Bank of Marin Bancorp 10-Q

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 unaudited consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our 2023 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances. Forward-Looking Statements 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. 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, 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; 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 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. 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 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, Fair Value Measurements, and Goodwill. Page-29 Executive Summary Net loss for the second quarter of 2024 was $21.9 million, compared to net income of $2.9 million for the first quarter of 2024 and $4.6 million for the second quarter of 2023. Diluted loss per share was $(1.36) for the second quarter of 2024, compared to earnings per share of $0.18 for the preceding quarter and $0.28 for the same quarter a year ago. Net loss for the first six months of 2024 totaled $19.0 million, compared to net income of $14.0 million for the same period last year. Diluted (loss) earnings per share was $(1.18) and $0.87 for the first six months of 2024 and 2023, respectively. Both the second quarter and six months of 2024 results reflected a $32.5 million pre-tax loss from the previously announced balance sheet restructuring and a $5.2 million pre-tax provision for credit losses on loans. 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. • As previously announced, the Bank sold 56% of its available-for-sale securities ("AFS") portfolio at an after-tax loss of $22.9 million. Redeployment of the $292.6 million net proceeds is expected to provide a 30 basis point increase in annualized net interest margin and $0.46 per share estimated annualized earnings accretion beginning in the third quarter, assuming an average reinvestment yield of 5.75%. The sale is part of our strategy to improve future earnings and increase return on equity. Excluding the loss on security sales, net income and diluted earnings per share for the second quarter would have been $1.0 million and $0.06, all other factors unchanged (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 ). • A $5.6 million provision for credit losses on loans in the first half of 2024 compared to a provision of $850 thousand for the same period last year, bringing the allowance for credit losses to 1.47% of total loans, compared to 1.13% as of June 30, 2023. The provision in 2024 was largely due to an increased individual reserve for one non-owner occupied commercial real estate loan totaling $16.7 million that, although current, has experienced a deteriorating financial condition and a material increase in its loan-to-value ratio associated with a recent valuation of the underlying collateral. • Non-accrual loans were also significantly impacted by the loan discussed above and increased to 1.62% of total loans as of June 30, 2024 from 0.39% as of December 31, 2023. Net charge-offs were minimal in 2024. Approximately 60% of non-accrual loans were paying as agreed as of June 30, 2024. Subsequent to quarter end, one commercial loan on non-accrual totaling $1.8 million paid off in full. • Loan balances of $2.082 billion increased $8.7 million from $2.074 billion at December 31, 2023. Loan originations funded wer e $76.5 million for the six months ended June 30, 2024 , compared to $67.7 million for the same period of 2023. Payoffs were $53.0 mill ion in the six months ended June 30, 2024, compared to $46.8 million for the same period in 2023. • The tax-equivalent net interest margin was 2.51% for the six months ended June 30, 2024, compared to 2.74% for the same period in the prior year. The decrease was primarily attributed to higher deposit costs which reduced the margin by 90 basis points, partially offset by lower borrowing balances which positively impacted the margin by 38 basis points and higher loan yields which contributed 30 basis points. • Total deposits of $3.214 billion as of June 30, 2024, compared to $3.290 billion as of December 31, 2023 . Non-interest bearing depo sits made up 44.1% of total deposits as of June 30, 2024, compared to 43.8% as of December 31, 2023 . As anticipated, deposit balances rose in July 2024 with a peak of $67.0 million in growth and an ending balance $26.3 million above June 30, 2024 balances. • Total borrowings were reduced to zero representing a $26.0 million decrease from December 31, 2023, although there were intermittent borrowings averaging $8.9 million in the first six months of 2024. Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.797 billion, or 56% of total deposits and 202% of estimated uninsured and/or uncollateralized deposits as of June 30, 2024. • In the second quarter, the Bank reviewed its expense structure and eliminated some positions not viewed as critical to achieving its strategic objectives within the current operating environment. The Bank recorded severance costs in the second quarter of $243 thousand with an additional amount expected in the third Page-30 quarter related to the executive officer departure reported on July 25, 2024. The expected pre-tax cost savings for the remainder of 2024 is $876 thousand and the annualized cost savings is approximately $2.7 million. • Return on average assets ("ROA") was (2.35)% for the second quarter of 2024, compared to 0.31% for the first quarter of 2024, and return on average equity ("ROE") was (20.36)%, compared to 2.70% for the prior quarter. ROA was (1.01)% for the six months ended June 30, 2024, compared to 0.68% in the same period of the prior year. ROE was (8.79)% for the six months ended June 30, 2024 , compared to 6.65% in the same period of the prior year. The efficiency ratio for the second quarter of 2024 was (300.37)% , compared to 83.18% for the prior quarter. The efficiency ratio was 237.13% for the six months ended June 30, 2024 , compared to 67.74% in the same period of the prior year. Excluding the loss on security sales, ROA, ROE and the efficiency ratio for the first six months of 2024, would have been 0.21%, 1.83% and 84.93%, all other factors unchanged. (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 ). • Capital was above well-capitalized regulatory requirements with Bancorp's and the Bank's total risk-based capital ratios of 16.46% and 15.54%, respectively, as of June 30, 2024. Bancorp's tangible common equity to tangible assets ("TCE ratio") increased to 9.92% as of June 30, 2024, and the Bank's TCE ratio was 9.27%, consistent with prior quarter. 