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 2025 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, 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 2025 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, and Fair Value Measurements. Refer to Critical Accounting Estimates in Item 7 of our 2025 Form 10-K for more information. Page-29 Executive Summary Net income for the second quarter of 2026 was $9.2 million, compared to net income of $8.5 million for the prior quarter. Diluted earnings per share was $0.58 for the second quarter of 2026, compared to $0.53 for the prior quarter. Net income for the six months ended June 30, 2026 was $17.8 million, compared to a net loss of $3.7 million for the same period in the prior year. Diluted earnings per share for the six months ended June 30, 2026 was $1.11, compared to diluted loss per share of $0.23 for the same period in the prior year. On a non-GAAP basis, excluding the losses on sale of securities of $13.2 million net of taxes, diluted earnings per share was $0.60 for the same period in the prior year. Comparable (non-GAAP) Excluding Loss on Sale of Securities Three months ended Six months ended (in thousands, except per share amounts; unaudited) June 30, 2026 March 31, 2026 June 30, 2026 June 30, 2025 Pre-tax, pre-provision net income (loss) Pre-tax, pre-provision net income (loss) (GAAP) $ 12,353 $ 11,597 $ 23,950 $ (4,643) Comparable pre-tax, pre-provision net income (non-GAAP) 1 12,353 11,597 23,950 14,093 Net income (loss) Net income (loss) (GAAP) 9,246 8,510 17,756 (3,660) Comparable net income (non-GAAP) 1 9,246 8,510 17,756 9,538 Diluted earnings (loss) per share Diluted earnings (loss) per share (GAAP) 0.58 0.53 1.11 (0.23) Comparable diluted earnings per share (non-GAAP) 1 0.58 0.53 1.11 0.60 1 Non-GAAP ratios exclude the loss on sale of securities, 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% 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. • The tax-equivalent net interest margin increased to 3.38% in the second quarter of 2026 from 3.24% in the prior quarter, an improvement of 14 basis points. The increase is mostly explained by an eight basis point increase in loan yields, a seven basis point decrease in the cost of deposits, and the use of one-way sales of deposits, which improved the mix of average earnings assets, contributing to the decrease in the quarterly cost of deposits. The tax-equivalent net interest margin for the six months ended June 30, 2026 improved 51 basis points over the same period of the prior year due to the favorable impact of the securities repositioned in the second and fourth quarters of 2025, which resulted in higher yielding assets during the six months ended June 30, 2026 as well as higher average loan balances and yields. Also contributing to the improvement was the decrease in cost of deposits of seven basis points. • The average cost of interest bearing deposits decreased from 2.10% to 2.04% and the average cost of total deposits decreased from 1.35% to 1.28% in the second quarter of 2026 compared to the prior quarter primarily due to targeted rate cuts. The average cost of interest bearing deposits decreased from 2.26% to 2.07% and the average cost of total deposits decreased from 1.39% to 1.32% for the first six months of 2025 compared to 2026. Non-interest bearing deposits continued to make up a strong portion of total deposits at 36.7% as of June 30, 2026 and December 31, 2025. • Total deposits were $3.370 billion as of June 30, 2026, compared to $3.416 billion as of December 31, 2025, a decrease of $45.6 million. The decrease was primarily attributable to a small number of relationships and reflected seasonal customer activity and investment decisions, rather than broader changes in deposit trends. In addition, seasonal tax-related outflows contributed to the second quarter decrease. • Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $2.177 billion, or 65% of total deposits and 214% of estimated uninsured and/or uncollateralized deposits as of June 30, 2026. Page-30 • Loans totaled $2.101 billion as of June 30, 2026, a decrease of $19.9 million from December 31, 2025. The decrease was primarily due to the completion of a planned exit of $19.0 million in special mention loans related to one relationship, significantly reducing our exposure to the wine industry. Loan fundings during the second quarter of 2026 were $62.8 million compared to $60.8 million in the prior quarter, and $50.6 million for the second quarter of 2025. Loan fundings during the six months ended June 30, 2026 were $123.6 million compared to $98.0 million in the same period of the prior year. • During the quarter, we continued working to improve credit quality. Non-accrual loans continued to decline to 0.40% of total loans at June 30, 2026 from 0.41% at March 31, 2026 and 1.27% at December 31, 2025. The ratio of classified to total loans ended the second quarter at 0.95%, compared to 0.85% at March 31, 2026 and 1.51% at December 31, 2025. • The Bank recorded a reversal of the provision for credit losses on loans of $320 thousand in the six months ended June 30, 2026, compared to a provision for credit losses on loans of $75 thousand in the six months ended June 30, 2025. The allowance for credit losses was 1.07%, 1.08% and 1.42% of total loans at June 30, 2026, March 31, 2026 and December 31, 