What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2025-05-12 compared with 2024-11-08 · 156 added, 289 removed, 325 unchanged (58% of the section changed)

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.

Management's discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related unaudited consolidated interim financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our 2024 Annual Report on Form 10-K.

Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

6 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 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;

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 the Trump administration's approach to tariffs and trade, 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;

15 unchanged sentences

Allowance for Credit Losses on Loans and Unfunded Commitments, Fair Value Measurements, and Goodwill.

Refer to Critical Accounting Estimates in Item 7 of our 2024 Form 10-K for more information.

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.

Net income for the first quarter of 2025 was $4.9 million, compared to net income of $6.0 million for the fourth quarter of 2024.

Diluted earnings per share was $0.30 for the first quarter of 2025, compared to diluted earnings per share of $0.38 for the preceding quarter and $0.18 for the same quarter a year ago.

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.

• 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 tax-equivalent net interest margin increased to 2.86% in the first quarter of 2025 from 2.80% in the prior quarter, reflecting reductions in deposit interest rates.

The tax-equivalent net interest margin was 2.50% for the same period in the prior year.

The 36 basis point increase year over year was due to securities repositioning, the pay off of borrowings and the reduction of deposit costs.

• Total deposits increased by $82.0 million to $3.302 billion as of March 31, 2025, compared to $3.220 billion as of December 31, 2024 however, some seasonal outflow is expected in early second quarter.

Non-interest bearing deposits made up 43.2% of total deposits as of March 31, 2025, compared to 43.5% as of December 31, 2024.

• The average cost of total deposits decreased 7 basis points to 1.29% in the first quarter of 2025.

The average cost of interest bearing deposits decreased 17 basis points to 2.27% in the first quarter of 2025.

This reflected strategic deposit interest rate pricing adjustments with limited rate related outflows, as well as deposit growth.

• Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.917 billion, or 58% of total deposits and 203% of estimated uninsured and/or uncollateralized deposits as of March 31, 2025.

• Loan balances of $2.074 billion decreased $9.7 million from $2.083 billion at December 31, 2024.

Additions to the loan portfolio in the first quarter of 2025 reflected loan fundings of $47.4 million and payoffs of $25.5 million.

Loan amortization from scheduled repayments totaled $20.5 million and net utilization of credit lines decreased by $9.5 million during the first quarter of 2025.

• There was a $75 thousand provision for credit losses on loans in the first three months of 2025, and no provision in the previous quarter, bringing the allowance for credit losses to 1.44% of total loans as of March 31, 2025, compared to 1.47% as of December 31, 2024.

• Non-accrual loans decreased to $32.9 million, or 1.59% of total loans at March 31, 2025, compared to $33.9 million, or 1.63% at December 31, 2024.

The reduction in non-accrual balances included a $2.1 million non-owner occupied real estate loan sale that included a charge-off of $809 thousand.

Approximately 57% of non-accrual loans were paying as agreed and 90% were real estate secured as of March 31, 2025.

• Return on average assets ("ROA") was 0.53% for the first quarter of 2025, compared to 0.63% for the fourth quarter of 2024, and return on average equity ("ROE") was 4.52% for the first quarter of 2025, compared to 5.48% for the prior quarter.

• The efficiency ratio for the first quarter of 2025 was 76.44%, compared to 65.53% for the prior quarter.

The increase was primarily due to increased salary and benefit expense and contributions expense during the quarter.

• Capital was above well-capitalized regulatory thresholds with Bancorp's and the Bank's total risk-based capital ratios of 16.69% and 16.45%, respectively, as of March 31, 2025.

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.

• Bancorp's tangible common equity to tangible assets ("TCE ratio") was 9.82% as of March 31, 2025, and the Bank's TCE ratio was 9.66%.

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 8.08% as of March 31, 2025, compared to 7.85% as of December 31, 2024.

• The Board of Directors approved a cash dividend of $0.25 per share on April 24, 2025, which represents the 80 th consecutive quarterly dividend paid by Bancorp.

