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 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. 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 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; 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 2024 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. Refer to Critical Accounting Estimates in Item 7 of our 2024 Form 10-K for more information. Page-30 Executive Summary 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 2.86% 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. Page-31 • 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 9.82% 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. Page-32 RESULTS OF OPERATIONS Highlights of the financial results are presented in the following tables: Three months ended (dollars in thousands, except per share data) March 31, 2025 December 31, 2024 March 31, 2024 Selected operating data: Net interest income $ 24,946 $ 25,230 $ 22,694 Provision for credit losses on loans 75 — 350 Non-interest income 2,874 2,753 2,754 Non-interest expense 21,264 18,338 21,169 Net income 4,876 6,001 2,922 Net income per common share: Basic $ 0.31 $ 0.38 $ 0.18 Diluted $ 0.30 $ 0.38 $ 0.18 Performance and other financial ratios: Return on average assets 0.53 % 0.63 % 0.31 % Return on average equity 4.52 % 5.48 % 2.70 % Tax-equivalent net interest margin 2.86 % 2.80 % 2.50 % Cost of deposits 1.29 % 1.36 % 1.38 % Cost of funds 1.29 % 1.36 % 1.38 % Efficiency ratio 76.44 % 65.53 % 83.18 % Net charge-offs $ 825 $ 19 $ 21 Cash dividend payout ratio on common stock 1 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) March 31, 2025 December 31, 2024 Selected financial condition data: Total assets $ 3,784,243 $ 3,701,335 Investment securities 1,240,649 1,266,733 Loans, net of allowance for credit losses on loans 2,043,642 2,052,600 Deposits 3,301,971 3,220,015 Borrowings and other obligations 116 154 Stockholders' equity 439,566 435,407 Book value per share 27.13 27.06 Tangible book value per share 1 22.48 22.37 Asset quality ratios: Allowance for credit losses on loans to total loans 1.44 % 1.47 % Allowance for credit losses on loans to non-accrual loans 0.91x 0.90x 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: Equity to total assets ratio 11.62 % 11.76 % Tangible common equity to tangible assets 9.82 % 9.93 % Total capital (to risk-weighted assets) 16.69 % 16.54 % Tier 1 capital (to risk-weighted assets) 15.49 % 15.32 % Tier 1 capital (to average assets) 10.62 % 10.46 % Common equity Tier 1 capital (to risk weighted assets) 15.49 % 15.32 % 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-33 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 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 Assets Interest-earning deposits with banks 1 $ 163,446 $ 1,795 4.39 % $ 183,597 $ 2,227 4.75 % $ 23,439 $ 321 5.42 % Investment securities 2, 3 1,273,422 8,331 2.62 % 1,281,545 8,443 2.64 % 1,529,985 8,880 2.32 % Loans 1, 3, 4, 5 2,073,739 25,289 4.88 % 2,081,781 25,979 4.88 % 2,067,431 25,130 4.81 % Total interest-earning assets 1 3,510,607 35,415 4.04 % 3,546,923 36,649 4.04 % 3,620,855 34,331 3.75 % Cash and non-interest-bearing due from banks 37,493 36,762 35,302 Bank premises and equipment, net 6,831 6,936 7,708 Interest receivable and other assets, net 173,135 178,978 147,405 Total assets $ 3,728,066 $ 3,769,599 $ 3,811,270 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 191,089 $ 343 0.73 % $ 183,640 $ 327 0.71 % $ 215,001 $ 261 0.49 % Savings accounts 227,098 533 0.95 % 223,978 556 0.99 % 230,133 371 0.65 % Money market accounts 1,192,956 7,626 2.59 % 1,167,242 8,110 2.76 % 1,150,637 8,449 2.95 % Time accounts including CDARS 228,018 1,790 3.18 % 257,096 2,252 3.49 % 264,594 2,280 3.47 % Borrowings and other obligations 1 130 1 2.86 % 168 1 2.52 % 7,323 91 4.93 % Total interest-bearing liabilities 1,839,291 10,293 2.27 % 1,832,124 11,246 2.44 % 1,867,688 11,452 2.47 % Demand accounts 1,406,648 1,452,966 1,458,686 Interest payable and other liabilities 44,951 48,547 48,923 Stockholders' equity 437,176 435,962 435,973 Total liabilities & stockholders' equity $ 3,728,066 $ 3,769,599 $ 3,811,270 Tax-equivalent net interest income/margin 1 $ 25,122 2.86 % $ 25,403 2.80 % $ 22,879 2.50 % Reported net interest income/margin 1 $ 24,946 2.84 % $ 25,230 2.78 % $ 22,694 2.48 % Tax-equivalent net interest rate spread 1.77 % 1.60 % 1.28 % 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 $364 thousand, $341 thousand, and $375 thousand for the three months ended March 31, 2025, December 31, 2024, and March 31, 2024, respectively. Page-34 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 