2025, respectively. Performance and other financial ratios: 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 2025 GAAP ratios were significantly impacted by the securities sales in the second and fourth quarters of 2025. Non-GAAP ratios exclude the loss on sale of securities, with all other factors unchanged. See Reconciliation of GAAP and Non-GAAP Financial Measures below. Comparable (non-GAAP) Excluding Loss on Sale of Securities Three months ended Six months ended (unaudited) June 30, 2026 March 31, 2026 June 30, 2026 June 30, 2025 Return on average assets Return on average assets (GAAP) 0.96 % 0.87 % 0.91 % (0.20) % Comparable return on average assets (non-GAAP) 1 0.96 % 0.87 % 0.91 % 0.52 % Return on average equity Return on average equity (GAAP) 9.38 % 8.67 % 9.03 % (1.68) % Comparable return on average equity (non-GAAP) 1 9.38 % 8.67 % 9.03 % 4.39 % Efficiency ratio Efficiency ratio (GAAP) 63.62 % 66.03 % 64.82 % 112.77 % Comparable efficiency ratio (non-GAAP )1 63.62 % 66.03 % 64.82 % 74.42 % 1 Non-GAAP ratios exclude the loss on sale of securities, 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% • Return on average assets ("ROA") and return on average equity ("ROE") for the second quarter was 0.96%, and 9.38%, respectively, and increased on a GAAP basis from the prior quarter primarily due to increased GAAP net income. ROA and ROE for the six months ended June 30, 2026 was 0.91%, and 9.03%, respectively, and increased on a GAAP basis from the same period in the prior year primarily due to increased GAAP net income and the losses on securities sales in the second quarter of 2025, that are reflected in the prior year ROA and ROE. The efficiency ratio on a GAAP basis improved to 63.62% for the second quarter compared to 66.03% for the prior quarter, and was 64.82% for the six months ended June 30, 2026 compared to 112.77% for the same period in the prior year. • ROA and ROE for the six months ended June 30, 2026 was 0.91%, and 9.03%, respectively, and increased on a non-GAAP basis from the same period in the prior year primarily due to increased non-GAAP net income. The efficiency ratio on a non-GAAP basis, was 64.82% for the six months ended June 30, 2026 and was 74.42% for the same period in the prior year. All GAAP and non-GAAP ratios improved year over year due to the improved investment securities performance post-restructuring, increased loan yields and reduced deposit costs, combined with continued prudent expense management. Page-31 • Capital was above well-capitalized regulatory thresholds with Bancorp's and the Bank's total risk-based capital ratios of 15.58% and 14.61%, respectively, as of June 30, 2026. Our capital plan and point-in-time capital stress tests indicate that Bank of Marin and Bancorp capital ratios should 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 8.52% as of June 30, 2026, and the Bank's TCE ratio was 9.03%. 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. • The Board of Directors declared a cash dividend of $0.25 per share on July 23, 2026, which represents the 85 th consecutive quarterly dividend paid by Bancorp. The dividend is payable on August 13, 2026, to shareholders of record at the close of business on August 6, 2026. 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 Six months ended (dollars in thousands, except per share data) June 30, 2026 March 31, 2026 June 30, 2026 June 30, 2025 Selected operating data: Net interest income $ 30,781 $ 30,302 $ 61,083 $ 49,100 (Reversal of) provision for credit losses on loans (320) — (320) 75 Provision of credit losses on unfunded loan commitments — — — — Non-interest income (loss) 3,169 3,834 7,003 (12,747) Non-interest expense 21,597 22,539 44,136 40,996 Net income (loss) 9,246 8,510 17,756 (3,660) Net (loss) income per common share: Basic $ 0.58 $ 0.53 $ 1.11 $ (0.23) Diluted $ 0.58 $ 0.53 $ 1.11 $ (0.23) Performance and other financial ratios: Return on average assets 0.96 % 0.87 % 0.91 % (0.20) % Return on average equity 9.38 % 8.67 % 9.03 % (1.68) % Return on tangible common equity 11.55 % 10.67 % 11.11 % (2.03) % Tax-equivalent net interest margin 3.38 % 3.24 % 3.31 % 2.80 % Cost of deposits 1.28 % 1.35 % 1.32 % 1.39 % Cost of funds 1.36 % 1.43 % 1.40 % 1.39 % Efficiency ratio 63.62 % 66.03 % 64.82 % 112.77 % Net charge-offs $ 39 $ 7,266 $ 7,305 $ 877 Cash dividend payout ratio on common stock 1 43.10 % 47.17 % 45.05 % 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, 2026 December 31, 2025 Selected financial condition data: Total assets $ 3,856,720 $ 3,904,778 Investment securities 1,242,831 1,327,812 Loans, net of allowance for credit losses on loans 2,078,512 2,090,764 Deposits 3,369,900 3,415,542 Borrowings and other obligations 625 709 Subordinated notes, net of issuance costs 43,955 43,857 Stockholders' equity 396,684 394,654 Book value per share 24.51 24.51 Tangible book value per share 1 19.92 19.87 Asset quality ratios: Allowance for credit losses on loans to total loans 1.07 % 1.42 % Allowance for credit losses on loans to non-accrual loans 2.66x 1.12x Non-accrual loans to total loans 0.40 % 1.27 % Classified loans (graded substandard and doubtful) as a percentage of total loans 0.95 % 1.51 % Capital ratios: Equity to total assets ratio 10.29 % 10.11 % Tangible common equity to tangible assets 8.52 % 8.35 % Total capital (to risk-weighted assets) 15.58 % 15.25 % Tier 