BMRC US Equity☆

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of financial condition as of December 31, 2023 and 2022 and results of operations for each of the years in the three-year period ended December 31, 2023 should be read in conjunction with our consolidated financial statements and related notes thereto, included in Part II ITEM 8 of this report.

Forward-Looking Statements

The disclosures set forth in this item are qualified by important factors detailed in Part I captioned Forward-Looking Statements and ITEM 1A captioned Risk Factors of this report and other cautionary statements set forth elsewhere in the report.

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. Management has determined the following accounting estimates and related policies to be critical.

Allowance for Credit Losses on Loans and Unfunded Commitments

The allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis at the balance sheet date to present the net amount of loans expected to be collected. The allowance for losses on unfunded loan commitments is based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity, and loss rates as determined for pooled funded loans. The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities. Management estimates these allowances quarterly using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

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Credit loss experience among the Bank and peer groups provides the basis for the estimation of expected credit losses.

The allowance for credit losses ("ACL") model utilizes a discounted cash flow ("DCF") method to measure the expected credit losses on loans collectively evaluated that are sub-segmented by loan pools with similar credit risk characteristics, which generally correspond to federal regulatory reporting codes. In addition, the DCF method incorporates assumptions for probability of default ("PD"), loss given default ("LGD"), and prepayments and curtailments over the contractual terms of the loans. Under the DCF method, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows using the loan's effective rate.

Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable and supportable forecasts of economic conditions to differ from the conditions that existed during the historical period included in the development of PD and LGD.

Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which increased to 5.1% at December 31, 2023, from 4.1% at December 31, 2022. The ACL model incorporates a one-year forecast. For periods beyond the forecast horizon, the economic factors revert to historical averages on a straight-line basis over a one-year period. We performed a sensitivity analysis as of December 31, 2023, and estimated that a 100 basis point change (e.g., 4.5% to 5.5%) in the forecasted unemployment rates over the next four quarters would result in about a 5% change to our allowance for credit losses on loans. This impact does not consider changes to other assumptions for either the quantitative factors, such as probability of default, loss given default, loan mix or cash flows, prepayment/curtailment rates, and individually analyzed loans, or qualitative factors as discussed in Note 1 - Summary of Significant Accounting Policies. Additionally, because current economic conditions and forecasts can change, as future events are inherently difficult to predict, the estimated credit losses on loans and unfunded commitments could change significantly.

While we believe we use the best information available to determine the allowance for credit losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. For information regarding critical estimates related to our allowance for credit losses methodology, the provision for credit losses, and risks to asset quality and lending activity, see ITEM 1A - Risk Factors, the Allowance for Credit Losses section in ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations,

Fair Value Measurements

We use fair value measurements to record certain financial instruments and to determine fair value disclosures. Available-for-sale securities and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis. Additionally, we record at fair value other financial assets on a nonrecurring basis, such as collateral dependent loans and other real estate owned. These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets. We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement. Fair value is discussed further in Note 1 - Summary of Significant Accounting Policies, and Note 9 - Fair Value of Assets and Liabilities in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.

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Goodwill

Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is tested annually for impairment, or more often if conditions change and indicate a possible impairment. Significant judgment is used in the assessment of goodwill, both in a qualitative assessment and a quantitative assessment. Assessments of goodwill often require the use of fair value estimates, which are dependent upon various factors, including estimates concerning the Company’s long-term growth prospects and comparability to industry data. Uncertainty and imprecision in estimates can affect the estimated fair value of the reporting unit in a goodwill assessment. Additionally, various events or circumstances could have a negative effect on the estimated fair value of a reporting unit, such as declines in business performance, increases in credit losses, and deterioration in economic or market conditions, which may result in a material impairment charge to earnings in future periods.

In 2023, the Company assessed goodwill for impairment by performing a quantitative assessment, which encompassed an income approach and a market approach. The income approach considered such factors as the estimated future cash flows of our reporting unit based on internal long-term forecasts, assumptions concerning potential synergies and other economic benefits, and a discount rate used to present value such cash flows to determine the fair value. The market approach utilized observable market data from comparable public companies, including price-to-tangible book value ratios, to estimate the Company’s fair value. The market approach also incorporated a control premium to represent the Company’s expectation of a hypothetical acquisition. Management used judgment in the selection of comparable companies and included those with similar business activities, and related operating environments. In addition, the selection and weighting of the various fair value techniques may result in higher or lower estimates of fair value. Judgment is applied in determining the weightings between the income approach and the market approach in determining fair value. The results of this assessment indicated the value of goodwill was not impaired as of our annual impairment testing date of November 30, 2023, and there were no changes to our assessment through December 31, 2023.

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RESULTS OF OPERATIONS

Financial Highlights

The following are highlights of our financial condition and results of operations. The data was derived from the audited consolidated financial statements of Bank of Marin Bancorp.

At December 31,

(dollars in thousands, except per share data) 2023 2022

Selected financial condition data:

Loans, net of allowance for credit losses on loans $ 2,048,548 $ 2,069,563

Asset quality ratios:

Allowance for credit losses to total loans 1.21 % 1.10 %

Allowance for credit losses to non-accrual loans 3.15x 9.45x

Non-accrual loans to total loans 0.39 % 0.12 %

Capital ratios:

Equity to total assets 11.54 % 9.94 %

Tangible common equity to tangible assets 9.73 % 8.21 %

Total capital (to risk-weighted assets) 16.89 % 15.90 %

Tier 1 capital (to risk-weighted assets) 15.91 % 15.02 %

Tier 1 capital (to average assets) 10.46 % 9.60 %

Common equity Tier 1 capital (to risk-weighted assets) 15.91 % 15.02 %

Other data:

Number of branches 27 31

Full-time equivalent employees 329 313

For the Years Ended December 31,

Selected operating data:

Provision for (reversal of) credit losses on loans 2,575 (63) (1,449)

Reversal of credit losses on unfunded loan commitments (342) (318) (992)

Net income per common share:

Performance and other financial ratios:

Tax-equivalent net interest margin 2.63 % 3.11 % 3.17 %

Net charge-offs (recoveries) $ 386 $ (23) $ (93)

Net charge-offs (recoveries) to average loans 0.02 % NM NM

Cash dividend payout ratio on common stock 1 80.65 % 33.45 % 40.52 %

Cash dividends per common share $ 1.00 $ 0.98 $ 0.94

NM - Not meaningful.

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Executive Summary

Annual earnings were $19.9 million in 2023, compared to $46.6 million in 2022. Diluted earnings were $1.24 per share in 2023, compared to $2.92 per share in 2022. Results for 2023 were significantly impacted by industry disruptions and the aftermath of a few regional bank failures in the first half of the year, causing some deposit run-off and a shift to higher cost funding sources, coupled with the FOMC's monetary policy resulting in rapid interest rate increases impacting both our funding costs and lending activity. However, we took several actions to reposition our balance sheet and improve our net interest margin, and, although there can be no assurance given, believe we laid the foundation for improved earnings in 2024, as discussed below.

The following are highlights of operating and financial performance for the year ended December 31, 2023:

•Over the course of 2023, balance sheet restructuring activities included the sale of $214.5 million in lower yielding available-for-sale securities, offsetting some losses with a gain from the sale of our remaining investment in Visa Inc. Class B restricted common stock, for a net pretax loss of $5.9 million. At the time, the sales proceeds were largely directed toward new loan originations and repayment of borrowings, which is expected to accelerate the improvement of the net interest margin over the coming quarters through higher interest earned on cash and loans and lower borrowing costs. In addition, the Bank entered into various interest rate swap agreements with notional values totaling $101.8 million to hedge balance sheet interest rate sensitivity and protect certain of our fixed-rate available-for-sale securities against changes in fair value related to changes in the benchmark interest rate. These interest rate swaps were accretive to net interest income in 2023.

•Loan balances of $2.074 billion as of December 31, 2023, were down slightly from $2.093 billion as of December 31, 2022. Loan originations were $144.1 million in 2023, compared to $240.2 million in 2022. Excluding paycheck protection loans ("PPP loans"), payoffs were $107.1 million in 2023, compared to $258.5 million in 2022. PPP loan payoffs during 2023 and 2022 were $2.7 million and $107.7 million, respectively. In addition, loan amortization from scheduled repayments, partially offset by the net utilization of lines of credit, reduced loans by $53.1 million in 2023.

•Our loan portfolio continues to perform well, with classified loans at 1.56% of total loans as of December 31, 2023, compared to 1.34% as of December 31, 2022. Non-owner-occupied commercial real estate loans made up $23.7 million, or 73%, of total classified loans as of December 31, 2023. Non-accrual loans were 0.39% and 0.12% of total loans as of December 31, 2023 and 2022, respectively. The Bank continues to proactively identify and manage credit risk within the loan portfolio.

•A $2.6 million provision for credit losses on loans in 2023 brought the allowance for credit losses to 1.21% of total loans, compared to 1.10% as of December 31, 2022. The increase was due primarily to adjustments to qualitative risk factors and specific allowances on loans with unique credit risk characteristics not indicative of pooled loans, as discussed below. This compares to a $63 thousand provision reversal in 2022.

•Total deposits decreased by $283.3 million to $3.290 billion as of December 31, 2023, from $3.573 billion as of December 31, 2022. As discussed further below, the decline was primarily due to a combination of outflows related to planned business activities, some balance declines associated with loan relationships exited during the year, and a number of customers moving cash into alternative investments to capture higher returns, a portion of which was directed to our own wealth management group. In addition, we had some deposit run-off as a result of regional bank failures and industry disruptions in the first half of the year. Non-interest bearing deposits continue to remain strong compared to our peers and made up 43.8% of total deposits as of December 31, 2023, compared to 51.5% as of December 31, 2022. We believe we are appropriately competitive in regard to deposit pricing, given our relationship banking model, which differentiates Bank of Marin through exceptional service. Estimated uninsured and/or uncollateralized deposits comprised 28% of total deposits as of December 31, 2023.

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•Total borrowings decreased by $86.0 million to $26.0 million, compared to $112.0 million at December 31, 2022, as part of the strategic balance sheet restructuring in 2023. Net available funding sources of $2.0 billion provided 213% coverage of uninsured deposits as of December 31, 2023.

•The tax-equivalent net interest margin was 2.63% for 2023, compared to 3.11% for 2022. The decrease was primarily attributed to higher deposit and borrowing costs, partially offset by higher yields on loans and investment securities.

•All capital ratios were above well-capitalized regulatory requirements. Bancorp's total risk-based capital ratio was 16.89% as of December 31, 2023, compared to 15.90% as of December 31, 2022. Tangible common equity to tangible assets ("TCE ratio") increased to 9.73% as of December 31, 2023, from 8.21% as of December 31, 2022. While we do not intend to sell our held-to-maturity securities, the TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.80% as of December 31, 2023, compared to 6.15% as of December 31, 2022 (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).

•The Board of Directors declared a cash dividend of $0.25 per share on January 25, 2024, which was the 75th consecutive quarterly dividend paid by Bancorp. The dividend was paid on February 15, 2024 to shareholders of record at the close of business on February 8, 2024.

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Net Interest Income

Net interest income is the interest earned on loans, investments and other interest-earning assets minus 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 net interest income and/or margin due to an imbalance in the timing of repricing or 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.

