UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission File Number 001-33572 Bank of Marin Bancorp (Exact name of Registrant as specified in its charter) | --- | ...

Financial Data and Key Metrics Changes - The company reported a net income of $8.9 million for Q1 2021, with diluted earnings per share of $0.66, exceeding results from both the prior quarter and Q1 2020 [5] - Total deposits grew by $152 million to $2.7 billion, with noninterest-bearing deposits comprising 54% of total deposits [7] - The total risk-based capital ratio was 15.7% at March 31, well above regulatory requirements [7] Business Line Data and Key Metrics Changes - The loan portfolio grew modestly to $2.1 billion, reflecting a 15% increase year-over-year, driven by new loan origination and participation in the SBA's Paycheck Protection Program (PPP) [6] - The company funded $25 million in new PPP loans during the quarter, with a total of $127 million funded as of April 15 [7] Market Data and Key Metrics Changes - The Greater Sacramento region is projected to see population and household income growth exceeding national estimates by 2026, making it an attractive market for business growth [13] - The merger with American River Bank positions the company to become a $4 billion bank, enhancing its presence in Northern California [9] Company Strategy and Development Direction - The acquisition of American River Bank is seen as a strategic fit, allowing the company to expand its franchise and improve efficiency in a low-interest-rate environment [5][9] - The merger is expected to generate 14% accretion to 2022 earnings and a 15% internal rate of return, with a focus on maintaining strong credit quality and customer service [10][18] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the economic outlook and the potential for growth, particularly in the Sacramento and Sonoma markets [30][32] - The company anticipates that the integration of American River Bank will provide opportunities for growth and expansion in new markets [36][42] Other Important Information - The company reversed $2.9 million in provisions for credit losses on loans, indicating improved credit quality [6] - A cash dividend of $0.23 per share was declared, marking the 64th consecutive quarterly dividend [8] Q&A Session Summary Question: Margin impact and core margin numbers - Management indicated that the Q1 margin was only affected by 1 basis point from PPP, with Q4 impacted by 13 basis points due to lack of forgiveness [19][20] Question: Cost savings from the merger - The company expects 35% cost savings from the merger, primarily from branch overlaps and administrative efficiencies [24] Question: Growth pipeline and loan demand - The pipeline is improving, but loan demand remains relatively weak, with ongoing deleveraging attitudes observed [30] Question: Fee income opportunities - Management noted that fee waivers during the pandemic negatively impacted fee income, but they expect a resurgence as fees are reinstated [34] Question: Future M&A considerations - The company is open to further M&A opportunities post-integration, particularly in the Sacramento market [36] Question: Reserve levels and economic forecasts - Management indicated that reserves would likely diminish as the economy improves, but specific estimates were not provided [37] Question: Integration and branding post-merger - The company plans to maintain the American River Bank branding during integration but may consider rebranding to Bank of Marin in the long term [52]

Part I [Business](index=6&type=section&id=ITEM%201.%20BUSINESS) Bank of Marin Bancorp operates as a commercial bank through its subsidiary, serving businesses and professionals in the San Francisco Bay Area - Bank of Marin Bancorp operates through its sole subsidiary, Bank of Marin, with **25 offices** across seven Bay Area counties serving small to medium-sized businesses and professionals[20](index=20&type=chunk)[21](index=21&type=chunk)[23](index=23&type=chunk) - The bank offers a comprehensive suite of services including commercial and retail lending, deposit accounts, and Wealth Management and Trust Services[23](index=23&type=chunk)[24](index=24&type=chunk) - In its primary market of Marin County, the bank holds the **third-largest market share** of total deposits at **12.3%** as of June 30, 2020[31](index=31&type=chunk) - As of December 31, 2020, the company employed **289 full-time equivalent staff**[31](index=31&type=chunk) - In response to the COVID-19 pandemic, the company implemented remote work, enhanced safety protocols, and maintained regular pay for all staff with **no layoffs**[36](index=36&type=chunk)[38](index=38&type=chunk) - The company is extensively regulated by federal and state agencies, including the Federal Reserve, FDIC, and California's DFPI[39](index=39&type=chunk)[40](index=40&type=chunk)[42](index=42&type=chunk) [Risk Factors](index=14&type=section&id=ITEM%201A.%20RISK%20FACTORS) The company faces significant risks from the COVID-19 pandemic, credit concentration, interest rate fluctuations, and cybersecurity threats - The COVID-19 pandemic poses a significant risk, potentially leading to **increased loan delinquencies** and **net interest margin compression**[74](index=74&type=chunk) - The company has significant credit risk, with **77% of its loans secured by real estate** and a CRE loan concentration of **314% of total risk-based capital**, exceeding regulatory guidance[95](index=95&type=chunk)[97](index=97&type=chunk) - Lending is focused on small to medium-sized businesses, which may have fewer resources to withstand economic downturns[92](index=92&type=chunk) - Earnings are highly dependent on net interest income and are vulnerable to the **prolonged low interest rate environment**[104](index=104&type=chunk)[106](index=106&type=chunk) - The company faces risks related to the planned cessation of LIBOR after 2021, affecting a small number of loans and all interest rate swap agreements[115](index=115&type=chunk)[116](index=116&type=chunk) - Operational risks include potential cybersecurity breaches, adapting to technological changes, and reliance on third-party vendors for critical functions[117](index=117&type=chunk)[120](index=120&type=chunk)[122](index=122&type=chunk) [Unresolved Staff Comments](index=23&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) The company reports no unresolved comments from the staff of the Securities and Exchange Commission - There are no unresolved staff comments[126](index=126&type=chunk) [Properties](index=23&type=section&id=ITEM%202.%20PROPERTIES) The company leases all of its physical locations, including its corporate headquarters and branch facilities - The company leases its corporate headquarters and all branch and office facilities[126](index=126&type=chunk) [Legal Proceedings](index=23&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) Information regarding legal proceedings is incorporated by reference from the Consolidated Financial Statements - For information on litigation matters, refer to Note 12, Commitment and Contingencies[127](index=127&type=chunk) [Mine Safety Disclosures](index=23&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company - Not applicable[128](index=128&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=24&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) The company's common stock trades on Nasdaq, and it maintains an active share repurchase program that was reactivated in late 2020 - The company's common stock is traded on the Nasdaq Capital Market under the symbol **BMRC**, with **13,359,479 shares outstanding** as of February 28, 2021[8](index=8&type=chunk)[131](index=131&type=chunk) - A new Share Repurchase Program was approved in January 2020, allowing for the repurchase of up to **$25.0 million** of common stock through February 28, 2022[137](index=137&type=chunk) 2020 Share Repurchases | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value That May yet Be Purchased Under the Program (in thousands) | | :--- | :--- | :--- | :--- | | January 1-31, 2020 | 13,283 | $44.42 | $2,376 | | February 1-28, 2020 | 20,855 | $42.17 | $1,495 | | March 1-31, 2020 | 58,526 | $30.00 | $23,241 | | October 1-30, 2020 | 100 | $30.00 | $23,238 | | November 1-30, 2020 | 44,815 | $34.73 | $21,680 | | December 1-31, 2020 | 66,130 | $36.48 | $19,264 | | **Total** | **203,709** | **$35.33** | **$19,264** | [Selected Financial Data](index=26&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) A five-year summary shows asset growth in 2020, but a decline in net income, EPS, and net interest margin compared to 2019 Selected Financial Highlights (2019 vs. 2020) | Metric (in thousands, except per share data) | 2020 | 2019 | | :--- | :--- | :--- | | Total assets | $2,911,926 | $2,707,280 | | Loans, net | $2,065,682 | $1,826,609 | | Deposits | $2,504,249 | $2,336,489 | | Stockholders' equity | $358,253 | $336,788 | | Net interest income | $96,659 | $95,680 | | Net income | $30,242 | $34,241 | | Diluted EPS | $2.22 | $2.48 | | Return on average assets | 1.04% | 1.34% | | Return on average equity | 8.60% | 10.49% | | Tax-equivalent net interest margin | 3.55% | 3.98% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=ITEM%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Net