1 capital (to risk-weighted assets) 12.93 % 12.34 % Tier 1 capital (to average assets) 8.66 % 8.26 % Common equity Tier 1 capital (to risk weighted assets) 12.93 % 12.34 % 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 June 30, 2026 March 31, 2026 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Interest-earning deposits with banks 1 $ 176,889 $ 1,646 3.68 % $ 265,720 $ 2,392 3.60 % Investment securities 2, 3 1,329,846 13,465 4.05 % 1,374,555 13,906 4.05 % Loans 1, 3, 4, 5 2,113,964 27,382 5.12 % 2,114,052 26,646 5.04 % Total interest-earning assets 1 3,620,699 42,493 4.64 % 3,754,327 42,944 4.58 % Cash and non-interest-bearing due from banks 32,830 32,496 Bank premises and equipment, net 7,965 8,007 Interest receivable and other assets, net 188,646 194,423 Total assets $ 3,850,140 $ 3,989,253 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 363,579 $ 1,462 1.61 % $ 464,323 $ 2,039 1.78 % Savings accounts 235,698 635 1.08 % 228,635 577 1.02 % Money market accounts 1,351,175 7,674 2.28 % 1,367,142 7,821 2.32 % Time accounts including CDARS 165,017 965 2.35 % 192,553 1,242 2.62 % Borrowings and other obligations 1 640 6 3.71 % 683 6 3.66 % Subordinated notes, net 43,923 817 7.44 % 43,873 808 7.36 % Total interest-bearing liabilities 2,160,032 11,559 2.15 % 2,297,209 12,493 2.21 % Demand accounts 1,247,995 1,244,595 Interest payable and other liabilities 46,785 49,432 Stockholders' equity 395,328 398,017 Total liabilities & stockholders' equity $ 3,850,140 $ 3,989,253 Tax-equivalent net interest income/margin 1 $ 30,934 3.38 % $ 30,451 3.24 % Reported net interest income/margin 1 $ 30,781 3.36 % $ 30,302 3.23 % Tax-equivalent net interest rate spread 2.49 % 2.37 % Page-34 Six months ended Six months ended June 30, 2026 June 30, 2025 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (in thousands) Balance Expense Rate Balance Expense Rate Assets Interest-earning deposits with banks 1 $ 221,059 $ 4,038 3.63 % $ 172,136 $ 3,799 4.39 % Investment securities 2, 3 1,352,077 27,370 4.05 % 1,269,850 16,821 2.65 % Loans 1, 3, 4, 5 2,114,008 54,028 5.08 % 2,073,423 51,254 4.92 % Total interest-earning assets 1 3,687,144 85,436 4.61 % 3,515,409 71,874 4.07 % Cash and non-interest-bearing due from banks 32,664 37,608 Bank premises and equipment, net 7,986 7,046 Interest receivable and other assets, net 191,518 172,894 Total assets $ 3,919,312 $ 3,732,957 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 413,673 $ 3,501 1.71 % $ 339,058 $ 2,452 1.46 % Savings accounts 232,186 1,212 1.05 % 224,798 1,120 1.00 % Money market accounts 1,359,115 15,495 2.30 % 1,210,326 15,504 2.58 % Time accounts including CDARS 178,709 2,207 2.49 % 223,057 3,349 3.03 % Borrowings and other obligations 1 661 12 3.61 % 111 2 3.08 % Subordinated notes, net 43,898 1,625 7.40 % — — — % Total interest-bearing liabilities 2,228,242 24,052 2.18 % 1,997,350 22,427 2.26 % Demand accounts 1,246,304 1,252,711 Interest payable and other liabilities 48,101 44,709 Stockholders' equity 396,665 438,187 Total liabilities & stockholders' equity $ 3,919,312 $ 3,732,957 Tax-equivalent net interest income/margin 1 $ 61,384 3.31 % $ 49,447 2.80 % Reported net interest income/margin 1 $ 61,083 3.29 % $ 49,100 2.78 % Tax-equivalent net interest rate spread 2.43 % 1.81 % 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 $427 thousand and $398 thousand for the three months ended June 30, 2026 and March 31, 2026 and totaled $825 thousand and $764 thousand for the six months ended June 30, 2026 and 2025, respectively. Page-35 The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the periods indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one day more in the three months ended June 30, 2026, compared to the three months ended March 31, 2026. Three months ended June 30, 2026 compared to three months ended March 31, 2026 Six months ended June 30, 2026 compared to six months ended June 30, 2025 (in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total Interest-earning deposits with banks $ (799) $ 53 $ — $ (746) $ 1,080 $ (655) $ (186) $ 239 Investment securities 1 (454) 13 — (441) 1,090 8,883 575 10,548 Loans 1 (1) 436 301 736 1,003 1,737 34 2,774 Total interest-earning assets (1,254) 502 301 (451) 3,173 9,965 423 13,561 Interest-bearing transaction accounts (443) (192) 58 (577) 539 418 92 1,049 Savings accounts 18 32 8 58 37 53 2 92 Money market accounts (91) (142) 86 (147) 1,906 (1,705) (210) (9) Time accounts, including CDARS (178) (128) 29 (277) (666) (594) 118 (1,142) Borrowings and other obligations — — — — 10 — — 10 Subordinated notes — 9 — 9 — — 1,625 1,625 Total interest-bearing liabilities (694) (421) 181 (934) 1,826 (1,828) 1,627 1,625 Changes in tax-equivalent net interest income $ (560) $ 923 $ 120 $ 483 $ 1,347 $ 11,793 $ (1,204) $ 11,936 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 2026 compared to the First Quarter of 2026 Net interest income totaled $30.8 million for the second quarter of 2026, a $479 thousand increase from the prior quarter. This was driven by an eight basis point increase in the average loan yield, combined with a seven basis point decrease in the cost of deposits in the quarter. The tax-equivalent net interest margin was 3.38% for the second quarter of 2026, compared to 3.24% for the prior quarter. The increase is mostly explained by the increase in average loan yields and the