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 7.74% a s of June 30, 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 ). • On July 29, 2024, the Bank purchased a pool of high quality 30-year fixed rate residential mortgage loans totaling $35.7 million that is expected to yield approximately 6.30% based on our prepayment expectations. • Bancorp's share repurchase program continues to be available for up to $25.0 million, expiring on July 31, 2025. There were no repurchases through June 30, 2024 or in the 2023 year, however the Bank began repurchasing shares in August 2024 and will continue to assess opportunities to utilize the program. • The Board of Directors approved a cash dividend of $0.25 per share on July 25, 2024, which represents the 77 th consecutive quarterly dividend paid by Bancorp. The dividend is payable on August 15, 2024, to shareholders of record at the close of business on August 8, 2024. Page-31 RESULTS OF OPERATIONS Highlights of the financial results are presented in the following tables: Three months ended Six months ended (dollars in thousands, except per share data) June 30, 2024 March 31, 2024 June 30, 2024 June 30, 2023 Selected operating data: Net interest income $ 22,467 $ 22,694 $ 45,161 $ 54,029 Provision for credit losses on loans 5,200 350 5,550 850 Reversal of credit losses on unfunded loan commitments — — — (342) Non-interest income (29,755) 2,754 (27,001) 5,674 Non-interest expense 21,894 21,169 43,063 40,445 Net (loss) income (21,902) 2,922 (18,980) 13,991 Net (loss) income per common share: Basic $ (1.36) $ 0.18 $ (1.18) $ 0.88 Diluted $ (1.36) $ 0.18 $ (1.18) $ 0.87 Performance and other financial ratios: Return on average assets (2.35) % 0.31 % (1.01) % 0.68 % Return on average equity (20.36) % 2.70 % (8.79) % 6.65 % Tax-equivalent net interest margin 2.52 % 2.50 % 2.51 % 2.74 % Cost of deposits 1.45 % 1.38 % 1.41 % 0.44 % Cost of funds 1.46 % 1.38 % 1.42 % 0.82 % Efficiency ratio (300.37) % 83.18 % 237.13 % 67.74 % Net charge-offs (recoveries) $ 26 $ 21 $ 47 $ 1 Cash dividend payout ratio on common stock 1 NM 138.89 % NM 56.82 % NM - Not meaningful 1 Calculated as dividends on common shares divided by basic net (loss) income per common share. (dollars in thousands, except per share data) June 30, 2024 December 31, 2023 Selected financial condition data: Total assets $ 3,694,728 $ 3,803,903 Investment securities 1,157,527 1,477,226 Loans, net 2,051,724 2,048,548 Deposits 3,213,777 3,290,075 Short-term borrowings and other obligations 231 26,298 Stockholders' equity 434,943 439,062 Book value per share 26.72 27.17 Asset quality ratios: Allowance for credit losses on loans to total loans 1.47 % 1.21 % Allowance for credit losses on loans to non-performing loans 0.91x 3.15x Non-accrual loans to total loans 1.62 % 0.39 % Capital ratios: Equity to total assets ratio 11.77 % 11.54 % Tangible common equity to tangible assets 9.92 % 9.73 % Total capital (to risk-weighted assets) 16.46 % 16.89 % Tier 1 capital (to risk-weighted assets) 15.23 % 15.91 % Tier 1 capital (to average assets) 10.42 % 10.46 % Common equity Tier 1 capital (to risk weighted assets) 15.23 % 15.91 % Page-32 Net Interest Income Net interest income is the interest earned on loans, investments 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 tables also present net interest income, net interest margin and net interest rate spread for each period reported. Three months ended Three months ended June 30, 2024 March 31, 2024 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Interest-earning deposits with banks 1 $ 67,786 $ 924 5.39 % $ 23,439 $ 321 5.42 % Investment securities 2, 3 1,430,939 8,367 2.34 % 1,529,985 8,880 2.32 % Loans 1, 3, 4, 5 2,059,273 25,215 4.84 % 2,067,431 25,130 4.81 % Total interest-earning assets 1 3,557,998 34,506 3.84 % 3,620,855 34,331 3.75 % Cash and non-interest-bearing due from banks 37,248 35,302 Bank premises and equipment, net 7,420 7,708 Interest receivable and other assets, net 148,493 147,405 Total assets $ 3,751,159 $ 3,811,270 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 197,535 $ 274 0.56 % $ 215,001 $ 261 0.49 % Savings accounts 226,985 511 0.90 % 230,133 371 0.65 % Money market accounts 1,154,346 8,641 3.01 % 1,150,637 8,449 2.95 % Time accounts including CDARS 260,602 2,291 3.54 % 264,594 2,280 3.47 % Borrowings and other obligations 1 10,909 148 5.35 % 7,323 91 4.93 % Subordinated debenture 1, 5 — — — % — — — % Total interest-bearing liabilities 1,850,377 11,865 2.58 % 1,867,688 11,452 2.47 % Demand accounts 1,421,543 1,458,686 Interest payable and other liabilities 46,547 48,923 Stockholders' equity 432,692 435,973 Total liabilities & stockholders' equity $ 3,751,159 $ 3,811,270 Tax-equivalent net interest income/margin 1 $ 22,641 2.52 % $ 22,879 2.50 % Reported net interest income/margin 1 $ 22,467 2.50 % $ 22,694 2.48 % Tax-equivalent net interest rate spread 1.26 % 1.28 % Page-33 Six months ended Six months ended June 30, 2024 June 30, 2023 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (in thousands) Balance Expense Rate Balance Expense Rate Assets Interest-earning deposits with banks 1 $ 45,613 $ 1,245 5.40 % $ 4,217 $ 104 4.91 % Investment securities 2, 3 1,480,462 17,247 2.33 % 1,835,525 20,297 2.21 % Loans 1, 3, 4, 5 2,063,351 50,346 4.83 % 2,114,952 49,115 4.62 % Total interest-earning assets 1 3,589,426 68,838 3.79 % 3,954,694 69,516 3.50 % Cash and non-interest-bearing due from banks 36,275 38,985 Bank premises and equipment, net 7,564 8,471 Interest receivable and other assets, net 147,949 139,134 Total assets $ 3,781,214 $ 4,141,284 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 206,268 $ 535 0.52 % $ 252,110 $ 488 0.39 % Savings accounts 228,559 882 0.78 % 307,402 316 0.21 % Money market accounts 1,152,492 17,090 2.98 % 950,564 5,377 1.14 % Time accounts including CDARS 262,598 4,571 3.50 % 150,384 1,169 1.57 % Borrowings and other obligations 1 9,116 239 5.18 % 297,853 7,589 5.07 % Subordinated debenture 1, 5 — — — % — — — % Total interest-bearing liabilities 1,859,033 23,317 2.52 % 1,958,313 14,939 1.54 % Demand accounts 1,440,114 1,709,907 Interest payable and other liabilities 47,735 48,678 Stockholders' equity 434,332 424,386 Total liabilities & stockholders' equity $ 3,781,214 $ 4,141,284 Tax-equivalent net interest income/margin 1 $ 45,521 2.51 % $ 54,577 2.74 % Reported net interest income/margin 1 $ 45,161 2.49 % $ 54,029 2.72 % Tax-equivalent net interest rate spread 1.27 % 1.96 % 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. 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 Net loan origination costs in interest income totaled $436 thousand, $375 thousand, and $362 thousand for the three months ended June 30, 2024, March 31, 2024, and June 30, 2023, totaled $811 thousand and $552 thousand for the six months ended June 30, 2024 and 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. 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 day more in the six months ended June 30, 2024, compared to the six months ended June 30, 2023. Page-34 Three months ended June 30, 2024 compared to Three months ended March 31, 2024 Six months ended June 30, 2024 compared to Six months ended June 30, 2023 (in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total Interest-earning deposits with banks $ 607 $ (1) $ (3) $ 603 $ 1,021 $ 10 $ 110 $ 1,141 Investment securities 1 (575) 66 (4) (513) (3,926) 1,086 (210) (3,050) Loans 1 (99) 185 (1) 85 (1,199) 2,207 223 1,231 Total interest-earning assets (67) 250 (8) 175 (4,104) 3,303 123 (678) Interest-bearing transaction accounts (21) 37 (3) 13 (88) 162 (27) 47 Savings accounts (5) 147 (2) 140 (81) 864 (217) 566 Money market accounts 26 165 1 192 1,142 8,641 1,930 11,713 Time accounts, including CDARS (34) 46 (1) 11 872 1,435 1,096 3,403 Borrowings and other obligations 45 8 4 57 (7,358) 176 (169) (7,351) Total interest-bearing liabilities 11 403 (1) 413 (5,513) 11,278 2,613 8,378 Changes in tax-equivalent net interest income $ (78) $ (153) $ (7) $ (238) $ 1,409 $ (7,975) $ (2,490) $ (9,056) 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%. Second Quarter of 2024 Compared to the First Quarter of 2024 Net interest income totaled $22.5 million for the second quarter of 2024, compared to $22.7 million for the prior quarter. The $227 thousand decrease from the prior quarter was primarily related to an increase of $356 thousand in interest expense on deposits and slightly higher intra-quarter borrowing balances. This was partially offset by a $186 thousand increase in interest income from the reallocation of proceeds from investment security sales into higher yielding loans, securities and interest-bearing cash accounts. Quarter-over-quarter, the cost of interest-bearing deposits increased by 10 basis points to 2.56%, decelerating significantly from the 33 basis point increase in the first quarter. The tax-equivalent net interest margin was 2.52% for the second quarter of 2024, compared to 2.50% for the prior quarter. Higher loan yields contributed 6 basis points while a higher cost of deposits reduced the margin by 5 basis points. The combination of lower average investment security balances and higher average cash and borrowing balances contributed 1 basis point. First Six Months of 2024 Compared to the First Six Months of 2023 Net interest income totaled $45.2 million for the six months ended June 30, 2024, compared to $54.0 million for the same period in the prior year. The $8.9 million decrease from the prior year was primarily due to higher costing deposits and lower average balances on investments, partially offset by a lower average balance on borrowings and higher yields on loans. The tax-equivalent net interest margin was 2.51% for the six months ended June 30, 2024, compared to 2.74% for the same period in the prior year. The decrease was primarily attributed to higher deposit costs, which reduced the margin by 90 basis points, partially offset by lower borrowing balances which positively affected the margin by 38 basis points and higher loan yields contributed 30 basis points. 