What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-08 compared with 2024-08-08 · 205 added, 201 removed, 409 unchanged (50% of the section changed)

9 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.

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;

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, 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;

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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.

Net income for the third quarter of 2024 was $4.6 million, compared to net loss of $21.9 million for the second quarter of 2024.

Diluted earnings per share was $0.28 for the third quarter of 2024, compared to loss per share of $(1.36) for the preceding quarter.

Net loss for the first nine months of 2024 totaled $14.4 million, compared to net income of $19.3 million for the same period last year.

Diluted (loss) earnings per share was $(0.90) and $1.20 for the first nine months of 2024 and 2023, respectively.

Both the prior quarter and year-to-date 2024 results reflected a $32.5 million pre-tax loss from the 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.

• 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.

• The tax-equivalent net interest margin increased to 2.70% in the third quarter from 2.52% in the prior quarter, reflecting the addition of higher average earning assets from the second quarter balance sheet restructuring, including new loans funded and purchased at yields higher than both the portfolio average yield and loans that paid off.

The tax-equivalent net interest margin was 2.57% for the nine months ended September 30, 2024, compared to 2.66% for the same period in the prior year.

The nine basis point decrease was primarily attributed to higher deposit costs, partially offset by lower borrowing balances and higher earning asset yields, including new loans funded and purchased at higher yields than both the average portfolio yield and loans that paid off.

• Total deposits increased by $19.2 million to $3.309 billion as of September 30, 2024, compared to $3.290 billion as of December 31, 2023.

Non-interest bearing deposits made up 44.5% of total deposits as of September 30, 2024, compared to 43.8% as of December 31, 2023.

• The average cost of total deposits increased one basis point to 1.46% in the third quarter, compared to a seven basis point increase in the prior quarter.

After a targeted effort to begin reducing rates was initiated mid-August, the average spot rate on non-deposit-network, interest-bearing deposits declined 18 bps while balances went up approximately $10.0 million by September 30th.

The average cost of total deposits was 1.43% for the first nine months of 2024, compared to 0.61% in 2023, primarily due to market interest rates remaining high for longer than anticipated.

• Total borrowings were reduced to zero in the second quarter and remained there for the third quarter representing a $26.0 million decrease from December 31, 2023, although there were intermittent borrowings averaging $5.9 million in the first nine months of 2024.

Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.934 billion, or 58% of total deposits and 208% of estimated uninsured and/or uncollateralized deposits as of September 30, 2024.

• Loan balances of $2.090 billion increased $16.4 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

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.

Additions to the loan portfolio in the first nine months of 2024 totaled $140.4 million which consisted of loan originations of $104.7 million and the purchase of a residential real estate loan pool totaling $35.7 million, compared to $90.3 million for the same period of 2023.

Payoffs were $83.9 million in the nine months ended September 30, 2024, compared to $59.5 million for the same period last year.

The largest portion of payoffs in the first nine months of 2024 was the result of asset sales and cash payoffs.

• There was a $5.6 million provision for credit losses on loans in the first nine months of 2024, compared to a provision of $1.3 million for the same period last year, bringing the allowance for credit losses to 1.47% of total loans, compared to 1.16% and 1.21% as of September 30, 2023 and December 31, 2023, respectively.

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 due to a material increase in its loan-to-value ratio associated with a recent valuation of the underlying collateral.

Net charge-offs were minimal in 2024.

• Non-accrual loans were also significantly impacted by the loan relationship discussed above and increased to $39.9 million, or 1.91% of total loans at September 30, 2024, compared to $8.0 million, or 0.39% at December 31, 2023.

Three loan relationships accounted for $35.3 million of the $36.7 million in loans placed on non-accrual in the nine months ended September 30, 2024.

Approximately 50% of non-accrual loans were paying as agreed and 80% were real estate secured as of September 30, 2024.

One commercial loan that was on non-accrual status totaling $1.8 million paid off in full, including all accrued interest in the third quarter of 2024, contributing to the $4.7 million in total non-accrual payoffs and paydowns year-to-date.

