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-31 Executive Summary Net loss for the second quarter of 2025 was $8.5 million, compared to net income of $4.9 million for the prior quarter. Diluted loss per share was $0.53 for the second quarter of 2025, compared to diluted earnings per share of $0.30 for the prior quarter. The loss was attributable to securities repositioning which is more fully described below. Net income and diluted earnings per share for the second quarter excluding the loss on sale of securities was $4.7 million and $0.29, respectively, all other factors unchanged and with adjustments made based on the Company's blended statutory tax rate of 29.56%. If the adjustments were made using the Company's second quarter 2025 effective tax rate of 23.78%, net income and diluted earnings per share for the second quarter of 2025 excluding the loss on sale of securities was $5.7 million and $0.36, respectively, all other factors unchanged. Net loss for the six months ended June 30, 2025 was $3.7 million, compared to a loss of $19.0 million for the same period of 2024, and diluted loss per share was $0.23 and $1.18 for the first six months of 2025 and 2024, respectively. Net income and diluted earnings per share for the six months ending June 30 excluding the loss on sale of securities during both periods was $9.5 million and $0.59 in 2025 and $3.9 million and $0.24 in 2024, respectively, all other factors unchanged. Comparable (non-GAAP) Excluding Loss on Sale of Securities Three months ended Six months ended (in thousands, except per share amounts; unaudited) June 30, 2025 March 31, 2025 June 30, 2025 June 30, 2024 Pre-tax, pre-provision net (loss) income Pre-tax, pre-provision net (loss) income (GAAP) $ (11,199) $ 6,556 $ (4,643) $ (24,903) Comparable pre-tax, pre-provision net income (non-GAAP) 7,537 6,556 14,093 7,639 Net (loss) income Net (loss) income (GAAP) (8,536) 4,876 (3,660) (18,980) Comparable net income (non-GAAP) 4,662 4,876 9,538 3,942 Diluted (loss) earnings per share Diluted (loss) earnings per share (GAAP) (0.53) 0.30 (0.23) (1.18) Comparable diluted earnings per share (non-GAAP) 0.29 0.30 0.59 0.24 See complete Reconciliation of GAAP and Non-GAAP Financial Measures below Related tax benefit calculated using blended statutory rate of 29.56% The following are highlights of our operating and financial performance for the periods presented. Additional performance details can be found on the pages that follow. • As previously announced, the Bank sold a book value of $185.8 million of available-for-sale securities ("AFS") securities resulting in a loss on sale of $18.7 million. Redeployment of the proceeds is expected to provide a 13 basis point increase in annualized net interest margin and $0.20 of estimated earnings per share accretion over the next four quarters, assuming a 5.0% average yield on reinvestment. The securities repositioning is expected to have an approximate four-year earn back. The sale is part of a continued strategy to improve future earnings and increase return on equity. Excluding the loss on security sales, net income and diluted earnings per share for the second quarter would have been $4.7 million and $0.29, respectively, all other factors unchanged. See Reconciliation of GAAP and Non-GAAP Financial Measures below. • The tax-equivalent net interest margin increased to 2.93% in the second quarter of 2025 from 2.86% in the prior quarter, largely due to the effects of new loan production at higher rates. The tax-equivalent net interest margin for the six months ended June 30, 2025, improved 39 basis points over the same period of the prior year due to the favorable impact of the securities repositioned in the second quarter of 2024, which resulted in higher yielding assets during the first six months of 2025. Page-32 • Total deposits were $3.245 billion as of June 30, 2025, compared to $3.220 billion as of December 31, 2024, an increase of $25.0 million. The primary recipient of the deposit growth was money market accounts while non-interest bearing accounts experienced outflows due to business operating expenses, asset purchases, distributions, payroll and taxes. We continue to manage targeted deposit interest rate reductions that are aligned with customer relationship pricing policies and expected Federal Reserve interest rate reductions. • The average cost of total deposits and of interest-bearing deposits decreased by 1 and 3 basis points, respectively, to 1.28% and 2.24%, in the second quarter of 2025, compared to the prior quarter. Non-interest-bearing deposits continued to make up a significant portion of total deposits at 42.5% as of June 30, 2025, compared to 43.5% on December 31, 2024. • Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.863 billion, or 57% of total deposits and 200% of estimated uninsured and/or uncollateralized deposits as of June 30, 2025. • Loans totaled $2.074 billion as of June 30, 2025, a net decrease of $9.6 million from December 31, 2024. Loan originations during the six months ended June 30, 2025 were $132.8 million ($98.0 million funded) including $99.7 million ($85.3 million funded) in commercial loans, which are comprised of commercial and industrial and commercial real estate loans. Originations increased to $69.2 million ($50.6 million funded) in the second quarter compared to $63.6 million ($47.4 million funded) in the first quarter of 2025. Loan originations were $119.9 million ($76.5 million funded) for the first six months of 2024. Payoffs were $62.0 million in the six months ending June 30, 2025, compared to $53.0 million for the