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 Interest-earning deposits with banks $ (244) $ (166) $ (22) $ (432) $ 1,918 $ (61) $ (383) $ 1,474 Investment securities 1 (54) (58) — (112) (1,489) 1,129 (189) (549) Loans 1 (100) (28) (562) (690) 77 362 (280) 159 Total interest-earning assets (398) (252) (584) (1,234) 506 1,430 (852) 1,084 Interest-bearing transaction accounts 13 10 (7) 16 (29) 129 (18) 82 Savings accounts 8 (19) (12) (23) (5) 175 (8) 162 Money market accounts 179 (483) (180) (484) 311 (1,012) (122) (823) Time accounts, including CDARS (255) (190) (17) (462) (315) (180) 5 (490) Borrowings and other obligations — — — — (89) (34) 33 (90) Total interest-bearing liabilities (55) (682) (216) (953) (127) (922) (110) (1,159) Changes in tax-equivalent net interest income $ (343) $ 430 $ (368) $ (281) $ 633 $ 2,352 $ (742) $ 2,243 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%. 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 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"). Page-35 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 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, 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. 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 (dollars in thousands) March 31, 2025 December 31, 2024 March 31, 2024 Provision for credit losses on loans $ 75 $ — $ 350 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. Page-36 Non-interest Income The following table details the components of non-interest income. 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 % Service charges on deposit accounts 548 551 529 (3) (0.5) % 19 3.6 % Earnings on bank-owned life insurance, net 544 432 $ 435 112 25.9 % 109 25.1 % Debit card interchange fees, net 396 426 408 (30) (7.0) % (12) (2.9) % Dividends on Federal Home Loan Bank stock 375 370 377 5 1.4 % (2) (0.5) % Merchant interchange fees, net 96 80 167 16 20.0 % (71) (42.5) % Gains (losses) on sale of investment securities — — — — 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 % 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 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 % 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 % Information technology 413 432 402 (19) (4.4) % 11 2.7 % Charitable contributions 403 30 12 373 1,243.3 % 391 3,258.3 % Federal Deposit Insurance Corporation insurance 388 420 435 (32) (7.6) % (47) (10.8) % Depreciation and amortization 322 341 388 (19) (5.6) % (66) (17.0) % Directors' expense 304 297 317 7 2.4 % (13) (4.1) % Amortization of core deposit intangible 227 237 251 (10) (4.2) % (24) (9.6) % Other non-interest expense Advertising 226 291 296 (65) (22.3) % (70) (23.6) % Other expense 1,820 1,687 2,022 133 7.9 % (202) (10.0) % Total other non-interest expense 2,046 1,978 2,318 68 3.4 % (272) (11.7) % Total non-interest expense $ 21,264 $ 18,338 $ 21,169 $ 2,926 16.0 % $ 95 0.4 % 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 Page-37 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 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 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. 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 March 31, 2025, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits. Page-38 FINANCIAL CONDITION SUMMARY Cash, Cash Equivalents and Restricted Cash 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 $1.241 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. The portfolios are comprised of high credit quality investments with average effective durations of 3.27 on available-for-sale securities and 5.61 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 $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 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 Within California: General obligation bonds $ 22,889 $ 19,390 14.6 % $ 22,913 $ 18,749 14.5 % Revenue bonds 2,058 1,718 1.3 2,060 1,658 1.3 Total within California 24,947 21,108 15.9 24,973 20,407 15.8 Outside California: General obligation bonds 107,682 94,393 68.4 108,037 94,748 68.5 Revenue bonds 24,671 21,349 15.7 24,728 21,778 15.7 Total outside California 132,353 115,742 84.1 132,765 116,526 84.2 Total obligations of state and political subdivisions $ 157,300 $ 136,850 100.0 % $ 157,738 $ 136,933 100.0 % Percent of investment portfolio 12.4 % 12.0 % 12.2 % 11.9 % Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (38.4%), Washington (15.6%) 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 • 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) Page-39 • Credit ratings by major credit rating agencies Loans and Credit Quality 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 $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 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 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 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. Balances in Page-40 the reciprocal deposit network program were $435.9 million and $404.7 million at March 31, 2025 and December 31, 2024, respectively. 