decrease in cost of deposits noted above, and the use of one-way sales of deposits, which improved the mix of average earning assets. The spot rate of deposits at March 31, 2026 of 1.31% dropped to 1.28% at June 30, 2026. First Six Months of 2026 compared to the First Six Months of 2025 Net interest income totaled $61.1 million for the six months ended June 30, 2026, compared to $49.1 million for the same period in the prior year. The $12.0 million increase from the prior year was primarily due to higher yields in reinvested securities and loans. The tax-equivalent net interest margin was 3.31% for the six months ended June 30, 2026, compared to 2.80% for the same period in the prior year. The increase of 51 basis points was primarily attributed to the investment securities restructuring performed in both 2024 and 2025 contributing 53 basis points and lower deposit costs and the mix of deposits contributing six basis points, and higher average loan balances and yields. These were partially offset by the impact of the subordinated debt, detracting nine basis points. The spot rate of deposits at June 30, 2025 of 1.29% dropped to 1.28% at June 30, 2026. 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"). 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. Following a pause of approximately nine months, the FOMC resumed decreasing rates in September 2025, and made a total of three rate decreases in 2025 ending the year at a range of 3.50% to 3.75%. Page-36 During the second and fourth quarters of 2025, the Bank sold additional securities with relatively low yields and redeployed the proceeds to further reposition our balance sheet, by investing in higher yielding securities. 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 provisions charged to expense during the periods presented. Three months ended Six months ended (dollars in thousands) June 30, 2026 March 31, 2026 June 30, 2026 June 30, 2025 (Reversal of) provision for credit losses on loans $ (320) $ — $ (320) $ 75 We recorded a reversal of the provision for credit losses on loans of $320 thousand in the second quarter of 2026, driven by lower loan balances and improved credit quality in the non-owner occupied commercial real estate portfolio. This compared to no provision in the prior quarter. Non-accrual loans declined during the quarter to $8.5 million, or 0.40% of the loan portfolio, at June 30, 2026, compared to $8.6 million or 0.41% at March 31, 2026, and $26.9 million, or 1.27%, at December 31, 2025. We recorded a reversal of the provision for credit losses on loans of $320 thousand in the six months ended June 30, 2026, and recorded a provision for credit losses on loans of $75 thousand in the six months ended June 30, 2025. 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-37 Non-interest Income (Loss) The following table details the components of non-interest income (loss). Three months ended (dollars in thousands) June 30, 2026 March 31, 2026 Amount Change Percent Change Service charges on deposit accounts $ 563 $ 563 $ — — % Wealth management and trust services 543 596 (53) (8.9) % Earnings on bank-owned life insurance, net 442 487 (45) (9.2) % Debit card interchange fees, net 397 362 35 9.7 % Dividends on Federal Home Loan Bank stock 199 855 (656) (76.7) % Merchant interchange fees, net 142 118 24 20.3 % Earnings on bank-owned life insurance death benefits 59 479 (420) (87.7) % Other income 824 374 450 120.3 % Total non-interest (loss) income $ 3,169 $ 3,834 $ (665) (17.3) % Six months ended (dollars in thousands) June 30, 2026 June 30, 2025 Amount Change Percent Change Service charges on deposit accounts $ 1,126 $ 1,098 $ 28 2.6 % Wealth management and trust services 1,139 1,175 (36) (3.1) % Earnings on bank-owned life insurance, net 929 905 24 2.7 % Debit card interchange fees, net 759 806 (47) (5.8) % Dividends on Federal Home Loan Bank stock 1,054 737 317 43.0 % Merchant interchange fees, net 260 186 74 39.8 % Earnings on bank-owned life insurance death benefits 538 306 232 75.8 % Losses on sale of investment securities — (18,736) 18,736 NM Other income 1,198 776 422 54.4 % Total non-interest (loss) income $ 7,003 $ (12,747) $ 19,750 (154.9) % NM - not meaningful Second Quarter of 2026 Compared to the First Quarter of 2026 Non-interest income was $3.2 million for the second quarter of 2026, compared to $3.8 million for the prior quarter. The decrease of $665 thousand from the prior quarter was primarily attributable to a decrease in dividend income on FHLB stock of $656 thousand which included the $479 thousand special dividend received in the first quarter. There was also bank owned life insurance death benefits of $479 thousand received in the first quarter, compared to $59 thousand in the second quarter. These were partially offset by the increase in fee income within other income of $377 thousand due to one-way sales of deposits in the quarter. First Six Months of 2026 Compared to the First Six Months of 2025 Non-interest income was $7.0 million for the first six months ended June 30, 2026, compared to a loss of $12.7 million for the same period of the prior year. The prior year included $18.7 million in pre-tax losses on the sale of investment securities. Excluding those losses, non-interest income increased $1.0 million primarily due to an increase of $317 thousand earned in dividends including a special dividend