same period in 2024. This included payoffs of $36.5 million and $25.5 million in the second and first quarters of 2025, respectively. • There was no provision for credit losses on loans in the second quarter of 2025, compared to a $75 thousand provision in the prior quarter. The allowance for credit losses was 1.44% of total loans on June 30, 2025, compared to 1.47% as of December 31, 2024. • Non-accrual loans decreased to $32.5 million, or 1.57% of total loans on June 30, 2025, compared to $33.9 million, or 1.63% on December 31, 2024. Of the total non-accrual loans as of June 30, 2025, approximately 60% were paying as agreed and 89% were real estate secured. • The following table summarizes GAAP and non-GAAP results for return on average assets ("ROA"), return on average equity ("ROE") and the efficiency ratio for comparable periods. All GAAP ratios were significantly impacted by the securities sales discussed above. Non-GAAP ratios exclude the loss on security sales, with all other factors unchanged. See Reconciliation of GAAP and Non-GAAP Financial Measures below. Performance and other financial ratios: Comparable (non-GAAP) Excluding Loss on Sale of Securities Three months ended Six months ended (in thousands, except per share amounts; unaudited) June 30, 2025 March 31, 2025 June 30, 2025 June 30, 2024 Return on average assets Return on average assets (GAAP) (0.92) % 0.53 % (0.20) % (1.01) % Comparable return on average assets (non-GAAP) 0.50 % 0.53 % 0.52 % 0.21 % Return on average equity Return on average equity (GAAP) (7.80) % 4.52 % (1.68) % (8.79) % Comparable return on average equity (non-GAAP) 4.26 % 4.52 % 4.39 % 1.83 % Efficiency ratio Efficiency ratio (GAAP) 208.81 % 76.44 % 112.18 % 237.13 % Comparable efficiency ratio (non-GAAP) 74.03 % 76.44 % 75.21 % 84.93 % Non-GAAP ratios exclude the loss on security sales, and all other factors unchanged..See complete Reconciliation of GAAP and Non-GAAP Financial Measures below Related tax benefit calculated using blended statutory rate of 29.56% Page-33 • ROA was (0.92)% (non-GAAP 0.50%), ROE was (7.80)% (non-GAAP 4.26%), and the efficiency ratio was 208.81% (non-GAAP 74.03%) for the second quarter of 2025. • ROA was (0.20)% (non-GAAP 0.52%), ROE was (1.68)% (non-GAAP 4.39%) and the efficiency ratio was 112.18% (non-GAAP 75.21%) for the six months ended June 30, 2025. • Capital was above well-capitalized regulatory thresholds with Bancorp's and the Bank's total risk-based capital ratios of 16.25% and 15.00%, respectively, as of June 30, 2025. Our 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 9.95% as of June 30, 2025, and the Bank's TCE ratio was 9.09%. 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 8.26% as of June 30, 2025, compared to 7.85% as of December 31, 2024. • Bancorp repurchased 100,000 in shares for $2.2 million during the second quarter of 2025, contributing to an increase in the book value per share to $27.21 at June 30, 2025 compared to $27.13 at March 31, 2025 and the tangible book value per share to $22.55 at June 30, 2025 compared to $22.48 at March 31, 2025. • The Board of Directors approved a cash dividend of $0.25 per share on July 24, 2025, which represents the 81 st consecutive quarterly dividend paid by Bancorp. The dividend is payable on August 14, 2025, to shareholders of record at the close of business on August 7, 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-34 RESULTS OF OPERATIONS Highlights of the financial results are presented in the following tables: Three months ended Six months ended (dollars in thousands, except per share data) June 30, 2025 March 31, 2025 June 30, 2025 June 30, 2024 Selected operating data: Net interest income $ 25,912 $ 24,946 $ 50,858 $ 45,161 Provision for credit losses on loans — 75 75 5,550 Non-interest income (15,621) 2,874 (12,747) (27,001) Non-interest expense 21,490 21,264 42,754 43,063 Net (loss) income (8,536) 4,876 (3,660) (18,980) Net (loss) income per common share: Basic $ (0.53) $ 0.31 $ (0.23) $ (1.18) Diluted $ (0.53) $ 0.30 $ (0.23) $ (1.18) Performance and other financial ratios: Return on average assets (0.92) % 0.53 % (0.20) % (1.01) % Return on average equity (7.80) % 4.52 % (1.68) % (8.79) % Tax-equivalent net interest margin 2.93 % 2.86 % 2.90 % 2.51 % Cost of deposits 1.28 % 1.29 % 1.28 % 1.41 % Cost of funds 1.28 % 1.29 % 1.28 % 1.42 % Efficiency ratio 208.81 % 76.44 % 112.18 % 237.13 % Net charge-offs $ 52 $ 825 $ 877 $ 47 Cash dividend payout ratio on common stock 1 NM 80.65 % NM NM 1 Calculated as dividends on common shares divided by basic net income (loss) per common share. (dollars in thousands, except per share data) June 30, 2025 December 31, 2024 Selected financial condition data: Total assets $ 3,726,193 $ 3,701,335 Investment securities 1,215,299 1,266,733 Loans, net of allowance for credit losses on loans 2,043,784 2,052,600 Deposits 3,245,048 3,220,015 Borrowings and other obligations 77 154 Stockholders' equity 438,538 435,407 Book value per share 27.21 27.06 Tangible book value per share 1 22.55 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 0.92x 0.90x Non-accrual loans to total loans 1.57 % 1.63 % Classified loans (graded substandard and doubtful) as a percentage of total loans 2.95 % 2.17 % Capital ratios: Equity to total assets ratio 11.77 % 11.76 % Tangible common equity to tangible assets 9.95 % 9.93 % Total capital (to risk-weighted assets) 16.25 % 16.54 % Tier 1 capital (to risk-weighted assets) 15.03 % 15.32 % Tier 1 capital (to average assets) 10.22 % 10.46 % Common equity Tier 1 capital (to risk weighted assets) 15.03 % 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-35 Net Interest Income Net interest income is the interest earned on loans, investments and other interest-earning assets minus the interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in the net interest income and/or margin due to an imbalance in the timing of repricing and maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income. For more information, refer to Item 3. Quantitative and Qualitative Disclosure about Market Risk in this Form 10-Q. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders’ equity. Average Statements of Condition and Analysis of Net Interest Income The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The tables also present net interest income, net interest margin and net interest rate spread for each period reported. Three months ended Three months ended June 30, 2025 March 31, 2025 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Interest-earning deposits with banks 1 $ 180,730 $ 2,004 4.39 % $ 163,446 $ 1,795 4.39 % Investment securities 2, 3 1,266,317 8,495 2.68 % 1,273,422 8,331 2.62 % Loans 1, 3, 4, 5 2,073,110 25,965 4.95 % 2,073,739 25,289 4.88 % Total interest-earning assets 1 3,520,157 36,464 4.10 % 3,510,607 35,415 4.04 % Cash and non-interest-bearing due from banks 37,721 37,493 Bank premises and equipment, net 7,259 6,831 Interest receivable and other assets, net 172,657 173,135 Total assets $ 3,737,794 $ 3,728,066 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 187,297 $ 351 0.75 % $ 191,089 $ 343 0.73 % Savings accounts 222,524 587 1.06 % 227,098 533 0.95 % Money market accounts 1,227,506 7,878 2.57 % 1,192,956 7,626 2.59 % Time accounts including CDARS 218,150 1,559 2.87 % 228,018 1,790 3.18 % Borrowings and other obligations 1 91 1 3.39 % 130 1 2.86 % Total interest-bearing liabilities 1,855,568 10,376 2.24 % 1,839,291 10,293 2.27 % Demand accounts 1,398,570 1,406,648 Interest payable and other liabilities 44,469 44,951 Stockholders' equity 439,187 437,176 Total liabilities & stockholders' equity $ 3,737,794 $ 3,728,066 Tax-equivalent net interest income/margin 1 $ 26,088 2.93 % $ 25,122 2.86 % Reported net interest income/margin 1 $ 25,912 2.91 % $ 24,946 2.84 % Tax-equivalent net interest rate spread 1.86 % 1.77 % Page-36 Six months ended Six months ended June 30, 2025 June 30, 2024 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (in thousands) Balance Expense Rate Balance Expense Rate Assets Interest-earning deposits with banks 1 $ 172,136 $ 3,799 4.39 % $ 45,613 $ 1,245 5.40 % Investment securities 2, 3 1,269,850 16,821 2.65 % 1,480,462 17,247 2.33 % Loans 1, 3, 4, 5 2,073,423 51,254 4.92 % 2,063,351 50,346 4.83 % Total interest-earning assets 1 3,515,409 71,874 4.07 % 3,589,426 68,838 3.79 % Cash and non-interest-bearing due from banks 37,608 36,275 Bank premises and equipment, net 7,046 7,564 Interest receivable and other assets, net 172,894 147,949 Total assets $ 3,732,957 $ 3,781,214 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 189,182 $ 694 0.74 % $ 206,268 $ 535 0.52 % Savings accounts 224,798 1,120 1.00 % 228,559 882 0.78 % Money market accounts 1,210,327 15,504 2.58 % 1,152,492 17,090 2.98 % Time accounts including CDARS 223,057 3,349 3.03 % 262,598 4,571 3.50 % Borrowings and other obligations 1 110 2 3.08 % 9,116 239 5.18 % Total interest-bearing liabilities 1,847,474 20,669 2.26 % 1,859,033 23,317 2.52 % Demand accounts 1,402,587 1,440,114 Interest payable and other liabilities 44,709 47,735 Stockholders' equity 438,187 434,332 Total liabilities & stockholders' equity $ 3,732,957 $ 3,781,214 Tax-equivalent net interest income/margin 1 $ 51,205 2.90 % $ 45,521 2.51 % Reported net interest income/margin 1 $ 50,858 2.88 % $ 45,161 2.49 % Tax-equivalent net interest rate spread 1.81 % 1.27 % 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 $399 thousand and $364 thousand for the three months ended June 30, 2025 and March 31, 2025, and totaled $764 thousand and $811 thousand for the six months ended June 30, 2025 and 2024, respectively. Page-37 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 June 30, 2025, compared to the three months ended March 31, 2025, and one day less in the first three months of 2025, compared to the first three months of 2024. Three months ended June 30, 2025 compared to three months ended March 31, 2025 Six months ended June 30, 2025 compared to six months ended June 30, 2024 (in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total Interest-earning deposits with banks $ 190 $ (3) $ 22 $ 209 $ 3,453 $ (233) $ (666) $ 2,554 Investment securities 1 (46) 212 (2) 164 (2,454) 2,365 (337) (426) Loans 1 (8) 398 286 676 247 941 (280) 908 Total interest-earning assets 136 607 306 1,049 1,246 3,073 (1,283) 3,036 Interest-bearing transaction accounts (7) 10 5 8 (44) 226 (23) 159 Savings accounts (11) 59 6 54 (15) 263 (10) 238 Money market accounts 221 (53) 84 252 858 (2,245) (199) (1,586) Time accounts, including CDARS (77) (176) 22 (231) (688) (608) 74 (1,222) Borrowings and other obligations — — — — (236) (74) 73 (237) Total interest-bearing liabilities 126 (160) 117 83 (125) (2,438) (85) (2,648) Changes in tax-equivalent net interest income $ 10 $ 767 $ 189 $ 966 $ 1,371 $ 5,511 $ (1,198) $ 5,684 1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%. Second Quarter of 2025 compared to the First Quarter of 2025 Net interest income totaled $25.9 million for the second quarter of 2025, a $966 thousand increase from the prior quarter. This was driven by an increase of $9.6 million in average earning assets including a $676 thousand increase in loan interest income due to the