• Return on average assets ("ROA") was 0.48% for the third quarter of 2024, compared to (2.35)% for the second quarter of 2024, and return on average equity ("ROE") was 4.17%, compared to (20.36)% for the prior quarter.

ROA was (0.51)% for the nine months ended September 30, 2024, compared to 0.63% in the same period of the prior year.

ROE was (4.43)% for the nine months ended September 30, 2024, compared to 6.07% in the same period of the prior year.

• The efficiency ratio for the third quarter of 2024 was 75.18%, compared to (300.37)% for the prior quarter.

The efficiency ratio was 140.08% for the nine months ended September 30, 2024, compared to 69.37% in the same period of the prior year.

Excluding the loss on security sales with all other factors unchanged, ROA, ROE and the efficiency ratio for the first nine months of 2024, would have been 0.30%, 2.62% and 81.53%, respectively.

• Capital was above well-capitalized regulatory thresholds with Bancorp's and the Bank's total risk-based capital ratios of 16.40% and 15.82%, respectively, as of September 30, 2024.

The capital plan and point-in-time capital stress tests indicate that Bank of Marin and Bancorp capital ratios will remain above regulatory well-capitalized and internal policy minimums throughout a five-year forecast horizon and across stress scenarios such as additional unrealized losses on the investment portfolio, additional deposit growth or decline, loan credit quality deterioration, and potential share repurchases.

• Bancorp's tangible common equity to tangible assets ("TCE ratio") was 9.72% as of September 30, 2024, and the Bank's TCE ratio was 9.32%.

While we do not intend to sell our held-to-maturity securities, the Bancorp's TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized 1 , was 8.16% as of September 30, 2024, compared to 7.80% as of December 31, 2023.

• Bancorp repurchased $4.2 million in shares during the quarter, contributing to an increase in the book value per share to $27.17 at September 30, 2024, compared to $26.72 at June 30, 2024, and the tangible book value per share 2 to $22.46 at September 30, 2024 compared to $22.05 at June 30, 2024.

• Non-interest expense in the third quarter of 2024, included an accrual for a non-recurring legal resolution of a Private Attorneys General Act/putative class action lawsuit covering the period of December 11, 2019 to October 12, 2024 of $615 thousand, pre-tax, with an after-tax estimated $0.04 impact to earnings-per-share.

• The Board of Directors approved a cash dividend of $0.25 per share on October 24, 2024, which represents the 78 th consecutive quarterly dividend paid by Bancorp.

The dividend is payable on November 14, 2024, to shareholders of record at the close of business on November 7, 2024.

1 Refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled S tatement Regarding Use of Non-GAAP Financial Measures.

2 Tangible book value per share is a non-GAAP financial measure used by Bancorp, as well as investors and analysts, in assessing Bancorp’s use of equity.

Refer to the reconciliation of common equity to tangible common equity and resulting calculation of tangible book value per share in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures.

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

Three months ended Nine months ended

(dollars in thousands, except per share data) September 30, 2024 June 30, 2024 September 30, 2024 September 30, 2023

Selected operating data:

3 unchanged sentences

Reversal of credit losses on unfunded loan commitments

(233) — (233) (342)

Non-interest income 2,888 (29,755) (24,113) 8,272

Non-interest expense 20,417 21,894 63,480 60,192

Net (loss) income (21,902) 2,922 (18,980) 13,991

Net (loss) income per common share:

Net income (loss)

4,570 (21,902) (14,410) 19,285

Net income (loss) per common share:

Basic $ 0.28 $ (1.36) $ (0.90) $ 1.21

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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

1 Calculated as dividends on common shares divided by basic net income (loss) per common share.

(dollars in thousands, except per share data) September 30, 2024 December 31, 2023

Selected financial condition data:

6 unchanged sentences

Book value per share 27.17 27.17

Tangible book value per share 1

Asset quality ratios:

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Common equity Tier 1 capital (to risk weighted assets) 15.18 % 15.91 %

1 Tangible book value per share is a non-GAAP financial measure used by Bancorp, as well as investors and analysts, in assessing Bancorp’s use of equity.