on Federal Home Loan Bank stock received, an increase of $232 thousand earned on bank-owned life insurance death benefits, and increased fees on one-way sales of deposits of $395 thousand included in other income in 2026. Page-38 Non-interest Expense The following table details the components of non-interest expense. Three months ended (dollars in thousands) June 30, 2026 March 31, 2026 Amount Change Percent Change Salaries and related benefits $ 12,609 $ 13,394 $ (785) (5.9) % Occupancy and equipment 2,090 2,099 (9) (0.4) % Data processing 1,138 1,228 (90) (7.3) % Professional services 1,371 1,093 278 25.4 % Federal Deposit Insurance Corporation insurance 555 730 (175) (24.0) % Information technology 510 515 (5) (1.0) % Charitable contributions 190 437 (247) (56.5) % Directors' expense 261 285 (24) (8.4) % Depreciation and amortization 270 263 7 2.7 % Amortization of core deposit intangible 196 200 (4) (2.0) % Deposit network fees 118 149 (31) (20.8) % Other expense 2,289 2,146 143 6.7 % Total non-interest expense $ 21,597 $ 22,539 $ (942) (4.2) % Six months ended (dollars in thousands) June 30, 2026 June 30, 2025 Amount Change Percent Change Salaries and related benefits $ 26,003 $ 24,095 $ 1,908 7.9 % Occupancy and equipment 4,189 4,332 (143) (3.3) % Data processing 2,366 2,177 189 8.7 % Professional services 2,464 1,845 619 33.6 % Federal Deposit Insurance Corporation insurance 1,285 809 476 58.8 % Information technology 1,025 976 49 5.0 % Charitable contributions 627 519 108 20.8 % Directors' expense 546 583 (37) (6.3) % Depreciation and amortization 533 642 (109) (17.0) % Amortization of core deposit intangible 396 447 (51) (11.4) % Deposit network fees 267 228 39 17.1 % Other expense 4,435 4,343 92 2.1 % Total non-interest expense $ 44,136 $ 40,996 $ 3,140 7.7 % Second Quarter of 2026 Compared to the First Quarter of 2026 Non-interest expense totaled $21.6 million for the second quarter of 2026, compared to $22.5 million for the prior quarter, a decrease of $942 thousand. This was primarily due to a decrease of $785 thousand in salaries and related benefits. Expenses decreased due to incentive bonus accruals, 401(k) contribution matching, profit sharing accruals, and stock-based compensation grants that occurred in the first quarter and were not repeated in the second quarter. There were also decreases of $247 thousand in charitable contributions because the majority of annual giving occurs in the first quarter, and $175 thousand in FDIC insurance. This was partially offset by an increase of $278 thousand in professional services expense in the second quarter of 2026 mostly related to audit, operations, compliance, information security and accounting fees. First Six Months of 2026 Compared to the First Six Months of 2025 Non-interest expense totaled $44.1 million for the first six months ending June 30, 2026, compared to $41.0 million for the same period of 2025, an increase of $3.1 million. This was primarily due to an increase of $1.9 million in salaries and benefits. Expenses increased due to a higher full-time employee count and annual salary increases. There were also increases of $619 thousand in professional services expense and $476 thousand in FDIC insurance in the first six months of 2026. Page-39 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 second quarter of 2026 totaled $3.4 million at an effective tax rate of 27.0%, compared to a provision of $3.1 million at an effective tax rate of 26.6% in the prior quarter. The increase in the provision for income taxes in the second quarter of 2026 reflected higher pre-tax income as compared to the prior quarter. The increase in the effective tax rate in the second quarter of 2026 was primarily driven by the treatment of certain permanent tax differences, which had a greater proportional effect given the lower pre‑tax income in the prior quarter. The income tax provision for the first six months of 2026 totaled $6.5 million at an effective tax rate of 26.8%, compared to an income tax benefit of $1.1 million at an effective tax rate of 22.4% for the first six months of 2025. The increase in the provision for incomes taxes and effective tax rate in the first six months of 2026, as compared to the same period a year ago, was primarily due to an increase of $29.0 million in pre-tax income. 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 Revenue & 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. This law does not have a material impact on the company’s tax expense as of June 30, 2026. On July 4, 2025, the Trump Administration signed and enacted the One Big Beautiful Bill Act ("the Act") into law. Except for certain provisions, the 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 evaluated the impact of the Act on income tax expense, deferred tax assets and liabilities, and related valuation allowances. This law did not have a material impact on the company's tax expense as of June 30, 2026. We file a consolidated return in the U.S. federal tax jurisdiction and combined returns in the states of California and New Jersey due to interest on purchased auto loans registered in New Jersey. There were no ongoing federal or state income tax examinations at the time of the issuance of this report. As of June 30, 2026, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits. Page-40 FINANCIAL CONDITION SUMMARY Cash, Cash Equivalents