The dividend is payable on May 15, 2025, to shareholders of record at the close of business on May 8, 2025.

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 Nine months ended

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

Three months ended

(dollars in thousands, except per share data) March 31, 2025 December 31, 2024 March 31, 2024

Selected operating data:

1 unchanged sentence

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 2,874 2,753 2,754

Non-interest expense 21,264 18,338 21,169

Net income (loss)

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

Net income (loss) per common share:

Net income 4,876 6,001 2,922

Net income per common share:

Basic $ 0.31 $ 0.38 $ 0.18

8 unchanged sentences

Efficiency ratio 76.44 % 65.53 % 83.18 %

Net charge-offs (recoveries) $ — $ 26 $ 47 $ (2)

Net charge-offs $ 825 $ 19 $ 21

Cash dividend payout ratio on common stock 1

89.29 % NM NM 61.98 %

NM - Not meaningful

80.65 % 65.79 % 138.89 %

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

(dollars in thousands, except per share data) March 31, 2025 December 31, 2024

Selected financial condition data:

1 unchanged sentence

Investment securities 1,240,649 1,266,733

Loans, net 2,059,416 2,048,548

Loans, net of allowance for credit losses on loans

2,043,642 2,052,600

Deposits 3,301,971 3,220,015

Short-term borrowings and other obligations 193 26,298

Borrowings and other obligations

Stockholders' equity 439,566 435,407

3 unchanged sentences

Allowance for credit losses on loans to total loans 1.44 % 1.47 %

Allowance for credit losses on loans to non-performing loans 0.77x 3.15x

Allowance for credit losses on loans to non-accrual loans

Non-accrual loans to total loans 1.59 % 1.63 %

Classified loans (graded substandard and doubtful) as a percentage of total loans 2.77 % 2.17 %

Capital ratios:

21 unchanged sentences

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

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 %

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

Three months ended Three months ended Three months ended

March 31, 2025 December 31, 2024 March 31, 2024

Interest Interest Interest

Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/

(dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate

Interest-earning deposits with banks 1

33 unchanged sentences

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.

5 Net loan origination costs in interest income totaled $364 thousand, $341 thousand, and $375 thousand for the three months ended March 31, 2025, December 31, 2024, and March 31, 2024, 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 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

Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including two days less in the three months ended March 31, 2025, compared to the three months ended December 31, 2024, and one day less in the first three months of 2025, compared to the first three months of 2024.

Three months ended March 31, 2025 compared to three months ended

December 31, 2024

Three months ended March 31, 2025 compared to three months ended

March 31, 2024

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

13 unchanged sentences

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.

First Quarter of 2025 compared to the Fourth Quarter of 2024

Net interest income totaled $24.9 million for the first quarter of 2025, a $284 thousand decrease from the prior quarter related to the decrease of $36.3 million in average earning assets including an $8.0 million decrease in average loan balances over the quarter, reducing interest income by $1.2 million.

This was significantly offset by the reduction of interest expense of $1.0 million despite average interest-bearing deposit growth of $7.2 million over the quarter.

Average money market balances increased by 2.20% and average time deposits decreased by 11.31% while the average cost of those deposits decreased by 17 and 31 basis points, respectively, due to relationship-focused rate management, contributing to the reduced costs.

The tax-equivalent net interest margin was 2.86% for the first quarter of 2025, compared to 2.80% for the prior quarter.

Lower cost of funds, as referenced above, contributed 7 basis points, while lower average interest-earning deposit balances with banks and the December fed funds rate cut of 25 basis points, reducing the earning power on those deposits, reduced margin by 5 basis points.

Minor changes in the loan and investment mix contributed to the margin by 2 basis points each, resulting in the 6 basis point margin expansion.

First Quarter of 2025 compared to the First Quarter of 2024

Net interest income totaled $24.9 million for the three months ended March 31, 2025, compared to $22.7 million for the same period in the prior year.