Net Interest Income

13 unchanged sentences

Three months ended Three months ended

June 30, 2024 March 31, 2024

September 30, 2024 June 30, 2024

Interest Interest

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206 1 2.32 % 10,909 148 5.35 %

Subordinated debenture 1, 5

— — — % — — — %

Total interest-bearing liabilities 1,820,737 12,050 2.63 % 1,850,377 11,865 2.58 %

8 unchanged sentences

Tax-equivalent net interest rate spread 1.41 % 1.26 %

Six months ended Six months ended

June 30, 2024 June 30, 2023

Nine months ended Nine months ended

September 30, 2024 September 30, 2023

Interest Interest

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6,125 240 5.15 % 260,973 10,182 5.14 %

Subordinated debenture 1, 5

— — — % — — — %

Total interest-bearing liabilities 1,846,174 35,367 2.56 % 1,955,090 25,574 1.75 %

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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.

5 Net loan origination costs in interest income totaled $436 thousand for both the three months ended September 30, 2024 and June 30, 2024, and totaled $1.2 million and $927 thousand for the nine months ended September 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.

1 unchanged sentence

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.

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

Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one day more in the three and nine months ended September 30, 2024, compared to the three months ended June 30, 2024, and nine months ended September 30, 2023.

Three months ended September 30, 2024 compared to Three months ended

June 30, 2024

Nine months ended September 30, 2024 compared to Nine months ended

September 30, 2023

(in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total

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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.

Third Quarter of 2024 Compared to the Second Quarter of 2024

Net interest income totaled $24.3 million for the third quarter of 2024, a $1.8 million increase from the prior quarter related to the favorable reallocation of earning assets from lower yielding investments to higher yielding cash, loans and investments.

The tax-equivalent net interest margin was 2.70% for the third quarter of 2024, compared to 2.52% for the prior quarter.

Higher average cash and loan balances, and lower average borrowing balances contributed a combined 31 basis points lift, while lower average investment security balances and higher cost of deposits reduced margin by 11 basis points.

First Nine Months of 2024 Compared to the First Nine Months of 2023

Net interest income totaled $69.4 million for the nine months ended September 30, 2024, compared to $78.5 million for the same period in the prior year.

The $9.1 million decrease from the prior year was primarily due to a smaller balance sheet and higher costing deposits, partially offset by lower borrowing costs and higher average earning asset yields.

The tax-equivalent net interest margin was 2.57% for the nine months ended September 30, 2024, compared to 2.66% for the same period in the prior year.

The decrease was primarily attributed to higher deposit costs which reduced the margin by 77 basis points, partially offset by higher loan yields contributing 32 basis points and lower borrowing balances which positively affected the margin by 33 basis points.

Higher interest-earning deposits with banks and decreased investment security balances netted a positive effect of six basis points.

Market Interest Rates

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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

increased average borrowings, putting pressure on the net interest margin.

The FOMC began increasing rates in March 2022, totaling seven rate increases in 2022 and four additional rate increases in 2023, ended the year of 2023 at a federal funds target rate range between 5.25% and

Rising interest rates resulted in rapid increases in the cost of funds through rising deposit costs and increased average borrowings, putting pressure on our 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.

Primarily due to declining inflation and rising unemployment, the Federal Reserve lowered the target for the federal funds rate by 50 basis points, to a range of 4.75% to 5.00% at its September 2024 meeting and indicated that more rate cuts are likely in the coming months.

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.

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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

Three months ended Nine months ended

(dollars in thousands) September 30, 2024 June 30, 2024 September 30, 2024 September 30, 2023

Provision for credit losses on loans $ — $ 5,200 $ 5,550 $ 1,275

There was no provision for credit losses on loans in the third quarter.

Minor qualitative risk factor adjustments and loan growth in several segments with lower reserve rates in the quarter were offset by balance declines in other segments with higher reserve rates, as well as a slight improvement in the economic forecast.

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.

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 challenges.

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.

2 unchanged sentences

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.

The provision totaling $1.3 million for the nine months ended September 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.