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 activity caused by the COVID-19 pandemic, the FOMC made two emergency federal funds rate cuts totaling 150 basis points in March 2020. The federal funds rate range remained between 0.0% and 0.25% through the beginning of 2022, putting downward pressure on our asset yields and net interest margin. Beginning in March 2022, the FOMC began successive increases to the federal funds rate due to evolving inflation risks, international political unrest, and oil and other supply chain disruptions. As a result of seven rate adjustments during 2022, the federal funds target rate range increased to between 4.25% and 4.50% at year-end 2022 and our net interest margin increased gradually over the course of the year. In 2023, on each of February 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%. Rising interest rates resulted in rapid increases in the cost of funds through rising deposit costs and Page-35 increased average borrowings, putting pressure on the net interest margin. Because market interest rates remained high for longer than many market participants anticipated, during the second quarter of 2024 we sold securities with relatively low yields and redeployed the proceeds to pay off borrowings, invest in higher yielding loans and securities, and position the balance sheet for future acquisitions of similar assets. Primarily due to declining rates of inflation and rising unemployment, many market participants now expect the Federal Reserve to begin lowering policy rates during the second half of 2024. Management and the Board are continuously monitoring and analyzing the impact of market rates on the Company's financial condition and results of operations to enhance performance, safety and soundness and returns to shareholders. 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 (dollars in thousands) June 30, 2024 March 31, 2024 June 30, 2024 June 30, 2023 Provision for credit losses on loans $ 5,200 $ 350 $ 5,550 $ 850 We recorded a $5.2 million provision for credit losses on loans in the second quarter. The provision was due primarily to an increase to the individual reserve for one non-owner occupied commercial real estate loan totaling $16.7 million placed on non-accrual during the quarter. The underlying collateral property is a multi-story office building located in San Francisco that was materially impacted by the pandemic and subsequent remote work and vacancy issues. After careful monitoring, we downgraded the credit to substandard in the fourth quarter of 2021, and have continued to evaluate the occupancy, operating income, and underlying valuation. The loan is guaranteed, and payments have always been current with enough pledged cash held at the Bank to cover payments to maturity in 2026. Nonetheless, a recent appraisal indicated that the refinance loan amount for which the property would qualify at maturity would likely be less than the payoff amount based on current rents, occupancy, and sponsorship wherewithal. Based on this consideration we chose to place the loan on non-accrual and provision for that shortfall. We recorded a $350 thousand provision for credit losses on loans in the first quarter. 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. The provision totaling $850 thousand for the six months ended June 30, 2023 was due primarily to increases in qualitative risk factors to account for continued uncertainty about inflation and recession risks, and 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. 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. Page-36 Non-interest Income The following table details the components of non-interest income. Three months ended (dollars in thousands) June 30, 2024 March 31, 2024 Amount Change Percent Change Wealth management and trust services $ 585 $ 553 $ 32 5.8 % Service charges on deposit accounts 541 529 12 2.3 % Debit card interchange fees, net 444 408 36 8.8 % Earnings on bank-owned life insurance, net 421 $ 435 (14) (3.2) % Dividends on Federal Home Loan Bank stock 366 377 (11) (2.9) % Merchant interchange fees, net 10 167 (157) (94.0) % Loss on sale of investment securities (32,542) — (32,542) NM Other income 420 285 135 47.4 % Total non-interest income $ (29,755) $ 2,754 $ (32,509) (1,180.4) % Six months ended Amount Change Percent Change (dollars in thousands) June 30, 2024 June 30, 2023 Wealth management and trust services $ 1,138 $ 1,070 $ 68 6.4 % Service charges on deposit accounts 1,070 1,053 17 1.6 % Earnings on bank-owned life insurance, net 856 1,067 (211) (19.8) % Debit card interchange fees, net 852 1,002 (150) (15.0) % Dividends on Federal Home Loan Bank stock 743 592 151 25.5 % Merchant interchange fees, net 177 260 (83) (31.9) % Loss on sale of investment securities (32,542) — (32,542) NM Other income 705 630 75 11.9 % Total non-interest income $ (27,001) $ 5,674 $ (32,675) (575.9) % NM - not meaningful Second Quarter of 2024 Compared to the First Quarter of 2024 Non-interest income showed a loss of $29.8 million for the second quarter of 2024, compared to income of $2.8 million for the prior quarter. The decrease from the prior quarter was primarily attributed to a $32.5 million pre-tax net loss on sale of available-for-sale investment securities in the second quarter as part of the balance sheet repositioning, as discussed elsewhere in this quarterly report. Excluding the loss on sale, non-interest income was $2.8 million for the second quarter, consistent with prior quarter. See the non-GAAP disclosure below. First Six Months of 2024 Compared to the First Six Months of 2023 Non-interest income showed a loss of $27.0 million for the first half of 2024, compared to income of $5.7 million for the same period of the prior year. The $32.7 million decrease from the prior year period was primarily attributed to a $32.5 million pre-tax net loss on sale of available-for-sale investment securities in the second quarter of 2024, as discussed above. Additionally, 2023 included higher bank owned life insurance income due to death benefits. Page-37 Non-interest Expense The following table details the components of non-interest expense. Three months ended (dollars in thousands) June 30, 2024 March 31, 2024 Amount Change Percent Change Salaries and related benefits $ 12,364 $ 12,084 $ 280 2.3 % Occupancy and equipment 2,049 1,969 