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.

The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for the years indicated.

Average Statements of Condition and Analysis of Net Interest Income

Year ended Year ended Year ended

Interest Interest Interest

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

Assets

Liabilities and Stockholders' Equity

Tax-equivalent net interest rate spread 1.67 % 3.03 % 3.04 %

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Analysis of Changes in Net Interest Income

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 years 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.

Subordinated debenture — — — — (1,361) — (1,361)

2023 Compared to 2022

Net interest income totaled $102.8 million in 2023, compared to $127.5 million in 2022. The $24.7 million decrease from the prior year was primarily due to higher funding costs of $34.2 million, partially offset by higher average yields on earning assets.

The tax-equivalent net interest margin was 2.63% for 2023, compared to 3.11% for 2022. The decrease was primarily attributed to higher deposit and borrowing costs, partially offset by higher yields on loans and investment securities. Average interest-bearing deposit balances decreased by $115.2 million, while the average rate increased by 133 basis points, decreasing the margin by 58 basis points. Average borrowings and other obligations increased by $219.3 million, while the average cost increased by 125 basis points, decreasing the net interest margin by 29 basis points. Average loan balances decreased by $75.5 million, while the average yield increased by 36 basis points, increasing the margin by 23 basis points. Average investment securities decreased $42.9 million, while their average yield increased 25 basis points, improving the margin by 14 basis points.

2022 Compared to 2021

Net interest income totaled $127.5 million in 2022, compared to $105.0 million in 2021. The $22.5 million increase from the prior year was primarily due to higher balances in the investment and commercial real estate loan portfolios, which added $18.4 million and $6.1 million, respectively, to net interest income. Additionally, 2022 incorporated a full year of net interest income from the acquired earning assets of AMRB, compared to five months in 2021. Average interest-bearing liabilities increased $376.6 million, while the average cost dropped nine basis points, largely due to the extinguishment of subordinated debt that generated $1.4 million of interest expense in 2021.

The tax-equivalent net interest margin decreased six basis points to 3.11% in 2022, from 3.17% in 2021, as the proportion of average investment securities to average total interest-earning assets grew from 26% in 2021 to 44% in 2022, and fee income from PPP loans declined.

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").

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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 1st, March 22nd, May 3rd, and July 26th, the FOMC increased the target rate by 25 basis points to a range of 5.25% to 5.50%. Rising interest rates and first quarter disruptions in the banking industry resulted in rapid increases in the cost of funds through rising deposit costs and increased borrowings, putting pressure on the net interest margin. Additional rate increases are not widely anticipated in 2024, as Federal Reserve policymakers continue to monitor inflation and economic developments throughout the year. See ITEM 7A. 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 or contraction of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans. The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off.

The following table shows the activity for the periods presented.

Years ended December 31,

Provision for (reversal of) credit losses on loans $ 2,575 $ (63) $ (1,449)

The provision in 2023 was due primarily to adjustments to qualitative risk factors from continued uncertainty about inflation and recession risks, the potential impact of rapidly increasing interest rates and other external factors on both our non-owner-occupied commercial real estate and construction portfolios, loan and collateral concentration risks in our construction and commercial real estate portfolios, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values for our non-owner occupied commercial real estate office and multi-family real estate portfolios. The allowance for individually evaluated loans increased for a small number of loans that exhibited credit risk characteristics over time that were not indicative of pooled loans in the CECL calculation, including collateral valuation issues caused by persistently higher than average vacancy rates and estimated credit losses from other adjustments to discounted expected cash flows or estimated loss rates. Other elements of the provision included a $406 thousand loss on the note sale of an owner-occupied agricultural commercial real estate loan to an unrelated third party that was charged to the allowance concurrent with the sale and a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rate, partially offset by the impact of a $45.0 million overall decrease in loans.

The provision reversal in 2022 was largely due to a $55.4 million decrease in applicable loan balances (excludes the $107.7 million decrease in PPP loans for which there was no allowance) and improvements in Moody's Analytics' Baseline Forecast of California unemployment rates since December 31, 2021, which decreased the quantitative "modeled" allowance for credit losses. These decreases were partially offset by adjustments to qualitative risk factors to account for the ongoing deterioration in the economic outlook that management believed was not captured in the quantitative portion of the allowance calculation.

The provision reversal in 2021 was primarily due to continued improvements in Moody's Analytics' Baseline Forecast of California unemployment rates at the time, and adjustments to qualitative risk factors due to a decline in the volume of loans downgraded to substandard classification, fewer delinquencies, and the elimination of an allowance related to a commercial real estate loan that had been individually analyzed for potential credit losses in the previous periods and paid off in 2021. These reversals were partially offset by an increase in the allowance for credit losses related to qualitative risk factor adjustments for recent changes in executive leadership and senior lending positions, and integration of loans from the merger with AMRB.

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Non-interest Income

The table below details the components of non-interest income.

2023 Compared to 2022

Non-interest income totaled $5.0 million in 2023, a $5.9 million decrease from $10.9 million in 2022. The decrease in 2023 was primarily due to the $5.9 million net loss on the sale of investment securities mentioned above. Excluding this loss, non-interest income decreased by $86 thousand, which included a $504 thousand decline in deposit network fees earned when deposit balances were brought back on the balance sheet, and a $220 thousand decrease in debit card interchange income. Decreases were partially offset by $573 thousand higher benefit payments from and earnings on bank-owned life insurance, and $209 thousand from increases in dividends on Federal Home Loan Bank stock.

2022 Compared to 2021

Non-interest income totaled $10.9 million in 2022, a $773 thousand increase from $10.1 million in 2021. The increase was primarily due to higher fees on deposit balances held in off-balance sheet deposit networks, contributing $504 thousand in additional income, $414 thousand more service charges on deposit accounts, a $366 thousand increase in debit card and merchant interchange fees, $296 thousand higher FHLB dividends, and a combination of smaller increases. Increases were partially offset by a $965 thousand reduction in bank-owned life insurance, as the prior year included $1.1 million in benefits collected on insurance policies. Additionally, 2022 incorporated a full year of non-interest income from the AMRB acquisition, compared to five months in 2021.

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Non-interest Expense

The table below details the components of non-interest expense.

Other non-interest expense:

NM - not meaningful

2023 Compared to 2022

Non-interest expenses increased $4.2 million to $79.5 million in 2023 from $75.3 million in 2022. Significant fluctuations were as follows:

•Deposit network fees increased by $2.5 million as customers sought additional FDIC insurance protection through reciprocal deposit networks.

•Salaries and employee benefits increased by $1.4 million primarily due to the filling of open positions and the hiring of several key employees and officers, an increase in SERP-related expenses largely due to new and retired participant adjustments lowering costs for 2022, an increase in deferred officer compensation expense from increased participation and interest rates, higher insurance costs, and lower deferred loan origination costs. Increases to salaries and employee benefits were partially offset by a decrease in profit sharing expense mainly from accrual adjustments and because some contributions in 2023 were made from forfeitures rather than paid in cash, a decrease in accrued incentive bonuses, and a decrease in stock-based compensation from changes in award structure and estimated performance award payout estimates.

•FDIC insurance costs increased by $699 thousand due to an increase in the FDIC statutory assessment rate to strengthen the Deposit Insurance Fund.

•Occupancy and equipment and depreciation and amortization expenses rose by $483 thousand and $258 thousand, respectively, mainly from the acceleration of lease-related costs for branch closures in the first quarter of 2023 and higher maintenance costs.

•Professional services expenses increased by $299 thousand, mainly from consulting fees associated with core systems contract negotiations, systems transformation projects, and internal and external audit costs.

•Information technology and data processing expenses decreased by $628 thousand and $592 thousand, respectively, due to our core system contract renegotiation for the current period and because the prior year included data processing expenses largely eliminated after the systems conversion associated with the American River Bankshares merger.

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•Other real estate owned expenses decreased by $311 thousand due to the write-down in 2022 of the property that was then sold in the third quarter of 2023.

2022 Compared to 2021

Non-interest expenses increased $2.6 million to $75.3 million in 2022 from $72.6 million in 2021. Significant fluctuations were as follows:

•Information technology expenses increased by $647 thousand due to investments in software and equipment during 2022.

•Total occupancy expenses, including depreciation and amortization, increased $626 thousand resulting primarily from merger growth and $212 thousand in accelerated costs related to planned branch closures.

•Other increases in 2022 included core deposit intangible amortization and FDIC insurance, largely attributable to the 2021 AMRB acquisition, a $345 thousand valuation adjustment in other real estate owned expense, and a $490 thousand increase in employment recruiting costs included in other expense.

•Salaries and employee benefits expense remained relatively flat year-over-year. In 2022, increases in staffing and profit sharing expenses, a reduction in deferred loan origination costs, and a combination of smaller items were largely offset by a decrease in supplemental executive retirement plan expense from an adjustment to the discount rate, and a decline in merger-related expenses, as shown in Note 18, Merger, in ITEM 8 of this report.

•Professional services expense decreased by $1.7 million from the prior year, primarily due to higher merger-related costs and additional consulting expenses associated with PPP loan forgiveness application processing in 2021, partially offset by higher audit and accounting fees in 2022.

•Data processing expenses decreased by $490 thousand primarily due to merger-related expenses in 2021, partially offset by an increase in processing costs in 2022 associated with higher volumes for the larger bank.

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 provision for income taxes totaled $6.1 million at an effective tax rate of 23.6% in 2023, compared to $16.9 million at an effective tax rate of 26.6% in 2022 and $11.7 million at an effective tax rate of 26.0% in 2021. The decrease in the provision for income taxes in 2023, as compared to 2022, reflected lower pre-tax income. The 300 basis point decrease in the effective tax rate in 2023, as compared to 2022, was primarily due to a larger proportional effect of permanent tax differences on lower pretax income and higher tax-exempt BOLI income. This decrease was partially offset by a reduction in the tax-exempt interest exclusion (due to a larger IRC Section 291(e) interest expense disallowance), compared to 2022. The 60 basis point increase in the effective tax rate in 2022 as compared to 2021 was primarily due to lower BOLI income and the smaller proportion of tax-exempt loan and investment securities interest income to pre-tax income in 2022, partially offset by the non-deductible merger expenses and executive compensation in 2021.

We file a consolidated return in the U.S. federal tax jurisdiction and a combined return in the state of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the time of the issuance of this report. As of December 31, 2023 and 2022, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits.

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FINANCIAL CONDITION

Investment Securities

We maintain an investment securities portfolio to provide liquidity and generate earnings on funds that have not been loaned to customers. Management determines the maturities and types of securities to be purchased based on liquidity and interest rate risk position, and the desire to attain a reasonable investment yield balanced with risk exposure. The tables below show the composition of the debt securities portfolio by weighted average life at December 31, 2023 and 2022. Weighted average life takes into account the issuer's right to call or prepay obligations, with or without call or prepayment penalties. The weighted average life of the investment portfolio at December 31, 2023 and 2022 was approximately 6.6 and 6.8 years, respectively. The effective duration of the investment portfolio was 5.2 and 5.0 at December 31, 2023 and 2022, respectively.

