Bank of Marin Bancorp

Previous wording

Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues that may impact Bancorp's earnings in future periods. Factors that could cause future results to vary materially from current management expectations include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including economic or other disruptions to financial markets caused by acts of terrorism, war, 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.

Current wording

Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues that may impact Bancorp's earnings in future periods. Factors that could cause future results to vary materially from current management expectations include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including economic or other disruptions to financial markets caused by acts of terrorism, war or other conflicts, impacts from inflation, supply chain disruptions, changes in interest rates (including the actions taken by the Federal Reserve to control inflation), California's unemployment rate, deposit flows, real estate values, and expected future cash flows on loans and securities; the impact of adverse developments at other banks, including bank failures, that impact general sentiment regarding the stability and liquidity of banks; costs or effects of acquisitions; competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; natural disasters (such as wildfires and earthquakes in our area); adverse weather conditions; interruptions of utility service in our markets for sustained periods; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting our operations, pricing, products and services; and successful integration of acquisitions.

Previous wording

Net loss for the second quarter of 2024 was $21.9 million, compared to net income of $2.9 million for the first quarter of 2024 and $4.6 million for the second quarter of 2023. Diluted loss per share was $(1.36) for the second quarter of 2024, compared to earnings per share of $0.18 for the preceding quarter and $0.28 for the same quarter a year ago. Net loss for the first six months of 2024 totaled $19.0 million, compared to net income of $14.0 million for the same period last year. Diluted (loss) earnings per share was $(1.18) and $0.87 for the first six months of 2024 and 2023, respectively. Both the second quarter and six months of 2024 results reflected a $32.5 million pre-tax loss from the previously announced balance sheet restructuring and a $5.2 million pre-tax provision for credit losses on loans.

Current wording

Net income for the third quarter of 2024 was $4.6 million, compared to net loss of $21.9 million for the second quarter of 2024. Diluted earnings per share was $0.28 for the third quarter of 2024, compared to loss per share of $(1.36) for the preceding quarter. Net loss for the first nine months of 2024 totaled $14.4 million, compared to net income of $19.3 million for the same period last year. Diluted (loss) earnings per share was $(0.90) and $1.20 for the first nine months of 2024 and 2023, respectively. Both the prior quarter and year-to-date 2024 results reflected a $32.5 million pre-tax loss from the balance sheet restructuring.

Previous wording

•Total deposits of$3.214 billion as of June 30, 2024, compared to$3.290 billion as of December 31, 2023. Non-interest bearing depo sits made up 44.1% of total deposits as of June 30, 2024, compared to 43.8% as of December 31, 2023. As anticipated, deposit balances rose in July 2024 with a peak of $67.0 million in growth and an ending balance $26.3 million above June 30, 2024 balances.

Current wording

•Total deposits increased by $19.2 million to $3.309 billion as of September 30, 2024, compared to $3.290 billion as of December 31, 2023. Non-interest bearing deposits made up 44.5% of total deposits as of September 30, 2024, compared to 43.8% as of December 31, 2023.

Previous wording

•Total borrowings were reduced to zero representing a $26.0 million decrease from December 31, 2023, although there were intermittent borrowings averaging $8.9 million in the first six months of 2024. Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.797 billion, or 56% of total deposits and 202% of estimated uninsured and/or uncollateralized deposits as of June 30, 2024.

Current wording

•Total borrowings were reduced to zero in the second quarter and remained there for the third quarter representing a $26.0 million decrease from December 31, 2023, although there were intermittent borrowings averaging $5.9 million in the first nine months of 2024. Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.934 billion, or 58% of total deposits and 208% of estimated uninsured and/or uncollateralized deposits as of September 30, 2024.

Previous wording

•A $5.6 million provision for credit losses on loans in the first half of 2024 compared to a provision of $850 thousand for the same period last year, bringing the allowance for credit losses to 1.47% of total loans, compared to 1.13% as of June 30, 2023. The provision in 2024 was largely due to an increased individual reserve for one non-owner occupied commercial real estate loan totaling $16.7 million that, although current, has experienced a deteriorating financial condition and a material increase in its loan-to-value ratio associated with a recent valuation of the underlying collateral.