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 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 16.69% 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 . 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 (dollars in thousands) Actual Adequately Capitalized Threshold 1 Threshold to be a Well Capitalized Bank Holding Company 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 % Tier 1 Capital (to risk-weighted assets) $ 391,243 15.49 % $ 214,737 8.50 % $ 202,106 8.00 % Tier 1 Leverage Capital (to average assets) $ 391,243 10.62 % $ 147,330 4.00 % $ 184,162 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 391,243 15.49 % $ 176,842 7.00 % $ 164,211 6.50 % December 31, 2024 Total Capital (to risk-weighted assets) $ 420,606 16.54 % $ 266,991 10.50 % $ 254,277 10.00 % Tier 1 Capital (to risk-weighted assets) $ 389,448 15.32 % $ 216,136 8.50 % $ 203,422 8.00 % Tier 1 Leverage Capital (to average assets) $ 389,448 10.46 % $ 148,899 4.00 % $ 186,123 5.00 % 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. Page-41 Bank Capital Ratios (dollars in thousands) Actual Adequately Capitalized Threshold 1 Threshold to be Well Capitalized under Prompt Corrective Action Provisions 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 % Tier 1 Capital (to risk-weighted assets) $ 385,191 15.25 % $ 214,709 8.50 % $ 202,079 8.00 % Tier 1 Leverage Capital (to average assets) $ 385,191 10.46 % $ 147,316 4.00 % $ 184,145 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 385,191 15.25 % $ 176,819 7.00 % $ 164,189 6.50 % December 31, 2024 Total Capital (to risk-weighted assets) $ 410,186 16.13 % $ 266,955 10.50 % $ 254,243 10.00 % Tier 1 Capital (to risk-weighted assets) $ 379,028 14.91 % $ 216,107 8.50 % $ 203,395 8.00 % Tier 1 Leverage Capital (to average assets) $ 379,028 10.18 % $ 148,887 4.00 % $ 186,108 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 379,028 14.91 % $ 177,970 7.00 % $ 165,258 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 $1.917 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 Internal Sources Unrestricted cash 1 $ 231,437 N/A $ 231,437 Unencumbered securities at market value 310,643 N/A 310,643 External Sources FHLB line of credit 925,249 $ — 925,249 FRB line of credit 325,074 — 325,074 Lines of credit at correspondent banks 125,000 — 125,000 Total Liquidity $ 1,917,403 $ — $ 1,917,403 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, 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 deposits depend upon the variety and effectiveness of our customer account products, service and convenience, Page-42 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 $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 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. Over the next twelve months, $206.0 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 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. 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. 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 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. Page-43 Reconciliation of GAAP and Non-GAAP Financial Measures (in thousands, except per share amounts; unaudited) March 31, 2025 December 31, 2024 Tangible Common Equity - Bancorp Total stockholders' equity $ 439,566 $ 435,407 Goodwill and core deposit intangible (75,319) (75,546) Total TCE a 364,247 359,861 Unrealized losses on HTM securities, net of tax 1 (77,768) (89,171) Unrealized losses on HTM securities included in AOCI, net of tax 2 7,462 7,701 TCE, net of unrealized losses on HTM securities (non-GAAP) b $ 293,941 $ 278,391 Total assets $ 3,784,243 $ 3,701,335 Goodwill and core deposit intangible (75,319) (75,546) Total tangible assets c 3,708,924 3,625,789 Unrealized losses on HTM securities, net of tax 1 (77,768) (89,171) Unrealized losses on HTM securities included in AOCI, net of tax 2 7,462 7,701 Total tangible assets, net of unrealized losses on HTM securities (non-GAAP) d $ 3,638,618 $ 3,544,319 Bancorp TCE ratio a / c 9.8 % 9.9 % Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP) b / d 8.1 % 7.9 % Tangible Book Value Per Share Common shares outstanding e 16,203 16,089 Book value per share $ 27.13 $ 27.06 Tangible book value per share a / e $ 22.48 $ 22.37 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.