December 31, 2023 Within 1 Year 1-5 Years 5-10 Years After 10 Years Total

Held-to-maturity:

Available-for-sale:

Asset-backed securities — — — — — — — — — — —

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December 31, 2022 Within 1 Year 1-5 Years 5-10 Years After 10 Years Total

Held-to-maturity:

Available-for-sale:

1 Book value reflects cost, adjusted for accumulated amortization and accretion.

2 Weighted average calculation is based on amortized cost of securities.

3 Yields on tax-exempt municipal bonds are presented on a taxable equivalent basis, using a federal tax rate of 21%.

The amortized cost of our investment securities portfolio decreased by $326.1 million, or 17.5%, in 2023. In 2023, we sold $214.5 million in available-for-sale securities with an average yield of 2.35%, as part of a balance sheet restructuring, including $75.2 million in debentures of government sponsored agencies, $69.6 million in agency collateralized mortgage obligations ("CMOs"), $25.0 million in corporate bonds, $15.4 million in SBA-backed securities, $14.6 million in agency mortgage-backed securities ("MBSs"), $13.2 million in obligations of state and political subdivisions, and $1.4 million in asset-backed securities. Offset by a $2.8 million pre-tax gain from the sale of our remaining holdings of Visa Inc. Class B restricted common stock, these sales of available-for-sale securities generated a net pre-tax loss of $5.9 million.

In 2022, we transferred $357.5 million of available-for-sale securities to held-to-maturity. Refer to Note 2, Investment Securities, to the Consolidated Financial Statements in ITEM 8 of this report for further information.

We consider agency debentures and CMOs issued by U.S. government sponsored entities to have low credit risk as they carry the credit support of the U.S. federal government. The debentures, CMOs and MBS issued by U.S. government sponsored agencies, SBA-backed securities and U.S. Treasury securities made up 86.6% of the portfolio as of December 31, 2023, compared to 86.7% at December 31, 2022. See the discussion in the section captioned “Securities May Lose Value Due to Credit Quality of the Issuers” in ITEM 1A Risk Factors above.

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At December 31, 2023 and 2022, distribution of our investment in obligations of state and political subdivisions was as follows:

Within California:

Tax allocation bonds — — —

Outside California:

Percent of investment portfolio 10.7% 10.7% 9.6% 9.3%

The portion of the portfolio outside the state of California is distributed among twelve states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside California are in Texas (37.1%), Washington (15.4%), and Wisconsin (9.0%). Our investments in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF"), rated AAA without enhancement, 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 the stability of its tax revenues

•Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer

•Local demographics and economics including unemployment data, the largest local taxpayers and employers, income indices, and home values

•For revenue bonds, the source and strength of revenue for municipal authorities, including obligors' financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurers' strength)

•Credit ratings by major credit rating agencies

Loans

Loans Outstanding by Class and Percent of Total

Real estate

Allowance for credit losses on loans (25,172) (22,983)

Total loans, net of allowance for credit losses $ 2,048,548 $ 2,069,563

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Loans decreased by $18.8 million in 2023, or 1%, to $2.074 billion as of December 31, 2023, from $2.093 billion as of December 31, 2022. Loan originations were $144.1 million in 2023, compared to $240.2 million in 2022. Non-PPP payoffs were $107.3 million in 2023, compared to $258.5 million in 2022. PPP loan payoffs during 2023 and 2022 were $2.5 million and $107.7 million, respectively. The majority of the payoffs were a result of asset sales, cash payoffs, project completions, and purposeful relationship exits, all of which showcased the Bank's focus on credit quality and proactive engagement with customers. It should be noted that only a minimal amount was refinanced. In addition, $53.1 million of loan amortization from scheduled repayments, net of credit line utilization, contributed to the decline in loan balances for 2023. The originations and payoffs noted above, combined with utilization on lines of credit and amortization on existing loans, resulted in a net decrease for this period.

Non-PPP payoffs as a percentage of beginning-of-year loan balances were 5.1% in 2023 and 11.5% in 2022. Approximately 90%, of total loans were secured by real estate as of both December 31, 2023 and 2022. For additional information on loan concentration risk, see ITEM 1A, Risk Factors.

The following table summarizes our commercial real estate loan concentrations by the county in which the property was located as of December 31, 2023 and 2022.

Commercial Real Estate Loans Outstanding by County

(dollars in thousands; unaudited) December 31, 2023 December 31, 2022

Commercial real estate loans increased by $5.8 million in 2023, compared to a $34.6 million decrease in 2022. The increase in 2023 was comprised of the $27.5 million increase within the non-owner occupied loan portfolio, partially offset by the $21.7 million decrease within the owner-occupied loan portfolio. The decrease in 2022 was primarily due to cash paydowns as part of ongoing deleveraging, refinancing, and asset sales. Of the commercial real estate loans as of December 31, 2023, 79% were non-owner occupied and 21% were owner-occupied. Almost the entire commercial real estate loan portfolio is comprised of term loans for which the primary source of repayment is either the cash flow from leasing activities of the real estate collateral or the operating cash flow of the owner occupant.

With the heightened market concern about non-owner-occupied commercial real estate, and in particular the office sector, we are providing the following additional information: We continue to maintain diversity among property types and within our geographic footprint. In particular, our office commercial real estate portfolio in the City of San Francisco represents just 3% of our total loan portfolio and 6% of our total non-owner-occupied commercial real estate portfolio. As of the last measurement period, the weighted average loan-to-value and weighted average debt-service coverage ratios for the entire non-owner-occupied office portfolio were 59% and 1.60x, respectively. For the thirteen non-owner-occupied office loans in the City of San Francisco, the weighted average loan-to-value and debt-service coverage ratios were 67% and 1.00x, respectively. As of December 31, 2023, we conducted a review of the refinance risk in our non-owner-occupied commercial real estate portfolio and evaluated 70 loans with commitments of $1.0 million or more, totaling $184.1 million, that mature or reprice in 2024 and 2025. As a result of our assessment, we determined that the refinance risk on these loans is manageable, with weighted average debt

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service coverage ratios ranging from 1.52 to 1.69 times for maturities and from 1.20 to 1.59 times for repricings based on current market interest rates. As such, we believe the non-owner-occupied commercial real estate portfolio is well-positioned to absorb a higher rate environment at the loans' repricing or maturity dates.

The following table shows an analysis of construction loans by type and county as of December 31, 2023 and 2022.

Construction Loans Outstanding by Type and County

(dollars in thousands; unaudited) December 31, 2023 December 31, 2022

(dollars in thousands; unaudited) December 31, 2023 December 31, 2022

County Amount Percent of Construction Loans Amount Percent of Construction Loans

Construction loans decreased by $15.2 million in 2023, compared to a decrease of $5.5 million in 2022. The decrease in 2023 was primarily due to $22.2 million in payoffs and $16.9 million in conversions to commercial real estate financing. These decreases were partially offset by $24.5 million in advances on existing construction loans. The decrease in 2022 was primarily due to $46.6 million in payoffs and $3.6 million in conversions to commercial real estate financing. These decreases were partially offset by $37.5 million advanced on existing construction loans and $7.2 million in new financing. Undisbursed construction loan commitments at December 31, 2023 and 2022 were $13.9 million and $43.2 million, respectively.

The following table presents the amortized costs and maturity distribution of our loans by portfolio class as of December 31, 2023 based on their contractual maturity dates. Maturities do not include scheduled payments or potential prepayments.

Loan Maturity Distribution

(in thousands; unaudited)

Real estate

1 Construction loans that mature after 5 years are structured to convert to permanent financing after the initial construction period.

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The following table shows the mix of variable-rate loans and fixed-rate loans due after one year by portfolio class as of December 31, 2023. The large majority of variable-rate loans are tied to independent indices, such as the Prime Rate or a Treasury Constant Maturity Rate. Most loans with original terms of more than five years have provisions for the fixed rates to reset, or convert to variable rates, after three, five or seven years. These loans are included in the variable-rate balances below.

Loan Interest Rate Sensitivity - Due After One Year

(in thousands; unaudited) Fixed Variable Total

Real estate

Allowance for Credit Losses on Loans

The allowance for credit losses on loans is calculated in accordance with ASC 326 based on management's best estimate of current expected credit losses over the loans' contractual terms, adjusted for estimated prepayments where applicable. The contractual terms exclude anticipated extensions, renewals and modifications. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. All specifically identifiable and quantifiable losses are charged off against the allowance. The ultimate adequacy of the allowance depends on a variety of complex factors, some of which may be beyond management's control, such as volatility in the real estate market, changes in interest rates and economic and political environments. Based on the current conditions of the loan portfolio and reasonable and supportable forecasts, management believes that the $25.2 million allowance for credit losses at December 31, 2023 was adequate to absorb expected credit losses in our loan portfolio. For additional information on our allowance for credit losses methodology, refer to Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

The ratio of the allowance for credit losses to total loans was 1.21% at December 31, 2023 and 1.10% at December 31, 2022.

The $2.2 million increase in the allowance for credit losses on loans in 2023 was largely due to adjustments to qualitative risk factors from continued uncertainty about inflation and recession risks, the potential impact of rapidly increasing interest rates and other external factors, loan and collateral concentration risk, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values. The allowance for individually evaluated loans increased for a small number of loans that exhibited credit risk characteristics over time that were not indicative of pooled loans in the CECL calculation. Other elements of the increased allowance included a $406 thousand loss on the note sale of a loan that was charged to the allowance concurrent with the sale, contributing to the $386 thousand in net charge-offs and the impact of a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rate, partially offset by the effect of a $45.0 million overall decrease in loans. For further information, refer to the Provision for Credit Losses section above, and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

The following table presents the allowance for credit losses on loans by loan portfolio class in accordance with the methodology described in Note 1 to the Consolidated Financial Statements in ITEM 8 of this report, as well as the percentage of total loans in each of the same loan portfolio classes as of December 31, 2023 and 2022.

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Allocation of the Allowance for Credit Losses

Specific allocations 9 — — — — — — — 9

The table below shows the activity in the allowance for credit losses for each of the three years presented below.

Allowance for Credit Losses on Loans Rollforward

Provision for (reversal of) credit losses 2,575 (63) (1,449)

Initial allowance for PCD loans — — 1,505

Loans charged-off:

Commercial and industrial (11) (9) —

Real estate:

Commercial real estate, owner-occupied (406) — —

Installment and other consumer (24) (23) (5)

Total loans charged-off (441) (32) (5)

Loans recovered:

Commercial and industrial 29 22 14

Real estate:

Home equity — — 50

Installment and other consumer 1 — —

Net loans (charged-off) recovered (386) 23 93

Net charge-offs (recoveries) to average loans 0.02 % NM NM

NM - Not meaningful.

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The following table shows non-performing assets as of December 31, 2023 and 2022.

Non-Performing Assets

(dollars in thousands; unaudited) December 31, 2023 December 31, 2022

Non-accrual loans:

Commercial and industrial $ 4,008 $ —

Real estate:

Commercial, owner-occupied 434 1,563

Commercial, non-owner occupied 3,081 —

Installment and other consumer — 91

Other real estate owned $ — $ 455

Total non-performing assets $ 7,992 $ 2,887

Criticized and classified loans:

Doubtful $ — $ 99

Allowance for credit losses to non-accrual loans 3.15x 9.45x

Non-accrual loans to total loans 0.39 % 0.12 %

Non-performing assets to total assets 0.21 % 0.07 %

Non-Accrual Loans

Non-accrual loans increased by $5.6 million in 2023, primarily due to $7.6 million in loans designated as non-accrual in 2023 comprised mostly of commercial and industrial and non-owner occupied commercial real estate loans. These increases were partially offset by the payoff of two owner-occupied commercial real estate loans totaling $1.3 million and four home equity loans totaling $421 thousand, the upgrade of a $223 thousand home equity loan and a $91 thousand personal loan to accrual status, as a result of improved financial condition and performance, and $83 thousand in paydowns. Over 66% of the non-accrual loans as of December 31, 2023 were well-secured by either commercial or residential real estate.