income declined in 2020 due to a higher credit loss provision and margin compression, despite strong loan and deposit growth [Executive Summary](index=29&type=section&id=Executive%20Summary) Earnings declined in 2020 due to a lower net interest margin and pandemic-related provisions, despite strong loan and deposit growth Key Performance Indicators (2020 vs. 2019) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Income | $30.2 million | $34.2 million | | Diluted EPS | $2.22 | $2.48 | | Total Loan Growth | 13% | - | | Deposit Growth | 7% | - | | Net Interest Margin | 3.55% | 3.98% | | Return on Assets | 1.04% | 1.34% | | Return on Equity | 8.60% | 10.49% | - The bank originated over 1,800 PPP loans totaling **$291.6 million** outstanding at year-end, supporting nearly 28,000 employees[161](index=161&type=chunk)[164](index=164&type=chunk) - Of the $402.9 million in loans granted payment relief, **$71.0 million remained on additional relief programs** as of December 31, 2020[165](index=165&type=chunk)[166](index=166&type=chunk) [Results of Operations](index=31&type=section&id=RESULTS%20OF%20OPERATIONS) Net interest income rose slightly, but a compressed margin and a surged credit loss provision drove lower overall profitability in 2020 - Net interest income increased by $1.0 million to $96.7 million, but the tax-equivalent net interest margin **decreased 43 basis points to 3.55%**[175](index=175&type=chunk) - The provision for credit losses **increased significantly to $4.6 million** in 2020 from $900 thousand in 2019, due to the pandemic and CECL adoption[182](index=182&type=chunk) - Non-interest income decreased by $534 thousand to $8.6 million, primarily due to a **$551 thousand decline in waived service charges**[184](index=184&type=chunk) - Non-interest expense increased by $2.1 million to $60.0 million, driven by a **$1.4 million provision for unfunded loan commitments** and higher charitable contributions[190](index=190&type=chunk)[191](index=191&type=chunk) [Financial Condition](index=35&type=section&id=FINANCIAL%20CONDITION) Total assets grew to $2.91 billion, driven by PPP loans and deposit growth, while the allowance for credit losses increased due to CECL - The investment securities portfolio **decreased by $79.3 million (14%)** during 2020 to $482.1 million[204](index=204&type=chunk) - Total loans **increased by $245.3 million (13%)** to $2.089 billion, driven by **$291.6 million in SBA PPP loans**[210](index=210&type=chunk) - The allowance for credit losses to total loans **increased to 1.10%** from 0.90% in 2019, reflecting CECL adoption and the pandemic's impact[224](index=224&type=chunk) - Non-performing assets **increased to $9.2 million** from $226 thousand in 2019, primarily due to two TDR loans placed on non-accrual status[232](index=232&type=chunk)[233](index=233&type=chunk) - Total deposits **grew by $167.8 million to $2.504 billion**, with non-interest bearing deposits constituting 54% of the total[242](index=242&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=49&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risk is interest rate risk, with simulation models indicating an asset-sensitive position benefiting from rising rates - The company's primary market risk is interest rate risk, managed by the Asset Liability Management Committee (ALCO)[272](index=272&type=chunk)[273](index=273&type=chunk) Estimated Change in Net Interest Income (NII) from Immediate Rate Changes | Rate Change (bps) | Estimated Change in NII (Year 1) | Estimated Change in NII (Year 2) | | :--- | :--- | :--- | | up 400 | 8.9% | 23.3% | | up 300 | 6.7% | 17.6% | | up 200 | 4.4% | 11.3% | | up 100 | 1.8% | 4.6% | | down 100 | (1.2)% | (2.3)% | [Financial Statements and Supplementary Data](index=51&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section includes audited financial statements, with the adoption of the CECL accounting standard noted as a critical audit matter - The independent auditor's report provides an **unqualified opinion** on the financial statements and internal controls[280](index=280&type=chunk) - The adoption of the **CECL accounting standard (ASC Topic 326)** is identified as a Critical Audit Matter due to its subjectivity[281](index=281&type=chunk)[289](index=289&type=chunk)[290](index=290&type=chunk) Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $2,911,926 | $2,707,280 | | Loans, net | $2,065,682 | $1,826,609 | | Total Deposits | $2,504,249 | $2,336,489 | | Total Liabilities | $2,553,673 | $2,370,492 | | Total Stockholders' Equity | $358,253 | $336,788 | Consolidated Income Statement Highlights (in thousands) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Interest Income | $96,659 | $95,680 | $91,544 | | Provision for Credit Losses | $4,594 | $900 | $0 | | Non-interest Income | $8,550 | $9,084 | $10,139 | | Non-interest Expense | $60,028 | $57,970 | $58,266 | | Net Income | $30,242 | $34,241 | $32,622 | [Note 1: Summary of Significant Accounting Policies](index=61&type=section&id=Note%201%3A%20Summary%20of%20Significant%20Accounting%20Policies) The company adopted the CECL standard on December 31, 2020, resulting in a $1.2 million after-tax reduction to retained earnings - The company adopted the **CECL standard (ASC 326)** effective December 31, 2020, replacing the incurred loss model[312](index=312&type=chunk)[313](index=313&type=chunk) Impact of CECL Adoption (Pre-Tax) | Item | Cumulative Transition Adjustment (to Retained Earnings) | Impact on Q4 2020 Net Income | | :--- | :--- | :--- | | Allowance for Credit Losses on Loans | ($1,604 thousand) | $856 thousand (reversal of provision) | | Allowance for Unfunded Commitments | ($122 thousand) | ($960 thousand) (provision) | [Note 3: Loans and Allowance for Credit Losses](index=78&type=section&id=Note%203%3A%20Loans%20and%20Allowance%20for%20Credit%20Losses) The loan portfolio grew to $2.09 billion driven by PPP loans, while the allowance for credit losses increased to $22.9 million - The increase in commercial and industrial loans was primarily due to **$291.6 million in PPP loans** originated under the CARES Act[418](index=418&type=chunk)[419](index=419&type=chunk)[422](index=422&type=chunk) - The allowance for credit losses rollforward shows a beginning balance of $16.7 million, a **$1.6 million CECL adjustment**, a $4.6 million provision, and an ending balance of $22.9 million[449](index=449&type=chunk) - Total Troubled Debt Restructurings (TDRs) were **$12.5 million** at year-end, with **$71.0 million** in loans remaining on pandemic-related payment relief[443](index=443&type=chunk)[445](index=445&type=chunk) [Note 8: Stockholders' Equity and Stock Plans](index=87&type=section&id=Note%208%3A%20Stockholders'%20Equity%20and%20Stock%20Plans) The company paid $12.5 million in dividends and repurchased $7.2 million of stock under its authorized program in 2020 - The company has several equity compensation plans, including the 2017 Equity Plan, 2020 Director Stock Plan, and an Employee Stock Purchase Plan (ESPP)[472](index=472&type=chunk)[473](index=473&type=chunk)[474](index=474&type=chunk) - Dividend payments from the Bank to the Bancorp are restricted, with **$30.6 million** available for dividend payment as of December 31, 2020[488](index=488&type=chunk) - In 2020, the company **repurchased 203,709 shares for a total of $7.2 million** under its share repurchase program[496](index=496&type=chunk) Cash Dividends Paid | Year | Total (in thousands) | Per Common Share | | :--- | :--- | :--- | | 2020 | $12,506 | $0.92 | | 2019 | $10,958 | $0.80 | | 2018 | $8,860 | $0.64 | [Note 15: Regulatory Matters](index=100&type=section&id=Note%2015%3A%20Regulatory%20Matters) The company and its bank subsidiary exceeded all minimum capital requirements to be considered "well capitalized" as of year-end 2020 - Both the Bancorp and the Bank were categorized as **well capitalized** under the regulatory framework as of December 31, 2020[547](index=547&type=chunk) Bank Capital Ratios as of December 31, 2020 | Capital Ratio | Actual Ratio | Well Capitalized Threshold | | :--- | :--- | :--- | | Total Capital (to risk-weighted assets) | 15.80% | ≥ 10.00% | | Tier 1 Capital (to risk-weighted assets) | 14.59% | ≥ 8.00% | | Tier 1 Capital (to average assets) | 10.64% | ≥ 5.00% | | Common Equity Tier 1 (to risk-weighted assets) | 14.59% | ≥ 6.50% | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=105&type=section&id=ITEM%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) The company reported no disagreements with its accountants on any matter of accounting or financial disclosure - None reported[563](index=563&type=chunk) [Controls and Procedures](index=105&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - The CEO and CFO concluded that **disclosure controls and procedures were effective** as of the end of the reporting period[564](index=564&type=chunk) - Management concluded that the company maintained **effective internal control over financial reporting** as of December 31, 2020[565](index=565&type=chunk) - During the fourth quarter of 2020, new and modified controls were implemented as part of the **adoption of the CECL accounting standard**[569](index=569&type=chunk) [Other Information](index=106&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) The company reported no other