80 4.1 % Professional services 1,043 1,078 (35) (3.2) % Data processing 1,005 1,070 (65) (6.1) % Deposit network fees 916 845 71 8.4 % Charitable contributions 604 13 591 4,546.2 % Information technology 448 402 46 11.4 % Federal Deposit Insurance Corporation insurance 426 435 (9) (2.1) % Depreciation and amortization 379 388 (9) (2.3) % Directors' expense 306 317 (11) (3.5) % Amortization of core deposit intangible 246 251 (5) (2.0) % Other real estate owned — — — N/A Other non-interest expense Advertising 324 296 28 9.5 % Other expense 1,784 2,021 (237) (11.7) % Total other non-interest expense 2,108 2,317 (209) (9.0) % Total non-interest expense $ 21,894 $ 21,169 $ 725 3.4 % Six months ended Amount Change Percent Change (dollars in thousands) June 30, 2024 June 30, 2023 Salaries and related benefits $ 24,448 $ 22,346 $ 2,102 9.4 % Occupancy and equipment 4,018 4,394 (376) (8.6) % Professional services 2,121 1,920 201 10.5 % Data processing 2,075 1,967 108 5.5 % Deposit network fees 1,761 616 1,145 185.9 % Federal Deposit Insurance Corporation insurance 861 955 (94) (9.8) % Information technology 850 727 123 16.9 % Depreciation and amortization 767 1,282 (515) (40.2) % Directors' expense 623 621 2 0.3 % Charitable contributions 617 687 (70) (10.2) % Amortization of core deposit intangible 497 685 (188) (27.4) % Other real estate owned — 48 (48) NM Other non-interest expense Advertising 621 578 43 7.4 % Other expense 3,804 3,619 185 5.1 % Total other non-interest expense 4,425 4,197 228 5.4 % Total non-interest expense $ 43,063 $ 40,445 $ 2,618 6.5 % NM - Not Meaningful Second Quarter of 2024 Compared to the First Quarter of 2024 Non-interest expense totaled $21.9 million for the second quarter of 2024, compared to $21.2 million for the prior quarter, an increase of $725 thousand. The increase included $591 thousand in charitable contributions related to our annual grant program, and $280 thousand in salaries and related benefits, which included both annual merit increases and $243 thousand severance payments related to the recent staff reduction. Last quarter included higher 401(k) contribution matching associated with the usual reset and bonus payments at the beginning of the year. Other expenses decreased by small amounts in various categories including operating expenses due to some efficiencies identified and implemented. Page-38 First Six Months of 2024 Compared to the First Six Months of 2023 Non-interest expense totaled $43.1 million for the first half of 2024 , compared to $40.4 million for the first half of 2023, an increase of $2.6 million. The most significant increase was $2.1 million in salaries and related benefits, which included an increase of 15 full-time equivalents ("FTE") on average, annual merit increases and $243 thousand severance payments related to the recent staff reduction discussed above. Stock-based compensation expenses increased due to the accelerated vesting of an officer's awards due to retirement eligibility. An additional $1.1 million in expenses and fees were associated with an increase in our customers' participation in reciprocal deposit networks to bolster their FDIC insured balances. Increases were partially offset by the combined decrease of $891 thousand in depreciation/amortization and occupancy/equipment expenses related to the 2023 acceleration of expenses related to the closure of two branches and other minor decreases in expenses. Provision for Income Taxes Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, bank-owned life insurance ("BOLI"), low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards). The income tax benefit for the second quarter of 2024 totaled $(12.5) million at a negative effective tax rate of (36.3)%, compared to a provision of $1.0 million at an effective tax rate of 25.6% in the prior quarter. The decrease in the p rovision for income taxes in the second quarter of 2024 reflected a lower pre-tax income as compared to the prior quarter. The decrease in the effective tax rate in the second quarter of 2024 was primarily due to the recording of an income tax benefit resulting from a $32.5 million pre-tax loss on the sale of available-for-sale investment securities. The income tax benefit for the first half of 2024 totaled $(11.5) million at a negative effective tax rate of (37.7)%, compared to a provision of $4.8 million at an effective tax rate of 25.4% for the first half of 2023. The decrease in the effective tax rate in the first half of 2024, as compared to the same period a year ago, was primarily due to the pre-tax loss on investment securities sale in 2024 as mentioned in the previous paragraph. We file a consolidated return in the U.S. federal tax jurisdiction and a combined return in the state of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the time of the issuance of this report. As of June 30, 2024, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits. Page-39 FINANCIAL CONDITION SUMMARY Cash, Cash Equivalents and Restricted Cash Total cash, cash equivalents and restricted cash were $231.4 million at June 30, 2024, an increase of $201.0 million compared to $30.5 million at December 31, 2023, largely due to proceeds of $292.6 million from the sale of available-for-sale securities discussed below. Investment Securities The investment securities portfolio totaled $1.158 billion at June 30, 2024, a decrease of $319.7 million from $1.477 billion at December 31, 2023. The decrease was primarily the result of the sale of $325.2 million in available-for-sale securities. The sold securities had an average book yield of 1.94%. The proceeds of the sales were allocated to $19.0 million in securities purchases with an expected yield of 5.23%, intra-quarter borrowing repayments, and loan fundings, with the remainder held in cash available for future use. In addition, there were principal repayments and maturities totaling $40.4 million, a reduction of unrealized loss on available-for-sale securities including the impact of the sales of $28.5 million, and $1.7 million in net amortization. 