Current wording

•There was a $5.6 million provision for credit losses on loans in the first nine months of 2024, compared to a provision of $1.3 million for the same period last year, bringing the allowance for credit losses to 1.47% of total loans, compared to 1.16% and 1.21% as of September 30, 2023 and December 31, 2023, respectively. The provision in 2024 was largely due to an increased individual reserve for one non-owner occupied commercial real estate loan totaling $16.7 million that, although current, has experienced a deteriorating financial condition due to a material increase in its loan-to-value ratio associated with a recent valuation of the underlying collateral. Net charge-offs were minimal in 2024.

Previous wording

•Return on average assets ("ROA") was (2.35)% for the second quarter of 2024, compared to 0.31% for the first quarter of 2024, and return on average equity ("ROE") was (20.36)%, compared to 2.70% for the prior quarter. ROA was(1.01)% for thesix months ended June 30, 2024, compared to 0.68% in the same period of the prior year. ROE was(8.79)% for thesix months ended June 30, 2024, compared to 6.65% in the same period of the prior year. The efficiency ratio for thesecond quarter of 2024 was(300.37)%, compared to 83.18% for the prior quarter. The efficiency ratio was 237.13% for thesix months ended June 30, 2024, compared to 67.74% in the same period of the prior year. Excluding the loss on security sales, ROA, ROE and the efficiency ratio for the first six months of 2024, would have been 0.21%, 1.83% and 84.93%, all other factors unchanged. (Refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures).

Current wording

•The efficiency ratio for the third quarter of 2024 was 75.18%, compared to (300.37)% for the prior quarter. The efficiency ratio was 140.08% for the nine months ended September 30, 2024, compared to 69.37% in the same period of the prior year. Excluding the loss on security sales with all other factors unchanged, ROA, ROE and the efficiency ratio for the first nine months of 2024, would have been 0.30%, 2.62% and 81.53%, respectively.1

Previous wording

•Capital was above well-capitalized regulatory requirements with Bancorp's and the Bank's total risk-based capital ratios of 16.46% and 15.54%, respectively, as of June 30, 2024. Bancorp's tangible common equity to tangible assets ("TCE ratio") increased to 9.92% as of June 30, 2024, and the Bank's TCE ratio was 9.27%, consistent with prior quarter. While we do not intend to sell ourheld-to-maturity securities, the TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.74%as of June 30, 2024, compared to 7.80% as of December 31, 2023 (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures).

Current wording

•Bancorp's tangible common equity to tangible assets ("TCE ratio") was 9.72% as of September 30, 2024, and the Bank's TCE ratio was 9.32%. While we do not intend to sell our held-to-maturity securities, the Bancorp's TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized 1, was 8.16% as of September 30, 2024, compared to 7.80% as of December 31, 2023.

Previous wording

•The Board of Directors approved a cash dividend of $0.25 per share on July 25, 2024, which represents the 77 th consecutive quarterly dividend paid by Bancorp. The dividend is payable on August 15, 2024, to shareholders of record at the close of business on August 8, 2024.

Current wording

•The Board of Directors approved a cash dividend of $0.25 per share on October 24, 2024, which represents the 78 th consecutive quarterly dividend paid by Bancorp. The dividend is payable on November 14, 2024, to shareholders of record at the close of business on November 7, 2024.

Previous wording

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 six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Current wording

The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the periods indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one day more in the three and nine months ended September 30, 2024, compared to the three months ended June 30, 2024, and nine months ended September 30, 2023.

Previous wording

The tax-equivalent net interest margin was 2.52% for the second quarter of 2024, compared to 2.50% for the prior quarter. Higher loan yields contributed 6 basis points while a higher cost of deposits reduced the margin by 5 basis points. The combination of lower average investment security balances and higher average cash and borrowing balances contributed 1 basis point.

Current wording

The tax-equivalent net interest margin was 2.70% for the third quarter of 2024, compared to 2.52% for the prior quarter. Higher average cash and loan balances, and lower average borrowing balances contributed a combined 31 basis points lift, while lower average investment security balances and higher cost of deposits reduced margin by 11 basis points.