information for this item - None[571](index=571&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=106&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) Required information is incorporated by reference from the company's 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders[571](index=571&type=chunk) [Executive Compensation](index=106&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) Required information regarding executive compensation is incorporated by reference from the company's 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders[572](index=572&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=106&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) Required information is incorporated by reference from this report and the company's 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders[573](index=573&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=106&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) Required information is incorporated by reference from the company's 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders[574](index=574&type=chunk) [Principal Accountant Fees and Services](index=106&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) Required information regarding accountant fees is incorporated by reference from the company's 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders[575](index=575&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=107&type=section&id=ITEM%2015.%20EXHIBITS%2C%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists the financial statements and exhibits filed as part of the Form 10-K report - Lists the financial statements filed under Item 8 and specifies that all financial statement schedules have been omitted[578](index=578&type=chunk)[579](index=579&type=chunk) - Provides a list of exhibits filed with the report or incorporated by reference, including corporate governance documents and SEC certifications[582](index=582&type=chunk) [Form 10-K Summary](index=108&type=section&id=ITEM%2016.%20FORM%2010-K%20SUMMARY) The company indicates that no Form 10-K summary is provided - None[583](index=583&type=chunk)

Financial Data and Key Metrics Changes - Net income for the full year 2020 was $30.2 million, with a return on assets of 1.04% and a return on equity of 8.6% [7] - Loans increased by $245 million or 13% to $2.1 billion as of December 31, 2020, compared to $1.8 billion at the end of 2019 [7] - Deposits grew by $168 million or 7% to $2.5 billion at year-end 2020, up from $2.3 billion at the end of 2019 [8] - Noninterest-bearing deposits increased by $226 million in 2020, making up 54% of total deposits at year-end [8] - Nonaccrual loans represented only 0.44% of the bank's loan portfolio as of December 31, 2020 [8] Business Line Data and Key Metrics Changes - Net interest income for 2020 was $96.7 million, growing by $1 million over 2019, primarily due to growth in PPP and commercial real estate loans [17] - Non-interest income decreased by $534,000 to $8.6 million, mainly due to reductions in overdraft and ATM fees [17] - Non-interest expense increased by $2 million to $60 million, attributed to higher provisions for unfunded loan commitments and occupancy expenses [18] Market Data and Key Metrics Changes - The bank provided payment relief for 269 loans totaling $403 million since the onset of the pandemic, with most loans resuming normal payments [12] - As of December 31, 2020, 14 borrowing relationships with 29 loans totaling $71 million had requested additional payment relief, primarily in the education and health club industries [12] Company Strategy and Development Direction - The company is optimistic about growth opportunities in its San Mateo and Walnut Creek offices and is making key hires to support ongoing growth [15] - The bank plans to redeem its remaining $2.8 million trust preferred debt in the first quarter of 2021 to eliminate a high-cost funding source [22] - The company anticipates robust M&A activity as the industry adjusts to a new normal, positioning itself as a buyer of choice due to its strong capital position [25] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating the remaining stages of the pandemic and transitioning to growth mode in 2021 [23] - The competitive landscape is challenging, with margin compression being a significant concern as banks offer low rates [30] - Management expects loan growth to occur more in the latter half of the year as businesses begin to reinvest [60] Other Important Information - The Board of Directors declared a cash dividend of $0.23 per share, marking the 63rd consecutive quarterly dividend [9] - The bank has opened its application portal for the second round of PPP loan funding, expecting lighter demand compared to 2020 [14] Q&A Session Summary Question: How does the company view its ability to grow going forward? - Management believes they are well-positioned for growth due to new commercial banking offices and a strong focus on relationship banking [28] Question: What is the competitive landscape like? - The competitive environment is aggressive, with many banks offering low rates, which poses challenges for maintaining margins [30] Question: What are the trends in asset quality, particularly in the health club and hotel sectors? - Management sees a pathway for recovery in these sectors once businesses can reopen, supported by strong collateral [69] Question: How does the company plan to manage its balance sheet fluctuations? - Management anticipates that loan growth will occur in the latter half of the year, with deposits potentially remaining flat or growing slightly [60]

Financial Performance - Net income for Q3 2020 was $7.5 million, down from $9.4 million in Q3 2019, with diluted earnings per share at $0.55 compared to $0.69 a year ago[158] - Net income for the three months ended September 30, 2020, was $7,491,000, down from $9,448,000 in the same quarter of 2019[168] - Basic net income per common share decreased to $0.55 from $0.70 year-over-year[168] - Return on average assets was 0.98% for the quarter, down from 1.49% in the same period last year[168] - Return on average equity decreased to 8.37% from 11.34% year-over-year[168] Loan and Deposit Growth - Total loans increased by $264.7 million to $2,108.0 million as of September 30, 2020, primarily due to $301.7 million in SBA PPP loans, representing 14% of loan balances[161] - Total deposits rose by $232.8 million to $2,569.3 million at September 30, 2020, with non-interest bearing deposits increasing to 54% of total deposits from 48% at December 31, 2019[161] - Non-interest bearing deposits rose to $1,383.7 million, representing 53.9% of total deposits as of September 30, 2020[218] - Loans increased by $264.7 million to $2,108.0 million, driven mainly by $308.2 million in SBA PPP loans[217] Provision for Loan Losses - The provision for loan losses for the first nine months of 2020 was $5.45 million, significantly higher than $400 thousand for the same period in 2019, reflecting the economic impact of the pandemic[159] - Provision for loan losses increased to $1,250,000 for the quarter, compared to $400,000 in the prior year[168] - The ratio of allowance for loan losses to total loans was 1.05% at September 30, 2020, compared to 0.90% at December 31, 2019[190] - The provision for loan losses was $5.45 million for the nine months ended September 30, 2020, compared to $400 thousand for the same period in the prior year, reflecting the economic uncertainties from the COVID-19 pandemic[189] Non-Interest Income and Expenses - Non-interest income decreased by $931 thousand in Q3 2020 to $1.8 million, compared to $2.7 million in Q3 2019, primarily due to lower service charges and benefits from BOLI policies[196] - Total non-interest income for the first nine months of 2020 was $6.7 million, a slight decrease from $6.8 million in the same period in 2019, with higher gains on sales of investment securities partially offsetting declines in other categories[197] - Non-interest expense increased by $1.0 million to $15.2 million in Q3 2020, compared to $14.2 million in Q3 2019, primarily due to higher charitable contributions and provisions for losses on off-balance sheet commitments[202] - Total non-interest expense for the first nine months of 2020 was $44.8 million, a slight increase of $204 thousand from $44.6 million in the same period of 2019[203] Capital and Liquidity - The total risk-based capital ratio was 15.5% at September 30, 2020, up from 14.6% at December 31, 2019, indicating strong capital position[161] - The Bank's total capital to risk-weighted assets ratio was 16.05% as of September 30, 2020, exceeding the well-capitalized threshold of 10.00%[225] - Tier 1 capital to risk-weighted assets ratio was 14.92% as of September 30, 2020, above the required minimum of 8.50%[225] - Management anticipates that the current strong liquidity position will provide adequate liquidity to fund operations going forward[230] Tax and Regulatory Matters - The effective tax rate for Q3 2020 was 24.1%, compared to 23.0% in Q3 2019, reflecting a decrease in pre-tax income[205] - The provision for income taxes for the first nine months of 2020 was $7.4 million at an effective tax rate of 25.0%, compared to $8.3 million at 24.9% in the same period of 2019[206] - The Bank had no accruals for interest or penalties related to unrecognized tax benefits as of September 30, 2020[209] Charitable Contributions - The company made $360 thousand in charitable contributions during Q3 2020 to support remote learning resources for underserved students[160] - Charitable contributions increased by $370 thousand in Q3 2020, reflecting a 333.3% increase compared to the same period last year[202]

