are presented in the following tables.
+Added: Management believes this non-GAAP measure is important because it reflects the level of capital available to withstand drastic changes in market conditions (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures ).
+Added: The Bancorp’s and Bank’s capital adequacy ratios as of March 31, 2024 and December 31, 2023 are presented in the following tables.
Bancorp Capital Ratios
2 unchanged sentences
Threshold to be a Well Capitalized Bank Holding Company
−Removed: September 30, 2023 Amount Ratio Amount Ratio Amount Ratio
+Added: March 31, 2024 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 441,181 17.05 % $ 271,680 10.50 % $ 258,743 10.00 %
11 unchanged sentences
Threshold to be Well Capitalized under Prompt Corrective Action Provisions
−Removed: September 30, 2023 Amount Ratio Amount Ratio Amount Ratio
+Added: March 31, 2024 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 432,306 16.71 % $ 271,640 10.50 % $ 258,705 10.00 %
12 unchanged sentences
Our Asset Liability Management Committee ("ALCO"), which is comprised of Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies.
−Removed: The Bank has long-established minimum liquidity and diversification requirements using tools similar to larger banks such as the Liquidity Coverage Ratio and multi-scenario, long-horizon stress testing.
−Removed: Our c on tingency funding plan provides for early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis.
+Added: The Bank has long-established minimum liquidity requirements that are regularly monitored using metrics and tools similar to those used by larger banks, such as the liquidity coverage ratio, and multi-scenario, long-horizon stress tests.
+Added: Our c on tingency funding plan provides for early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a liquidity crisis.
Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs.
We also have relationships with third-party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash management strategy.
−Removed: We maintained $2.2 million in off-balance sheet one-way deposit sales with our deposit networks at both September 30, 2023 and December 31, 2022.
−Removed: Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $2.086 billion, or 211% of estimated uninsured and/or uncollateralized deposits as of September 30, 2023.
−Removed: The Federal Reserve's BTFP facility offers borrowing capacity based on par values of securities pledged making it less sensitive to changes in market rates.
−Removed: The following table details the components of our contingent liquidity sources as of September 30, 2023.
+Added: Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.905 billion, or 208% of estimated uninsured and/or uncollateralized deposits as of March 31, 2024.
+Added: The following table details the components of our contingent liquidity sources as of March 31, 2024.
(in thousands) Total Available Amount Used Net Availability
5 unchanged sentences
FHLB line of credit 951,238 $ — 951,238
−Removed: FRB line of credit and BTFP facility
+Added: FRB line of credit
349,991 — 349,991
3 unchanged sentences
Brokered deposits available through third party networks are not included above.
−Removed: We obtain funds from the repayment and maturity of loans, deposit inflows, investment securities sales, maturities and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations.
+Added: We obtain funds from the repayment and maturity of loans, deposit inflows, investment securities sales, maturities and paydowns, federal funds purchases, FRB and FHLB advances, other borrowings, and cash flow from operations.
+Added: Although available as a liquidity source, we have not needed to utilize brokered deposits.
Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, dividends to common stockholders, and operating expenses.
2 unchanged sentences
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.
−Removed: Our cash and cash equivalents increased $77.7 million in the first nine months of 2023.
−Removed: The most significant sources of liquidity during the first nine months of 2023 were proceeds from principal paydowns and maturities of investment securities of $87.8 million, proceeds from the sales of $82.7 million of available-for-sale securities and the remaining Visa Inc.
−Removed: Class B restricted common stock in the third quarter, and $34.9 million in net cash provided by operating activities.
+Added: Our cash and cash equivalents increased $5.9 million in the first three months of 2024.
+Added: The most significant sources of liquidity during the first three months of 2024 were proceeds from principal paydowns and maturities of investment securities of $20.3 million, and proceeds from loans collected net of originations totaling $18.7 million.
+Added: In addition, $4.3 million in net cash was provided by operating activities.
+Added: Significant uses of liquidity during the first three months of 2024 were $26.0 million in repayments of short-term borrowings, $6.0 million in net withdrawals of deposits and $4.0 million in cash dividends paid on common stock to our shareholders.
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, as detailed in this report, and contingent funding sources outlined in the table above are adequate to support our operational needs.
−Removed: Significant uses of liquidity during 2023 were $129.7 million in net withdrawals of deposits and $12.1 million in cash dividends paid on common stock to our shareholders.
−Removed: Unfunded loan commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $510.2 million at September 30, 2023.
+Added: Unfunded loan commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $489.4 million at March 31, 2024.
We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, principal paydowns of investment securities, and liquid assets.
2 unchanged sentences
We believe our emphasis on local deposits, combined with our immediately available funding sources, provides a very stable base for our liquidity needs.
−Removed: We had borrowings under our credit facilities of $120.0 million at September 30, 2023, and $112.0 million at December 31, 2022, as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report.
+Added: We had no borrowings under our credit facilities of at March 31, 2024, and $26.0 million at December 31, 2023, as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report.
Because Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank.
1 unchanged sentence
The primary uses of funds for Bancorp are shareholder dividends and ordinary operating expenses.
−Removed: Bancorp held $11.5 million in cash at September 30, 2023 and 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.
+Added: Bancorp held $8.6 million in cash at March 31, 2024 and management anticipates that there will be sufficient capacity 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
−Removed: Results for 2022 we re impacted by costs associated with our 2021 acquisition of American River Bankshares, which we considered immaterial to discuss in this report.
−Removed: For additional information regarding the impact of non-GAAP adjustments to our third quarter and year-to-date 2022 performance measures, refer to Form 10-Q filed on November 8, 2022.
Financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures.
−Removed: Management believes that, given recent industry turmoil, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after-tax impact of unrealized losses on held-to-maturity securities provides useful supplemental information to investors because it reflects the level of capital available to withstand drastic changes in market conditions.
+Added: Management believes that, given recent industry turmoil, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after tax impact of unrealized losses on held-to-maturity securities provides useful supplemental information to investors because it reflects the level of capital remaining after a hypothetical liquidation of the entire securities portfolio .
Because there are limits to the usefulness of this measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the Securities and Exchange Commission, and not to rely on any single financial measure.
1 unchanged sentence
Reconciliation of GAAP and Non-GAAP Financial Measures
−Removed: (in thousands, unaudited) September 30, 2023 December 31, 2022
+Added: (in thousands, unaudited) March 31, 2024 December 31, 2023
Tangible Common Equity - Bancorp
13 unchanged sentences
Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP) b / d 7.7 % 7.8 %
−Removed: 1 Net unrealized losses on held-to-maturity securities as of September 30, 2023 and December 31, 2022 of $151.9 million and $127.0, respectively, as shown in Note 4, net of an estimated $44.9 million and $37.5, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%.
+Added: 1 Net unrealized losses on held-to-maturity securities as of March 31, 2024 and December 31, 2023 of $119.2 million and $110.4 million, respectively, as shown in Note 4, net of an estimated $35.2 million and $32.6 million, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%.
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.