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 5.02 on available-for-sale securities and 5.52 on held-to-maturity securities. Both portfolios generate cash flows monthly from interest, principal amortization and payoffs, which supports the Bank's liquidity. Those cash flows totaled $28.6 million and $31.3 million in the second and first quarters of 2024, respectively. See Note 4, Investment Securities, for additional information. The following table summarizes our investment in obligations of state and political subdivisions at June 30, 2024 and December 31, 2023. June 30, 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 Within California: General obligation bonds $ 22,921 $ 18,615 14.5 % $ 24,191 $ 20,009 14.7 % Revenue bonds 2,048 1,655 1.3 3,507 2,917 2.1 Total within California 24,969 20,270 15.8 27,698 22,926 16.8 Outside California: General obligation bonds 108,200 95,670 68.6 108,846 98,139 66.3 Revenue bonds 24,691 21,948 15.6 27,692 25,014 16.9 Total outside California 132,891 117,618 84.2 136,538 123,153 83.2 Total obligations of state and political subdivisions $ 157,860 $ 137,888 100.0 % $ 164,236 $ 146,079 100.0 % Percent of investment portfolio 13.3 % 13.3 % 10.7 % 10.7 % Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (38.4%), Washington (15.8%) and Wisconsin (9.4%). 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). 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 Page-40 • 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 Loans totaled $2.082 billion as of June 30, 2024, compared to $2.074 billion as of December 31, 2023. The increase in the first six months of 2024 totaled $8.7 million, compared to $10.3 million during the six months ended June 30, 2023. Loan originations funded wer e $76.5 million for the six months ended June 30, 2024 , compared to $67.7 million for the six months ended June 30, 2023 . The pipeline has grown, and key opportunistic hires and new compensation plans have accelerated calling activity, pipeline growth and diversification. Payoffs were $53.0 mill ion in the six months ended June 30, 2024, compared to $46.8 million for the same period in 2023. The largest portion of payoffs in the first half of 2024 was the result of asset sales by customers. Non-accrual loans totaled $33.7 million, or 1.62% of the loan portfolio, at June 30, 2024, compared to $8.0 million, or 0.39% at December 31, 2023. The $25.7 million increase primarily resulted from the movement of seven relationships totaling $27.8 million to non-accrual status in the second quarter, $16.7 million of which is the non-owner occupied commercial real estate loan discussed below. Another $8.8 million relationship consisting of two commercial loans, one commercial real estate loan and one home equity loan is anticipated to pay off all related loans in full through the sale of assets in the near future. In the first six months of 2024, pay-offs and paydowns of non-accrual loans totaled $2.5 million. Of the total non-accrual loans as of June 30, 2024, approximately 60% were paying as agreed, 71% were real estate secured, and all are being closely monitored for payments or payoff. Subsequent to quarter end, one commercial loan on non-accrual totaling $1.8 million paid off in full. During the second quarter, we moved a $16.7 million non-owner occupied commercial real estate loan, mentioned above to non-accrual status. The underlying collateral property is a multi-story office building located in San Francisco that was materially impacted by the pandemic and subsequent remote work and vacancy issues. We downgraded the credit to substandard in the fourth quarter of 2021, and have continued to evaluate the occupancy, operating income, and underlying valuation. The loan is guaranteed, and payments have always been current with enough pledged cash held at the Bank to cover payments to maturity in 2026. Nonetheless, a recent appraisal indicated that the refinance loan amount for which the property would qualify at maturity would likely be less than the payoff amount based on current rents, occupancy, and sponsorship wherewithal. Based on this consideration we chose to provision for that shortfall. Bank of Marin has continued its steadfast conservative underwriting practices and, in light of current market conditions, our portfolio management and credit teams are exercising heightened vigilance for potential credit quality weakening. Classified loans increased to $54.7 million as of June 30, 2024, compared to $32.3 million as of December 31, 2023. Accruing loans past due 30 to 89 days totaled $2.2 million as of June 30, 2024, compared to $1.0 million as of December 31, 2023. We had one accruing non-owner-occupied commercial real estate loan over 90 days past due as of June 30, 2024 that has been in extended renewal negotiations, but it is secured and expected to be restored to a current payment status in the near future. Loans designated special mention, which are not considered adversely classified, decreased by $36.2 million to $99.0 million as of June 30, 2024, from $135.2 million as of December 31, 2023. Of the loans designated special mention, 99% were real estate secured. All but two of the loans, outside of not-for-profits, are guaranteed by owners or sponsors. One of the two loans had a zero balance at June 30, 2024. Net charge-offs for the first half of 2024 totaled $47 thousand, compared to net charge-offs of $1 thousand for the first half of last year. 