Financial Data and Key Metrics Changes - Bank of Marin generated net income of $7.5 million with diluted earnings per share of $0.55, compared to $0.69 in the same quarter of 2019, primarily due to the pandemic's economic impact [10][24] - Total loans remained steady at $6.1 billion, while total deposits decreased by $210.6 million to $2.6 billion, reflecting normal fluctuations in large business accounts [10][11] - The tax equivalent net interest margin was 3.44%, down 9 basis points from the prior quarter and 60 basis points from Q3 2019 [26] Business Line Data and Key Metrics Changes - Net interest income was $24.6 million, slightly up from $24.4 million in the prior quarter, driven by SBA PPP loan income [25] - Non-interest income was $1.8 million, down from $2.7 million in Q3 2019, primarily due to lower ATM fees and service charges [30] - Non-accrual loans represented only 0.07% of the loan portfolio, with loan loss provisions totaling $1.25 million in Q3 [27] Market Data and Key Metrics Changes - The number of borrowers needing loan payment relief declined significantly, with only $47 million of the original $389 million in loans still requiring assistance [18] - The bank's exposure to industries most affected by the pandemic is relatively small, with most borrowers resuming normal payments [35] Company Strategy and Development Direction - The bank is focused on disciplined risk management and maintaining a strong capital base, with a reactivation of the $25 million share repurchase program approved by the Board [13] - The bank aims to adapt to the pandemic environment by exploring remote work opportunities and potential branch consolidations to enhance efficiency [42] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strength of the loan portfolio, citing a decline in classified and non-accrual loans [34] - The bank remains optimistic about growth opportunities in new markets while continuing to support existing clients [21] Other Important Information - The bank declared a cash dividend of $0.23 per share, marking the 62nd consecutive quarterly dividend [14] - The bank plans to adopt the current expected credit loss accounting standard (CECL) on December 31, 2020, which will result in an increase to the allowance for credit losses [28][29] Q&A Session Summary Question: Strategy on balancing expense management with reinvestment - Management emphasized a focus on efficiency and potential remote work opportunities while maintaining customer relationships [40][41] Question: Comments on capital usage and buyback program - Management indicated comfort with the loan portfolio and reinstated the stock repurchase plan, while also monitoring M&A opportunities [49][51] Question: Rationale for off-balance-sheet strategy - The bank typically pushes significant deposits off-balance sheet for liquidity management, especially in a volatile environment [57] Question: Thoughts on commercial real estate market - Management acknowledged uncertainty in the commercial real estate market but expressed confidence in their conservative underwriting approach [61][62] Question: Loan originations outlook - Management indicated that loan originations are hard to predict but are actively seeking to grow the pipeline [86][88] Question: Status of PPP loan forgiveness process - The bank is ready to start the forgiveness process as soon as final guidance is received [91][94] Question: Customer fee waivers during the pandemic - Management plans to continue waiving fees to support customers until it is prudent to revert back [98] Question: Balance sheet liquidity and customer behavior - Management noted mixed customer behavior with some deposits being paid down, making future predictions challenging [100]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission File Number 001-33572 Bank of Marin Bancorp (Exact name of Registrant as specified in its charter) | --- | ...

Financial Data and Key Metrics Changes - The company generated net income of $7.4 million with diluted earnings per share of $0.55, compared to $0.53 in the prior quarter and $0.60 in the same quarter last year [30] - Total loans increased by approximately 14% to $2.1 billion, driven by growth in commercial and industrial loans, particularly from PPP loans [12][30] - Total deposits rose by $473 million to $2.8 billion, influenced by PPP loan proceeds and increased liquidity in the banking system [13] - The average cost of deposits decreased to nine basis points, with non-interest bearing deposits representing 52% of total deposits [14] Business Line Data and Key Metrics Changes - The bank's loan portfolio exposure to the most affected industries is low, with total exposure to vulnerable segments at $430 million, or 20% of the loan portfolio [22] - Non-accrual loans represented only 0.08% of the loan portfolio, indicating strong asset quality [35] - Classified loans increased by $1.5 million to $13.5 million, but are still down compared to the first quarter of 2019 [16] Market Data and Key Metrics Changes - The bank funded over $300 million in PPP loans, assisting over 1,800 local small businesses and nearly 28,000 employees [7] - The bank's exposure to retail businesses and related commercial real estate totaled $198 million, or 9% of the total portfolio [23] Company Strategy and Development Direction - The company is focused on relationship banking, disciplined fundamentals, and community commitments to assist customers during the pandemic [6] - The bank is looking for strategic opportunities for expansion, including the establishment of a commercial banking office in San Mateo [28] - Management emphasized the importance of maintaining a strong capital position and high-quality loan portfolio as they navigate the pandemic [39] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the bank's conservative lending philosophy and strong asset quality, despite the economic pressures from COVID-19 [16][38] - The bank anticipates that the full impact of the COVID-19 crisis will take time to materialize, but remains well-capitalized and prepared for future challenges [14][38] Other Important Information - The Board of Directors declared a cash dividend of $0.23 per share, marking the 61st consecutive quarterly dividend [17] - The bank's efficiency ratio was reported at 54%, reflecting continued expense control [36] Q&A Session Summary Question: Impact of lowering interest rate floors on margin - Management is reviewing the impact on a case-by-case basis, with expectations that the lowering of floors may continue to affect margins [40][42] Question: Resumption of service charges - Management indicated that while they are currently waiving fees to support customers, they expect to resume normal fee structures as the situation stabilizes [43] Question: Changes in borrower behavior - There has been a trend of reduced credit usage among borrowers, with some initially drawing on lines of credit but later paying them down [44][45] Question: Balance sheet size and PPP loan pay-off modeling - Management expects a significant portion of PPP loans to be forgiven by the end of 2020, impacting deposit flows accordingly [46][47] Question: Excess liquidity and its duration - There is excess liquidity in the banking system, but its duration is uncertain as it is influenced by various factors including tax payments [48] Question: Growth expectations for the San Mateo office - The bank plans to hire additional commercial banking officers and is optimistic about growth in the region, although specific growth targets are currently under review [50][52] Question: Loan deferrals and risk rating downgrades - The bank's deferral program provided immediate relief without extensive underwriting, and management is monitoring the situation closely for potential risk rating adjustments [79][80]