Previous wording

The tax-equivalent net interest margin was 2.51% for the six months ended June 30, 2024, compared to 2.74% for the same period in the prior year. The decrease was primarily attributed to higher deposit costs, which reduced the margin by 90 basis points, partially offset by lower borrowing balances which positively affected the margin by 38 basis points and higher loan yields contributed 30 basis points.

Current wording

The tax-equivalent net interest margin was 2.57% for the nine months ended September 30, 2024, compared to 2.66% for the same period in the prior year. The decrease was primarily attributed to higher deposit costs which reduced the margin by 77 basis points, partially offset by higher loan yields contributing 32 basis points and lower borrowing balances which positively affected the margin by 33 basis points. Higher interest-earning deposits with banks and decreased investment security balances netted a positive effect of six basis points.

Previous wording

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. Beginning in March 2022, the FOMC began successive increases to the federal funds rate due to evolving inflation risks, international political unrest, and oil and other supply chain disruptions. As a result of seven rate adjustments during 2022, the federal funds target rate range increased to between 4.25% and 4.50% at year-end 2022 and our net interest margin increased gradually over the course of the year. In 2023, on each of February 1 st, March 22 nd, May 3 rd, and July 26 th, the FOMC increased the target rate by 25 basis points to a range of 5.25% to 5.50%. Rising interest rates resulted in rapid increases in the cost of funds through rising deposit costs and

Current wording

In response to the evolving risks to economic activity caused by the COVID-19 pandemic, the FOMC made two emergency federal funds rate cuts totaling 150 basis points in March 2020. The federal funds rate range remained between 0.0% and 0.25% through the beginning of 2022, putting downward pressure on our asset yields and net interest margin. The FOMC began increasing rates in March 2022, totaling seven rate increases in 2022 and four additional rate increases in 2023, ended the year of 2023 at a federal funds target rate range between 5.25% and

Previous wording

Page-35 increased average borrowings, putting pressure on the net interest margin. Because market interest rates remained high for longer than many market participants anticipated, during the second quarter of 2024 we sold securities with relatively low yields and redeployed the proceeds to pay off borrowings, invest in higher yielding loans and securities, and position the balance sheet for future acquisitions of similar assets. Primarily due to declining rates of inflation and rising unemployment, many market participants now expect the Federal Reserve to begin lowering policy rates during the second half of 2024. 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.

Current wording

5.50%. Rising interest rates resulted in rapid increases in the cost of funds through rising deposit costs and increased average borrowings, putting pressure on our net interest margin. Because market interest rates remained high for longer than many market participants anticipated, during the second quarter of 2024, we sold securities with relatively low yields and redeployed the proceeds to pay off borrowings, invest in higher yielding loans and securities, and position the balance sheet for future acquisitions of similar assets.

Previous wording

We recorded a $5.2 million provision for credit losses on loans in the second quarter. The provision was due primarily to an increase to the individual reserve for one non-owner occupied commercial real estate loan totaling $16.7 million placed on non-accrual during the quarter. The underlying collateral property is a multi-story office building located in San Francisco that was materially impacted by the pandemic and subsequent remote work and vacancy issues. After careful monitoring, we downgraded the credit to substandard in the fourth quarter of 2021, and have continued to evaluate the occupancy, operating income, and underlying valuation. The loan is guaranteed, and payments have always been current with enough pledged cash held at the Bank to cover payments to maturity in 2026. Nonetheless, a recent appraisal indicated that the refinance loan amount for which the property would qualify at maturity would likely be less than the payoff amount based on current rents, occupancy, and sponsorship wherewithal. Based on this consideration we chose to place the loan on non-accrual and provision for that shortfall.

Current wording

We recorded a $5.2 million provision for credit losses on loans in the second quarter. The provision was due primarily to an increase to the individual reserve for one non-owner occupied commercial real estate loan totaling $16.7 million placed on non-accrual during the quarter. The underlying collateral property is a multi-story office building located in San Francisco that was materially impacted by the pandemic and subsequent remote work and vacancy challenges. After careful monitoring, we downgraded the credit to substandard in the fourth quarter of 2021, and have continued to evaluate the occupancy, operating income, and underlying valuation. The loan is guaranteed, and payments have always been current with enough pledged cash held at the Bank to cover payments to maturity in 2026. Nonetheless, a recent appraisal indicated that the refinance loan amount for which the property would qualify at maturity would likely be less than the payoff amount based on current rents, occupancy, and sponsorship wherewithal. Based on this consideration we chose to place the loan on non-accrual and provision for that shortfall.