Non-accrual loans decreased by $5.9 million in 2022, primarily due to the payoff of two owner-occupied commercial real estate loans totaling $7.1 million and paydowns and the upgrade of a $695 thousand loan to accrual status as a result of improved financial condition and performance, partially offset by $2.0 million in loans designated as non-accrual in 2022. Over 96% of the non-accrual loans as of December 31, 2022 were well-secured by either commercial or residential real estate.

Criticized and Classified Loans

Loans designated as special mention, which are not considered adversely classified, increased by $75.0 million in 2023, primarily due to downgrades from the watch category to special mention. The majority of the downgrades from watch to special mention were not necessarily due to worsening conditions or deterioration in the borrowers' financial condition but to a lack of meaningful improvement over the most recent quarters. Of the $92.5 million in downgrades to special mention in 2023, $83.2 million (or 90%) were collateralized by real estate. These increases were partially offset by $7.7 million in paydowns and payoffs, $6.0 million in downgrades from special mention to substandard, and $3.8 million in upgrades to a pass risk rating.

Loans designated as special mention decreased by $13.1 million in 2022, primarily due to $30.2 million in upgrades to a pass risk rating, $7.7 million in paydowns and payoffs, and $3.6 million in downgrades from special mention to substandard. These decreases were partially offset by $27.8 million in downgrades from pass to special mention and $695 thousand in upgrades from substandard to special mention during 2022. Of the $27.8 million in downgrades to special mention, $22.5 million (or 81%) was well-secured by commercial real estate, and the remaining $5.3 million commercial loans had strong support.

Loans classified as substandard increased by $4.2 million in 2023, primarily due to downgrades from special mention totaling $6.0 million and from pass totaling $3.7 million, partially offset by $4.5 million in paydowns and

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payoffs and $939 thousand in upgrades to pass. Of the downgraded loans, $7.0 million (or 72%) was secured by commercial real estate, and the remaining $2.7 million was to commercial borrowers.

Loans classified as substandard decreased by $8.1 million in 2022, primarily due to $16.1 million in paydowns and payoffs and $871 thousand in upgrades to special mention or pass, partially offset by downgrades totaling $8.8 million. Of the downgraded loans, $4.7 million (or 53%) was secured by commercial real estate, and $3.6 million (or 41%) was to commercial borrowers. In addition, of the $16.1 million in paydowns and payoffs, $2.7 million was from loans downgraded in 2022.

Refer to Note 3 to the Consolidated Financial Statements in ITEM 8 of this report for an allocation of criticized and classified loans by loan portfolio class.

Other Assets

BOLI totaled $68.1 million as of December 31, 2023, compared to $67.1 million at December 31, 2022. The $1.0 million increase was primarily due to earnings from the BOLI policies.

Interest receivable and other assets totaled $74.9 million and $79.8 million at December 31, 2023 and 2022, respectively. The $4.9 million decrease was primarily due to an $8.8 million decrease in net deferred tax assets, as discussed below.

Net deferred tax assets totaled $35.1 million and $43.9 million at December 31, 2023 and 2022, respectively. Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to temporary differences such as allowances for credit losses and unfunded loan commitments, net operating loss carryforwards, and deferred compensation and salary continuation obligations. The $8.8 million decrease in 2023 was primarily due to an $8.5 million decrease in deferred tax assets related to changes in unrealized losses on available-for-sale investment securities and an $803 thousand decrease in deferred tax assets related to state franchise tax. These decreases in net deferred tax assets were partially offset by a $399 thousand decrease in deferred tax liabilities related to core deposit intangibles. Management believes deferred tax assets will be realizable due to our expectation that earnings will continue to be at a level adequate to realize such tax benefits. Therefore, no valuation allowance was established as of December 31, 2023 or 2022. For additional information, refer to Note 11 to the Consolidated Financial Statements in ITEM 8 of this report.

We held $16.7 million of FHLB stock recorded at cost in other assets at both December 31, 2023 and 2022. We received $1.3 million, $1.0 million and $760 thousand in cash dividends in 2023, 2022 and 2021, respectively. For additional information, refer to Note 2 to the Consolidated Financial Statements in ITEM 8 of this report.

Deposits

Deposits decreased by $283.3 million, to $3.290 billion at December 31, 2023, compared to $3.573 billion at December 31, 2022. Non-interest bearing deposits declined to 43.8% of total deposits at December 31, 2023, compared to 51.5% at December 31, 2022.

While we saw a decline in deposits overall in 2023, deposits were up $39.5 million since the events that led to the failure of a few regional banks at the end of the first quarter of 2023, and we continue to execute our business model without the utilization of brokered deposits. In addition to the deposit run-off we experienced as a result of these bank failures, general market disruptions, and the FOMC's monetary policy of rapid interest rate increases, much of the decline, particularly in the fourth quarter, was due to a combination of outflows related to planned business activities. Additionally, some balance declines were associated with loan relationships exited during the year, and we saw some customers move cash into alternative investments to capture higher returns, a portion of which was directed to our own wealth management group. Given the nature of our customer base, our customers' daily operating balances can fluctuate significantly, which is a primary reason we maintain high levels of on-balance sheet and contingent liquidity.

Although we experienced growth and movement in both money market accounts and time deposits, all activity was a result of relationship pricing, the current rate environment, and customer behaviors, as opposed to offering CD specials or making blanket rate adjustments. We continued our disciplined and focused approach to relationship management and customer outreach, adding over 5,000 new accounts in 2023.

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As of December 31, 2023, 59% of deposit balances were held in business accounts, with average balances of $120 thousand per account. The remaining 41% were consumer accounts, with average balances of $41 thousand per account. The largest depositor represented 1.7% of total deposits, and the combined four largest depositors represented 4.6% of total deposits.

Balances in the reciprocal deposit network program increased by $250.0 million during 2023 to $424.0 million as of December 31, 2023. Costs associated with network deposits are recorded as non-interest expense and totaled $2.8 million, $258 thousand, and $26 thousand for the years ended December 31, 2023, 2022 and 2021, respectively.

Estimated uninsured and/or uncollateralized deposits decreased to 28% of total deposits as of December 31, 2023, compared to 39% as of December 31, 2022, due primarily to our customers' increased usage of the reciprocal deposit network program, as noted above.

Our liquidity policies require that compensating cash balances be held against concentrations over a certain level. See ITEM 1A, Risk Factors, for a discussion of potential risks associated with concentrations and volatility due to the activity of our large deposit customers.

Distribution of Average Deposits

The table below shows the relative composition of our average deposits for 2023 and 2022. For average rates paid on deposits, refer to the Average Statements of Condition and Analysis of Net Interest Income table in ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations.

For the year ended December 31,

1 Money market balances include Insured Cash Sweep® ("ICS") in both 2023 and 2022. Demand Deposit Marketplace SM ("DDM") and ICS balances are discussed in Note 6 to the Consolidated Financial Statements in ITEM 8 of this report.

Maturities of Uninsured Time Deposits

The following table shows time deposits by account that are in excess of $250,000 by time remaining to maturity at December 31, 2023.

(in thousands; unaudited) Total Uninsured Portion

Over six months through twelve months 23,500 11,000

Borrowings

As of December 31, 2023 and 2022, our borrowing capacity with the Federal Home Loan Bank ("FHLB") under secured lines of credit totaled $1.009 billion and $711.6 million, respectively. The increase in our borrowing capacity at the FHLB resulted from pledging certain held-to-maturity securities to the Securities-Backed Credit Program in February 2023. Our borrowing capacity with the Federal Reserve Bank of San Francisco ("FRBSF") under a secured line of credit and the Bank Term Funding Program ("BTFP"), which was new in 2023, totaled $334.2 million and $58.7 million as of December 31, 2023 and 2022, respectively. In addition, as of December 31, 2023 and 2022

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we had $135.0 million and $150.0 million, respectively, in unsecured lines of credit with correspondent banks to cover short-term borrowing needs.

As of December 31, 2023, the Bank had $26.0 million outstanding in short-term borrowings under the BTFP facility at an average rate of 4.83%, compared to $112.0 million in FHLB overnight borrowings as of December 31, 2022 at a rate of 4.65%. Other correspondent bank lines of credit were not utilized as of December 31, 2023 or 2022.

For additional information, see Note 7, Borrowings and Other Obligations, in ITEM 8 of this report.

Deferred Compensation Obligations

We maintain a non-qualified, unfunded deferred compensation plan for certain key management personnel. Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for up to, but not exceeding, fifteen years commencing upon retirement, death, disability or termination of employment. A similar Deferred Director Fee Plan entitles participating members of the Board of Directors to receive payments as elected by the participant upon separation from service, death, disability or termination of service. At December 31, 2023 and 2022, our aggregate payment obligations under both plans totaled $6.6 million and $7.1 million, respectively, and was recorded in interest payable and other liabilities in the consolidated statements of condition.

We have entered into supplemental executive retirement plans ("SERPs") with a select group of executive officers, providing for certain retirement benefits at age 65 and reduced benefits upon early retirement. The annual amount of benefits in either pre-retirement scenario is based on a vesting schedule unique to each executive. The SERP also provides for lump sum benefits in the event of a change in control followed by the termination of the executive. Payments under the SERPs are expected to be funded by income from bank-owned life insurance policies. On December 31, 2023 and 2022, our liabilities under the SERPs totaled $4.5 million and $4.7 million, respectively, and were recorded in interest payable and other liabilities in the consolidated statements of condition. The SERPs are unfunded and non-qualified for tax purposes and subject to Title I of the Employee Retirement Income Security Act of 1974.

Decreases in both the deferred compensation plans and SERP liabilities in 2023 mainly resulted from increases in benefit payments to retired employees. In addition, we increased the discount rate on the SERP payments to reflect market conditions, which reduced the present value of the SERP obligation.

For additional information, see Note 10 to the Consolidated Financial Statements in ITEM 8 of this report.

Capital Adequacy

As discussed in Note 15 to the Consolidated Financial Statements in ITEM 8 of this report, the Bank's capital ratios were above regulatory guidelines to be considered "well capitalized" and Bancorp's ratios exceeded the required minimum ratios for capital adequacy purposes. For further discussion of bank capital requirements, refer to the SUPERVISION AND REGULATION section in ITEM 1 of this report.

Bancorp's total risk-based capital ratio increased to 16.89% at December 31, 2023, from 15.90% at December 31, 2022. Bancorp's tangible common equity to tangible assets ("TCE ratio") increased to 9.73% at December 31, 2023, from 8.21% at December 31, 2022, primarily due to a decrease in unrealized losses on available-for-sale securities and a decrease in tangible assets. Bancorp's TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.80% as of December 31, 2023, compared to 6.15% (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). The Bank's total risk-based capital ratio increased to 16.62% at December 31, 2023, from 15.73% at December 31, 2022, primarily from net income and a decrease in risk-weighted assets, partially offset by $20.0 million in dividends to Bancorp to be used for cash dividends to shareholders and operating costs.