[PART I FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section provides the unaudited consolidated financial statements and management's discussion for Bank of Marin Bancorp, covering Q1 2020 performance and financial condition [ITEM 1. Financial Statements](index=3&type=section&id=ITEM%201.%20Financial%20Statements) This section presents Bank of Marin Bancorp's unaudited consolidated financial statements, including Statements of Condition, Comprehensive Income, Equity, and Cash Flows, with detailed notes on accounting policies and financial instruments [Consolidated Statements of Condition](index=3&type=section&id=Consolidated%20Statements%20of%20Condition) Total assets and deposits slightly decreased from December 31, 2019, to March 31, 2020, while stockholders' equity experienced an increase Consolidated Statements of Condition (in thousands) | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------- | :---------------------------- | :------------------------------- | | Total assets | $2,697,738 | $2,707,280 | | Total deposits | $2,307,110 | $2,336,489 | | Total stockholders' equity | $345,940 | $336,788 | | Loans, net | $1,824,976 | $1,826,609 | [Consolidated Statements of Comprehensive Income](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Net income slightly decreased in Q1 2020 due to a significant provision for loan losses, partially offset by increased non-interest income Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net income | $7,228 | $7,479 | | Provision for loan losses | $2,200 | $0 | | Total non-interest income | $3,120 | $1,771 | | Basic EPS | $0.53 | $0.54 | | Diluted EPS | $0.53 | $0.54 | [Consolidated Statements of Changes in Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Total equity increased from January 1 to March 31, 2020, driven by net income and other comprehensive income, partially offset by dividends and stock repurchases Consolidated Statements of Changes in Stockholders' Equity (in thousands) | Metric | Three months ended March 31, 2020 (in thousands) | | :------------------------------------------------- | :--------------------------------------------- | | Balance at January 1, 2020 | $336,788 | | Net income | $7,228 | | Other comprehensive income | $6,425 | | Cash dividends paid on common stock ($0.23 per share) | ($3,127) | | Stock repurchased, net of commissions | ($3,230) | | Balance at March 31, 2020 | $345,940 | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Cash flows for Q1 2020 show a net decrease in cash, cash equivalents, and restricted cash, primarily due to significant cash used in financing activities Consolidated Statements of Cash Flows (in thousands) | Metric | Three months ended March 31, 2020 (in thousands) | | :---------------------------------------------------- | :--------------------------------------------- | | Net cash provided by operating activities | $9,525 | | Net cash (used in) provided by investing activities | ($1,540) | | Net cash used in financing activities | ($35,099) | | Net (decrease) increase in cash, cash equivalents and restricted cash | ($27,114) | | Cash, cash equivalents and restricted cash at end of period | $156,274 | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes provide essential context for the consolidated financial statements, detailing accounting policies, fair value measurements, investment securities, loan quality, and commitments [Note 1: Basis of Presentation](index=9&type=section&id=Note%201%3A%20Basis%20of%20Presentation) This note clarifies the consolidated financial statements include Bank of Marin Bancorp and its subsidiary, prepared under SEC rules and GAAP, detailing EPS calculation - The consolidated financial statements include Bank of Marin Bancorp and its wholly-owned bank subsidiary, Bank of Marin, prepared pursuant to SEC rules and GAAP[22](index=22&type=chunk) - The NorCal Community Bancorp Trust II is not consolidated in the financial statements; the subordinated debenture is shown as a liability[23](index=23&type=chunk) Basic and Diluted EPS | Metric | March 31, 2020 | March 31, 2019 | | :-------------------- | :------------- | :------------- | | Basic EPS | $0.53 | $0.54 | | Diluted EPS | $0.53 | $0.54 | [Note 2: Recently Adopted and Issued Accounting Standards](index=10&type=section&id=Note%202%3A%20Recently%20Adopted%20and%20Issued%20Accounting%20Standards) ASU 2018-13 and 2018-15 were adopted with no material impact, while CECL adoption was postponed due to the CARES Act and COVID-19 uncertainties - ASU 2018-13 (Fair Value Measurement) and ASU 2018-15 (Cloud Computing Arrangement) were adopted effective January 1, 2020, with no impact on financial condition or results of operations[27](index=27&type=chunk)[28](index=28&type=chunk) - Adoption of ASU 2016-13 (CECL standard) was postponed under the CARES Act due to the COVID-19 pandemic, with an estimated **5% to 15% increase** to the allowance for loan losses if adopted earlier[29](index=29&type=chunk)[30](index=30&type=chunk) - Other accounting standards (ASU 2019-04, 2019-05, 2019-11, 2019-12, 2020-01, 2020-04) are not expected to have a material impact or are still being assessed[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk)[37](index=37&type=chunk)[38](index=38&type=chunk)[39](index=39&type=chunk)[41](index=41&type=chunk) [Note 3: Fair Value of Assets and Liabilities](index=12&type=section&id=Note%203%3A%20Fair%20Value%20of%20Assets%20and%20Liabilities) Assets and liabilities measured at fair value are categorized into a three-level hierarchy, with most available-for-sale securities and derivatives classified as Level 2 - The fair value hierarchy classifies valuations into Level 1 (quoted prices in active markets), Level 2 (observable market data), and Level 3 (unobservable inputs with significant management judgment)[43](index=43&type=chunk)[44](index=44&type=chunk)[45](index=45&type=chunk) Fair Value of Assets and Liabilities Measured on a Recurring Basis (in thousands) | Instrument Type | March 31, 2020 (in thousands) | Fair Value Level | | :---------------------------------------------------- | :---------------------------- | :--------------- | | Securities available-for-sale | $448,868 | Level 2 | | Derivative financial liabilities (interest rate contracts) | $2,618 | Level 2 | Fair Value of Financial Instruments Recorded at Amortized Cost (in thousands) | Financial Instrument (Amortized Cost) | Carrying Amount (Mar 31, 2020, in thousands) | Fair Value (Mar 31, 2020, in thousands) | Fair Value Level | | :------------------------------------ | :------------------------------------------- | :-------------------------------------- | :--------------- | | Cash and cash equivalents | $156,274 | $156,274 | Level 1 | | Investment securities held-to-maturity | $131,140 | $137,501 | Level 2 | | Loans, net | $1,824,976 | $1,816,190 | Level 3 | [Note 4: Investment Securities](index=14&type=section&id=Note%204%3A%20Investment%20Securities) The investment securities portfolio increased to **$580.0 million** by March 31, 2020, with **$800 thousand** in sales gains and no other-than-temporarily impaired debt securities Investment Securities Summary (in thousands) | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Total investment securities | $580,008 | $569,673 | | Sales proceeds (Q1) | $27,442 | $4,229 | | Gross realized gains (Q1) | $800 | $3 | - At March 31, 2020, there were 13 securities in unrealized loss positions, but management determined no other-than-temporarily impairment (OTTI) as declines were primarily non-credit related and there was no intent to sell before recovery[61](index=61&type=chunk)[64](index=64&type=chunk) - Non-marketable securities include **$11.7 million** in FHLB stock and Visa Inc. Class B common stock with a carrying value of zero, but a converted value of **$2.7 million** at March 31, 2020[65](index=65&type=chunk)[66](index=66&type=chunk)[67](index=67&type=chunk) [Note 5: Loans and Allowance for Loan Losses](index=17&type=section&id=Note%205%3A%20Loans%20and%20Allowance%20for%20Loan%20Losses) The loan portfolio totaled **$1,843.9 million**, with a **$2.2 million** provision for loan losses in Q1 2020 due to COVID-19, and **$358 million** in CARES Act loan modifications Loan Portfolio and Credit Quality (in thousands) | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------------- | :---------------------------- | :------------------------------- | | Total loans | $1,843,860 | $1,843,286 | | Total past due (30+ days) | $2,732 | $1,648 | | Non-accrual loans | $1,632 | $226 | | Recorded Investment in TDRs | $11,159 | $11,333 | Credit Risk Grade (in thousands) | Credit Risk Grade | March 31, 2020 (in thousands) | | :---------------- | :---------------------------- | | Pass | $1,756,128 | | Special Mention | $75,676 | | Substandard | $12,056 | - In Q1 2020, a **$2.2 million** provision for loan losses was recorded due to economic uncertainties from the COVID-19 pandemic, with the company postponing CECL adoption under the CARES Act[100](index=100&type=chunk)[180](index=180&type=chunk) - By April 30, 2020, **253 loan modifications** for principal and/or interest deferrals totaling **$358 million** were approved, which were not evaluated for TDR designation due to the CARES Act[89](index=89&type=chunk) Allowance for Loan Losses (in thousands) | Metric | March 31, 2020 (in thousands) | | :----------------------------------- | :------------- | | Allowance for loan losses (ALLL) | $18,884 | | Ratio of ALLL to total loans | 1.02% | | Ratio of ALLL to non-accrual loans | 1,157% | [Note 6: Borrowings and Other Obligations](index=24&type=section&id=Note%206%3A%20Borrowings%20and%20Other%20Obligations) The company maintains **$92.0 million** in unsecured lines, **$676.8 million** in FHLB, and **$79.3 million** in FRB lines, with no outstanding borrowings, plus a **$2.725 million** subordinated debenture - The Bank had unsecured lines of credit totaling **$92.0 million** with correspondent banks, FHLB lines of credit totaling **$676.8 million**, and an FRB line of credit totaling **$79.3 million** at March 31, 2020, with no outstanding borrowings under these facilities[104](index=104&type=chunk)[105](index=105&type=chunk)[106](index=106&type=chunk) - A subordinated debenture due to NorCal Community Bancorp Trust II, with a balance of **$2.725 million** at March 31, 