Previous wording

The provision totaling $850 thousand for the six months ended June 30, 2023 was due primarily to increases in qualitative risk factors to account for continued uncertainty about inflation and recession risks, and from continued negative trends in adversely graded loans and/or collateral values on our non-owner occupied commercial real estate office and multi-family real estate portfolios.

Current wording

The provision totaling $1.3 million for the nine months ended September 30, 2023 was due primarily to increases in qualitative risk factors to account for continued uncertainty about inflation and recession risks, and from continued negative trends in adversely graded loans and/or collateral values on our non-owner occupied commercial real estate office and multi-family real estate portfolios.

Previous wording

Non-interest income showed a loss of $29.8 million for the second quarter of 2024, compared to income of $2.8 million for the prior quarter. The decrease from the prior quarter was primarily attributed to a $32.5 million pre-tax net loss on sale of available-for-sale investment securities in the second quarter as part of the balance sheet repositioning, as discussed elsewhere in this quarterly report. Excluding the loss on sale, non-interest income was $2.8 million for the second quarter, consistent with prior quarter. See the non-GAAP disclosure below.

Current wording

Non-interest income was $2.9 million for the third quarter of 2024, compared to a loss of $29.8 million for the prior quarter. The increase from the prior quarter was primarily attributed to a $32.5 million pre-tax net loss on sale of available-for-sale investment securities in the second quarter, as discussed previously. Excluding the loss on sale, non-interest income was $2.8 million for the second quarter. See the Statement Regarding use of Non-GAAP Financial Measures below. The quarter over quarter increase of $100 thousand excluding the loss on sale was primarily due to a $121 thousand increase in wealth management and trust services income.

Previous wording

Non-interest income showed a loss of $27.0 million for the first half of 2024, compared to income of $5.7 million for the same period of the prior year. The $32.7 million decrease from the prior year period was primarily attributed to a $32.5 million pre-tax net loss on sale of available-for-sale investment securities in the second quarter of 2024, as discussed above. Additionally, 2023 included higher bank owned life insurance income due to death benefits.

Current wording

Non-interest income showed a loss of $24.1 million for the nine months ended September 30, 2024, compared to income of $8.3 million for the same period of the prior year. The $32.4 million decrease from the prior year period was primarily attributed to a $32.5 million pre-tax net loss on sale of available-for-sale investment securities in the second quarter, as discussed previously. Excluding the loss on sale, non-interest income was $8.4 million for the nine months ended September 30, 2024. See the Statement Regarding use of Non-GAAP Financial Measures below.

Previous wording

Non-interest expense totaled$43.1 million for thefirst half of 2024, compared to$40.4 million for thefirst half of 2023, an increase of $2.6 million. The most significant increase was $2.1 million in salaries and related benefits, which included an increase of 15 full-time equivalents ("FTE") on average, annual merit increases and $243 thousand severance payments related to the recent staff reduction discussed above. Stock-based compensation expenses increased due to the accelerated vesting of an officer's awards due to retirement eligibility. An additional $1.1 million in expenses and fees were associated with an increase in our customers' participation in reciprocal deposit networks to bolster their FDIC insured balances. Increases were partially offset by the combined decrease of $891 thousand in depreciation/amortization and occupancy/equipment expenses related to the 2023 acceleration of expenses related to the closure of two branches and other minor decreases in expenses.

Current wording

Non-interest expense totaled$63.5 million for thenine months ended September 30, 2024, compared to$60.2 million for the same period of 2023, an increase of $3.3 million. The most significant increase was $2.2 million in salaries and related benefits, which included annual merit increases and $418 thousand in severance payments related to the recent staff reduction discussed above. Stock-based compensation expenses increased due to the accelerated vesting of an officer's awards due to retirement eligibility. Additionally, professional services increased by $1.3 million and deposit network fees increased by $845 thousand. Increases were partially offset by reductions in depreciation and amortization of $580 thousand, amortization of core deposit intangible of $282 thousand, and occupancy and equipment expenses of $252 thousand.

