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 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; 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-31 Executive Summary 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. • 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. 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. Page-32 • 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. 1 • 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. Page-33 RESULTS OF OPERATIONS Highlights of the financial results are presented in the following tables: 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: Net interest income $ 24,269 $ 22,467 $ 69,430 $ 78,497 Provision for credit losses on loans — 5,200 5,550 1,275 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 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 Diluted $ 0.28 $ (1.36) $ (0.90) $ 1.20 Performance and other financial ratios: Return on average assets 0.48 % (2.35) % (0.51) % 0.63 % Return on average equity 4.17 % (20.36) % (4.43) % 6.07 % Tax-equivalent net interest margin 2.70 % 2.52 % 2.57 % 2.66 % Cost of deposits 1.46 % 1.45 % 1.43 % 0.61 % Cost of funds 1.46 % 1.46 % 1.43 % 0.94 % Efficiency ratio 75.18 % (300.37) % 140.08 % 69.37 % Net charge-offs (recoveries) $ — $ 26 $ 47 $ (2) Cash dividend payout ratio on common stock 1 89.29 % NM NM 61.98 % NM - Not meaningful 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: Total assets $ 3,792,833 $ 3,803,903 Investment securities 1,256,992 1,477,226 Loans, net 2,059,416 2,048,548 Deposits 3,309,249 3,290,075 Short-term borrowings and other obligations 193 26,298 Stockholders' equity 436,960 439,062 Book value per share 27.17 27.17 Tangible book value per share 1 22.46 22.44 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 0.77x 3.15x Non-accrual loans to total loans 1.91 % 0.39 % Capital ratios: Equity to total assets ratio 11.52 % 11.54 % Tangible common equity to tangible assets 9.72 % 9.73 % Total capital (to risk-weighted assets) 16.40 % 16.89 % Tier 1 capital (to risk-weighted assets) 15.18 % 15.91 % Tier 1 capital (to average assets) 10.42 % 10.46 % 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. 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. Page-34 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 September 30, 2024 June 30, 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 $ 238,378 $ 3,242 5.32 % $ 67,786 $ 924 5.39 % Investment securities 2, 3 1,207,545 7,661 2.54 % 1,430,939 8,367 2.34 % Loans 1, 3, 4, 5 2,091,146 25,588 4.79 % 2,059,273 25,215 4.84 % Total interest-earning assets 1 3,537,069 36,491 4.04 % 3,557,998 34,506 3.84 % Cash and non-interest-bearing due from banks 37,448 37,248 Bank premises and equipment, net 7,181 7,420 Interest receivable and other assets, net 181,962 148,493 Total assets $ 3,763,660 $ 3,751,159 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 177,929 $ 339 0.76 % $ 197,535 $ 274 0.56 % Savings accounts 227,179 565 0.99 % 226,985 511 0.90 % Money market accounts 1,147,786 8,714 3.02 % 1,154,346 8,641 3.01 % Time accounts including CDARS 267,637 2,431 3.61 % 260,602 2,291 3.54 % Borrowings and other obligations 1 206 1 2.32 % 10,909 148 5.35 % Total interest-bearing liabilities 1,820,737 12,050 2.63 % 1,850,377 11,865 2.58 % Demand accounts 1,460,011 1,421,543 Interest payable and other liabilities 47,267 46,547 Stockholders' equity 435,645 432,692 Total liabilities & stockholders' equity $ 3,763,660 $ 3,751,159 Tax-equivalent net interest income/margin 1 $ 24,441 2.70 % $ 22,641 2.52 % Reported net interest income/margin 1 $ 24,269 2.68 % $ 22,467 2.50 % Tax-equivalent net interest rate spread 1.41 % 1.26 % Page-35 Nine months ended Nine months ended September 30, 2024 September 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 $ 110,337 $ 4,487 5.34 % $ 28,710 $ 1,159 5.32 % Investment securities 2, 3 1,388,825 24,907 2.39 % 1,797,054 29,731 2.21 % Loans 1, 3, 4, 5 2,072,684 75,934 4.81 % 2,108,840 73,938 4.62 % Total interest-earning assets 1 3,571,846 105,328 3.87 % 3,934,604 104,828 3.51 % Cash and non-interest-bearing due from banks 36,669 38,641 Bank premises and equipment, net 7,436 8,457 Interest receivable and other assets, net 159,369 137,428 Total assets $ 3,775,320 $ 4,119,130 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 196,752 $ 874 0.59 % $ 244,688 $ 758 0.41 % Savings accounts 228,096 1,447 0.85 % 293,709 545 0.25 % Money market accounts 1,150,911 25,804 2.99 % 982,729 11,365 1.55 % Time accounts including CDARS 264,290 7,002 3.54 % 172,991 2,724 2.11 % Borrowings and other obligations 1 6,125 240 5.15 % 260,973 10,182 5.14 % Total interest-bearing liabilities 1,846,174 35,367 2.56 % 1,955,090 25,574 1.75 % Demand accounts 1,446,795 1,689,615 Interest payable and other liabilities 47,578 49,819 Stockholders' equity 434,773 424,606 Total liabilities & stockholders' equity $ 3,775,320 $ 4,119,130 Tax-equivalent net interest income/margin 1 $ 69,961 2.57 % $ 79,254 2.66 % Reported net interest income/margin 1 $ 69,430 2.55 % $ 78,497 2.63 % Tax-equivalent net interest rate spread 1.31 % 1.76 % 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 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. Page-36 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 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 Interest-earning deposits with banks $ 2,325 $ (12) $ 5 $ 2,318 $ 3,295 $ 4 $ 29 $ 3,328 Investment securities 1 (1,306) 710 (110) (706) (6,754) 2,496 (566) (4,824) Loans 1 390 (291) 274 373 (1,268) 3,038 226 1,996 Total interest-earning assets 1,409 407 169 1,985 (4,727) 5,538 (311) 500 Interest-bearing transaction accounts (27) 98 (6) 65 (149) 325 (60) 116 Savings accounts — 47 7 54 (122) 1,311 (287) 902 Money market accounts (49) 27 95 73 1,945 10,588 1,906 14,439 Time accounts, including CDARS 62 48 30 140 1,438 1,842 998 4,278 Borrowings and other obligations (145) (96) 94 (147) (9,943) 7 (6) (9,942) Total interest-bearing liabilities (159) 124 220 185 (6,831) 14,073 2,551 9,793 Changes in tax-equivalent net interest income $ 1,568 $ 283 $ (51) $ 1,800 $ 2,104 $ (8,535) $ (2,862) $ (9,293) 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%. 