2020, was assumed as part of a 2013 acquisition[107](index=107&type=chunk) [Note 7: Stockholders' Equity](index=24&type=section&id=Note%207%3A%20Stockholders'%20Equity) A **$0.23** per share cash dividend was declared, and the **$25.0 million** share repurchase program was suspended due to COVID-19 after **$3.2 million** in Q1 2020 repurchases - A **$0.23 per share** cash dividend was declared on April 17, 2020[109](index=109&type=chunk) - A new **$25.0 million** Share Repurchase Program was approved on January 24, 2020, but was indefinitely suspended on March 20, 2020, to focus resources on customer needs during the COVID-19 pandemic[116](index=116&type=chunk) - During the three months ended March 31, 2020, **92,664 shares** were repurchased for a total of **$3.2 million**[119](index=119&type=chunk) [Note 8: Commitments and Contingencies](index=26&type=section&id=Note%208%3A%20Commitments%20and%20Contingencies) Off-balance sheet commitments totaled **$488.9 million**, with **$294 million** in approved PPP loans, and operating lease liabilities increased, while litigation losses are deemed remote Commitments and Standby Letters of Credit (in thousands) | Commitment Type | March 31, 2020 (in thousands) | | :-------------------------------- | :---------------------------- | | Commercial lines of credit | $259,151 | | Revolving home equity lines | $185,715 | | Undisbursed construction loans | $31,367 | | Total commitments and standby letters of credit | $488,867 | - By April 30, 2020, the company approved **1,452 applications** for **$294 million** under the SBA's Paycheck Protection Program (PPP)[123](index=123&type=chunk) Operating Lease Liabilities (in thousands) | Lease Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Operating lease right-of-use assets | $22,225 | $11,002 | | Operating lease liabilities | $23,726 | $12,615 | - The company is responsible for a proportionate share of litigation indemnifications related to Visa's Covered Litigation, but no contingent liabilities are recorded as the probability of losses is considered remote due to an escrow account[134](index=134&type=chunk)[135](index=135&type=chunk)[136](index=136&type=chunk) [Note 9: Derivative Financial Instruments and Hedging Activities](index=28&type=section&id=Note%209%3A%20Derivative%20Financial%20Instruments%20and%20Hedging%20Activities) Interest rate swap agreements are used as fair value hedges, with five active contracts totaling **$2.618 million** in derivative liabilities and **$40 thousand** in net losses recognized in Q1 interest income - Interest rate swap agreements are used as an asset/liability management strategy to mitigate changes in the fair value of specified long-term fixed-rate loans caused by interest rate fluctuations[137](index=137&type=chunk) - As of March 31, 2020, the company had **five interest rate swap agreements**, all accounted for as fair value hedges[140](index=140&type=chunk) Derivative Financial Instruments and Hedging Activities (in thousands) | Metric | March 31, 2020 (in thousands) | | :---------------------------------------------------- | :---------------------------- | | Interest rate contracts fair value (Liability Derivatives) | $2,618 | | Net losses on fair value hedging relationships recognized in interest income | ($40) | [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section reviews Q1 2020 financial performance, condition, capital, and liquidity, emphasizing COVID-19's impact on earnings, loan loss provisions, and the company's proactive responses [Forward-Looking Statements](index=30&type=section&id=Forward-Looking%20Statements) This section cautions readers that forward-looking statements are subject to various risks and uncertainties, including natural disasters, COVID-19, and economic conditions, with no obligation for public updates - Forward-looking statements are based on management's current expectations and are subject to various factors beyond control, including natural disasters (wildfires, earthquakes), pandemics (COVID-19), economic uncertainty, changes in interest rates, real estate values, and regulatory changes[152](index=152&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk) - The company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements[155](index=155&type=chunk) [Critical Accounting Policies and Estimates](index=32&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) No material changes occurred to critical accounting policies, including Allowance for Loan Losses and Fair Value Measurements, with CECL adoption postponed due to the CARES Act and COVID-19 - No material changes to critical accounting policies: Allowance for Loan Losses, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes, and Fair Value Measurements[156](index=156&type=chunk) - The adoption of the current expected credit losses (CECL) accounting standard was postponed in accordance with the CARES Act due to the COVID-19 pandemic and lack of clarity for forecasting[156](index=156&type=chunk) [Executive Summary](index=32&type=section&id=Executive%20Summary) Q1 2020 net income was **$7.2 million** with **$0.53** diluted EPS, impacted by a **$2.2 million** loan loss provision due to COVID-19, prompting relief measures and share repurchase suspension Executive Summary Financial Highlights (in thousands, except EPS) | Metric | Q1 2020 (in thousands, except EPS) | Q1 2019 (in thousands, except EPS) | | :-------------------- | :------------------------------- | :------------------------------- | | Net income | $7,228 | $7,479 | | Diluted EPS | $0.53 | $0.54 | | Provision for loan losses | $2,200 | $0 | - Q1 2020 net income was negatively impacted by a **$2.2 million** provision for loan losses related to COVID-19 economic uncertainties, reducing diluted EPS by approximately **$0.12**, partially offset by gains on investment securities sales and accelerated discount accretion, which positively impacted diluted EPS by approximately **$0.07**[157](index=157&type=chunk) - In response to COVID-19, the company waived ATM and overdraft fees, canceled early withdrawal penalties for time CDs, provided payment relief for up to 120 days to borrowers, reduced interest rate floors on commercial loans, participated in the SBA's Paycheck Protection Program (PPP), and suspended its share repurchase program[159](index=159&type=chunk) - As of April 30, 2020, **253 loan modifications** for principal and/or interest deferrals totaling **$358 million** were approved, and **1,452 PPP applications** for **$294 million** were approved, supporting **25,412 employees**[161](index=161&type=chunk) Key Financial Metrics | Metric | March 31, 2020 | December 31, 2019 | | :-------------------------------- | :------------- | :---------------- | | Loans | $1,843.9M | $1,843.3M | | Non-accrual loans (% of total loans) | $1.6M (0.09%) | $226K (0.01%) |\ | Total deposits | $2,307.1M | $2,336.5M | | Non-interest bearing deposits (% of total deposits) | 49% | 48.3% | | Total risk-based capital ratio | 15.3% | 15.1% | | Return on average assets (Q1) | 1.09% | 1.19% | | Return on average equity (Q1) | 8.54% | 9.54% | [RESULTS OF OPERATIONS](index=34&type=section&id=RESULTS%20OF%20OPERATIONS) Q1 2020 operating results show a slight increase in net interest income but a decrease in net interest margin, a significant loan loss provision, increased non-interest income, and lower non-interest expense [Net Interest Income](index=35&type=section&id=Net%20Interest%20Income) Net interest income rose to **$24.1 million** in Q1 2020, but net interest margin declined to **3.88%** due to lower rates and higher cash, with further pressure expected from Fed rate cuts Net Interest Income and Margin (in thousands) | Metric | Q1 2020 (in thousands) | Q1 2019 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | | Net interest income | $24,119 | $23,846 | | Tax-equivalent net interest margin | 3.88% | 4.02% | - The decrease in net interest margin was primarily driven by lower interest rates impacting yields on loans and cash balances, higher cash balances, and higher rates on certain deposit categories, partially offset by accelerated accretion on a called investment security contributing **7 basis points** to the Q1 2020 net interest margin[174](index=174&type=chunk) - The Federal Reserve's two emergency rate cuts totaling **150 basis points** in March 2020 are expected to put downward pressure on asset yields and net interest margin in future quarters[176](index=176&type=chunk) - The company anticipates an annual reduction of **$750 thousand to $1.0 million** in net interest income due to reduced interest rate floors from COVID-19 payment relief measures[175](index=175&type=chunk) [Provision for Loan Losses](index=37&type=section&id=Provision%20for%20Loan%20Losses) A **$2.2 million** loan loss provision was recorded in Q1 2020, a significant increase from Q1 2019, reflecting COVID-19 economic uncertainties and increased impaired loan balances - A **$2.2 million** loan loss provision was recorded in Q1 2020, compared to no provision in Q1 2019, reflecting adjustments to qualitative factors under the incurred loss model due to COVID-19 economic uncertainty[180](index=180&type=chunk) Loan Loss Provision and Credit Quality (in