The $2.3 million increase from the prior year was primarily due to higher average earning asset yields and lower cost of deposits.

The tax-equivalent net interest margin was 2.86% for the three months ended March 31, 2025, compared to 2.50% for the same period in the prior year.

The increase of 36 basis points was primarily attributed to higher interest-earning deposit balances with banks and higher yields on investment securities resulting from the sale of lower yielding investment securities, which contributed 16 basis points.

In addition, higher average loan balances and yields and lower deposit costs provided a positive impact of 14 and 7 basis points, respectively.

Market Interest Rates

6 unchanged sentences

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.

Primarily due to declining inflation, the Federal Reserve lowered the target for the federal funds rate by 100 basis points, to a range of 4.25% to 4.50% in the later months of 2024.

In the first quarter of 2025, the FOMC left rates unchanged in the January 29th and March 19th meetings due to projected slower economic growth and higher inflation by year-end.

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.

4 unchanged sentences

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

Three months ended

(dollars in thousands) March 31, 2025 December 31, 2024 March 31, 2024

Provision for credit losses on loans $ 75 $ — $ 350

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.

We recorded a $75 thousand provision for credit losses on loans in the first quarter of 2025.

Modest deterioration in economic forecast, effects from the noted charge-offs, and the pooled and individual total loan balance declines this quarter contributed to the provision.

We recorded no provision for credit losses on loans in the fourth quarter of 2024.

We recorded a provision totaling $350 thousand for the three months ended March 31, 2024.

This was primarily due 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.

1 unchanged sentence

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

Three months ended Quarter over quarter Year over year

(dollars in thousands) March 31, 2025 December 31, 2024 March 31, 2024 Amount Change Percent Change Amount Change Percent Change

Wealth management and trust services $ 563 $ 576 553 $ (13) (2.3) % $ 10 1.8 %

$ 1,844 $ 1,585 $ 259 16.3 %

Service charges on deposit accounts 548 551 529 (3) (0.5) % 19 3.6 %

4 unchanged sentences

Gains (losses) on sale of investment securities

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

— — — — NM — NM

Other income 352 318 285 34 10.7 % 67 23.5 %

Total non-interest income $ 2,874 $ 2,753 $ 2,754 $ 121 4.4 % $ 120 4.4 %

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.

First Quarter of 2025 Compared to the Fourth Quarter of 2024

Non-interest income was $2.9 million for the first quarter of 2025, compared to income of $2.8 million for the prior quarter.

The increase from the prior quarter was primarily attributable to bank owned life insurance dividend income and a $71 thousand life insurance death benefit.

First Quarter of 2025 Compared to the First Quarter of 2024

Non-interest income was $2.9 million for the first quarter of 2025, compared to income of $2.8 million for the same period of the prior year.

The $120 thousand increase from the prior year period was primarily attributed to bank owned life insurance dividend income and other life insurance income.

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

Three months ended Year over year

(dollars in thousands) March 31, 2025 December 31, 2024 March 31, 2024 Amount Change Percent Change Amount Change Percent Change

Salaries and related benefits $ 12,050 $ 9,413 $ 12,084 $ 2,637 28.0 % $ (34) (0.3) %

Occupancy and equipment 2,106 2,127 1,969 (21) (1.0) % 137 7.0 %

Professional services 1,879 1,043 836 80.2 %

Data processing 1,136 1,096 1,070 40 3.6 % 66 6.2 %

Professional services 937 1,129 1,078 (192) (17.0) % (141) (13.1) %

Deposit network fees 932 838 845 94 11.2 % 87 10.3 %

Federal Deposit Insurance Corporation insurance 582 426 156 36.6 %

Information technology 413 432 402 (19) (4.4) % 11 2.7 %

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 403 30 12 373 1,243.3 % 391 3,258.3 %

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 388 420 435 (32) (7.6) % (47) (10.8) %

Information technology 1,254 1,138 116 10.2 %

Depreciation and amortization 322 341 388 (19) (5.6) % (66) (17.0) %

1 unchanged sentence

Amortization of core deposit intangible 227 237 251 (10) (4.2) % (24) (9.6) %

Charitable contributions 647 707 (60) (8.5) %

Other real estate owned — 48 (48) NM

Other non-interest expense

3 unchanged sentences

Total non-interest expense $ 21,264 $ 18,338 $ 21,169 $ 2,926 16.0 % $ 95 0.4 %

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.