2 unchanged sentences

Three months ended

(dollars in thousands) June 30, 2024 March 31, 2024 Amount Change Percent Change

(dollars in thousands) September 30, 2024 June 30, 2024 Amount Change Percent Change

Wealth management and trust services $ 706 $ 585 $ 121 20.7 %

Service charges on deposit accounts 543 541 2 0.4 %

Debit card interchange fees, net 444 408 36 8.8 %

Earnings on bank-owned life insurance, net 426 421 5 1.2 %

Debit card interchange fees, net 423 444 (21) (4.7) %

Dividends on Federal Home Loan Bank stock 365 366 (1) (0.3) %

Merchant interchange fees, net 67 10 57 570.0 %

Loss on sale of investment securities (32,542) — (32,542) NM

Gains (losses) on sale of investment securities

1 (32,542) 32,543 NM

Other income 357 420 (63) (15.0) %

Total non-interest income $ 2,888 $ (29,755) $ 32,643 (109.7) %

Six months ended Amount Change Percent Change

(dollars in thousands) June 30, 2024 June 30, 2023

Nine months ended Amount Change Percent Change

(dollars in thousands) September 30, 2024 September 30, 2023

Wealth management and trust services

5 unchanged sentences

Merchant interchange fees, net 244 377 (133) (35.3) %

Loss on sale of investment securities

Gains (losses) on sale of investment securities

(32,541) 14 (32,555) NM

2 unchanged sentences

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.

Third Quarter of 2024 Compared to the Second Quarter of 2024

Non-interest income was $2.9 million for the third quarter of 2024, compared to a loss of $29.8 million for the prior quarter.

The increase 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 discussed previously.

Excluding the loss on sale, non-interest income was $2.8 million for the second quarter.

See the Statement Regarding use of Non-GAAP Financial Measures below.

The quarter over quarter increase of $100 thousand excluding the loss on sale was primarily due to a $121 thousand increase in wealth management and trust services income.

First Nine Months of 2024 Compared to the First Nine Months of 2023

Non-interest income showed a loss of $24.1 million for the nine months ended September 30, 2024, compared to income of $8.3 million for the same period of the prior year.

The $32.4 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, as discussed previously.

Excluding the loss on sale, non-interest income was $8.4 million for the nine months ended September 30, 2024.

See the Statement Regarding use of Non-GAAP Financial Measures below.

Non-interest Expense

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Three months ended

(dollars in thousands) June 30, 2024 March 31, 2024 Amount Change Percent Change

(dollars in thousands) September 30, 2024 June 30, 2024 Amount Change Percent Change

Salaries and related benefits $ 10,822 $ 12,364 $ (1,542) (12.5) %

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Deposit network fees 927 916 11 1.2 %

Charitable contributions 604 13 591 4,546.2 %

Information technology 448 402 46 11.4 %

Federal Deposit Insurance Corporation insurance 582 426 156 36.6 %

Information technology 404 448 (44) (9.8) %

Depreciation and amortization 358 379 (21) (5.5) %

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Amortization of core deposit intangible 241 246 (5) (2.0) %

Other real estate owned — — — N/A

Other non-interest expense

Charitable contributions 30 604 (574) (95.0) %

Advertising 178 324 (146) (45.1) %

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Total non-interest expense $ 20,417 $ 21,894 $ (1,477) (6.7) %

Six months ended Amount Change Percent Change

(dollars in thousands) June 30, 2024 June 30, 2023

Nine months ended Amount Change Percent Change

(dollars in thousands) September 30, 2024 September 30, 2023

Salaries and related benefits $ 35,270 $ 33,087 $ 2,183 6.6 %

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Directors' expense 916 893 23 2.6 %

Charitable contributions 617 687 (70) (10.2) %

Amortization of core deposit intangible 738 1,020 (282) (27.6) %

Charitable contributions 647 707 (60) (8.5) %

Other real estate owned — 48 (48) NM

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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.

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.

Third Quarter of 2024 Compared to the Second Quarter of 2024

Non-interest expense totaled $20.4 million for the third quarter of 2024, compared to $21.9 million for the prior quarter, a decrease of $1.5 million.

The decrease was primarily due to a $1.5 million reduction in salaries and related benefits, which was elevated in the second quarter due to the reduction in force and the related severance and salaries costs.