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. Page-41 Liabilities - Deposits and Borrowings During the first six months of 2024, total liabilities decreased by $105.1 million to $3.260 billion. Deposits totaled $3.214 billion at June 30, 2024, a decrease of $76.3 million, compared to $3.290 billion at December 31, 2023. The Bank had zero outstanding borrowings at June 30, 2024 as a result of repayments with proceeds from securities sales compared to $26.0 million at December 31, 2023. Non-interest bearing deposits made up 44.1% of total deposits at June 30, 2024 , compared to 43.8% at December 31, 2023 . Additionally, the Bank's competitive and balanced approach to relationship management and focused outreach supported the addition of approximately 2 ,500 new accounts during the first half of 2024. During the first six months of 2024, outstanding borrowings decreased by $26.0 million to zero at June 30, 2024, primarily due to the strategic balance sheet repositioning and the resulting proceeds from the sale of AFS securities mentioned above. There were intermittent borrowings averaging $8.9 million in 2024, compared to $297.5 in the first half of 2023. Although available as a liquidity source, we have not utilized brokered deposits. Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and remaining borrowing capacity was $1.797 billion, or 56% of total deposits and 202% of estimated uninsured and/or uncollateralized deposits as of June 30, 2024. 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, 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. The total risk-based capital ratio for Bancorp was 16.46% at June 30, 2024, compared to 17.05% at March 31, 2024. The total risk-based capital ratio for the Bank was 15.54% at June 30, 2024, compared to 16.71% at March 31, 2024. Reductions in risk-based capital ratios were related to losses realized on securities sales. Bancorp's TCE ratio was 9.92% at June 30, 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 7.74%, compared to 7.80% at December 31, 2023. 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 ). Page-42 The Bancorp’s and Bank’s capital adequacy ratios as of June 30, 2024 and December 31, 2023 are presented in the following tables. Bancorp Capital Ratios (dollars in thousands) Actual Adequately Capitalized Threshold 1 Threshold to be a Well Capitalized Bank Holding Company June 30, 2024 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 421,184 16.46 % $ 268,752 10.50 % $ 255,954 10.00 % Tier 1 Capital (to risk-weighted assets) $ 389,821 15.23 % $ 217,561 8.50 % $ 204,763 8.00 % Tier 1 Leverage Capital (to average assets) $ 389,821 10.42 % $ 149,686 4.00 % $ 187,107 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 389,821 15.23 % $ 179,168 7.00 % $ 166,370 6.50 % December 31, 2023 Total Capital (to risk-weighted assets) $ 440,842 16.89 % $ 274,002 10.50 % $ 260,954 10.00 % Tier 1 Capital (to risk-weighted assets) $ 415,224 15.91 % $ 221,811 8.50 % $ 208,763 8.00 % Tier 1 Leverage Capital (to average assets) $ 415,224 10.46 % $ 158,771 4.00 % $ 198,464 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 415,224 15.91 % $ 182,668 7.00 % $ 169,620 6.50 % Bank Capital Ratios (dollars in thousands) Actual Adequately Capitalized Threshold 1 Threshold to be Well Capitalized under Prompt Corrective Action Provisions June 30, 2024 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 397,781 15.54 % $ 268,710 10.50 % $ 255,914 10.00 % Tier 1 Capital (to risk-weighted assets) $ 366,418 14.32 % $ 217,527 8.50 % $ 204,731 8.00 % Tier 1 Leverage Capital (to average assets) $ 366,418 9.79 % $ 149,672 4.00 % $ 187,090 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 366,418 14.32 % $ 179,140 7.00 % $ 166,344 6.50 % December 31, 2023 Total Capital (to risk-weighted assets) $ 433,598 16.62 % $ 273,986 10.50 % $ 260,939 10.00 % Tier 1 Capital (to risk-weighted assets) $ 407,981 15.64 % $ 221,798 8.50 % $ 208,751 8.00 % Tier 1 Leverage Capital (to average assets) $ 407,981 10.28 % $ 158,767 4.00 % $ 198,459 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 407,981 15.64 % $ 182,657 7.00 % $ 169,610 6.50 % 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 Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies. The Bank has long-established minimum liquidity requirements that are regularly monitored using metrics and tools similar to those used by larger banks, such as the liquidity coverage ratio, and multi-scenario, long-horizon stress tests. Our 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. Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.797 billion, or 56% of total deposits and 202% of estimated uninsured and/or uncollateralized deposits as of June 30, 2024. Page-43 The following table details the components of our contingent liquidity sources as of June 30, 2024. (in thousands) Total Available Amount Used Net Availability Internal Sources Unrestricted cash 1 $ 201,854 N/A $ 201,854 Unencumbered securities at market value 193,462 N/A 193,462 External Sources FHLB line of credit 941,699 $ — 941,699 FRB line of credit 335,397 — 335,397 Lines of credit at correspondent banks 125,000 — 125,000 Total Liquidity $ 1,797,412 $ — $ 1,797,412 1 Excludes cash items in transit. Note: Brokered deposits available through third party networks are not included above. We obtain funds from the repayment and maturity of loans, deposit inflows, investment securities sales, maturities and paydowns, federal funds purchases, FRB and FHLB advances, other borrowings, and cash flow from operations. Although available as a liquidity source, we have not chosen 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, share repurchases and operating expenses. Customer deposits are a significant component of our daily liquidity position. The