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 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. 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 Page-37 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 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 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. 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 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 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. 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. 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. Page-38 Non-interest Income The following table details the components of non-interest income. Three months ended (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 % 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 % 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) % Nine months ended Amount Change Percent Change (dollars in thousands) September 30, 2024 September 30, 2023 Wealth management and trust services $ 1,844 $ 1,585 $ 259 16.3 % Service charges on deposit accounts 1,613 1,561 52 3.3 % Earnings on bank-owned life insurance, net 1,282 1,438 (156) (10.8) % Debit card interchange fees, net 1,275 1,458 (183) (12.6) % Dividends on Federal Home Loan Bank stock 1,108 916 192 21.0 % Merchant interchange fees, net 244 377 (133) (35.3) % Gains (losses) on sale of investment securities (32,541) 14 (32,555) NM Other income 1,062 923 139 15.1 % Total non-interest income $ (24,113) $ 8,272 $ (32,385) (391.5) % NM - not meaningful 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. Page-39 Non-interest Expense The following table details the components of non-interest expense. Three months ended (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) % Occupancy and equipment 2,097 2,049 48 2.3 % Professional services 1,879 1,043 836 80.2 % Data processing 1,051 1,005 46 4.6 % Deposit network fees 927 916 11 1.2 % 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) % Directors' expense 293 306 (13) (4.2) % Amortization of core deposit intangible 241 246 (5) (2.0) % Charitable contributions 30 604 (574) (95.0) % Advertising 178 324 (146) (45.1) % Other expense 1,555 1,784 (229) (12.8) % Total other non-interest expense 1,733 2,108 (375) (17.8) % Total non-interest expense $ 20,417 $ 21,894 $ (1,477) (6.7) % 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 % Occupancy and equipment 6,115 6,367 (252) (4.0) % Professional services 4,000 2,677 1,323 49.4 % Data processing 3,126 2,976 150 5.0 % Deposit network fees 2,688 1,843 845 45.8 % Federal Deposit Insurance Corporation insurance 1,443 1,424 19 1.3 % Information technology 1,254 1,138 116 10.2 % Depreciation and amortization 1,125 1,705 (580) (34.0) % Directors' expense 916 893 23 2.6 % 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 Other non-interest expense Advertising 799 897 (98) (10.9) % Other expense 5,359 5,410 (51) (0.9) % Total other non-interest expense 6,158 6,307 (149) (2.4) % Total non-interest expense $ 63,480 $ 60,192 $ 3,288 5.5 % NM - Not Meaningful 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. Page-40 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. 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 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 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. 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 September 30, 2024, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits. Page-41 FINANCIAL CONDITION SUMMARY Cash, Cash Equivalents and Restricted Cash 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 $1.257 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 $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. The portfolios are comprised of high credit quality investments with average effective durations of 3.58 on available-for-sale securities and 5.35 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 $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 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 Within California: General obligation bonds $ 22,899 $ 19,480 14.5 % $ 24,191 $ 20,009 14.7 % Revenue bonds 2,047 1,728 1.3 3,507 2,917 2.1 Total within California 24,946 21,208 15.8 27,698 22,926 16.8 Outside California: General obligation bonds 107,874 97,694 68.5 108,846 98,139 66.3 Revenue bonds 24,641 22,440 15.7 27,692 25,014 16.9 Total outside California 132,515 120,134 84.2 136,538 123,153 83.2 Total obligations of state and political subdivisions $ 157,461 $ 141,342 100.0 % $ 164,236 $ 146,079 100.0 % Percent of investment portfolio 12.3 % 12.1 % 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 (15.7%) 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-42 • 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 $2.090 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 $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. 