At the same time we have redeployed resources to ensure staffing is aligned with our long-term strategic vision, which resulted in the reduction in average full-time equivalent staff quarter over quarter.

Additional third quarter decreases came from $574 thousand in charitable contributions as the annual grant program is paid out each year in the second quarter, as well as a $375 thousand reduction in other expense.

These reductions were partially offset by an $836 thousand increase in professional services expense that included an accrual for a non-recurring legal resolution of a Private Attorneys General Act/putative class action lawsuit of $615 thousand, pre-tax, with an after-tax estimated $0.04 impact to earnings-per-share.

First Nine Months of 2024 Compared to the First Nine Months of 2023

Non-interest expense totaled $63.5 million for the nine months ended September 30, 2024 , compared to $60.2 million for the same period of 2023 , an increase of $3.3 million.

The most significant increase was $2.2 million in salaries and related benefits, which included annual merit increases and $418 thousand in 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.

Additionally, professional services increased by $1.3 million and deposit network fees increased by $845 thousand.

Increases were partially offset by reductions in depreciation and amortization of $580 thousand, amortization of core deposit intangible of $282 thousand, and occupancy and equipment expenses of $252 thousand.

Provision for Income Taxes

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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.

The income tax provision for the third quarter of 2024 totaled $2.4 million at an effective tax rate of 34.5%, compared to a benefit of $12.5 million at an effective tax rate of 36.3% in the prior quarter.

The increase in the provision for income taxes in the third quarter of 2024 reflected a higher pre-tax income as compared to the prior quarter.

The decrease in the effective tax rate in the third 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 in the prior quarter.

The income tax benefit for the first nine months of 2024 totaled $9.1 million at an effective tax rate of 38.6%, compared to a provision of $6.4 million at an effective tax rate of 24.8% for the first nine months of 2023.

The increase in the effective tax rate in the first nine months 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.

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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.

As of September 30, 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

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.

Total cash, cash equivalents and restricted cash were $229.2 million at September 30, 2024, an increase of $198.7 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 in the second quarter and deposit growth, partially offset by purchases of investment securities and the residential real estate loan pool 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 investment securities portfolio totaled $1.257 billion at September 30, 2024, a decrease of $220.2 million from $1.477 billion at December 31, 2023.

The decrease was primarily the result of the sale of available-for-sale securities totaling $325.2 million in the second quarter of 2024.

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.

The proceeds of the sales were allocated to $133.5 million in securities purchases in the second and third quarters, borrowing repayments, and loan purchases and fundings, with the remainder held in cash available for future use.

In addition, there were principal repayments, calls and maturities totaling $63.2 million, a reduction of unrealized loss on available-for-sale securities including the impact of the sales of $36.6 million, and $1.9 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.

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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.

Those cash flows totaled $91.9 million in the first nine months of 2024.

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

The following table summarizes our investment in obligations of state and political subdivisions at September 30, 2024 and December 31, 2023.

September 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

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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 .

Loans totaled $2.090 billion as of September 30, 2024, compared to $2.074 billion as of December 31, 2023.

The increase in the first nine months of 2024 totaled $16.4 million, compared to a $5.6 million decrease during the nine months ended September 30, 2023.

Additions to the loan portfolio in the first nine months of 2024 totaled $140.4 million and consisted of loan originations of $104.7 million and the purchase of a residential real estate loan pool totaling $35.7 million , compared to $90.3 million for the same period ended September 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.

Payoffs were $83.9 mill ion in the nine months ended September 30, 2024, compared to $59.5 million for the same period in 2023.

In addition, amortization from scheduled payments and utilization of credit lines accounted for the remainder of the change in total loans.

The largest portion of payoffs in the first nine months of 2024 was the result of asset sales and cash payoffs by customers.

Non-accrual loans totaled $39.9 million, or 1.91% of the loan portfolio, at September 30, 2024, compared to $8.0 million, or 0.39% at December 31, 2023.

The $31.9 million increase in 2024 primarily resulted from the movement of three loans totaling $8.5 million to non-accrual status in the third quarter, and seven relationships totaling $27.8 million in the second quarter.

