[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]

PART I [Business](index=5&type=section&id=ITEM%201.%20BUSINESS) Bank of Marin Bancorp, operating through its subsidiary, provides commercial and retail banking and wealth management services across six San Francisco Bay Area counties, focusing on relationship-based banking under extensive regulation - The company operates through its subsidiary, Bank of Marin, with **23 offices** across six San Francisco Bay Area counties[20](index=20&type=chunk) - Its core focus is providing banking services to **small to medium-sized businesses**, professionals, and non-profit organizations[20](index=20&type=chunk) - Key offerings include commercial and retail deposit and lending programs, alongside **Wealth Management and Trust Services**[21](index=21&type=chunk)[26](index=26&type=chunk) - The bank differentiates itself in a competitive market through **personalized relationship banking** and deep local market knowledge[30](index=30&type=chunk)[33](index=33&type=chunk) - As of December 31, 2019, the company employed **290 full-time equivalent staff**[35](index=35&type=chunk) - The company is subject to extensive supervision by the **California Department of Business Oversight**, **FDIC**, and the **Federal Reserve**[36](index=36&type=chunk)[37](index=37&type=chunk)[39](index=39&type=chunk) [Risk Factors](index=13&type=section&id=ITEM%201A.%20RISK%20FACTORS) The company faces material risks from geographic concentration in the San Francisco Bay Area, interest rate fluctuations, significant credit risk from commercial real estate loans, natural disasters, cybersecurity threats, and regulatory changes - The company's success is highly dependent on the local economic conditions of the San Francisco Bay Area, creating a **geographic concentration risk**[72](index=72&type=chunk) - Earnings are significantly influenced by **interest rate risk**, as **net interest income** is the primary driver of profitability, making the business vulnerable to **margin compression** in a falling or flat rate environment[73](index=73&type=chunk) - A significant portion of the loan portfolio is secured by real estate, with **Commercial Real Estate (CRE) loans** representing **330% of total risk-based capital** as of December 31, 2019, exceeding the **300% regulatory guidance threshold** for heightened scrutiny[80](index=80&type=chunk)[82](index=82&type=chunk) - The company is exposed to significant credit risk, and the adoption of the **Current Expected Credit Loss (CECL) accounting standard** on January 1, 2020, will materially change the methodology for estimating the allowance for credit losses[84](index=84&type=chunk)[88](index=88&type=chunk) - The business is located in **earthquake and wildfire-prone zones**, posing risks from natural disasters and climate change-related events which could impact operations and collateral values[83](index=83&type=chunk) - The company faces risks associated with **cybersecurity threats**, reliance on **third-party vendors** for critical operations like core processing, and the upcoming phase-out of the **LIBOR interest rate benchmark**[104](index=104&type=chunk)[107](index=107&type=chunk)[118](index=118&type=chunk) [Unresolved Staff Comments](index=20&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[120](index=120&type=chunk) [Properties](index=21&type=section&id=ITEM%202.%20PROPERTIES) The company leases its corporate headquarters in Novato, California, as well as all of its branch and office facilities across its primary market areas - The company leases its corporate headquarters and all branch and office facilities[121](index=121&type=chunk) [Legal Proceedings](index=21&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) The company is not aware of any pending legal proceedings that would have a material adverse effect on its financial condition - Management is not aware of any pending legal proceedings expected to have a material adverse effect on the company[122](index=122&type=chunk) - The Bank has a proportionate share of litigation indemnifications for Visa U.S.A. but does not expect to