attraction and retention of new deposits depend 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 increased $201.0 million in the first six months of 2024. The most significant sources of liquidity during the first six months of 2024 were proceeds of $333.0 million from principal paydowns, maturities and sales of investment securities and $7.8 million in net cash provided by operating activities. Significant uses of liquidity during the first six months of 2024 were $76.3 million in net withdrawals of deposits, $26.0 million in repayments of short-term borrowings, $19.0 million in investment securities purchased, $8.9 million in loan originations and advances, net of principal collected, and $8.1 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. Unfunded loan commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $472.1 million at June 30, 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. Over the next twelve months, $252.4 million of time deposits will mature. We expect to replace these funds with new deposits or excess liquidity. We believe our emphasis on local deposits, combined with our immediately available funding sources, provides a very stable base for our liquidity needs. We had no borrowings under our credit facilities of at June 30, 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. 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 Bank recently received approval for a dividend of $19.0 million which was paid to Bancorp on June 24, 2024. The primary uses of funds for Bancorp are shareholder dividends, share repurchases and ordinary operating expenses. Bancorp held $23.1 million in cash at June 30, 2024, which is expected to cover cash needs beyond January 1, 2025 when the calculation of dividend approval requirements will be reset. Page-44 Statement Regarding use of Non-GAAP Financial Measures Financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures. Management believes that, given industry turmoil that largely began in the first quarter of 2023, 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. In addition, management believes that providing selected financial measures excluding the loss on sale of securities discussed above is useful to investors as the strategic short-term loss taken for long-term profitability makes the operational performance difficult to compare to other periods. 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 for their entirety, as filed with the Securities and Exchange Commission, and not to rely on any single financial measure. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below. Reconciliation of GAAP and Non-GAAP Financial Measures (in thousands, unaudited) June 30, 2024 December 31, 2023 Tangible Common Equity - Bancorp Total stockholders' equity $ 434,943 439,062 Goodwill and core deposit intangible (76,023) (76,520) Total TCE a 358,920 362,542 Unrealized losses on HTM securities, net of tax 1 (93,600) (86,500) Unrealized losses on HTM securities included in AOCI, net of tax 2 8,222 8,761 TCE, net of unrealized losses on HTM securities (non-GAAP) b $ 273,542 $ 284,803 Total assets $ 3,694,728 3,803,903 Goodwill and core deposit intangible (76,023) (76,520) Total tangible assets c 3,618,705 3,727,383 Unrealized losses on HTM securities, net of tax 1 (93,600) (86,500) Unrealized losses on HTM securities included in AOCI, net of tax 2 8,222 8,761 Total tangible assets, net of unrealized losses on HTM securities (non-GAAP) d $ 3,533,327 $ 3,649,644 Bancorp TCE ratio a / c 9.9 % 9.7 % Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP) b / d 7.7 % 7.8 % 1 Unrealized losses on held-to-maturity securities as of June 30, 2024 and December 31, 2023 of $132.9 million and $122.8 million, respectively, including the unrealized losses that resulted from the transfer of securities from AFS to HTM, net of an estimated $39.3 million and $36.3 million, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%. 2 The remaining unrealized losses that resulted from the transfer of securities from AFS to HTM, net of an estimated $3.5 million and $3.7 million, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56% are added back as they are already included in AOCI. Page-45 (in thousand, unaudited) Three months ended Six months ended Net (loss) income June 30, 2024 March 31, 2024 June 30, 2024 June 30, 2023 Net (loss) income (GAAP) $ (21,902) $ 2,922 $ (18,980) $ 13,991 Adjustments: Losses on sale of investment securities 32,542 — 32,542 — Income tax benefit (9,620) — (9,620) — Adjustments, net of taxes 22,922 — 22,922 — Comparable net income (non-GAAP) $ 1,020 $ 2,922 $ 3,942 $ 13,991 Diluted (loss) earnings per share Weighted average diluted shares 16,108 16,092 16,095 16,008 Diluted (loss) earnings per share (GAAP) $ (1.36) $ 0.18 $ (1.18) $ 0.87 Comparable diluted earnings per share (non-GAAP) $ 0.06 $ 0.18 $ 0.24 $ 0.87 Return on average assets Average assets $ 3,751,159 $ 3,811,270 $ 3,781,214 $ 4,141,284 Return on average assets (GAAP) (2.35) % 0.31 % (1.01) % 0.68 % Comparable return on average assets (non-GAAP) 0.11 % 0.31 % 0.21 % 0.68 % Return on average equity Average stockholders' equity $ 432,692 $ 435,973 $ 434,332 $ 424,386 Return on average equity (GAAP) (20.36) % 2.70 % (8.79) % 6.65 % Comparable return on average equity (non-GAAP) 0.95 % 2.70 % 1.83 % 6.65 % Efficiency ratio Non-interest expense $ 21,894 $ 21,169 $ 43,063 $ 40,445 Net interest income $ 22,467 $ 22,694 $ 45,161 $ 54,029 Non-interest income (GAAP) $ (29,755) $ 2,754 $ (27,001) $ 5,674 Losses on sale of investment securities 32,542 — 32,542 — Non-interest income (non-GAAP) $ 2,787 $ 2,754 $ 5,541 $ 5,674 Efficiency ratio (GAAP) (300.37) % 83.18 % 237.13 % 67.74 % Comparable efficiency ratio (non-GAAP) 86.70 % 83.18 % 84.93 % 67.74 %