and Restricted Cash Total cash, cash equivalents and restricted cash were $279.6 million at June 30, 2026, an increase of $54.3 million compared to $225.3 million at December 31, 2025, driven by proceeds from paydowns and maturities of investment securities of $137.9 million, loan payoffs and paydowns of $101.8 million, and $40.4 million in amortization of principal, partially offset by $123.6 million in loan fundings, purchases of investment securities of $65.2 million, $45.6 million from net decrease of deposits, and dividends of $8.1 million to shareholders. Investment Securities The investment securities portfolio totaled $1.243 billion at June 30, 2026, a decrease of $85.0 million from $1.328 billion at December 31, 2025. The decrease was primarily due to principal repayments and calls/maturities totaling $137.9 million, partially offset by purchases of AFS securities of $65.2 million. The portfolio is eligible for pledging to FHLB or the Federal Reserve as collateral for borrowing, and is comprised of high credit quality investments with an average effective duration of 2.91. The portfolio generates cash flows monthly from interest, principal amortization and payoffs, which supports the Bank's liquidity. Those cash flows totaled $92.1 million and $73.4 million in the second quarter of 2026 and the first quarter of 2026, respectively. Refer to Note 4, Investment Securities, to the consolidated financial statements in this Form 10-Q. The following table summarizes our investment in obligations of state and political subdivisions at June 30, 2026 and December 31, 2025. June 30, 2026 December 31, 2025 (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 $ 9,980 $ 8,227 17.2 % $ 9,891 $ 8,359 16.3 % Revenue bonds — — — — — — Total within California 9,980 8,227 17.2 9,891 8,359 16.3 Outside California: General obligation bonds 37,242 33,010 64.1 40,352 35,985 65.9 Revenue bonds 10,850 9,589 18.7 10,881 9,544 17.8 Total outside California 48,092 42,599 82.8 51,233 45,529 83.7 Total obligations of state and political subdivisions $ 58,072 $ 50,826 100.0 % $ 61,124 $ 53,888 100.0 % Percent of investment portfolio 4.5 % 4.1 % 4.5 % 4.1 % Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (41.4%), Wisconsin (25.4%) and Virginia (7.0%). 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) • Credit ratings by major credit rating agencies Page-41 Loans and Credit Quality Loans totaled $2.101 billion as of June 30, 2026, compared to $2.121 billion as of December 31, 2025 with a decrease of $19.9 million. See the rollforward of loan balances below. Three months ended Six months ended (in millions; unaudited) June 30, 2026 March 31, 2026 June 30, 2026 June 30, 2025 Gross loans beginning balance $ 2,115.7 $ 2,120.9 $ 2,120.9 $ 2,083.3 Newly funded 62.8 60.8 123.6 98.0 New total commitments 1 98.4 80.5 178.9 132.8 Purchased — — — — Net increase (decrease) in line of credit utilization 14.5 0.6 15.1 (6.6) Pay-downs and maturities (71.2) (30.6) (101.8) (59.9) Charge-offs — (7.3) (7.3) (0.8) Note sales — (9.1) (9.1) (1.3) Amortization (20.8) (19.6) (40.4) (39.1) Gross loans ending balance $ 2,101.0 $ 2,115.7 $ 2,101.0 $ 2,073.6 1 New total commitments includes both newly funded loans and new unfunded commitments For the six months ending June 30, 2026, loans originated were $178.9 million ($123.6 million funded) compared to $132.8 million ($98.0 million funded) in the same period of the prior year. The second quarter of 2026 originations exceeded both prior quarter and prior year's second quarter. Payoffs in the six months ended June 30, 2026 were $101.8 million, compared to $59.9 million in the prior year including a significant increase in the second quarter of 2026 mostly related to planned exits and customer asset sales. In addition, net utilization of credit lines increased to $15.1 million during the six months ended June 30, 2026, compared to the net decrease in utilization of credit lines of $6.6 million in the prior year. There were significant improvements to our credit quality in the first six months of 2026 including non-accrual balances, classified loan balances and past due loan balances. Non-accrual loans declined by $18.4 million during that time to $8.5 million, or 0.40% of total loans, compared to $26.9 million, or 1.27%, at December 31, 2025. The reduction was driven primarily by the sale of two non-owner occupied commercial real estate loans totaling $16.3 million in the first quarter of 2026 with continued payoffs in the second quarter. Classified loans declined by $12.2 million during the first six months of 2026 to $19.9 million from $32.1 million at December 31, 2025. The improvement was driven primarily by the sale of the two non‑owner occupied commercial real estate loans previously discussed, along with payoffs totaling $2.6 million. These positive trends were partially offset by downgrades totaling $8.0 million into the classified category, $2.2 million of which occurred in the second quarter. The Bank remains disciplined and proactive in our credit management approach with close monitoring and active resolution efforts across the portfolio. Accruing loans past due 30 to 89 days totaled $2.0 million at June 30, 2026, down from $2.8 million at December 31, 2025. Loans designated as special mention, which are not considered adversely classified, decreased to $100.9 million at June 30, 2026 compared to $118.0 million at December 31, 2025 . The $17.1 million net decrease reflects $22.5 million in payoffs, $12.0 million in upgrades, $5.7 million in downgrades out of the category and $2.0 million in contractual amortization and payoffs, partially offset by $24.6 million that migrated into special mention. Net charge-offs totaled $7.3 million in the first six months of 2026 compared to $877 thousand in the prior year during the same time period. Approximately $7.2 million of the charge‑offs were related to the two non-accrual loans that were sold in the first quarter of 2026. These charge‑offs were fully offset by specific reserves that were already in place for the two loans. 