Bancorp's share repurchase program and activity are discussed in detail in ITEM 5 and in Note 8 to the Consolidated Financial Statements in ITEM 8 of this report. We expect to maintain strong capital levels and do not expect that we will be required to raise additional capital in 2024. Our anticipated sources of capital in 2024 include future earnings and shares issued under the stock-based compensation program.

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Liquidity and Capital Resources

The goal of liquidity management is to provide adequate funds to meet loan demand and 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 discussed in Note 7 to the Consolidated Financial Statement in ITEM 8 of this report. Our Asset Liability Management Committee ("ALCO"), which is comprised of independent 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 contingency 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, as discussed in Note 6 to the Consolidated Financial Statement in ITEM 8 of this report.

Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and available borrowing capacity, totaled $1.967 billion, or 60% of total deposits, and 213% of estimated uninsured and/or uncollateralized deposits as of December 31, 2023. The Federal Reserve's BTFP facility offers borrowing capacity based on the par value of securities pledged, making it less sensitive to changes in market rates.

The following table details the components of our contingent liquidity sources as of December 31, 2023.

(in thousands) Total Available Amount Used Net Availability

Internal Sources

External Sources

1 Excludes cash items in transit as of December 31, 2023.

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 security maturities, sales and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations. 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, and operating expenses.

Customer deposits are a significant component of our daily liquidity position. The attraction and retention of deposits depends on 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 decreased by $15.0 million to $30.5 million at December 31, 2023, from $45.4 million at December 31, 2022. Significant uses of liquidity during 2023 were $283.3 million in withdrawals of deposits, $86.0 million in repayments of short-term borrowings, and $16.1 million in cash dividends paid on common stock to our shareholders.

The most significant sources of liquidity during 2023 were proceeds from principal paydowns, maturities and sales of investment securities totaling $315.1 million, and proceeds from loans collected net of originations totaling $16.9 million. In addition, $35.7 million in net cash was provided by operating activities. Refer to the Consolidated Statement of Cash Flows in this Form 10-K 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 are adequate to support our operational needs.

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Unfunded credit commitments, as discussed in Note 16 to the Consolidated Financial Statements in ITEM 8 of this report, totaled $505.2 million at December 31, 2023. 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, $233.7 million of time deposits will mature. We expect to replace these funds with new deposits or 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 outstanding borrowings under our credit facilities of $26.0 million and $112.0 million as of December 31, 2023 and 2022, respectively, as discussed in Note 7 to the Consolidated Financial Statements in ITEM 8 of this report.

Because Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period. The primary uses of funds for Bancorp are shareholder dividends, ordinary operating expenses and stock repurchases. Bancorp held $7.2 million in cash as of December 31, 2023. Management anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.

Statement Regarding Use of Non-GAAP Financial Measures

Financial results for 2022 and 2021 were impacted by costs associated with our 2021 acquisition of American River Bankshares, for which non-GAAP financial measures are not repeated in this report. For additional information regarding the impact of non-GAAP adjustments for 2022 and 2021 performance measures, refer to Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 15, 2023.

Financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures. Management believes that, given recent industry turmoil, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after-tax impact of unrealized losses on held-to-maturity securities provides useful supplemental information to investors because it reflects the level of capital remaining after a hypothetical liquidation of the entire securities portfolio. Because there are limits to the usefulness of this 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 SEC, and not to rely on any single financial measure. A reconciliation of the non-GAAP TCE ratio is presented below.

Reconciliation of GAAP and Non-GAAP Financial Measures

(in thousands, unaudited) December 31, 2023 December 31, 2022

Tangible Common Equity - Bancorp

Goodwill and core deposit intangible (76,520) (77,870)

Unrealized losses on HTM securities, net of tax 1 (77,739) (89,432)

TCE, net of unrealized losses on HTM securities (non-GAAP) b $ 284,803 244,790

Goodwill and core deposit intangible (76,520) (77,870)

Unrealized losses on HTM securities, net of tax 1 (77,739) (89,432)

Bancorp TCE ratio a / c 9.73 % 8.21 %

1 Net unrealized losses on held-to-maturity securities as of December 31, 2023 and 2022 of $110.4 million and $127.0 million, respectively, as shown in Note 2, net of an estimated $32.6 million and $37.5 million, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%.

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ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Market risk is defined as the risk of loss arising from an adverse change in the market value (or prices) of financial instruments. A significant component of market risk is interest rate risk, which is inherent in our lending, investment, borrowing, and deposit gathering activities. The Bank manages interest rate sensitivity to minimize the exposure of our net interest margin, earnings, and capital to changes in interest rates. Interest rate changes can create fluctuations in the net interest margin due to an imbalance in the timing of repricing, or maturity of assets or liabilities. Interest rate changes can also affect the market value of our financial instruments, such as available-for-sale securities and the related unrealized gains or losses, which affect our equity value.

To mitigate interest rate risk, the structure of our assets and liabilities is managed with the objective of correlating the effects of interest rate changes on loans and investments with those of deposits and borrowings. The Asset/Liability Management Policy sets limits on the acceptable amount of change to net interest income and the economic value of equity in different interest rate environments.

From time to time, we enter into interest rate swap contracts to mitigate the changes in the fair value of selected investment securities and specified long-term fixed-rate loans and firm commitments to enter into long-term fixed-rate loans caused by changes in interest rates. Refer to Note 14 to the Consolidated Financial Statements in ITEM 8 of this report.

ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly. We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability in the context of policy guidelines. A simplified statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs. If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions. Governing policies are subject to review by regulators and are updated to incorporate their observations and adapt to changes in idiosyncratic and systemic risks. As of December 31, 2023, interest rate risk was within the policy guidelines established by ALCO and the Board. One set of interest rates modeled and evaluated against flat interest rates and a static balance sheet is a series of immediate parallel shifts in the yield curve. Our most recent analysis of our interest rate sensitivity is provided in the following table as an example rather than an expectation of likely interest rate movements.

Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. The Bank runs a combination of scenarios and sensitivities in its attempt to capture the range of interest rate risk including the simulations mentioned above. As with any simulation model or other method of measuring interest rate risk, limitations are inherent in the process and dependent on assumptions. For example, lower deposit growth than modeled may cause the Bank to increase its borrowing position, thereby increasing its liability sensitivity. Additionally, assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements. Important deposit modeling assumptions include the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates change, otherwise known as the deposit beta. The above tables reflect deposit betas of up to 68%, averaging 40%, to rates paid on non-maturity interest-bearing deposits in rising rate scenarios and deposit betas of up to 60%, averaging 34%, to rates paid on non-maturity interest-bearing deposits in falling rate scenarios. The actual rates

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and timing of prepayments on loans and investment securities could vary significantly from the assumptions applied in the various scenarios. Lastly, uneven changes in different tenors of U.S. Treasury rates that result in changes to the shape of the yield curve could produce different results from those presented in the table. Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

Bank of Marin Bancorp

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of condition of Bank of Marin Bancorp and Subsidiary (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses on Loans

As discussed in Notes 1 and 3 to the consolidated financial statements, the Allowance for Credit Losses on Loans at December 31, 2023, was $25.2 million on a total loan portfolio of $2.1 billion. The allowance for credit losses provides an estimate of lifetime expected losses in the loan portfolio. The measurement of expected credit losses is based on relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

We identified the Allowance for Credit Losses on Loans as a critical audit matter. The principal considerations for our determination of the Allowance for Credit Losses on Loans as a critical audit matter are subjectivity of the estimation and application of forecasted economic conditions and qualitative internal and external risk factors used in the calculation of the Allowance for Credit Losses on Loans. The economic forecast component of the Allowance for Credit Losses on Loans is used to compare the conditions that existed during the historical period to current conditions and future expectations. The qualitative internal and external risk factors are used to adjust for differences in segment-specific risk characteristics or conditions that differ from those that existed during the historical period for which the probability of default and loss given default factors were developed. Auditing management’s judgements regarding forecasted economic conditions and qualitative internal and external risk factors applied to the Allowance for Credit Losses on Loans involved a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included:

•Testing the design, implementation, and operating effectiveness of controls related to management’s calculation of the Allowance for Credit Losses on Loans, including controls over qualitative internal and external risk factors and the forecasted economic conditions utilized.

•Testing the appropriateness of the methodology used in the calculation of the Allowance for Credit Losses on Loans, as well as testing completeness and accuracy of the data used in the calculation, application of the forecasted economic conditions, and qualitative internal and external risk factors determined by management and used in the calculation, and verifying calculations in the Allowance for Credit Losses on Loans.

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•Obtaining management’s analysis and supporting documentation related to the forecasted economic conditions, and testing whether the forecasts used in the calculation of the Allowance for Credit Losses on Loans are reasonable and supportable based on the analysis provided by management.

•Obtaining management’s analysis of internal and external qualitative factors, and evaluating the reasonableness of the assumptions used in determining the qualitative factor adjustments.

Goodwill Impairment Assessment

As described in Note 1 to the consolidated financial statements, the Company’s goodwill balance was $72.8 million at December 31, 2023, which is allocated to the Company’s sole reporting unit. Goodwill is evaluated for impairment, at a minimum, on an annual basis. To test for goodwill impairment, the Company may apply a qualitative analysis of conditions in order to determine whether it is more likely than not that the carrying value is impaired. If the qualitative analysis is bypassed or in the event the qualitative analysis suggests that the carrying value of goodwill may be impaired, the Company uses several quantitative valuation methodologies in evaluating goodwill for impairment.

We identified the quantitative goodwill impairment evaluation performed as of the annual impairment testing date as a critical audit matter. The Company bypassed the qualitative analysis and the quantitative goodwill impairment assessment is considered a significant accounting estimate for which our audit procedures to evaluate management's judgments involved subjectivity and increased audit effort, including use of an internal valuation specialist.

The primary procedures we performed to address this critical audit matter included:

•Testing the design, implementation, and operating effectiveness of the management review control related to the management’s quantitative goodwill impairment test, including the reporting unit determination and the determination of the fair value of the reporting unit.

•Testing the Company’s financial projections utilized in the discounted cash flow methodology for reasonableness, including the terminal period growth rate.

•Utilizing an internal valuation specialist to assist in performing the following:

◦Evaluating the methodologies and weighting of methodologies utilized by management.

◦Testing key inputs used by management to determine the fair value of the reporting unit, including:

▪Independently assessing the appropriateness of selected peers in the publicly traded guideline market approach.

▪Independently assessing the appropriateness of selected acquisitions in the guideline transactions market approach.

▪Independently obtaining data to verify key ratios and market value indicators for selected acquisitions.

▪Independently assessing the appropriateness of cost savings and equity cost of capital assumptions utilized in the discounted cash flow methodology.

/s/ Moss Adams LLP

Portland, Oregon

March 14, 2024

We have served as the Company’s auditor since 2004.

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March 14, 2024

Management's Report on Internal Control over Financial Reporting

Management of Bank of Marin Bancorp and subsidiary, (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles ("GAAP"). The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and board of directors; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

Management conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 2023, utilizing the framework established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2023.