Previous wording

The income tax benefit for the second quarter of 2024 totaled $(12.5) million at a negative effective tax rate of (36.3)%, compared to a provision of $1.0 million at an effective tax rate of 25.6% in the prior quarter. The decrease in the provision for income taxes in the second quarter of 2024 reflected a lower pre-tax income as compared to the prior quarter. The decrease in the effective tax rate in the second quarter of 2024 was primarily due to the recording of an income taxbenefit resulting from a $32.5 million pre-tax loss on the sale of available-for-sale investment securities.

Current wording

The income tax provision for the third quarter of 2024 totaled $2.4 million at an effective tax rate of 34.5%, compared to a benefit of $12.5 million at an effective tax rate of 36.3% in the prior quarter. The increase in the provision for income taxes in the third quarter of 2024 reflected a higher pre-tax income as compared to the prior quarter. The decrease in the effective tax rate in the third quarter of 2024 was primarily due to the recording of an income tax benefit resulting from a $32.5 million pre-tax loss on the sale of available-for-sale investment securities in the prior quarter.

Previous wording

The income tax benefit for the first half of 2024 totaled $(11.5) million at a negative effective tax rate of (37.7)%, compared to a provision of $4.8 million at an effective tax rate of 25.4% for the first half of 2023. The decrease in the effective tax rate in the first half of 2024, as compared to the same period a year ago, was primarily due to the pre-tax loss on investment securities sale in 2024 as mentioned in the previous paragraph.

Current wording

The income tax benefit for the first nine months of 2024 totaled $9.1 million at an effective tax rate of 38.6%, compared to a provision of $6.4 million at an effective tax rate of 24.8% for the first nine months of 2023. The increase in the effective tax rate in the first nine months of 2024, as compared to the same period a year ago, was primarily due to the pre-tax loss on investment securities sale in 2024 as mentioned in the previous paragraph.

Previous wording

Total cash, cash equivalents and restricted cash were $231.4 million at June 30, 2024, an increase of $201.0 million compared to $30.5 million at December 31, 2023, largely due to proceeds of $292.6 million from the sale of available-for-sale securities discussed below.

Current wording

Total cash, cash equivalents and restricted cash were $229.2 million at September 30, 2024, an increase of $198.7 million compared to $30.5 million at December 31, 2023, largely due to proceeds of $292.6 million from the sale of available-for-sale securities in the second quarter and deposit growth, partially offset by purchases of investment securities and the residential real estate loan pool discussed below.

Previous wording

The investment securities portfolio totaled $1.158 billion at June 30, 2024, a decrease of $319.7 million from $1.477 billion at December 31, 2023. The decrease was primarily the result of the sale of $325.2 million in available-for-sale securities. The sold securities had an average book yield of 1.94%. The proceeds of the sales were allocated to $19.0 million in securities purchases with an expected yield of 5.23%, intra-quarter borrowing repayments, and loan fundings, with the remainder held in cash available for future use. In addition, there were principal repayments and maturities totaling $40.4 million, a reduction of unrealized loss on available-for-sale securities including the impact of the sales of $28.5 million, and $1.7 million in net amortization.

Current wording

The investment securities portfolio totaled $1.257 billion at September 30, 2024, a decrease of $220.2 million from $1.477 billion at December 31, 2023. The decrease was primarily the result of the sale of available-for-sale securities totaling $325.2 million in the second quarter of 2024. The sold securities had an average book yield of 1.94%. The proceeds of the sales were allocated to $133.5 million in securities purchases in the second and third quarters, borrowing repayments, and loan purchases and fundings, with the remainder held in cash available for future use. In addition, there were principal repayments, calls and maturities totaling $63.2 million, a reduction of unrealized loss on available-for-sale securities including the impact of the sales of $36.6 million, and $1.9 million in net amortization.

Previous wording

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 5.02 on available-for-sale securities and 5.52 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 $28.6 million and $31.3 million in the second and first quarters of 2024, respectively. See Note 4, Investment Securities, for additional information.

Current wording

Both the available-for-sale and held-to-maturity portfolios are eligible for pledging to FHLB or the Federal Reserve as collateral for borrowings. The portfolios are comprised of high credit quality investments with average effective durations of 3.58 on available-for-sale securities and 5.35 on held-to-maturity securities. Both portfolios generate cash flows monthly from interest, principal amortization and payoffs, which supports the Bank's liquidity. Those cash flows totaled $91.9 million in the first nine months of 2024. See Note 4, Investment Securities, for additional information.