make cash payments due to an escrow account funded by Visa[123](index=123&type=chunk) [Mine Safety Disclosures](index=21&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company - Not applicable[124](index=124&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=22&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY,%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) Bank of Marin Bancorp's common stock trades on Nasdaq under BMRC, outperforming the Russell 2000 Index over five years, with **$15.0 million** in share repurchases in 2019 and a new **$25.0 million** program approved for 2020 - Bancorp common stock trades on the **Nasdaq Capital Market** under the symbol **BMRC**, with a **two-for-one stock split** occurring on November 27, 2018[127](index=127&type=chunk) Five-Year Stock Performance Comparison (Cumulative Total Return) | Period | Bank of Marin Bancorp (BMRC) | Russell 2000 Index | SNL Bank \$1B - \$5B Index | | :--- | :--- | :--- | :--- | | 2014 | 100.00 | 100.00 | 100.00 | | 2015 | 103.37 | 95.59 | 111.94 | | 2016 | 137.81 | 115.95 | 161.04 | | 2017 | 136.63 | 132.94 | 171.69 | | 2018 | 168.40 | 118.30 | 150.42 | | 2019 | 187.45 | 148.49 | 182.85 | - In 2019, Bancorp repurchased 356,000 shares for a total of **$15.0 million**, and a new **$25.0 million** share repurchase program was approved in January 2020, valid through February 28, 2022[135](index=135&type=chunk)[136](index=136&type=chunk) [Selected Financial Data](index=24&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) The company's five-year financial data shows total assets growing to **$2.71 billion** in 2019, with net income reaching **$34.2 million** and diluted EPS at **$2.48**, while maintaining strong asset quality with non-performing loans at **0.01%** Five-Year Selected Financial Data (2015-2019) | (in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Total assets** | $2,707,280 | $2,520,892 | $2,468,154 | $2,023,493 | $2,031,134 | | **Loans, net** | $1,826,609 | $1,748,043 | $1,663,246 | $1,471,174 | $1,436,299 | | **Deposits** | $2,336,489 | $2,174,840 | $2,148,670 | $1,772,700 | $1,728,226 | | **Stockholders' equity** | $336,788 | $316,407 | $297,025 | $230,563 | $214,473 | | **Net interest income** | $95,680 | $91,544 | $74,852 | $73,161 | $67,187 | | **Net income** | $34,241 | $32,622 | $15,976 | $23,134 | $18,441 | | **Diluted EPS** | $2.48 | $2.33 | $1.27 | $1.89 | $1.52 | | **Return on average assets** | 1.34% | 1.31% | 0.75% | 1.15% | 0.98% | | **Return on average equity** | 10.49% | 10.73% | 6.49% | 10.23% | 8.84% | | **Non-performing loans to total loans** | 0.01% | 0.04% | 0.02% | 0.01% | 0.15% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=ITEM%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) In 2019, net income increased to **$34.2 million** driven by strong loan and deposit growth, with total assets reaching **$2.7 billion**, while maintaining excellent credit quality and robust capital levels [Executive Summary](index=27&type=section&id=Executive%20Summary) For 2019, the company reported **$34.2 million** in net income and **$2.48** diluted EPS, driven by **4.5% loan growth** and **7.4% deposit growth**, with strong credit quality and improved efficiency 2019 Performance Highlights vs. 2018 | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Income | $34.2 million | $32.6 million | | Diluted EPS | $2.48 | $2.33 | | Loan Growth | 4.5% | - | | Deposit Growth | 7.4% | - | | Non-accrual Loans / Total Loans | 0.01% | - | | Efficiency Ratio | 55.3% | 57.3% | | Return on Assets | 1.34% | 1.31% | | Return on Equity | 10.49% | 10.73% | [Results of Operations](index=28&type=section&id=RESULTS%20OF%20OPERATIONS) Net interest income rose by **$4.2 million** to **$95.7 million** in 2019, while non-interest income decreased due to a prior-year one-time gain, and non-interest expense slightly declined Net Interest Income Analysis (2019 vs 2018) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total interest income | $100,437 | $95,080 | | Total interest expense | $4,757 | $3,536 | | **Net interest income** | **$95,680** | **$91,544** | | Tax-equivalent