The Company's independent registered public accounting firm, Moss Adams LLP, has issued an attestation report on our internal control over financial reporting, which appears on the previous page.

/s/ Timothy D. Myers

Timothy D. Myers, President and Chief Executive Officer

/s/ Tani Girton

Tani Girton, EVP and Chief Financial Officer

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BANK OF MARIN BANCORPCONSOLIDATED STATEMENTS OF CONDITION

(in thousands, except share data) 2023 2022

Assets

Cash, cash equivalents and restricted cash $ 30,453 $ 45,424

Investment securities:

Allowance for credit losses on loans (25,172) (22,983)

Bank premises and equipment, net 7,792 8,134

Other real estate owned — 455

Liabilities and Stockholders' Equity

Liabilities

Deposits:

Interest bearing:

Interest payable and other liabilities 25,562 22,946

Commitments and contingent liabilities (Note 12)

Stockholders' Equity

Preferred stock, no par value, Authorized - 5,000,000 shares, none issued — —

Accumulated other comprehensive loss, net of tax (53,006) (73,746)

The accompanying notes are an integral part of these consolidated financial statements.

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BANK OF MARIN BANCORPCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Interest income

Interest on federal funds sold and due from banks 2,329 1,407 399

Interest expense

Interest on interest-bearing transaction accounts 1,036 421 172

Interest on borrowings and other obligations 11,562 91 9

Interest on subordinated debenture — — 1,361

Provision for (reversal of) credit losses on loans 2,575 (63) (1,449)

Reversal of credit losses on unfunded loan commitments (342) (318) (992)

Non-interest income

Dividends on Federal Home Loan Bank stock 1,265 1,056 760

Losses on sale of investment securities, net of gains (5,893) (63) (16)

Non-interest expense

Federal Deposit Insurance Corporation insurance 1,878 1,179 889

Other real estate owned 48 359 5

Net income per common share:

Weighted average common shares:

Comprehensive income (loss):

Other comprehensive income (loss):

Reclassification adjustment for gains or losses on fair value hedges (1,359) — —

The accompanying notes are an integral part of these consolidated financial statements.

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BANK OF MARIN BANCORPCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Shares Amount

Other comprehensive loss, net of tax — — — (14,625) (14,625)

Stock issued under employee stock purchase plan 2,648 90 — — 90

Stock issued under employee stock ownership plan 36,075 1,330 — — 1,330

Restricted stock granted 30,742 — — — —

Restricted stock forfeited / cancelled (3,848) — — — —

Stock-based compensation - stock options — 491 — — 491

Stock-based compensation - restricted stock — 481 — — 481

Cash dividends paid on common stock ($0.94 per share) — — (13,107) — (13,107)

Stock purchased by directors under director stock plan 1,034 34 — — 34

Stock issued in payment of director fees 6,443 217 — — 217

Other comprehensive loss, net of tax — — — (71,722) (71,722)

Stock issued under employee stock purchase plan 2,025 62 — — 62

Stock issued under employee stock ownership plan 38,000 1,233 — — 1,233

Restricted stock granted 46,672 — — — —

Restricted stock forfeited / cancelled (13,692) — — — —

Stock-based compensation - stock options — 251 — — 251

Stock-based compensation - restricted stock — 712 — — 712

Cash dividends paid on common stock ($0.98 per share) — — (15,673) — (15,673)

Stock purchased by directors under director stock plan 515 16 — — 16

Stock issued in payment of director fees 10,145 355 — — 355

Stock repurchased, including commissions (23,275) (877) — — (877)

Other comprehensive income, net of tax — — — 20,740 20,740

Stock issued under employee stock purchase plan 2,527 46 — — 46

Stock issued under employee stock ownership plan 58,400 1,315 — — 1,315

Restricted stock granted 61,978 — — — —

Restricted stock forfeited / cancelled (21,024) — — — —

Stock-based compensation - stock options — 181 — — 181

Stock-based compensation - restricted stock — 341 — — 341

Cash dividends paid on common stock ($1.00 per share) — — (16,106) — (16,106)

Stock issued in payment of director fees 18,362 398 — — 398

The accompanying notes are an integral part of these consolidated financial statements.

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BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash Flows from Operating Activities:

Provision for (reversal of) credit losses on loans 2,575 (63) (1,449)

Reversal of credit losses on unfunded loan commitments (342) (318) (992)

Noncash contribution expense to employee stock ownership plan 1,315 1,233 1,330

Noncash director compensation expense 398 355 217

Accretion of discount on subordinated debenture — — 1,347

Net change in deferred loan origination costs/fees (836) (2,716) (3,155)

Write-down of other real estate owned 40 345 —

Losses on sale of investment securities, net of gains 5,893 63 16

Earnings on bank-owned life insurance policies (1,802) (1,229) (2,194)

Net changes in interest receivable and other assets (4,149) 2,228 5,554

Net changes in interest payable and other liabilities 2,378 (4,708) 2,276

Cash Flows from Investing Activities:

Purchase of held-to-maturity securities — (319,937) (305,329)

Purchase of available-for-sale securities — (243,459) (620,236)

Proceeds from sale of Visa Inc. Class B restricted common stock 2,807 — —

Proceeds from sale of loan 3,263 — —

Purchase of bank-owned life insurance policies — (4,714) (1,943)

Proceeds from bank-owned life insurance policies 766 350 2,478

Proceeds from sale of other real estate owned 420 — —

Cash and cash equivalents acquired from American River Bankshares — — 140,577

Cash paid for low income housing tax credit investment (42) (30) (398)

Cash Flows from Financing Activities:

Repayment of finance lease obligations (148) (131) (86)

Repayment of subordinated debenture including execution costs — — (4,126)

Proceeds from stock options exercised 230 821 463

Restricted stock surrendered for tax withholdings upon vesting (70) (40) (166)

Stock repurchased, including commissions — (1,250) (40,762)

Supplemental disclosure of cash flow information:

Supplemental disclosure of noncash investing and financing activities:

Transfer of loan to loans held-for-sale $ 3,263 $ — $ —

Repurchase of stock not yet settled $ — $ — $ 373

Fair value of liabilities assumed $ — $ — $ 816,558

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Summary of Significant Accounting Policies

Nature of Operations: Bank of Marin Bancorp ("Bancorp"), headquartered in Novato, California, conducts business primarily through its wholly-owned subsidiary, Bank of Marin (the "Bank"), a California state-chartered commercial bank that provides a wide range of financial services through 27 retail branches and 8 commercial banking offices across 10 counties, including Alameda, Amador, Contra Costa, Marin, Napa, Placer, Sacramento, San Francisco, San Mateo and Sonoma. Our customer base is made up of business, not-for-profit and personal banking relationships from the communities within our Northern California footprint.

Basis of Presentation:The consolidated financial statements include the accounts of Bancorp, a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin, a California state-chartered commercial bank. References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes. Our accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP"), general practice, and regulatory guidance within the banking industry. A summary of our significant policies follows. All material intercompany transactions have been eliminated. We monitor financial performance and evaluate the revenue streams of the various products, services, locations, and operations on a company-wide basis. Accordingly, all of the community banking and wealth management and trust services are considered by management to be aggregated into one reportable operating segment, community banking. We evaluated subsequent events through the date of filing with the Securities and Exchange Commission (“SEC”) and determined there were no subsequent events that required additional recognition or disclosure.

Accounting Changes and Reclassifications: Certain items in prior financial statements have been reclassified to conform to the current presentation, including the reclassification of the provision for credit losses on unfunded commitments in the second quarter of 2021 from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income (loss).

Use of Estimates:The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the consolidated financial statements include the allowance for credit losses, fair value measurements, and goodwill impairment assessment, as discussed in the Notes herein.

Cash, Cash Equivalents and Restricted Cash: This includes cash, due from banks, federal funds sold and other short-term investments with maturities of less than three months at the time of purchase.Restricted cash includes balances not immediately available for business operations such as Federal Reserve Bank of San Francisco reserve requirements and cash pledged for interest rate swap contracts and local agency deposits.

Investment Securities: Investment securities are classified as "held-to-maturity," "trading securities" or "available-for-sale." Investments classified as held-to-maturity are those that we have the ability and intent to hold until maturity and are reported at cost, adjusted for the amortization or accretion of premiums or discounts. Investments held for resale in anticipation of short-term market movements are classified as trading securities and are reported at fair value, with unrealized gains and losses included in earnings. Investments that are neither held-to-maturity nor trading are classified as available-for-sale and are reported at fair value. Unrealized gains and losses for available-for-sale securities, net of related taxes, are reported as a separate component of comprehensive income (loss) and included in stockholders' equity until realized. For discussion of our methodology in determining fair value, see Note 9, Fair Value of Assets and Liabilities.

Purchase premiums and discounts on investment securities are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. For certain callable debt securities purchased at a premium, we amortize the premium to the earliest call date.

Dividend and interest income are recognized when earned. Realized gains and losses on the sale of securities are included in non-interest income. The specific identification method is used to calculate realized gains and losses on sales of securities.

Securities transferred from the available-for-sale category to the held-to-maturity category are recorded at fair value

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at the date of transfer. Unrealized holding gains or losses on the dates of the transfer of securities from available-for-sale to held-to-maturity are included in the balance of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets. These unrealized holding gains or losses on the dates of transfer are amortized over the remaining life of the securities as yield adjustments in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security.

Non-marketable equity securities include stock held for membership and regulatory purposes, such as Federal Home Loan Bank ("FHLB") stock and other non-marketable equity securities. These securities are accounted for at cost, evaluated for impairment as of each reporting period, and included in interest receivable and other assets on the consolidated statements of condition. During 2023, the Bank sold its remaining investment in Visa Inc. Class B restricted common stock, as discussed in Note 2 - Investment securities. As of December 31, 2023 and 2022 our investment in FHLB stock was carried at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Both cash and stock dividends from the FHLB are reported as non-interest income.

Allowance for Credit Losses on Investment Securities: The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account determined in accordance with ASC 326, which is deducted from the securities' amortized cost basis at the balance sheet date as a result of management's assessment of the net amount expected to be collected. The allowance is measured on a pooled basis for securities with similar risk characteristics using historical credit loss information, adjusted for current conditions and reasonable and supportable forecasts. Securities that are determined to be uncollectible are written off against the allowance.

For available-for-sale securities in an unrealized loss position ("impaired security"), we assess whether 1) we intend to sell the security, or, 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. Under either of these conditions, the security's amortized cost is written down to fair value through a charge to previously recognized allowances or earnings, as applicable. For impaired securities that do not meet these conditions, we assess whether the decline in fair value was due to credit loss or other factors. This assessment considers, among other things: 1) the extent to which the fair value is less than amortized cost, 2) the financial condition and near-term prospects of the issuer, 3) any changes to the rating of the security by a rating agency, and 4) our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss component. Any impairment due to non-credit-related factors that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss). The discount rate used in determining the present value of the expected cash flows is based on the effective interest rate implicit in the security at the date of purchase.