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-42 Liabilities - Deposits and Borrowings During the first six months of 2026, total liabilities decreased by $50.1 million to $3.460 billion. Deposits totaled $3.370 billion at June 30, 2026, a decrease of $45.6 million, compared to $3.416 billion at December 31, 2025. The majority of the decrease in deposits was due to a decrease of $179.8 million in interest bearing transaction accounts, $47.5 million in time accounts and $17.1 million in non-interest bearing deposits, partially offset by an increase of $205.5 million in money market deposits. The decrease was primarily attributable to a small number of relationships and reflected seasonal customer activity and investment policy decisions, rather than broader changes in deposit trends. In addition, seasonal tax-related outflows contributed to the second quarter decrease. Interest bearing transaction accounts decreased while money market accounts increased primarily as a result of the transfer of approximately $170 million in reciprocal deposits during the second quarter. As of June 30, 2026, total one-way sales decreased to zero although the Bank strategically sold an average of $94.7 million during the second quarter which enhanced non-interest income and net interest margin. Non-interest bearing deposits continued to make up a strong 36.7% of total deposits at June 30, 2026, consistent with December 31, 2025. The Bank had no outstanding short-term borrowings at June 30, 2026 and December 31, 2025. Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and total available borrowing capacity was $2.177 billion, or 65% of total deposits and 214% of estimated uninsured and/or uncollateralized deposits as of June 30, 2026. Capital Adequacy We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the 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, loan credit quality deterioration, 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, 2026. 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 15.58% at June 30, 2026, compared to 15.25% at December 31, 2025. The total risk-based capital ratio for the Bank was 14.61% at June 30, 2026, compared to 13.90% at December 31, 2025. The Bancorp’s and Bank’s capital adequacy ratios as of June 30, 2026 and December 31, 2025 are presented in the following tables. Page-43 Bancorp Capital Ratios (dollars in thousands) Actual Regulatory Minimum Plus Capital Conservation Buffer 1 Threshold to be a Well Capitalized Bank Holding Company June 30, 2026 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 395,475 15.58 % $ 266,527 10.50 % $ 253,835 10.00 % Tier 1 Capital (to risk-weighted assets) $ 328,161 12.93 % $ 215,728 8.50 % $ 203,038 8.00 % Tier 1 Leverage Capital (to average assets) $ 328,161 8.66 % $ 151,575 4.00 % $ 189,469 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 328,161 12.93 % $ 177,659 7.00 % $ 164,969 6.50 % December 31, 2025 Total Capital (to risk-weighted assets) $ 392,305 15.25 % $ 270,111 10.50 % $ 257,249 10.00 % Tier 1 Capital (to risk-weighted assets) $ 317,501 12.34 % $ 218,700 8.50 % $ 205,835 8.00 % Tier 1 Leverage Capital (to average assets) $ 317,501 8.26 % $ 153,754 4.00 % $ 192,192 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 317,501 12.34 % $ 180,106 7.00 % $ 167,241 6.50 % Bank Capital Ratios (dollars in thousands) Actual Regulatory Minimum Plus Capital Conservation Buffer 1 Threshold to be Well Capitalized under Prompt Corrective Action Provisions June 30, 2026 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 370,718 14.61 % $ 266,430 10.50 % $ 253,742 10.00 % Tier 1 Capital (to risk-weighted assets) $ 347,358 13.69 % $ 215,672 8.50 % $ 202,985 8.00 % Tier 1 Leverage Capital (to average assets) $ 347,358 9.16 % $ 151,685 4.00 % $ 189,606 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 347,358 13.69 % $ 177,612 7.00 % $ 164,925 6.50 % December 31, 2025 Total Capital (to risk-weighted assets) $ 357,407 13.90 % $ 269,984 10.50 % $ 257,127 10.00 % Tier 1 Capital (to risk-weighted assets) $ 326,460 12.69 % $ 218,669 8.50 % $ 205,806 8.00 % Tier 1 Leverage Capital (to average assets) $ 326,460 8.49 % $ 153,809 4.00 % $ 192,262 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 326,460 12.69 % $ 180,081 7.00 % $ 167,218 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, Borrowings and Other Obligations, to the consolidated financial statements in this Form 10-Q. 