thousands) | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------------- | :---------------------------- | :------------------------------- | | Impaired loan balances | $12,700 | $11,500 | | Classified assets | $12,100 | $9,900 | | Ratio of loan loss reserves to total loans | 1.02% | 0.90% | | Non-accrual loans | $1,600 | $226 | [Non-interest Income](index=38&type=section&id=Non-interest%20Income) Total non-interest income surged **76.2%** to **$3.1 million** in Q1 2020, driven by **$800 thousand** in investment security gains and higher bank-owned life insurance earnings Non-interest Income (in thousands) | Metric | Q1 2020 (in thousands) | Q1 2019 (in thousands) | Change (in thousands) | Percent Change | | :---------------------------------- | :--------------------- | :--------------------- | :-------------------- | :------------- | | Total non-interest income | $3,120 | $1,771 | $1,349 | 76.2% | | Gains (losses) on sale of investment securities, net | $800 | ($6) | $806 | (13,433.3)% | | Earnings on (cost of) bank-owned life insurance | $275 | ($60) | $335 | (558.3)% | - The increase in non-interest income was primarily due to gains on the sale of short-duration agency residential mortgage-backed investment securities and higher earnings from bank-owned life insurance[185](index=185&type=chunk) - Waivers of ATM and overdraft fees and early withdrawal penalties for time CDs, effective March 2020, are expected to have a minimal effect on non-interest income[186](index=186&type=chunk) [Non-interest Expense](index=39&type=section&id=Non-interest%20Expense) Total non-interest expense slightly decreased by **$59 thousand** (0.4%) to **$15.5 million** in Q1 2020, mainly due to lower data processing and FDIC insurance costs Non-interest Expense (in thousands) | Metric | Q1 2020 (in thousands) | Q1 2019 (in thousands) | Change (in thousands) | Percent Change | | :-------------------------------- | :--------------------- | :--------------------- | :-------------------- | :------------- | | Total non-interest expense | $15,469 | $15,528 | ($59) | (0.4)% | | Federal Deposit Insurance Corporation insurance | $2 | $179 | ($177) | (98.9)% | | Data processing | $786 | $1,015 | ($229) | (22.6)% | | Salaries and related benefits | $9,477 | $9,146 | $331 | 3.6% | | Occupancy and equipment | $1,663 | $1,531 | $132 | 8.6% | - The decrease in non-interest expense was primarily due to costs associated with a new digital banking platform conversion in 2019, the lack of FDIC deposit insurance expense in Q1 2020, and lower accelerated stock-based compensation expense[190](index=190&type=chunk) [Provision for Income Taxes](index=39&type=section&id=Provision%20for%20Income%20Taxes) The provision for income taxes decreased to **$2.3 million** in Q1 2020, with an effective tax rate of **24.5%**, reflecting lower pre-tax income and higher tax-exempt earnings Provision for Income Taxes (in thousands) | Metric | Q1 2020 (in thousands) | Q1 2019 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | | Provision for income taxes | $2,342 | $2,610 | | Effective tax rate | 24.5% | 25.9% | - The decrease in the provision and effective tax rate reflected lower pre-tax income, higher tax-exempt earnings on bank-owned life insurance (BOLI), and higher discrete tax benefits from stock option exercises[192](index=192&type=chunk) [FINANCIAL CONDITION SUMMARY](index=40&type=section&id=FINANCIAL%20CONDITION%20SUMMARY) Total assets slightly decreased by March 31, 2020, while capital ratios remained strong and liquidity robust, supporting operations and COVID-19 relief efforts [Investment Securities](index=40&type=section&id=Investment%20Securities) Investment securities grew by **$10.3 million** to **$580.0 million** by March 31, 2020, with strategic increases in high-credit-quality municipal obligations and minimal COVID-19 sector exposure - The investment securities portfolio totaled **$580.0 million** at March 31, 2020, an increase of **$10.3 million** from December 31, 2019[196](index=196&type=chunk) - The increase reflects **$54.9 million** in purchases and an increase in the fair value of available-for-sale securities, partially offset by **$53.8 million** in calls, paydowns, maturities, and sales[196](index=196&type=chunk) - The company strategically increased credit exposure to high-credit-quality municipal issuers in Texas (**53.4%** of outside California portfolio) and has little to no exposure to municipal sectors vulnerable to COVID-19 (higher education or health care)[199](index=199&type=chunk) [Loans](index=41&type=section&id=Loans) Total loans increased slightly by **$574 thousand** to **$1,843.9 million** at March 31, 2020, with new originations largely offset by payoffs - Loans increased by **$574 thousand**, totaling **$1,843.9 million** at March 31, 2020[202](index=202&type=chunk) - New loan originations totaled **$29.8 million** in the first three months of 2020, with line utilization increases of **$28.9 million**, mostly offset by **$51.7 million** in payoffs[161](index=161&type=chunk)[202](index=202&type=chunk) [Liabilities](index=41&type=section&id=Liabilities) Total liabilities decreased by **$18.7 million** to **$2,351.8 million**, driven by a **$29.4 million** deposit decrease, while operating lease liabilities significantly increased - Total liabilities decreased by **$18.7 million** to **$2,351.8 million** at March 31, 2020[203](index=203&type=chunk) - Deposits decreased **$29.4 million** in the first three months of 2020, mainly due to the cash cycles of large commercial depositors[203](index=203&type=chunk) - Non-interest bearing deposits totaled **$1,130.5 million** at March 31, 2020, representing **49.0%** of total deposits[203](index=203&type=chunk) - Operating lease liabilities increased **$11.1 million** to **$23.7 million** in Q1 2020 due to modified lease terms for the headquarters office and a new retail branch lease[203](index=203&type=chunk) [Capital Adequacy](index=41&type=section&id=Capital%20Adequacy) Both Bancorp and Bank capital ratios exceeded regulatory minimums for 'well capitalized' status at March 31, 2020, despite Bancorp no longer having separate minimums - All capital ratios for both Bancorp and the Bank exceeded regulatory requirements to be considered "well capitalized" at March 31, 2020[161](index=161&type=chunk)[205](index=205&type=chunk) Capital Ratios | Capital Ratio | Bancorp (Mar 31, 2020) | Adequately Capitalized Threshold | | :-------------------------------- | :--------------------- | :------------------------------- | | Total Capital (to risk-weighted assets) | 15.29% | ≥ 10.50% | | Tier 1 Capital (to risk-weighted assets) | 14.35% | ≥ 8.50% | | Tier 1 Capital (to average assets) | 11.66% | ≥ 4.00% | | Common Equity Tier 1 (to risk-weighted assets) | 14.22% | ≥ 7.00% | - Bancorp is no longer subject to separate minimum capital requirements due to the increase in the "Small Bank Holding Company" asset threshold from **$1.0 billion to $3.0 billion**[206](index=206&type=chunk) [Liquidity](index=42&type=section&id=Liquidity) The company maintains strong liquidity with **$517.9 million** in unencumbered securities and cash, despite a **$27.1 million** Q1 2020 decrease, supporting operations and COVID-19 relief - The company's liquidity management aims to provide adequate funds by maintaining liquid assets and formal lines of credit with FHLB, FRBSF, and correspondent banks[213](index=213&type=chunk) - Unencumbered available-for-sale securities and cash totaled **$517.9 million** at March 31, 2020, providing substantial contingent and on-balance-sheet liquidity to support programs like loan payment relief and PPP[216](index=216&type=chunk) - Cash and cash equivalents decreased **$27.1 million** in Q1 2020, primarily due to a **$29.4 million** decrease in deposits, along with **$54.9 million** in investment securities purchases and **$3.3 million** in common stock repurchases[217](index=217&type=chunk) - Undrawn credit commitments totaled **$488.9 million** at March 31, 2020, expected to be funded through existing loan repayments, deposit growth, and liquid assets[218](index=218&type=chunk) - Bancorp held **$18.9 million** of cash at March 31, 2020, deemed sufficient to cover operational needs and cash dividends through mid-2021[219](index=219&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosure about Market Risk](index=44&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosure%20about%20Market%20Risk) Market risk, primarily interest rate risk, is managed via asset/liability strategies and swaps, with simulations showing a **100 bps** rate increase yields a **(1.0)%** net interest income change, and a **100 bps** decrease yields a **(4.5)%** change - Market risk, primarily interest rate risk, is managed through the structure of the Consolidated Statement of Condition and interest rate swap contracts to minimize exposure to interest rate changes[220](index=220&type=chunk)[221](index=221&type=chunk)[222](index=222&type=chunk) - The Asset Liability Management Committee (ALCO) and the Board of Directors review interest rate risk quarterly using simulation models[223](index=223&type=chunk) Estimated Change in Net Interest Income | Immediate Changes in Interest Rates (in basis points) | Estimated Change in Net Interest Income in Year 1, as percent of Net Interest Income | | :---------------------------------------------------- | :------------------------------------------------------------------- | | up 100 | (1.0)% | | down 100 | (4.5)% | - Limitations are inherent in simulation models, as assets and liabilities may react differently to market rate changes, and assumptions regarding deposit run-off and prepayment speeds can vary significantly from actual outcomes[225](index=225&type=chunk) [ITEM 4. Controls and Procedures](index=45&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no significant changes in internal control over financial reporting during the quarter [Evaluation of Disclosure Controls and Procedures](index=45&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2020 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[226](index=226&type=chunk) [Changes in Internal Control over Financial Reporting](index=45&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) No significant changes materially affected internal control over financial reporting during the quarter ended March 31, 2020 - No significant changes that materially affected, or are reasonably likely to affect, the company's internal control over financial reporting occurred during the quarter ended March 31, 2020[227](index=227&type=chunk) [PART II OTHER INFORMATION](index=46&type=section&id=PART%20II%20OTHER%20INFORMATION) This section provides additional information, including legal proceedings, updated risk factors, equity security sales, and other disclosures [ITEM 1. Legal Proceedings](index=46&type=section&id=ITEM%201.%20Legal%20Proceedings) This section refers to previous disclosures in the 2019 Form 10-K and Note 8 of the current Form 10-Q for information regarding legal proceedings - Refer to Note 12 to the Consolidated Financial Statements in the 2019 Form 10-K and Note 8 to the Consolidated Financial Statements in this Form 10-Q for information on legal proceedings[229](index=229&type=chunk) [ITEM 1A. Risk Factors](index=46&type=section&id=ITEM%201A.%20Risk%20Factors) This section updates risk factors, focusing on COVID-19's adverse effects, including increased loan losses, declining collateral, reduced demand, decreased net interest margin, and operational disruptions - The COVID-19 pandemic has negatively impacted the global economy, leading to potential increases in loan delinquencies, problem assets, and foreclosures, which may increase loan losses and necessitate increases in the allowance for loan losses[231](index=231&type=chunk) - Other risks include a decline in collateral value, decreased demand for products and services, reduced net interest margin due to federal funds rate cuts, a significant increase in the allowance for credit losses upon CECL adoption, reduced wealth management revenue, and business operation disruptions due to workforce illness or quarantines[231](index=231&type=chunk) - Government actions, such as the Paycheck Protection Program, may partially mitigate the financial impact, but their success is unknown, and changes to traditional service delivery channels may negatively impact customer experience and financial results[231](index=231&type=chunk)[232](index=232&type=chunk)[234](index=234&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=47&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) A new **$25.0 million** Share Repurchase Program was approved but suspended on March 20, 2020, due to COVID-19, after **92,664 shares** were repurchased for **$3.2 million** in Q1 2020 - A new **$25.0 million** Share Repurchase Program was approved on January 24, 2020, but was indefinitely suspended on March 20, 2020, to focus resources on customer needs during the COVID-19 pandemic[235](index=235&type=chunk) Share Repurchase Program (in thousands, except per share) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Cost (in thousands) | | :------------------ | :------------------------------- | :------------------------------------------ | :------------------------ | | January 1-31, 2020 | 13,283 | $44.42 | $2,376 | | February 1-29, 2020 | 20,855 | $42.17 | $1,495 | | March 1-31, 2020 | 58,526 | $30.00 | $1,800 | | Total (Q1 2020) | 92,664 | $38.86 | $3,200 | [ITEM 3. Defaults Upon Senior Securities](index=47&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities were reported during the period - No defaults upon senior securities were reported[239](index=239&type=chunk) [ITEM 4. Mine Safety Disclosures](index=47&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable[239](index=239&type=chunk) [ITEM 5. Other Information](index=47&type=section&id=ITEM%205.%20Other%20Information) No other information was reported for the period - No other information was reported[240](index=240&type=chunk) [ITEM 6. Exhibits](index=48&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed as part of the report or incorporated by reference, including organizational documents, equity plans, and various agreements - The exhibits include Articles of Incorporation, Bylaws, Rights Agreement, Employee Stock Ownership Plan, 2017 Equity Plan, Director Stock Plan, Indemnification Agreements, Employment Agreements, Salary Continuation Agreements, and various certifications[243](index=243&type=chunk) [SIGNATURES](index=49&type=section&id=SIGNATURES) The report was signed on May 8, 2020, by Russell A. Colombo (President & CEO), Tani Girton (EVP & CFO), and David A. Merck (VP & Financial Reporting Manager) - The report was signed on May 8, 2020, by Russell A. Colombo (President & Chief Executive Officer), Tani Girton (Executive Vice President & Chief Financial Officer), and David A. Merck (Vice President & Financial Reporting Manager)[245](index=245&type=chunk)

Financial Data and Key Metrics Changes - The company generated net income of $7.2 million with diluted earnings per share of $0.53 in Q1 2020, compared to $9.1 million and $0.66 in the prior quarter [14][18] - Total loans increased slightly to $1.8 billion from the record fourth quarter of 2019, while deposits remained steady at $2.3 billion [14][18] - The tax-equivalent net interest margin improved to 3.88% from 3.82% in the prior quarter [19] - Non-interest income rose to $3.1 million from $2.3 million in the previous quarter, primarily due to gains on the sale of investment securities [20] Business Line Data and Key Metrics Changes - The loan portfolio exposure to the most affected industries includes 10.4% in retail properties, 4.6% in wine-related businesses, and 2.7% in hospitality [11] - Non-accrual loans increased by $1.4 million to $1.6 million, representing 0.09% of total loans [16] - The company recorded a $2.2 million loan loss provision in Q1 2020, up from $500,000 in the previous quarter, reflecting adjustments for economic uncertainties due to COVID-19 [20][45] Market Data and Key Metrics Changes - Approximately 93% of loan relief requests are secured by real estate with loan-to-value ratios averaging less than 45% [10] - The company has received around $322 million in loan relief requests or conversions to interest-only or payment deferral [10] Company Strategy and Development Direction - The company is participating in the Small Business Administration Paycheck Protection Program, having received approximately 1,300 applications for an estimated total of $350 million [7][25] - The Board of Directors suspended the share repurchase program indefinitely in response to the pandemic, planning to monitor the situation closely [15] - The company is focused on maintaining strong capital positions and supporting customers through the crisis [24] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's conservative lending philosophy and strong historic asset quality performance despite the economic pressures from the pandemic [16][24] - The company emphasized the importance of supporting clients and communities during challenging times, highlighting the retention of all employees at full pay with no layoffs [12][24] Other Important Information - The company has waived all ATM and overdraft fees and is providing 120 days of payment relief to borrowers with hardship requests [9] - The company declared a cash dividend of $0.23 per share, marking the 60th consecutive quarterly dividend [17] Q&A Session Summary Question: Can you walk through the segment operations in the wine industry? - Management noted that while tasting room sales are down 100%, direct shipments and sales to grocery stores are still ongoing, indicating a mixed impact on the wine-related businesses [27][28] Question: What impact did waiving fees have in Q1? - The impact was minimal in Q1 as the fee waiving measures were implemented late in the quarter, but it is expected to affect earnings in Q2 [32] Question: Will there be additional reserve builds in the near term? - Management indicated that the reserve build was based on conditions as of March 31, but further deterioration in the economy could lead to additional reserve builds [35][37] Question: What is the company's outlook on loan pay-offs? - Management expects that pay-offs will not be substantial in the current environment, as borrowers are focusing on their day-to-day operations [76][81] Question: How will the company account for PPP loans? - The expectation is that origination fees from PPP loans will run through net interest income, with potential acceleration upon loan forgiveness [46][92]