continued replenishment of the loan portfolio at higher rates. The tax-equivalent net interest margin was 2.93% for the second quarter of 2025, compared to 2.86% for the prior quarter. Loan originations at higher rates contributed to 4 basis points growth in the second quarter. Higher average interest-earning deposit balances with banks increased the margin by 2 basis points and the repositioning of securities already added 1 basis point to the margin. First Six Months of 2025 compared to the First Six Months of 2024 Net interest income totaled $50.9 million for the six months ended June 30, 2025, compared to $45.2 million for the same period in the prior year. The $5.7 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 2.90% for the six months ended June 30, 2025, compared to 2.51% for the same period in the prior year. The increase of 39 basis points was primarily attributed to higher interest-earning deposit balances with banks, higher average loan balances and yields, and lower deposit costs which provided a positive impact of 15, 13 and 10 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"). 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, and 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 Page-38 high for longer than many market participants anticipated, during 2023, 2024 and 2025, we sold available-for-sale 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. The FOMC 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 half of 2025, the FOMC left rates unchanged due to continued economic uncertainty, relatively sound economic indicators and elevated inflation pressures, partly driven by trade policy uncertainties such as tariffs. Management and the Board are continuously monitoring and analyzing the impact of market rates on the Company's financial condition and results of operations to enhance performance, safety and soundness and returns to shareholders. See ITEM 3. Quantitative and Qualitative Disclosure about Market Risk for further information. Provision for Credit Losses on Loans Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors including growth of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans. The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off. The following table shows the activity for the periods presented. Three months ended Six months ended (dollars in thousands) June 30, 2025 March 31, 2025 June 30, 2025 June 30, 2024 Provision for credit losses on loans $ — $ 75 $ 75 $ 5,550 We recorded no provision for credit losses on loans in the second quarter of 2025. This compares to a $75 thousand provision in the prior quarter. We recorded a $75 thousand provision for credit losses on loans in the six months ended June 30, 2025. Modest deterioration in the economic forecast, the effects from charge-offs in the first quarter of 2025, and the pooled and individual total loan balance declines in the first quarter of 2025, contributed to the provision. We recorded a provision totaling $5.6 million for the six months ending June 30, 2024. This was primarily due to an increase to the individual reserve of $5.2 million for one non-owner occupied commercial real estate loan totaling $16.7 million placed on non-accrual during the second quarter of 2024. The remainder of the provision recorded in the six months ended June 30, 2024 was due to adjustments to certain qualitative risk factors to account for continued negative trends in adversely graded loans for our non-owner occupied commercial real estate and commercial and industrial portfolios, as well as adjustments to the discounted cash flow modeling assumptions to reflect revised estimated default timing and increased California unemployment forecasts. This was partially offset by the impact of a decrease in our pooled loans and changes in our loan mix. 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-39 Non-interest (Loss) Income The following table details the components of non-interest income (loss). Three months ended (dollars in thousands) June 30, 2025 March 31, 2025 Amount Change Percent Change Earnings on bank-owned life insurance, net $ 667 $ 544 $ 123 22.6 % Wealth management and trust services 612 563 49 8.7 % Service charges on deposit accounts 550 548 2 0.4 % Debit card interchange fees, net 410 396 14 3.5 % Dividends on Federal Home Loan Bank stock 362 375 (13) (3.5) % Merchant interchange fees, net 90 96 (6) (6.3) % Losses on sale of investment securities (18,736) — (18,736) NM Other income 424 352 72 20.5 % Total non-interest (loss) income $ (15,621) $ 2,874 $ (18,495) (643.5) % Six months ended (dollars in thousands) June 30, 2025 June 30, 2024 Amount Change Percent Change Earnings on bank-owned life insurance, net $ 1,211 $ 856 $ 355 41.5 % Wealth management and trust services 1,175 1,138 37 3.3 % Service charges on deposit accounts 1,098 1,070 28 2.6 % Debit card interchange fees, net 806 852 (46) (5.4) % Dividends on Federal Home Loan Bank stock 737 743 (6) (0.8) % Merchant interchange fees, net 186 177 9 5.1 % Losses on sale of investment securities (18,736) (32,542) 13,806 (42.4) % Other income 776 705 71 10.1 % Total non-interest (loss) income $ (12,747) $ (27,001) $ 14,254 (52.8) % NM - not meaningful Second Quarter of 2025 Compared to the First Quarter of 2025 Non-interest loss was $15.6 million for the second quarter of 2025, compared to income of $2.9 million for the prior quarter. The decrease of $18.5 million from the prior quarter was primarily attributable to securities repositioning during the second quarter of 2025. We sold available-for-sale securities ("AFS") securities with a book value of $185.8 million, resulting in a pre-tax loss of $18.7 million, as part of our strategy to improve future earnings and increase return on equity. This was partially offset by an increase in gains on proceeds from bank owned life insurance death benefits of $123 thousand. Excluding the loss on sales, non-interest income was $3.1 million for the second quarter of 2025, all other factors unchanged, an increase of $241 thousand from the prior quarter. See the non-GAAP disclosure below. First Six Months of 2025 Compared to the First Six Months of 2024 Non-interest loss was $12.7 million for the six months ended June 30, 2025, compared to a loss of $27.0 million for the same period of the prior year. The $14.3 million reduction in losses from the prior year period was primarily attributed to a reduction of $13.8 million in pre-tax losses on the sale of AFS securities and an increase in bank owned life insurance death benefit proceeds of $355 thousand. We sold AFS securities with a book value of $185.8 million, resulting in a pre-tax loss of $18.7 million, in the first six months of 2025, and sold AFS securities with a book value of $293.0 million, resulting in a pre-tax loss of $32.5 million, in the first six months of 2024. Excluding the loss on AFS sales, non-interest income was $6.0 million and $5.5 million for the first six months of 2025 and 2024, respectively, all other factors unchanged. See the non-GAAP disclosure below. Page-40 Non-interest Expense The following table details the components of non-interest expense. Three months ended (dollars in thousands) June 30, 2025 March 31, 2025 Amount Change Percent Change Salaries and related benefits $ 12,045 $ 12,050 $ (5) — % Occupancy and equipment 2,226 2,106 120 5.7 % Deposit network fees 1,054 932 122 13.1 % Data processing 1,041 1,136 (95) (8.4) % Professional services 908 937 (29) (3.1) % Information technology 563 413 150 36.3 % Federal Deposit Insurance Corporation insurance 421 388 33 8.5 % Depreciation and amortization 320 322 (2) (0.6) % Directors' expense 279 304 (25) (8.2) % Amortization of core deposit intangible 220 227 (7) (3.1) % Charitable contributions 116 403 (287) (71.2) % Other non-interest expense Advertising 269 226 43 19.0 % Other expense 2,028 1,820 208 11.4 % Total other non-interest expense 2,297 2,046 251 12.3 % Total non-interest expense $ 21,490 $ 21,264 $ 226 1.1 % Six months ended (dollars in thousands) June 30, 2025 June 30, 2024 Amount Change Percent Change Salaries and related benefits $ 24,095 $ 24,448 $ (353) (1.4) % Occupancy and equipment 4,332 4,018 314 7.8 % Data processing 2,177 2,075 102 4.9 % Deposit network fees 1,986 1,761 225 12.8 % Professional services 1,845 2,121 (276) (13.0) % Information technology 976 850 126 14.8 % Federal Deposit Insurance Corporation insurance 809 861 (52) (6.0) % Depreciation and amortization 642 767 (125) (16.3) % Directors' expense 583 623 (40) (6.4) % Charitable contributions 519 617 (98) (15.9) % Amortization of core deposit intangible 447 497 (50) (10.1) % Other real estate owned — — — NM Other non-interest expense Advertising 495 621 (126) (20.3) % Other expense 3,848 3,804 44 1.2 % Total other non-interest expense 4,343 4,425 (82) (1.9) % Total non-interest expense $ 42,754 $ 43,063 $ (309) (0.7) % NM - Not Meaningful Second Quarter of 2025 Compared to the First Quarter of 2025 Non-interest expense totaled $21.5 million for the second quarter of 2025, compared to $21.3 million for the prior quarter, an increase of $226 thousand. This was primarily due to an increase in information technology expense of $150 thousand, an increase of $122 thousand in deposit network fees, and a net increase of $208 thousand in all other expenses. This was offset by a decrease of $287 thousand in charitable contributions in the second quarter of 2025. 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. First Six Months of 2025 Compared to the First Six Months of 2024 Non-interest expense totaled $42.8 million for the six months ending June 30, 2025 , compared to $43.1 million for the same period of 2024 , a decrease of $309 thousand. This was primarily due to a decrease of $353 thousand in Page-41 salaries and benefits, a decrease of $276 thousand in professional services, partially offset by an increase in occupancy and equipment expense of $314 thousand. Provision for Income Taxes Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, bank-owned life insurance ("BOLI"), low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards). The income tax benefit for the second quarter of 2025 totaled $2.7 million at an effective tax rate of 23.8%, compared to a provision of $1.6 million at an effective tax rate of 24.8% in the prior quarter. The decrease in the provision for income taxes in the second quarter of 2025 reflected lower pre-tax income as compared to the prior quarter. The decrease in the effective tax rate in the second quarter of 2025 was primarily due to the treatment of certain permanent tax differences while in a loss position for the second quarter. The income tax benefit for the first half of 2025 totaled $1.1 million at an effective tax rate of 22.4%, compared to an income tax benefit of $11.5 million at an effective tax rate of 37.7% for the first half of 2024. The decrease in the effective tax rate in the first half of 2025, as compared to the same period a year ago, was primarily due to the lower pre-tax loss on investment securities sale of $18.7 million in 2025, compared to $32.5 million in 2024. On June 27, 2025, Senate Bill 132 (“SB 132”) was passed and signed into law by Governor Newsom. Effective