Previous wording

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (38.4%), Washington (15.8%) and Wisconsin (9.4%). Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation).

Current wording

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (38.4%), Washington (15.7%) and Wisconsin (9.4%). Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation).

Previous wording

Loans totaled $2.082 billion as of June 30, 2024, compared to $2.074 billion as of December 31, 2023. The increase in the first six months of 2024 totaled $8.7 million, compared to $10.3 million during the six months ended June 30, 2023. Loan originations funded were $76.5 million for the six months ended June 30, 2024, compared to $67.7 million for the six months ended June 30, 2023. The pipeline has grown, and key opportunistic hires and new compensation plans have accelerated calling activity, pipeline growth and diversification. Payoffs were $53.0 million in the six months ended June 30, 2024, compared to $46.8 million for the same period in 2023. The largest portion of payoffs in the first half of 2024 was the result of asset sales by customers.

Current wording

Loans totaled $2.090 billion as of September 30, 2024, compared to $2.074 billion as of December 31, 2023. The increase in the first nine months of 2024 totaled $16.4 million, compared to a $5.6 million decrease during the nine months ended September 30, 2023. Additions to the loan portfolio in the first nine months of 2024 totaled $140.4 million and consisted of loan originations of $104.7 million and the purchase of a residential real estate loan pool totaling $35.7 million, compared to $90.3 million for the same period ended September 30, 2023. The pipeline has grown, and key opportunistic hires and new compensation plans have accelerated calling activity, pipeline growth and diversification. Payoffs were $83.9 million in the nine months ended September 30, 2024, compared to $59.5 million for the same period in 2023. In addition, amortization from scheduled payments and utilization of credit lines accounted for the remainder of the change in total loans. The largest portion of payoffs in the first nine months of 2024 was the result of asset sales and cash payoffs by customers.

Previous wording

Non-accrual loans totaled $33.7 million, or 1.62% of the loan portfolio, at June 30, 2024, compared to $8.0 million, or 0.39% at December 31, 2023. The $25.7 million increase primarily resulted from the movement of seven relationships totaling $27.8 million to non-accrual status in the second quarter, $16.7 million of which is the non-owner occupied commercial real estate loan discussed below. Another $8.8 million relationship consisting of two commercial loans, one commercial real estate loan and one home equity loan is anticipated to pay off all related loans in full through the sale of assets in the near future. In the first six months of 2024, pay-offs and paydowns of non-accrual loans totaled $2.5 million. Of the total non-accrual loans as of June 30, 2024, approximately 60% were paying as agreed, 71% were real estate secured, and all are being closely monitored for payments or payoff. Subsequent to quarter end, one commercial loan on non-accrual totaling $1.8 million paid off in full.

Current wording

Non-accrual loans totaled $39.9 million, or 1.91% of the loan portfolio, at September 30, 2024, compared to $8.0 million, or 0.39% at December 31, 2023. The $31.9 million increase in 2024 primarily resulted from the movement of three loans totaling $8.5 million to non-accrual status in the third quarter, and seven relationships totaling $27.8 million in the second quarter.

Previous wording

During the second quarter, we moved a $16.7 million non-owner occupied commercial real estate loan, mentioned above to non-accrual status. The underlying collateral property is a multi-story office building located in San Francisco that was materially impacted by the pandemic and subsequent remote work and vacancy issues. We downgraded the credit to substandard in the fourth quarter of 2021, and have continued to evaluate the occupancy, operating income, and underlying valuation. The loan is guaranteed, and payments have always been current with enough pledged cash held at the Bank to cover payments to maturity in 2026. Nonetheless, a recent appraisal indicated that the refinance loan amount for which the property would qualify at maturity would likely be less than the payoff amount based on current rents, occupancy, and sponsorship wherewithal. Based on this consideration we chose to provision for that shortfall.