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.

First Quarter of 2025 Compared to the Fourth Quarter of 2024

Non-interest expense totaled $21.3 million for the first quarter of 2025, compared to $18.3 million for the prior quarter, an increase of $2.9 million.

Salaries and related benefits increased $2.6 million, due to various factors, both in prior and current quarter.

Last quarter, incentive, stock-based compensation and profit sharing accrual

adjustments reduced expenses.

In the first quarter of 2025, there was an increase to the 401(k) contribution matching associated with the usual reset, lower deferred loan origination costs, bonus accruals based on budget, stock-based compensation grants and increased salary costs due to new talent acquisition.

In order to better serve the timing needs of our non-profit communities, the bulk of our charitable contributions were pulled forward into the first quarter from the second quarter.

In the first quarter, we incurred $403 thousand of contributions expense which compares to $30 thousand in the fourth quarter of 2024 and $12 thousand in the first quarter of 2024.

First Quarter of 2025 Compared to the First Quarter of 2024

Non-interest expense totaled $21.3 million for the three months ended March 31, 2025 , compared to $21.2 million for the same period of 2024 , an increase of $95 thousand.

This was primarily due to an increase of $391 thousand in charitable contributions and an increase of $137 thousand in occupancy expenses, offset by a decrease in professional services expense of $141 thousand and a net decrease of $292 thousand in all other expenses.

Provision for Income Taxes

1 unchanged sentence

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.

The income tax provision for the first quarter of 2025 totaled $1.6 million at an effective tax rate of 24.8%, compared to a provision of $3.6 million at an effective tax rate of 37.8% in the prior quarter.

The decrease in the provision for income taxes in the first quarter of 2025 reflected lower pre-tax income as compared to the prior quarter.

The decrease in the effective tax rate in the first quarter of 2025 was primarily due to the treatment of certain permanent tax differences while in a loss position for the 2024 tax year.

We file a consolidated return in the U.S.

1 unchanged sentence

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.

As of March 31, 2025, 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 $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.

Total cash, cash equivalents and restricted cash were $259.9 million at March 31, 2025, an increase of $122.6 million compared to $137.3 million at December 31, 2024, driven by growth in deposits totaling $82.0 million and proceeds from paydowns and maturities of investment securities of $63.0 million offset by purchases of investment securities of $33.6 million.

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.

The investment securities portfolio totaled $1.241 billion at March 31, 2025, a decrease of $26.1 million from $1.267 billion at December 31, 2024.

The decrease was primarily the result of principal repayments and maturities totaling $63.0 million, offset by $33.6 million available-for-sale securities purchases and a $3.3 million improvement in unrealized losses on available for sale securities.

Both the available-for-sale and held-to-maturity portfolios are eligible for pledging to FHLB or the Federal Reserve as collateral for borrowings.

1 unchanged sentence

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.

Those cash flows totaled $72.8 million in the first three months of 2025.

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

The following table summarizes our investment in obligations of state and political subdivisions at March 31, 2025 and December 31, 2024.

March 31, 2025 December 31, 2024

(dollars in thousands) Amortized Cost Fair Value % of Total State and Political Subdivisions Amortized Cost Fair Value % of Total State and Political Subdivisions

19 unchanged sentences

Loans and Credit Quality

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.

Loans totaled $2.074 billion as of March 31, 2025, compared to $2.083 billion as of December 31, 2024.