In the third quarter, the movement of $8.5 million to non-accrual status consisted mainly of an $8.1 million non-owner occupied commercial real estate loan whose renewal negotiations remain ongoing with no expectations for actual losses.

During the second quarter, the $27.8 million increase primarily resulted from the addition of a $16.7 million non-owner occupied commercial real estate loan discussed below and another $8.8 million relationship consisting of two commercial loans, one commercial real estate loan and one home equity loan.

The $8.8 million relationship is anticipated to significantly pay down through the sale of assets in the near future.

The underlying collateral property of the $16.7 million non-owner occupied commercial real estate loan, mentioned above 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.

In connection with that continued evaluation, we determined that the loan, although current, has experienced a deteriorating financial condition due to a material increase in its loan-to-value ratio associated with a recent valuation of underlying collateral.

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.

In the first nine months of 2024, pay-offs and paydowns of non-accrual loans totaled $4.7 million.

Of the total non-accrual loans as of September 30, 2024, approximately 50% were paying as agreed, 80% were real estate secured, and all are being closely monitored for payments or payoff.

Bank of Marin has continued its 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 $52.4 million as of September 30, 2024, compared to $32.3 million as of December 31, 2023.

The $20.1 million increase was largely due to $26.8 million in downgrades, partially offset by $5.9 million in payoffs and paydowns and $827 thousand upgraded to pass.

Loans designated special mention, which are not considered adversely classified, decreased by $45.7 million to $89.5 million as of September 30, 2024, from $135.2 million as of December 31, 2023.

The decrease was largely due to net migrations out of special mention to both pass and classified risk ratings including downgrades which we are closely monitoring and actively managing.

Of the loans designated special mention, 90% 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.

Net charge-offs for the first nine months of 2024 totaled $47 thousand, compared to net recoveries of $2 thousand for the same period of 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

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.

During the first nine months of 2024, total liabilities decreased by $9.0 million to $3.356 billion.

Deposits totaled $3.309 billion at September 30, 2024, an increase of $19.2 million, compared to $3.290 billion at December 31, 2023.

The Bank had zero outstanding borrowings at September 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 44.5% of total deposits at September 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 3,700 new accounts during the first nine months of 2024.

During the first nine months of 2024, outstanding borrowings decreased by $26.0 million to zero at September 30, 2024, primarily due to the strategic balance sheet repositioning in the second quarter and the resulting proceeds from the sale of AFS securities mentioned above.

There were intermittent borrowings averaging $5.9 million in 2024, compared to $260.6 million in the first nine months 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.

Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and remaining borrowing capacity was $1.934 billion, or 58% of total deposits and 208% of estimated uninsured and/or uncollateralized deposits as of September 30, 2024.

Balances in the reciprocal deposit network program increased $17.7 million during the nine months ended September 30, 2024 to $441.2 million from $423.5 million as of December 31, 2023.

Capital Adequacy

We are subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.

Failure to meet minimum capital requirements as set forth in the following tables can trigger 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.

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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.

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, 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.

The total risk-based capital ratio for Bancorp was 16.40% at September 30, 2024, compared to 16.89% at December 31, 2023.

The total risk-based capital ratio for the Bank was 15.82% at September 30, 2024, compared to 16.62% at December 31, 2023.

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 tangible common equity to tangible assets ("TCE ratio") was 9.72% at September 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 1 , was 8.16%, 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 ).

The Bancorp’s and Bank’s capital adequacy ratios as of June 30, 2024 and December 31, 2023 are presented in the following tables.

Management believes this non-GAAP measure is important because it reflects the level of capital available to withstand drastic changes in market conditions .

1 Refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled S tatement Regarding Use of Non-GAAP Financial Measures.

The Bancorp’s and Bank’s capital adequacy ratios as of September 30, 2024 and December 31, 2023 are presented in the following tables.

Bancorp Capital Ratios

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Threshold to be a Well Capitalized Bank Holding Company

June 30, 2024 Amount Ratio Amount Ratio Amount Ratio

September 30, 2024 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 418,381 16.40 % $ 267,794 10.50 % $ 255,042 10.00 %

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Threshold to be Well Capitalized under Prompt Corrective Action Provisions

June 30, 2024 Amount Ratio Amount Ratio Amount Ratio

September 30, 2024 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 403,539 15.82 % $ 267,760 10.50 % $ 255,009 10.00 %

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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.