for taxable years beginning on or after January 1, 2025, SB 132 amends California Rev. & Tax. Code (“CRTC”) to require financial institutions to apportion income using the single sales factor formula. Prior to this change, these businesses were required by CRTC Sec. 25128(b) to use an evenly weighted three-factor apportionment formula contemplating a payroll factor, property factor, and sales factor. The company does not expect this bill to have a material impact on the company’s tax expense as of June 30, 2025 On July 4, 2025, the President of the United States signed and enacted the “One Big Beautiful Bill Act” into law. Except for certain provisions, the Tax Act is effective for tax years beginning on or after January 1, 2025. The tax and spending legislation permanently extends key business tax breaks originally enacted under the 2017 Tax Cuts and Jobs Act. The Company is currently evaluating the impact the bill will have on income tax expense. We file a consolidated return in the U.S. federal tax jurisdiction and a combined return in the state of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the time of the issuance of this report. As of June 30, 2025, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits. Page-42 FINANCIAL CONDITION SUMMARY Cash, Cash Equivalents and Restricted Cash Total cash, cash equivalents and restricted cash were $228.9 million at June 30, 2025, an increase of $91.6 million compared to $137.3 million at December 31, 2024, driven by proceeds from the sale of available for sale securities of $167.0 million, proceeds from paydowns and maturities of investment securities of $140.1 million, growth in deposits totaling $25.0 million, and a decrease of $9.1 million in loans receivable, offset by purchases of investment securities of $252.7 million. Investment Securities The investment securities portfolio totaled $1.215 billion at June 30, 2025, a decrease of $51.4 million from $1.267 billion at December 31, 2024. The decrease was primarily the result of the sale of available for sale securities with a book value of $185.8 million and principal repayments and maturities totaling $140.1 million, partially offset by a $21.5 million improvement in unrealized losses on available for sale securities and $252.7 million available-for-sale securities purchases. 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 2.55 on available-for-sale securities and 5.58 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 $158.2 million in the first six 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 June 30, 2025 and December 31, 2024. June 30, 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 $ 17,533 $ 14,619 18.5 % $ 22,913 $ 18,749 14.5 % Revenue bonds — — — 2,060 1,658 1.3 Total within California 17,533 14,619 18.5 24,973 20,407 15.8 Outside California: General obligation bonds 60,325 51,700 63.5 108,037 94,748 68.5 Revenue bonds 17,034 14,277 18.0 24,728 21,778 15.7 Total outside California 77,359 65,977 81.5 132,765 116,526 84.2 Total obligations of state and political subdivisions $ 94,892 $ 80,596 100.0 % $ 157,738 $ 136,933 100.0 % Percent of investment portfolio 7.7 % 7.2 % 12.2 % 11.9 % Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (37.6%), Washington (10.0%) and Wisconsin (15.5%). Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring. Key considerations include: • The soundness of a municipality’s budgetary position and stability of its tax revenues • Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer • Local demographics/economics including unemployment data, largest taxpayers and local employers, income indices and home values Page-43 • For revenue bonds, the source and strength of revenue for municipal authorities including the obligor’s financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer’s strength and collateral in escrow accounts) • Credit ratings by major credit rating agencies Loans and Credit Quality Loans totaled $2.074 billion as of June 30, 2025, compared to $2.083 billion as of December 31, 2024. The decrease in the six months ended June 30, 2025 totaled $9.6 million, compared to an increase of $8.7 million in the six months ended June 30, 2024. Loan originations for the six months ended June 30, 2025 were $132.8 million ($98.0 million funded) including $99.7 million ($85.3 million funded) in commercial loans, which includes commercial and industrial, commercial real estate and construction, compared to $119.9 million ($76.5 million funded) for the six months ended June 30, 2024. Originations increased to $69.2 million ($50.6 million funded) in the second quarter compared to $63.6 million ($47.4 million funded) in the first quarter of 2025. Payoffs were $62.0 million in the six months ended June 30, 2025, compared to $53.0 million for the same period in 2024. This included payoffs of $36.5 million and $25.5 million in the second and first quarters of 2025, respectively. In addition, amortization from scheduled payments totaled $39.1 million and net utilization of credit lines decreased by $6.5 million during the six months ended June 30, 2025, compared to amortization from scheduled payments totaled $40.0 million and net utilization of credit lines increased by $27.9 million during the six months ended June 30, 2024. Non-accrual loans totaled $32.5 million, or 1.57% of the loan portfolio, at June 30, 2025, compared to $33.9 million, or 1.63% at December 31, 2024. The $1.4 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 $726 thousand, payoffs of $661 thousand and charged off loans totaling $66 thousand, partially offset by the addition of nine loans totaling $2.7 million. Of the total non-accrual loans as of June 30, 2025, approximately 60% were paying as agreed, 89% 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 $61.1 million as of June 30, 2025, compared to $45.1 million as of December 31, 2024. The $16.0 million increase was largely due to downgrades of $19.8 million, partially offset by the sale of a $2.1 million non-owner occupied real estate loan and payoffs and paydowns of $1.6 million. Loans designated special mention, which are not considered adversely classified, decreased by $17.4 million to $91.5 million as of June 30, 2025, from $108.9 million as of December 31, 2024. The decrease was largely due to $17.1 million in downgrades to substandard risk rating and contractual paydowns and payoffs totaling $9.7 million, offset by downgrades from pass/watch to special mention loans of $9.4 million. Of the loans designated special mention, 100% were real estate secured. Net charge-offs for the six months ended June 30, 2025 totaled $877 thousand, including the $809 thousand charge-off of an acquired commercial non-owner occupied real estate loan. This compared to net charge-offs of $47 thousand for the same period 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 six months of 2025, total liabilities increased by $21.7 million to $3.288 billion. Deposits totaled $3.245 billion at June 30, 2025, an increase of $25.0 million, compared to $3.220 billion at December 31, 2024. Non-interest bearing deposits made up 42.5% of total deposits at June 30, 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 June 30, 2025. Page-44 We had no outstanding borrowings at June 30, 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 $1.863 billion, or 57% of total deposits and 200% of estimated uninsured and/or uncollateralized deposits as of June 30, 2025. Balances in the reciprocal deposit network program were $425.3 million and $404.7 million at June 30, 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 June 30, 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 16.25% at June 30, 2025, compared to 16.54% at December 31, 2024. The decrease was largely due to losses realized on the sale of available-for-sale securities associated with the portfolio repositioning. The total risk-based capital ratio for the Bank was 15.00% at June 30, 2025, compared to 16.13% at December 31, 2024. The decrease was mainly due to a dividend of $32.0 million that was paid by the Bank to Bancorp during the second quarter of 2025. Bancorp's tangible common equity to tangible assets ("TCE ratio") was 9.95% at June 30, 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 8.26%, compared to 7.85% at December 31, 2024. Management believes this non-GAAP measure is important because it reflects the level of capital remaining after a hypothetical liquidation of the entire securities portfolio. The Bancorp’s and Bank’s capital adequacy ratios as of June 30, 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 June 30, 2025 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 407,724 16.25 % $ 263,525 10.50 % $ 250,976 10.00 % Tier 1 Capital (to risk-weighted assets) $ 377,292 15.03 % $ 213,330 8.50 % $ 200,781 8.00 % Tier 1 Leverage Capital (to average assets) $ 377,292 10.22 % $ 147,678 4.00 % $ 184,597 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 377,292 15.03 % $ 175,683 7.00 % $ 163,135 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-45 Bank Capital Ratios (dollars in thousands) Actual Adequately Capitalized Threshold 1 Threshold to be Well Capitalized under Prompt Corrective Action Provisions June 30, 2025 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 376,299 15.00 % $ 263,470 10.50 % $ 250,924 10.00 % Tier 1 Capital (to risk-weighted assets) $ 345,867 13.78 % $ 213,285 8.50 % $ 200,739 8.00 % Tier 1 Leverage Capital (to average assets) $ 345,867 9.37 % $ 147,659 4.00 % $ 184,574 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 345,867 13.78 % $ 175,646 7.00 % $ 163,100 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 $1.863 billion or 57% of total deposits and 200% of estimated uninsured and/or uncollateralized deposits as of June 30, 2025. The following table details the components of our contingent liquidity sources as of June 30, 2025. (in thousands) Total Available Amount Used Net Availability Internal Sources Unrestricted cash 1 $ 201,162 N/A $ 201,162 Unencumbered securities at market value 270,966 N/A 270,966 External Sources FHLB line of credit 945,977 $ — 945,977 FRB line of credit 319,843 — 319,843 Lines of credit at correspondent banks 125,000 — 125,000 Total Liquidity $ 1,862,948 $ — $ 1,862,948 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-46 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 $91.6 million in the first six months of 2025. The most significant sources of liquidity during the first six months of 2025 were proceeds of $167.0 million from the sale of available for sale investment securities, $140.1 million from principal paydowns, calls and maturities of investment securities, loan payoffs of $62.0 million, $39.1 million in amortization of principal and a net $6.5 million decrease in utilization of credit lines, and $25.0 million from net increase of deposits, in addition to $13.0 million in net cash provided by operating activities. Significant uses of liquidity during the first six months of 2025 were $252.7 million in investment securities purchased, $98.0 million in loan fundings, and $8.1 million in cash dividends paid on common stock to our shareholders and $2.2 million in common stock repurchases. Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position, as detailed in this report, and contingent funding sources outlined in the table above are adequate to support our operational needs. Unfunded credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $449.4 million at June 30, 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, $208.4 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 June 30, 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"). On May 30, 2025, the Bank received approval from the State of California - DFPI for a dividend of $32.0 million which was paid to Bancorp on May 30, 2025. The primary uses of funds for Bancorp are shareholder dividends, share repurchases and ordinary operating expenses. Bancorp held $31.1 million in cash at June 30, 2025. Statement Regarding use of Non-GAAP Financial Measures Financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures. Management believes that, given industry turmoil that largely began in the first quarter of 2023, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after tax impact of unrealized losses on held-to-maturity securities provides useful supplemental information to investors because it reflects the level of capital remaining after a hypothetical liquidation of the entire securities portfolio. In addition, management believes that providing selected financial measures excluding the loss on sale of securities discussed above is useful to investors as the strategic short-term loss taken for long-term profitability makes the operational performance difficult to compare to other periods. Because there are limits to the usefulness of this or any other non-GAAP measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the Securities and Exchange Commission, and not to rely on any single financial measure. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below. Reconciliation of GAAP and Non-GAAP Financial Measures Page-47 (in thousands, except per share amounts; unaudited) June 30, 2025 December 31, 2024 Tangible Common Equity - Bancorp Total stockholders' equity $ 438,538 $ 435,407 Goodwill and core deposit intangible (75,098) (75,546) Total TCE a 363,440 359,861 Unrealized losses on HTM securities, net of tax 1 (74,625) (89,171) Unrealized losses on HTM securities included in AOCI, net of tax 2 7,205 7,701 TCE, net of unrealized losses on HTM securities (non-GAAP) b $ 296,020 $ 278,391 Total assets $ 3,726,193 $ 3,701,335 Goodwill and core deposit intangible (75,098) (75,546) Total tangible assets c 3,651,095 3,625,789 Unrealized losses on HTM securities, net of tax 1 (74,625) (89,171) Unrealized losses on HTM securities included in AOCI, net of tax 2 7,205 7,701 Total tangible assets, net of unrealized losses on HTM securities (non-GAAP) d $ 3,583,675 $ 3,544,319 Bancorp TCE ratio a / c 10.0 % 9.9 % Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP) b / d 8.3 % 7.9 % Tangible Book Value Per Share Common shares outstanding e 16,116 16,089 Book value per share $ 27.21 $ 27.06 Tangible book value per share a / e $ 22.55 $ 22.37 1 Unrealized losses on held-to-maturity securities as of June 30, 2025 and December 31, 2024 of $105.9 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 $31.3 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, as of June 30, 2025 and December 31, 2024, net of an estimated $3.0 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. Page-48 (in thousands, except per share amounts; unaudited) Three months ended Six months ended Pre-tax, pre-provision net (loss) income June 30, 2025 March 31, 2025 June 30, 2025 June 30, 2024 (Loss) income before (benefit from) provision for income taxes $ (11,199) $ 6,481 $ (4,718) $ (30,453) Provision for credit losses on loans — 75 75 5,550 Pre-tax, pre-provision net (loss) income (GAAP) (11,199) 6,556 (4,643) (24,903) Adjustments: Losses on sale of investment securities from portfolio repositioning 18,736 — 18,736 32,542 Comparable pre-tax, pre-provision net income (non-GAAP) $ 7,537 $ 6,556 $ 14,093 $ 7,639 Net (loss) income Net (loss) income (GAAP) $ (8,536) $ 4,876 $ (3,660) $ (18,980) Adjustments: Losses on sale of investment securities from portfolio repositioning 18,736 — 18,736 32,542 Related income tax benefit 1 (5,538) — (5,538) (9,620) Adjustments, net of taxes 13,198 — 13,198 22,922 Comparable net income (non-GAAP) $ 4,662 $ 4,876 $ 9,538 $ 3,942 Diluted (loss) earnings per share Weighted average diluted shares 15,989 16,002 15,983 16,095 Diluted (loss) earnings per share (GAAP) $ (0.53) $ 0.30 $ (0.23) $ (1.18) Comparable diluted earnings per share (non-GAAP) $ 0.29 $ 0.30 $ 0.60 $ 0.24 Return on average assets Average assets $ 3,737,794 $ 3,728,066 $ 3,732,957 $ 3,781,214 Return on average assets (GAAP) (0.92) % 0.53 % (0.20) % (1.01) % Comparable return on average assets (non-GAAP) 0.50 % 0.53 % 0.52 % 0.21 % Return on average equity Average stockholders' equity $ 439,187 $ 437,176 $ 438,187 $ 434,332 Return on average equity (GAAP) (7.80) % 4.52 % (1.68) % (8.79) % Comparable return on average equity (non-GAAP) 4.26 % 4.52 % 4.39 % 1.83 % Efficiency ratio Non-interest expense $ 21,490 $ 21,264 $ 42,754 $ 43,063 Net interest income $ 25,912 $ 24,946 $ 50,858 $ 45,161 Non-interest income (GAAP) $ (15,621) $ 2,874 $ (12,747) $ (27,001) Losses on sale of investment securities from portfolio repositioning 18,736 — 18,736 32,542 Non-interest income (non-GAAP) $ 3,115 $ 2,874 $ 5,989 $ 5,541 Efficiency ratio (GAAP) 208.81 % 76.44 % 112.18 % 237.13 % Comparable efficiency ratio (non-GAAP) 74.03 % 76.44 % 75.21 % 84.93 % 1 Related tax benefit calculated using blended statutory rate of 29.56%