The decrease in the first three months of 2025 totaled $9.7 million, compared to an $18.8 million decrease during the three months ended March 31, 2024.

Loan originations for the first quarter were $63.6 million ($47.4 million funded) including $50.2 million ($43.2 million funded) in commercial loans, which includes commercial and industrial, commercial real estate and construction.

Funded commercial loans were more than five times those funded in the first quarter of prior year.

The fourth quarter of 2024 included originations of $69.4 million ($47.1 million funded) and the first quarter of the prior year included total originations of $25.3 million ($12.4 million funded).

Payoffs were $25.5 million in the three months ended March 31, 2025, compared to $36.7 million for the fourth quarter of 2024.

In addition, amortization from scheduled payments totaled $20.5 million and net utilization of credit lines decreased by $9.5 million during the first quarter of 2025.

Non-accrual loans totaled $32.9 million, or 1.59% of the loan portfolio, at March 31, 2025, compared to $33.9 million, or 1.63% at December 31, 2024.

The $1.0 million decrease in non-accrual balances reflected a $2.1 million non-owner occupied real estate loan sale that incurred a charge-off of $809 thousand, net paydowns of $370 thousand, one payoff of $100 thousand and two charged off loans totaling $16 thousand, partially offset by the addition of four loans totaling $1.7 million.

Of the total non-accrual loans as of March 31, 2025, approximately 57% were paying as agreed, 90% 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.

Classified loans increased to $57.4 million as of March 31, 2025, compared to $45.1 million as of December 31, 2024.

The $12.3 million increase was largely due to downgrades of one $7.1 million commercial relationship and two non-owner occupied real estate relationships totaling $7.2 million, partially offset by the sale of a $2.1 million non-owner occupied real estate loan.

Loans designated special mention, which are not considered adversely classified, decreased by $20.0 million to $88.9 million as of March 31, 2025, from $108.9 million as of December 31, 2024.

The decrease was largely due to $14.2 million in downgrades to substandard risk rating and contractual paydowns and payoffs totaling $6.0 million.

Of the loans designated special mention, 100% 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.

Net charge-offs for the three months ended March 31, 2025 totaled $825 thousand, including the $809 thousand charge-off of an acquired commercial non-owner occupied real estate loan the Bank had previously reserved $449 thousand for as of December 31, 2024.

There was an additional decline in the financial condition of the borrower and guarantor and the value of the collateral during the first quarter that led to the Bank proactively selling the note in March rather than pursuing the additional costly steps of liquidating after foreclosure.

It had been on non-accrual since late 2023.

This compared to net charge-offs of $19 thousand for the fourth quarter of 2024.

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 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.

During the first three months of 2025, total liabilities increased by $78.7 million to $3.345 billion.

Deposits totaled $3.302 billion at March 31, 2025, an increase of $82.0 million, compared to $3.220 billion at December 31, 2024.

Non-interest bearing deposits made up 43.2% of total deposits at March 31, 2025 , compared to 43.5% at December 31, 2024 .

Additionally, the Bank's competitive and balanced approach to relationship management and focused outreach supported the addition of approximately 1,000 new accounts during the three months ended March 31, 2025.

We had no outstanding borrowings at March 31, 2025 and December 31, 2024.

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.

Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and total available borrowing capacity was $1.917 billion, or 58% of total deposits and 203% of estimated uninsured and/or uncollateralized deposits as of March 31, 2025.

the reciprocal deposit network program were $435.9 million and $404.7 million at March 31, 2025 and December 31, 2024, respectively.

Capital Adequacy

6 unchanged sentences

For all periods presented, the Bank’s ratios exceed the regulatory definition of “well capitalized” under the regulatory framework for prompt corrective action and Bancorp’s ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company.

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.

In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of March 31, 2025.

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.

The total risk-based capital ratio for Bancorp was 16.69% at March 31, 2025, compared to 16.54% at December 31, 2024.