Accrued interest receivable is excluded from the amortized costs and fair values of both held-to-maturity and available-for-sale securities and included in interest receivable and other assets on the consolidated statements of condition. Investment securities are placed on non-accrual status when principal or interest is contractually past due more than ninety days, or management does not expect full payment of principal and interest. We do not record an allowance for credit losses for accrued interest on investment securities, as the amounts are written-off when the investment is placed on non-accrual status. There were no non-accrual investment securities in any of the years presented in the consolidated financial statements.

Originated Loans: Loans are reported at amortized cost, which is the principal amount outstanding net of deferred fees (costs), purchase premiums (discounts) and net charge-offs (recoveries). Amortized cost excludes accrued interest, which is reflected in interest receivable and other assets in the consolidated statements of condition. We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed below. Interest income is accrued daily using the simple interest method. Fees collected upon loan origination and certain direct costs of originating loans are deferred and recognized over the contractual lives of the related loans as yield adjustments using the interest method or straight-line method, as applicable. Upon prepayment or other disposition of the underlying loans before their contractual maturities, any associated unearned fees or unamortized costs are recognized.

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Acquired Loans:ASC 326 modified the accounting for purchased loans and requires that an allowance for credit losses be established at the date of acquisition. However, for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than reported as a provision for credit losses. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the provision for credit losses.

Past-Due and Non-Accrual Loan Policy: A loan is considered past due when a payment has not been received by the contractual due date. Loans are placed on non-accrual status when management believes that there is substantial doubt as to the collection of principal or interest, generally when they become contractually past due by 90 days or more with respect to principal or interest, except for loans that are well-secured and in the process of collection. When loans are placed on non-accrual status, any accrued but uncollected interest is reversed from current-period interest income and the amortization of deferred loan origination fees and costs is suspended. Interest payments received on nonaccrual loans are either applied against principal or reported as interest income, according to management’s judgment as to the ultimate collectability of principal. We may return non-accrual loans to accrual status when one of the following occurs:

•The borrower has resumed paying the full amount of the principal and interest and we are satisfied with the borrower's financial position. In order to meet this test, we must have received repayment of all past due principal and interest, unless the amounts contractually due are reasonably assured of repayment within a reasonable period of time, and there has been a sustained period of repayment performance (generally, six consecutive monthly payments), according to the original or modified contractual terms.

•The loan has become well secured and is in the process of collection.

Loan Charge-Off Policy:For all loan types excluding overdraft accounts, we generally make a charge-off determination at or before 90 days past due. A collateral-dependent loan is partially charged down to the fair value of collateral securing it if: (1) it is deemed uncollectable, or (2) it has been classified as a loss by either our internal loan review process or external examiners. A non-collateral-dependent loan is partially charged down to its net realizable value under the same circumstances. Overdraft accounts are generally charged off when they exceed 60 days past due.

Collateral Dependent Loans: A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For collateral dependent loans, including those for which management determines foreclosure is probable, each loan is individually evaluated and the allowance for credit losses is based on the fair value of the collateral, adjusted for estimated selling costs when repayment is expected from the sale of the collateral, less the loan's amortized cost. In determining the fair value, management considers such information as the appraised value of the collateral, observed and potential future changes in collateral value, and historical loss experience for loans that were secured by similar collateral. Generally, with problem credits that are collateral dependent, we obtain appraisals of the collateral at least annually. We may obtain appraisals more frequently if we believe the collateral value is subject to market volatility, if a specific event has affected the collateral, or if we believe foreclosure is imminent.

Allowance for Credit Losses on Loans ("ACL"):The ACL is a valuation account that is deducted from the amortized cost basis at the balance sheet date to present the net amount of loans expected to be collected. Amortized cost does not include accrued interest, which management elected to exclude from the estimate of expected credit losses (refer to the Past-Due and Non-Accrual Loan Policy section above). Management estimates the allowance quarterly using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Credit loss experience provides the basis for the estimation of expected credit losses.

The ACL model utilizes a discounted cash flow ("DCF") method to measure the expected credit losses on loans collectively evaluated that are sub-segmented by loan pools with similar credit risk characteristics, which are generally comprised of federal regulatory reporting codes (i.e., Call codes). Pooled segments include the following:

•Loans secured by real estate:

- 1-4 family residential construction loans

- Other construction loans and all land development and other land loans

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- Secured by farmland (including residential and other improvements)

- Revolving, open-end loans secured by 1-4 family residential properties and extended under lines

of credit

- Closed-end loans secured by 1-4 family residential properties, secured by first liens

- Closed-end loans secured by 1-4 family residential properties, secured by junior liens

- Secured by multifamily (5 or more) residential properties

- Commercial real estate loans secured by owner-occupied non-farm nonresidential properties

- Commercial real estate loans secured by other non-farm nonresidential properties

•Loans to finance agricultural production and other loans to farmers

•Commercial and industrial loans

•Loans to individuals for household, family and other personal expenditures (i.e., consumer loans)

•Municipal entities

•Non-profit organizations

•Other loans (overdraft credit lines)

The DCF method incorporates assumptions for probability of default ("PD"), loss given default ("LGD"), and prepayments and curtailments over the contractual terms of the loans. Under the DCF method, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows using the loan's effective rate. We elected to report the change in present values from one reporting period to the next due to the passage of time and changes in the estimate of future expected cash flows through the provision for credit losses, rather than though interest income.

In determining the PD for each pooled segment, the Bank utilized regression analyses to identify certain economic drivers that were considered highly correlated to historical Bank or peer loan default experience. As a result, management chose the California unemployment rate as the primary economic forecast driver for all segments, except for municipal loans. In addition, the annual percentage change in the California gross domestic product was used in the commercial and industrial loan segment. For municipal loans, the ACL model utilized a constant default rate obtained from a nationally recognized default rate study, which is updated annually. A third party provides LGD estimates for each segment based on a banking industry Frye-Jacobs Risk Index approach. The ACL model incorporates a one-year reasonable and supportable forecast of economic factors, updated quarterly, which is based on Moody's Analytics' Baseline Forecast. For periods beyond the forecast horizon, the economic factors revert to historical averages on a straight-line basis over a one-year period.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments and curtailments, when appropriate. The pooled loans' contractual loan terms exclude assumptions about extensions, renewals, and modifications.

Loans that do not share the same risk characteristics as pooled loans are evaluated individually for credit loss and generally include all non-accrual loans, collateral dependent loans, and certain modified loans and loans graded substandard or worse, as determined by management.

Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable and supportable forecasts of economic conditions to differ from the conditions that existed during the historical period included in the development of PD and LGD. Qualitative internal and external risk factors include, but are not limited to, the following:

•Changes in the nature and volume of the loan portfolio

•Changes in the volume and severity of past due loans, the volume of non-accruals loans, and the volume and severity of adversely classified or graded loans

•The existence and effect of individual loan and loan segment concentrations

•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere

•Changes in the experience, ability, and depth of lending management and other relevant staff

•Changes in the quality of our systematic loan review processes

•Changes in economic and business conditions, and developments that affect the collectability of the portfolio

•Changes in the value of underlying collateral, where applicable

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•The effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the portfolio

•The effect of acquisitions of other loan portfolios on our infrastructure, including risk associated with entering new geographic areas as a result of such acquisitions

•The presence of specialized lending segments in the portfolio

There were no material changes to the ACL methodology during 2023. However, assumptions that mainly influenced management's current estimate of the expected credit losses were primarily adjustments to qualitative risk factors from continued uncertainty about inflation and recession risks, the potential impact of rapidly increasing interest rates and other external factors on both our non-owner-occupied commercial real estate and construction portfolios, loan and collateral concentration risks in our construction and commercial real estate portfolios, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values for our non-owner occupied commercial real estate office and multi-family real estate portfolios. Other elements of the estimated current expected credit losses included increased allowances for individually analyzed loans exhibiting unique credit risk characteristics and a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rate, partially offset by the impact of an overall decrease in loans. While we believe we use the best information available to determine the allowance for credit losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. Our ACL model is sensitive to changes in unemployment rate forecasts and certain other assumptions that could result in material fluctuations in the allowance for credit losses and adversely affect our financial condition and results of operations.

As discussed in the Other Recently Adopted Accounting Standards section below, as of January 1 2023, we adopted ASU No. 2022-02 under which the concept of troubled debt restructured loans and its impact on the ACL calculation was eliminated in favor of the disclosure of certain loan modifications made to borrowers experiencing financial difficulty. Such modified loans are now subject to the Bank's standard ACL process, as outlined above.

For further information regarding the allowance for loan losses, see Note 3, Loans and Allowance for Loan Losses.

Allowance for Credit Losses on Unfunded Loan Commitments: We make commitments to extend credit to meet the financing needs of our customers in the form of loans or standby letters of credit. We are exposed to credit losses over a loan's contractual period in the event that a decline in credit quality of the borrower leads to nonperformance. We record an allowance for losses on unfunded loan commitments at the balance sheet date based on estimates of probability that these commitments will be drawn upon according to historical utilization experience of different types of commitments and expected loss severity and loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities on the consolidated statements of condition. Adjustments to the allowance for unfunded commitments are included in non-interest expense as a provision for (or reversal of) the allowance for unfunded commitments.

Transfers of Financial Assets:We have entered into certain loan participation agreements with other organizations. We account for these transfers of financial assets as sales when control over the transferred financial assets has been surrendered. Control over transferred assets is deemed to be surrendered when 1) the assets and liabilities have been isolated from us, 2) the transferee has the right to pledge or exchange the assets (or beneficial interests) it received, free of conditions that constrain it from taking advantage of that right, beyond a trivial benefit and 3) we do not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred assets. Transfers of a portion of a loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, and the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan. We recognized no gains or losses on the sale of these participation interests in 2023, 2022 and 2021.

Premises and Equipment:Land is carried at cost and not depreciated. Bank-owned buildings, leasehold improvements, furniture, fixtures, software and equipment and are stated at cost, less accumulated depreciation, and depreciated/amortized on a straight-line basis. Furniture and fixtures are depreciated over eight years and

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equipment is generally depreciated over three to twenty years. Bank-owned buildings are depreciated over twenty-five to thirty years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the terms of the leases. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred.

Leases:We lease certain premises under long-term non-cancelable operating leases, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Only those renewal and termination options that management determines are reasonably certain of exercising are included in the calculation of the lease liability. In addition, we lease certain equipment under finance leases. The equipment finance lease terms do not contain renewal options, bargain purchase options or residual value guarantees. We did not have any significant short-term leases during the reported periods.

Lease right-of-use assets represent the right to use the underlying asset while lease liabilities represent the present value of future lease obligations. We elected not to separate non-lease components from lease components and to exclude short-term leases (i.e., lease term of 12 months or less at the commencement date) from right-of-use assets and lease liabilities for all lease classifications. When calculating the lease liability, because most lease contracts do not contain an implicit interest rate, we discount lease payments over a lease's expected term based on the collateralized Federal Home Loan Bank borrowing rate that was commensurate with lease terms and minimum payments at the lease commencement date. Right-of-use assets for operating leases are amortized over the lease term by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion on the related liability to make lease payments, whereas finance leases are amortized on a straight-line basis over the term of the lease. Expense recognition for operating leases is recorded on a straight-line basis while expense recognition for finance leases represents the sum of periodic amortization of the associated right-of-use asset and the interest accretion on the lease liability. Refer to Note 12, Commitments and Contingencies, for further information.