Current wording

During the second quarter, the $27.8 million increase primarily resulted from the addition of a $16.7 million non-owner occupied commercial real estate loan discussed below and another $8.8 million relationship consisting of two commercial loans, one commercial real estate loan and one home equity loan. The $8.8 million relationship is anticipated to significantly pay down through the sale of assets in the near future. The underlying collateral property of the $16.7 million non-owner occupied commercial real estate loan, mentioned above is a multi-story office building located in San Francisco that was materially impacted by the pandemic and subsequent remote work and vacancy issues. We downgraded the credit to substandard in the fourth quarter of 2021, and have continued to evaluate the occupancy, operating income, and underlying valuation. In connection with that continued evaluation, we determined that the loan, although current, has experienced a deteriorating financial condition due to a material increase in its loan-to-value ratio associated with a recent valuation of underlying collateral. The loan is guaranteed, and payments have always been current with enough pledged cash held at the Bank to cover payments to maturity in 2026.

Previous wording

Bank of Marin has continued its steadfast 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 $54.7 million as of June 30, 2024, compared to $32.3 million as of December 31, 2023.

Current wording

Bank of Marin has continued its conservative underwriting practices, and in light of current market conditions, our portfolio management and credit teams are exercising heightened vigilance for potential credit quality weakening. Classified loans increased to $52.4 million as of September 30, 2024, compared to $32.3 million as of December 31, 2023. The $20.1 million increase was largely due to $26.8 million in downgrades, partially offset by $5.9 million in payoffs and paydowns and $827 thousand upgraded to pass.

Previous wording

Net charge-offs for the first half of 2024 totaled $47 thousand, compared to net charge-offs of $1 thousand for the first half of last year.

Current wording

Net charge-offs for the first nine months of 2024 totaled $47 thousand, compared to net recoveries of $2 thousand for the same period of 2023.

Previous wording

During the first six months of 2024, total liabilities decreased by $105.1 million to $3.260 billion. Deposits totaled $3.214 billion at June 30, 2024, a decrease of $76.3 million, compared to $3.290 billion at December 31, 2023. The Bank had zero outstanding borrowings at June 30, 2024 as a result of repayments with proceeds from securities sales compared to $26.0 million at December 31, 2023.

Current wording

During the first nine months of 2024, total liabilities decreased by $9.0 million to $3.356 billion. Deposits totaled $3.309 billion at September 30, 2024, an increase of $19.2 million, compared to $3.290 billion at December 31, 2023. The Bank had zero outstanding borrowings at September 30, 2024 as a result of repayments with proceeds from securities sales compared to $26.0 million at December 31, 2023.

Previous wording

Non-interest bearing deposits made up 44.1% of total deposits at June 30, 2024, compared to 43.8% at December 31, 2023. Additionally, the Bank's competitive and balanced approach to relationship management and focused outreach supported the addition of approximately 2,500 new accounts during the first half of 2024.

Current wording

Non-interest bearing deposits made up 44.5% of total deposits at September 30, 2024, compared to 43.8% at December 31, 2023. Additionally, the Bank's competitive and balanced approach to relationship management and focused outreach supported the addition of approximately 3,700 new accounts during the first nine months of 2024.

Previous wording

During the first six months of 2024, outstanding borrowings decreased by $26.0 million to zero at June 30, 2024, primarily due to the strategic balance sheet repositioning and the resulting proceeds from the sale of AFS securities mentioned above. There were intermittent borrowings averaging $8.9 million in 2024, compared to $297.5 in the first half of 2023. Although available as a liquidity source, we have not utilized brokered deposits. Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and remaining borrowing capacity was $1.797 billion, or 56% of total deposits and 202% of estimated uninsured and/or uncollateralized deposits as of June 30, 2024.

Current wording

During the first nine months of 2024, outstanding borrowings decreased by $26.0 million to zero at September 30, 2024, primarily due to the strategic balance sheet repositioning in the second quarter and the resulting proceeds from the sale of AFS securities mentioned above. There were intermittent borrowings averaging $5.9 million in 2024, compared to $260.6 million in the first nine months of 2023. Although available as a liquidity source, we have not utilized brokered deposits. Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and remaining borrowing capacity was $1.934 billion, or 58% of total deposits and 208% of estimated uninsured and/or uncollateralized deposits as of September 30, 2024. Balances in the reciprocal deposit network program increased $17.7 million during the nine months ended September 30, 2024 to $441.2 million from $423.5 million as of December 31, 2023.