The total risk-based capital ratio for the Bank was 16.45% at March 31, 2025, compared to 16.13% at December 31, 2024.

Bancorp's tangible common equity to tangible assets ("TCE ratio") was 9.82% at March 31, 2025, compared to 9.93% at December 31, 2024.

Bancorp's TCE ratio, net of after tax unrealized losses on held-to-maturity securities 1 , was 8.08%, compared to 7.85% at December 31, 2024.

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.

The Bancorp’s and Bank’s capital adequacy ratios as of March 31, 2025 and December 31, 2024 are presented in the following tables.

Bancorp Capital Ratios

2 unchanged sentences

Threshold to be a Well Capitalized Bank Holding Company

September 30, 2024 Amount Ratio Amount Ratio Amount Ratio

March 31, 2025 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 421,685 16.69 % $ 265,264 10.50 % $ 252,632 10.00 %

7 unchanged sentences

Common Equity Tier 1 (to risk-weighted assets) $ 389,448 15.32 % $ 177,994 7.00 % $ 165,280 6.50 %

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.

Bank Capital Ratios

2 unchanged sentences

Threshold to be Well Capitalized under Prompt Corrective Action Provisions

September 30, 2024 Amount Ratio Amount Ratio Amount Ratio

March 31, 2025 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 415,633 16.45 % $ 265,228 10.50 % $ 252,598 10.00 %

16 unchanged sentences

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.

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

Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity totaled $1.917 billion or 58% of total deposits and 203% of estimated uninsured and/or uncollateralized deposits as of March 31, 2025.

The following table details the components of our contingent liquidity sources as of March 31, 2025.

(in thousands) Total Available Amount Used Net Availability

13 unchanged sentences

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.

Our primary uses of funds are the origination of loans, the purchase of investment securities and loans, withdrawals of deposits, maturities 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 attraction and retention of deposits depend upon the variety and effectiveness of our customer account products, service and convenience,

rates paid to customers, and our financial strength.

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

Our cash and cash equivalents increased $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.

Our cash and cash equivalents increased $122.6 million in the first three months of 2025.

The most significant sources of liquidity during the first three months of 2025 were proceeds of $82.0 million from net increase of deposits, $63.0 million from principal paydowns, calls and maturities of investment securities, loan payoffs of $25.5 million, $20.5 million in amortization of principal and a net $9.5 million decrease in utilization of credit lines, in addition to $4.9 million in net cash provided by operating activities.

Significant uses of liquidity during the first three months of 2025 were $47.4 million in loan fundings, $33.6 million in investment securities purchased, and $4.0 million in cash dividends paid on common stock to our shareholders.

Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity.

Management anticipates that our current strong liquidity position, as detailed in this report, and contingent funding sources outlined in the table above are adequate to support our operational needs.

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.

Unfunded credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $451.2 million at March 31, 2025.

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.

3 unchanged sentences

We believe our emphasis on local deposits, combined with our immediately available funding sources, provides a very stable base for our liquidity needs.

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.

We had no outstanding borrowings under our credit facilities at March 31, 2025, nor at December 31, 2024, 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.

Dividends in excess of that amount may be paid with prior approval of the Department of Financial Protection and Innovation ("DFPI").

The Bank received approval from the State of California - DFPI 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.

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

Bancorp held $5.8 million in cash at March 31, 2025.

Management has requested approval from the DFPI for a dividend to be paid in the second quarter of 2025.

Statement Regarding use of Non-GAAP Financial Measures

6 unchanged sentences

(in thousands, except per share amounts;

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

Tangible Common Equity - Bancorp

22 unchanged sentences

$ 22.48 $ 22.37

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%.

1 Unrealized losses on held-to-maturity securities as of March 31, 2025 and December 31, 2024 of $110.4 million and $126.6 million, respectively, including the unrealized losses that resulted from the transfer of securities from AFS to HTM, net of an estimated $32.6 million and $37.4 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 $3.1 million and $3.2 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 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 %

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