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 $2.177 billion or 65% of total deposits and 214% of estimated uninsured and/or uncollateralized deposits as of June 30, 2026. Page-44 The following table details the components of our contingent liquidity sources as of June 30, 2026. (in thousands) Total Available Amount Used Net Availability Internal Sources Unrestricted cash 1 $ 256,584 $ — $ 256,584 Unencumbered securities at market value 491,749 — 491,749 External Sources — FHLB line of credit 978,367 — 978,367 FRB line of credit 310,442 — 310,442 Lines of credit at correspondent banks 140,000 — 140,000 Total Liquidity $ 2,177,142 $ — $ 2,177,142 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, 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 $54.3 million in the first six months of 2026. The most significant sources of liquidity during the first six months of 2026 were $137.9 million from principal paydowns, calls and maturities of investment securities, loan payoffs and paydowns of $101.8 million, $40.4 million in amortization of principal, and $13.3 million in net cash provided by operating activities. In addition, there were proceeds from loan sales of $9.1 million. Significant uses of liquidity during the six months ended June 30, 2026 were $123.6 million in loan fundings, $65.2 million in investment securities purchased, $45.6 million from net decrease of deposits, net loan line utilization of $15.1 million and $8.1 million in cash dividends paid on common stock to our shareholders. Refer to the Consolidated Statements 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 $450.1 million at June 30, 2026. 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, $151.8 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 short term borrowings under our credit facilities at June 30, 2026, and at December 31, 2025, as discussed in Note 6, Borrowings and Other Obligations, to the Consolidated Financial Statements in this Form 10-Q. We issued Fixed-to-Floating Subordinated Notes of $45.0 million with a final maturity date of December 1, 2035, during 2025, to certain investors in a private placement, to strengthen our capital ratios as part of our balance sheet repositioning, as discussed in Note 9 to the Consolidated Financial Statements. At June 30, 2026, the balance of the 2035 Notes included in the Company’s Consolidated Statements of Condition, net of debt issuance cost, was $44.0 million. 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 Page-45 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 - Department of Financial Protection and Innovation on May 30, 2025, 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, subordinated notes servicing, share repurchases and ordinary operating expenses. Bancorp held $24.6 million in cash at June 30, 2026, which is expected to cover cash needs through the next twelve months. 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 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-46 Reconciliation of GAAP and Non-GAAP Financial Measures (in thousands, except per share amounts; unaudited) Three months ended Six months ended Pre-tax, pre-provision net income June 30, 2026 March 31, 2026 June 30, 2026 June 30, 2025 Income (loss) before (benefit from) provision for income taxes $ 12,673 $ 11,597 $ 24,270 $ (4,718) (Reversal of) provision for credit losses on loans (320) — (320) 75 Provision for credit losses on unfunded loan commitments — — — — Pre-tax, pre-provision net income (loss) (GAAP) 12,353 11,597 23,950 (4,643) Adjustments: Losses on sale of investment securities from portfolio repositioning — — — 18,736 Comparable pre-tax, pre-provision net income (non-GAAP) $ 12,353 $ 11,597 $ 23,950 $ 14,093 Net income (loss) Net income (loss) (GAAP) $ 9,246 $ 8,510 $ 17,756 $ (3,660) Adjustments: Losses on sale of investment securities from portfolio repositioning — — — 18,736 Related income tax benefit 1 — — — (5,538) Adjustments, net of taxes — — — 13,198 Comparable net income (non-GAAP) $ 9,246 $ 8,510 $ 17,756 $ 9,538 Diluted earnings (loss) per share Weighted average diluted shares 15,991 15,973 15,983 15,983 Diluted earnings (loss) per share (GAAP) $ 0.58 $ 0.53 $ 1.11 $ (0.23) Comparable diluted earnings per share (non-GAAP) $ 0.58 $ 0.53 $ 1.11 $ 0.60 Return on average assets Average assets $ 3,850,140 $ 3,989,253 $ 3,919,312 $ 3,732,957 Return on average assets (GAAP) 0.96 % 0.87 % 0.91 % (0.20) % Comparable return on average assets (non-GAAP) 0.96 % 0.87 % 0.91 % 0.52 % Return on average equity Average stockholders' equity $ 395,328 $ 398,017 $ 396,665 438,187 Return on average equity (GAAP) 9.38 % 8.67 % 9.03 % (1.68) % Comparable return on average equity (non-GAAP) 9.38 % 8.67 % 9.03 % 4.39 % Return on average tangible common equity Average goodwill and intangibles $ 74,393 $ 74,591 $ 74,491 $ 75,336 Average tangible common equity 320,935 323,426 322,174 362,851 Return on average tangible common equity (GAAP) 11.56 % 10.67 % 11.11 % (2.03) % Comparable return on average tangible common equity (non-GAAP) 11.56 % 10.67 % 11.11 % 5.30 % Efficiency ratio Non-interest expense $ 21,597 $ 22,539 $ 44,136 $ 40,996 Net interest income $ 30,781 $ 30,302 $ 61,083 $ 49,100 Non-interest income (loss) (GAAP) $ 3,169 $ 3,834 $ 7,003 $ (12,747) Losses on sale of investment securities from portfolio repositioning — — — 18,736 Non-interest income (non-GAAP) $ 3,169 $ 3,834 $ 7,003 $ 5,989 Efficiency ratio (GAAP) 63.62 % 66.03 % 64.82 % 112.77 % Comparable efficiency ratio (non-GAAP) 63.62 % 66.03 % 64.82 % 74.42 % 1 Related tax benefit calculated using blended statutory rate of 29.56%