Business Combinations: Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. A business is defined as a set of activities and assets that is both self-sustaining and managed to provide a return to investors and generally has three elements: inputs, processes and outputs. Under the acquisition method, the acquiring entity in a business combination recognizes the acquired assets and assumed liabilities at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceed the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from a business combination are recognized at fair value. Results of operations of an acquired business are included in the consolidated statements of operations from the date of acquisition. Business acquisition-related costs, including conversion and restructuring charges, are expensed as incurred. If substantially all of an acquisition is made up of one asset or several similar assets, or without a substantive process that together contributes to the ability to create outputs, the acquisition is accounted for as an asset acquisition and acquisition costs will be capitalized as part of the assets acquired, rather than expensed in a business combinations.

Goodwill and Other Intangible Assets: Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is deemed to have an indefinite life, is not subject to amortization, and as such is tested for impairment at least annually or more frequently if events and circumstances lead management to believe the value of goodwill may be impaired. Goodwill is the only intangible asset with an indefinite life recorded in the Company’s consolidated statements of financial condition. Impairment testing is performed at the reporting unit level. Management considered the Company to be its sole reporting unit for the year ended December 31, 2023.

Management’s assessment of goodwill impairment is performed in accordance with ASC 350-20, Intangibles - Goodwill and Other - Goodwill and encompasses a two-step process. First, the Company has the option to perform a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not the fair value of the Company is less than its carrying amount, including goodwill. The factors considered in the qualitative assessment typically include macroeconomic conditions, industry and market conditions and the overall financial performance of the Company, among other factors. If the Company determines that it is more likely than

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not the fair value of the Company may be less than its carrying amounts, then it proceeds to the quantitative impairment test, whereby it calculates the fair value of the Company. Under GAAP, in its performance of impairment testing, management has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the Company exceeds its fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge recorded in non-interest expense. If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the Company that is greater than the carrying amount, then no impairment charge is recorded.

The Company performs its annual goodwill impairment test as of November 30th each year. Due to the market volatility experienced in the banking sector during 2023, the Company elected to bypass a qualitative assessment of goodwill and proceed directly to a quantitative assessment, the results of which indicated that goodwill totaling $72.8 million was not impaired as of December 31, 2023, and there were no changes to our assessment through December 31, 2023. In addition, the Company recorded no goodwill impairment for the years ended December 31, 2022, and 2021.

Core deposit intangibles ("CDI") arising from the acquisition of other financial institutions are considered to have definite useful lives and are amortized on an accelerated method over their estimated useful life of ten years.At December 31, 2023, the future estimated amortization expense for the CDI arising from our past acquisitions was as follows:

The CDI represents the estimated future benefit of deposits related to an acquisition and is recorded separately from the related deposits and evaluated at least annually or when events and circumstances change. We recorded no impairment adjustments for the CDI in 2023, 2022 and 2021.

Other Real Estate Owned ("OREO"): OREO is comprised of property acquired through a business combination, foreclosure, in substance repossession or acceptance of deeds-in-lieu of foreclosure when the related loan receivable is de-recognized. OREO is recorded at fair value of the collateral less estimated costs to sell, establishing a new cost basis, and subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Any shortfall of collateral value from the recorded investment of the related loan is recognized as loss at the time of foreclosure and is charged against the allowance for loan losses. Fair value of collateral is generally based on an independent appraisal of the property. Revenues and expenses associated with OREO, and subsequent adjustments to the fair value of the property and to the estimated costs of disposal, are realized and reported as a component of non-interest income and expense when incurred. We recorded a $40 thousand and $345 thousand valuation adjustment to OREO in 2023 and 2022, respectively. In July 2023, the Bank completed the sale of its only OREO property.

Bank Owned Life Insurance ("BOLI"):The Bank owns life insurance policies on certain key current and former officers. BOLI is recorded in interest receivable and other assets on the consolidated statements of condition at the amount that can be realized under the insurance contract at period-end, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

Investments in Low Income Housing Tax Credit Funds:We have invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate-income tenants throughout California. Our ownership percentage in each limited partnership ranges from 1.0% to 3.5%. We account for the investments in qualified affordable housing tax credit funds using the proportional amortization method, where the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received. Low income housing tax credits and other tax benefits received, net of the amortization of the investment is recognized as part of income tax benefit. Each of the partnerships must meet the regulatory minimum requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credit may be denied for any period in which the project is not in compliance and a portion of the credit previously taken is subject to recapture with interest. We record an impairment charge if the value of the future tax credits and other tax benefits is less than the carrying value of the investments.

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Employee Stock Ownership Plan (“ESOP”):We recognize compensation cost for ESOP contributions when funds become committed for the purchase of Bancorp's common shares into the ESOP in the year in which the employees render service entitling them to the contribution. If we contribute stock, the compensation cost is the fair value of the shares when they are committed to be released (i.e., when the number of shares becomes known and formally approved). In 2023, 2022 and 2021, Bancorp only made stock contributions to the ESOP.

Income Taxes:Income taxes reported in the consolidated financial statements are computed based on an asset and liability approach. We recognize the amount of taxes payable or refundable for the current year and we record deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. We record net deferred tax assets to the extent it is more likely than not that they will be realized. In evaluating our ability to recover the deferred tax assets and the need to establish a valuation allowance against the deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. In projecting future taxable income, management develops assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates being used to manage the underlying business. Bancorp files consolidated federal and combined state income tax returns.

We recognize the financial statement effect of a tax position when it is more likely than not, based on the technical merits and all available evidence, that the position will be sustained upon examination, including the resolution through protests, appeals or litigation processes. For tax positions that meet the more likely than not threshold, we measure and record the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the taxing authority. The remainder of the benefits associated with tax positions taken is recorded as unrecognized tax benefits, along with any related interest and penalties. Interest and penalties related to unrecognized tax benefits are recorded in tax expense.

In deciding whether or not our tax positions taken meet the more likely than not recognition threshold, we must make judgments and interpretations about the application of inherently complex state and federal tax laws. To the extent tax authorities disagree with tax positions taken by us, our effective tax rates could be materially affected in the period of settlement with the taxing authorities. Revision of our estimate of accrued income taxes also may result from our own income tax planning, which may affect effective tax rates and results of operations for any reporting period.

We present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss ("NOL") carryforward, or similar tax loss or tax credit carryforward, rather than as a liability, when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) we intend to and are able to use the deferred tax asset for that purpose. Otherwise, the unrecognized tax benefit is presented as a liability instead of being netted with deferred tax assets.

Earnings per share (“EPS”): EPS is based upon the weighted average number of common shares outstanding during each year. The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic EPS are calculated by dividing net income by the weighted average number of common shares outstanding during each annual period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury stock method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, the difference in EPS is nominal for these participating securities.

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Potentially dilutive common shares related to:

Unvested restricted stock awards 11 17 20

Share-Based Compensation:All share-based payments, including stock options and restricted stock, are recognized as stock-based compensation expense in the consolidated statements of comprehensive income (loss) based on the grant-date fair value of the award with a corresponding increase in common stock. The grant-date fair value of the award is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. The stock-based compensation expense excludes stock grants to directors as compensation for their services, which are recognized as director expenses separately based on the grant-date value of the stock. We account for forfeitures as they occur. See Note 8, Stockholders' Equity and Stock Option Plans, for further discussion.

We determine the fair value of stock options at the grant date using a Black-Scholes pricing model that takes into account the stock price at the grant date, exercise price, expected life of the option, volatility of the underlying stock, expected dividend yield and risk-free interest rate over the expected life of the option. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatility is based on the historical volatility of the common stock over the most recent period that is generally commensurate with the expected life of the options. The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based award and stock price volatility. The assumptions used represent management's best estimates based on historical information, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if other assumptions had been used, the recorded stock-based compensation expense could have been materially different from that recorded in the consolidated financial statements. The fair value of restricted stock is based on the stock price on the grant date.

We record excess tax benefits resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as tax benefits in the consolidated statements of comprehensive income (loss) with a corresponding decrease to current taxes payable. In addition, we reflect excess tax benefits as an operating activity in the consolidated statements of cash flows.

Cash paid for tax withholdings when shares are surrendered in a cashless stock option exchange is classified as a financing activity in the consolidated statements of cash flows.

Derivative Financial Instruments and Hedging Activities - Fair Value Hedges: All of our interest rate swap contracts are designated and qualified as fair value hedges. The terms of our loan interest rate swap contracts are closely aligned to the terms of the designated fixed-rate loans. The hedging relationships are tested for effectiveness on a quarterly basis using a qualitative approach. The qualitative analysis includes verification that there are no changes to the derivative's or hedged item's key terms and conditions and no adverse developments regarding risk of counterparty default, and validation that we continue to have fair value hedge designation. Our rate swaps on available-for-sale securities were designated as partial term fair value hedges and structured such that the changes in fair value of the interest rate swaps are expected to be perfectly effective in offsetting the changes in the fair value of the hedged items attributable to changes in the swap rate. Because the hedges met the criteria for using the shortcut method, there is no need to periodically reassess effectiveness during the term of the hedges.

The interest rate swaps are carried on the consolidated statements of condition at their fair value in other assets (when the fair value is positive) or in other liabilities (when the fair value is negative). For fair value designated

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hedges, the gain or loss on the hedging instruments, as well as the offsetting loss or gain on the hedged items, are recognized in current earnings as fair values change.

For derivative instruments executed with the same counterparty under a master netting arrangement, we do not offset fair value amounts of interest rate swaps in liability positions with the ones in asset positions.

From time to time, we make firm commitments to enter into long-term fixed-rate loans with borrowers backed by yield maintenance agreements and simultaneously enter into forward interest rate swap agreements with correspondent banks to mitigate the change in fair value of the yield maintenance agreement. Prior to loan funding, yield maintenance agreements with net settlement features that meet the definition of a derivative are considered as non-designated hedges and are carried on the consolidated statements of condition at their fair value in other assets (when the fair value is positive) or in other liabilities (when the fair value is negative). The offsetting changes in the fair value of the forward swap and the yield maintenance agreement are recorded in interest income. When the fixed-rate loans are originated, the forward swaps are designated to offset the change in fair value in the loans. Subsequent to the point of the swap designations, the fair value of the related yield maintenance agreements at the designation date that was recorded in other assets is amortized using the effective yield method over the life of the respective designated loans.

For further detail, refer to Note 14, Derivative Financial Instruments and Hedging Activities.

Revenue Recognition:We utilize the following five-step model for non-financial instrument related revenue that is in scope for ASC 606, Revenue from Contracts with Customers: 1) identify the contract, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and, 5) recognize revenue when (or as) the entity satisfies the performance obligation. Our main revenue streams in scope for ASC 606 include:

•Wealth management and trust services ("WMTS") fees - WMTS services include, but are not limited to: customized investment advisory and management; administrative services such as bill pay and tax reporting; trust administration, estate settlement, custody and fiduciary services. Performance obligations for investment advisory and management services are generally satisfied over time. Revenue is recognized monthly according to a tiered fee schedule based on the client's month-end market value of assets under our management. WMTS does not earn revenue based on performance or incentives. Costs associated with WMTS revenue-generating activities, such as payments to sub-advisors, are recorded separately as part of professional service expenses when incurred.