The following table details the components of our contingent liquidity sources as of June 30, 2024.

Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity totaled $1.934 billion, or 58% of total deposits and 208% of estimated uninsured and/or uncollateralized deposits as of September 30, 2024.

The following table details the components of our contingent liquidity sources as of September 30, 2024.

(in thousands) Total Available Amount Used Net Availability

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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.

Our primary uses of funds are the origination of loans, the purchase of investment securities and loans, 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 attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength.

The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.

Our cash and cash equivalents 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.

Our cash and cash equivalents increased $198.7 million in the first nine months of 2024.

The most significant sources of liquidity during the first nine months of 2024 were proceeds of $355.9 million from principal paydowns, maturities, calls and sales of investment securities, $19.2 million from net increase of deposits and $17.7 million in net cash provided by operating activities.

Significant uses of liquidity during the first nine months of 2024 were $133.5 million in investment securities purchased, $26.0 million in repayments of short-term borrowings, and $16.4 million in purchased loan pool, loan originations, and unfunded loan commitment advances, net of principal collected.

Additionally, other uses included $12.2 million in cash dividends paid on common stock to our shareholders and $4.2 million in common stock repurchases.

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.

Unfunded loan commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $454.2 million at September 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, $262.6 million of time deposits will mature.

We expect to replace these funds with new deposits or excess liquidity.

We expect that a high percentage of these funds will remain with the Bank either through renewals or shifts to other deposit products.

Any outflows can be absorbed by the Bank's 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.

We had no borrowings under our credit facilities at September 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 Bank received approval from the State of California - Department of Financial Protection and Innovation on May 30, 2024, 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.

$14.6 million in cash at September 30, 2024, which is expected to cover cash needs well into the second quarter of 2025,

Statement Regarding use of Non-GAAP Financial Measures

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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.

Because there are limits to the usefulness of this or any other non-GAAP measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the Securities and Exchange Commission, and not to rely on any single financial measure.

A reconciliation of the 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

(in thousands, except per share amounts;

September 30, 2024 December 31, 2023

Tangible Common Equity - Bancorp

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Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP) b / d 8.2 % 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.

(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)

Tangible Book Value Per Share

Common shares outstanding

16,083 16,158

Losses on sale of investment securities

Book value per share

$ 27.17 $ 27.17

Income tax benefit (9,620) — (9,620) —

Tangible book value per share

$ 22.46 $ 22.44

1 Unrealized losses on held-to-maturity securities as of September 30, 2024 and December 31, 2023 of $100.6 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 $29.8 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 $3.3 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.

(in thousands, except per share amounts;

Three months ended Nine months ended

Net income (loss)

September 30, 2024 June 30, 2024 September 30, 2024 September 30, 2023

Net income (loss) (GAAP)

$ 4,570 $ (21,902) $ (14,410) $ 19,285

Losses on sale of investment securities from portfolio repositioning — 32,542 32,542 —

Related income tax benefit — (9,620) (9,620) —

Adjustments, net of taxes — 22,922 22,922 —

Comparable net income (non-GAAP) $ 4,570 $ 1,020 $ 8,512 $ 19,285

Diluted (loss) earnings per share

Diluted earnings (loss) per share

Weighted average diluted shares 16,066 16,108 16,076 16,017

Diluted (loss) earnings per share (GAAP)

Diluted earnings (loss) per share (GAAP)

$ 0.28 $ (1.36) $ (0.90) $ 1.20

12 unchanged sentences

Non-interest income (GAAP) $ 2,888 $ (29,755) $ (24,113) $ 8,272

Losses on sale of investment securities

32,542 — 32,542 —

Losses on sale of investment securities from portfolio repositioning — 32,542 32,542 —

Non-interest income (non-GAAP) $ 2,888 $ 2,787 $ 8,429 $ 8,272

2 unchanged sentences

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.

What changed 10-Q

Item 2. Management’s Discussion and Analysis