Previous wording

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 initiate 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.

Current wording

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.

Previous wording

The total risk-based capital ratio for Bancorp was 16.46% at June 30, 2024, compared to 17.05% at March 31, 2024. The total risk-based capital ratio for the Bank was 15.54% at June 30, 2024, compared to 16.71% at March 31, 2024. Reductions in risk-based capital ratios were related to losses realized on securities sales.

Current wording

The total risk-based capital ratio for Bancorp was 16.40% at September 30, 2024, compared to 16.89% at December 31, 2023. The total risk-based capital ratio for the Bank was 15.82% at September 30, 2024, compared to 16.62% at December 31, 2023. Reductions in risk-based capital ratios were related to losses realized on securities sales.

Previous wording

Bancorp's TCE ratio was 9.92% at June 30, 2024, compared to 9.73% at December 31, 2023. Bancorp's TCE ratio, net of after tax unrealized losses on held-to-maturity securities, was 7.74%, compared to 7.80% at December 31, 2023. Management believes this non-GAAP measure is important because it reflects the level of capital available to withstand drastic changes in market conditions(refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures).

Current wording

Bancorp's tangible common equity to tangible assets ("TCE ratio") was 9.72% at September 30, 2024, compared to 9.73% at December 31, 2023. Bancorp's TCE ratio, net of after tax unrealized losses on held-to-maturity securities 1, was 8.16%, compared to 7.80% at December 31, 2023. Management believes this non-GAAP measure is important because it reflects the level of capital available to withstand drastic changes in market conditions.

Previous wording

Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity was $1.797 billion, or 56% of total deposits and 202% of estimated uninsured and/or uncollateralized deposits as of June 30, 2024.

Current wording

Net available contingent funding sources, including unrestricted cash, unencumbered available-for-sale securities and total available borrowing capacity totaled $1.934 billion, or 58% of total deposits and 208% of estimated uninsured and/or uncollateralized deposits as of September 30, 2024.

Previous wording

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, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, dividends to common stockholders, share repurchases and operating expenses.

Current wording

We obtain funds from the repayment and maturity of loans, deposit inflows, investment securities sales, maturities and paydowns, federal funds purchases, FRB and FHLB advances, other borrowings, and cash flow from operations. Although available as a liquidity source, we have not chosen to utilize brokered deposits. Our primary uses of funds are the origination of loans, the purchase of investment securities and loans, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, dividends to common stockholders, share repurchases and operating expenses.

Previous wording

Customer deposits are a significant component of our daily liquidity position. The attraction and retention of new 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.

Current wording

Customer deposits are a significant component of our daily liquidity position. The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength. The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.

Previous wording

Our cash and cash equivalents increased $201.0 million in the first six months of 2024. The most significant sources of liquidity during the first six months of 2024 were proceeds of $333.0 million from principal paydowns, maturities and sales of investment securities and $7.8 million in net cash provided by operating activities.

Current wording

Our cash and cash equivalents increased $198.7 million in the first nine months of 2024. The most significant sources of liquidity during the first nine months of 2024 were proceeds of $355.9 million from principal paydowns, maturities, calls and sales of investment securities, $19.2 million from net increase of deposits and $17.7 million in net cash provided by operating activities.

Previous wording

Significant uses of liquidity during the first six months of 2024 were $76.3 million in net withdrawals of deposits, $26.0 million in repayments of short-term borrowings, $19.0 million in investment securities purchased, $8.9 million in loan originations and advances, net of principal collected, and $8.1 million in cash dividends paid on common stock to our shareholders. Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position, as detailed in this report, and contingent funding sources outlined in the table above are adequate to support our operational needs.

Current wording

Significant uses of liquidity during the first nine months of 2024 were $133.5 million in investment securities purchased, $26.0 million in repayments of short-term borrowings, and $16.4 million in purchased loan pool, loan originations, and unfunded loan commitment advances, net of principal collected. Additionally, other uses included $12.2 million in cash dividends paid on common stock to our shareholders and $4.2 million in common stock repurchases. Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position, as detailed in this report, and contingent funding sources outlined in the table above are adequate to support our operational needs.