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. 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. Page-43 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-44 Liabilities - Deposits and Borrowings 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 $1.934 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 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. 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 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 16.40% 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 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 . 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. Page-45 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 (dollars in thousands) Actual Adequately Capitalized Threshold 1 Threshold to be a Well Capitalized Bank Holding Company 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 % Tier 1 Capital (to risk-weighted assets) $ 387,221 15.18 % $ 216,785 8.50 % $ 204,033 8.00 % Tier 1 Leverage Capital (to average assets) $ 387,221 10.42 % $ 148,706 4.00 % $ 185,882 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 387,221 15.18 % $ 178,529 7.00 % $ 165,777 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 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 % Tier 1 Capital (to risk-weighted assets) $ 372,379 14.60 % $ 216,758 8.50 % $ 204,007 8.00 % Tier 1 Leverage Capital (to average assets) $ 372,379 10.02 % $ 148,692 4.00 % $ 185,866 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 372,379 14.60 % $ 178,506 7.00 % $ 165,756 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 totaled $1.934 billion, or 58% of total deposits and 208% of estimated uninsured and/or uncollateralized deposits as of September 30, 2024. Page-46 The following table details the components of our contingent liquidity sources as of September 30, 2024. (in thousands) Total Available Amount Used Net Availability Internal Sources Unrestricted cash 1 $ 204,889 N/A $ 204,889 Unencumbered securities at market value 302,336 N/A 302,336 External Sources FHLB line of credit 923,582 $ — 923,582 FRB line of credit 377,813 — 377,813 Lines of credit at correspondent banks 125,000 — 125,000 Total Liquidity $ 1,933,620 $ — $ 1,933,620 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 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 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 $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 $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 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 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 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 Page-47 $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 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 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, except per share amounts; unaudited) September 30, 2024 December 31, 2023 Tangible Common Equity - Bancorp Total stockholders' equity $ 436,960 $ 439,062 Goodwill and core deposit intangible (75,782) (76,520) Total TCE a 361,178 362,542 Unrealized losses on HTM securities, net of tax 1 (70,837) (86,500) Unrealized losses on HTM securities included in AOCI, net of tax 2 7,951 8,761 TCE, net of unrealized losses on HTM securities (non-GAAP) b $ 298,292 $ 284,803 Total assets $ 3,792,833 $ 3,803,903 Goodwill and core deposit intangible (75,782) (76,520) Total tangible assets c 3,717,051 3,727,383 Unrealized losses on HTM securities, net of tax 1 (70,837) (86,500) Unrealized losses on HTM securities included in AOCI, net of tax 2 7,951 8,761 Total tangible assets, net of unrealized losses on HTM securities (non-GAAP) d $ 3,654,165 $ 3,649,644 Bancorp TCE ratio a / c 9.7 % 9.7 % Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP) b / d 8.2 % 7.8 % Tangible Book Value Per Share Common shares outstanding e 16,083 16,158 Book value per share $ 27.17 $ 27.17 Tangible book value per share a / e $ 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. Page-48 (in thousands, except per share amounts; unaudited) 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 Adjustments: 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 earnings (loss) per share Weighted average diluted shares 16,066 16,108 16,076 16,017 Diluted earnings (loss) per share (GAAP) $ 0.28 $ (1.36) $ (0.90) $ 1.20 Comparable diluted earnings per share (non-GAAP) $ 0.28 $ 0.06 $ 0.53 $ 1.20 Return on average assets Average assets $ 3,763,660 $ 3,751,159 $ 3,775,320 $ 4,119,130 Return on average assets (GAAP) 0.48 % (2.35) % (0.51) % 0.63 % Comparable return on average assets (non-GAAP) 0.48 % 0.11 % 0.30 % 0.63 % Return on average equity Average stockholders' equity $ 435,645 $ 432,692 $ 434,773 $ 424,606 Return on average equity (GAAP) 4.17 % (20.36) % (4.43) % 6.07 % Comparable return on average equity (non-GAAP) 4.17 % 0.95 % 2.62 % 6.07 % Efficiency ratio Non-interest expense $ 20,417 $ 21,894 $ 63,480 $ 60,192 Net interest income $ 24,269 $ 22,467 $ 69,430 $ 78,497 Non-interest income (GAAP) $ 2,888 $ (29,755) $ (24,113) $ 8,272 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 Efficiency ratio (GAAP) 75.18 % (300.37) % 140.08 % 69.37 % Comparable efficiency ratio (non-GAAP) 75.18 % 86.70 % 81.53 % 69.37 %