net interest margin | 3.98% | 3.90% | - A provision for loan losses of **$0.9 million** was recorded in 2019, consistent with loan growth, compared to no provision in 2018[174](index=174&type=chunk) - Non-interest income decreased to $9.1 million from **$10.1 million** in 2018, primarily due to a **$0.96 million** pre-tax gain on the sale of Visa stock in 2018 that did not recur[176](index=176&type=chunk)[177](index=177&type=chunk) - Non-interest expense decreased by **$0.3 million** to **$58.0 million**, mainly due to **$1.0 million** in consulting expenses in 2018 for core processing contract renegotiations and lower FDIC insurance expenses in 2019[180](index=180&type=chunk)[181](index=181&type=chunk) [Financial Condition](index=33&type=section&id=FINANCIAL%20CONDITION) Total assets increased to **$2.71 billion** at year-end 2019, driven by deposit and loan growth, with the loan portfolio concentrated in commercial real estate, while maintaining strong credit quality and robust capital - Total assets increased by **$186.4 million** to **$2.71 billion** at year-end 2019, primarily due to increases in cash, funded by deposit growth[186](index=186&type=chunk) - The investment securities portfolio decreased by **$61.8 million** (**10%**) to $561.3 million at amortized cost during 2019[191](index=191&type=chunk) Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Commercial loans | $246,687 | $230,739 | | Real estate - Commercial | $1,255,141 | $1,186,687 | | Real estate - Construction | $61,095 | $76,423 | | Real estate - Home equity | $116,024 | $124,696 | | Real estate - Other residential | $136,657 | $117,847 | | Installment and other consumer | $27,682 | $27,472 | | **Total loans** | **$1,843,286** | **$1,763,864** | - The allowance for loan losses was **$16.7 million**, representing **0.90%** of total loans, unchanged from year-end 2018, with non-performing assets minimal at **$226 thousand**[212](index=212&type=chunk)[223](index=223&type=chunk) - Total deposits grew by **$161.6 million** (**7.4%**) to **$2.34 billion**, with non-interest bearing deposits accounting for **48%** of total deposits at year-end[231](index=231&type=chunk) - Bancorp's total risk-based capital ratio was **15.1%** at December 31, 2019, exceeding the **well capitalized** regulatory requirements[250](index=250&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risk is interest rate risk, managed by ALCO, with simulations showing NII sensitivity to rate changes, and interest rate swaps used to mitigate risk on fixed-rate loans - The primary market risk is **interest rate risk**, managed by the **Asset Liability Management Committee (ALCO)** to minimize exposure of net interest margin and earnings to rate changes[261](index=261&type=chunk) Estimated Impact of Interest Rate Changes on Net Interest Income (NII) | Immediate Change in Rates (bps) | Estimated Change in NII in Year 1 | Estimated Change in NII in Year 2 | | :--- | :--- | :--- | | +400 | (5.0)% | 7.1% | | +300 | (3.6)% | 6.3% | | +200 | (2.2)% | 5.3% | | +100 | (1.0)% | 3.5% | | -100 | (4.5)% | (9.5)% | - The company uses **interest rate swap contracts** as **fair value hedges** to mitigate **interest rate risk** on specified long-term fixed-rate loans[263](index=263&type=chunk) [Financial Statements and Supplementary Data](index=47&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section presents the audited consolidated financial statements for 2019 and 2018, including the independent auditor's report, detailing the company's financial position, operations, equity, and cash flows, with comprehensive notes on accounting policies and disclosures Consolidated Statement of Condition Highlights (in thousands) | | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | **Total Assets** | **$2,707,280** | **$2,520,892** | | Loans, net | $1,826,609 | $1,748,043 | | Total investment securities | $569,673 | $619,670 | | **Total Liabilities** | **$2,370,492** | **$2,204,485** | | Total deposits | $2,336,489 | $2,174,840 | | **Total Stockholders' Equity** | **$336,788** | **$316,407** | Consolidated Statement of Income Highlights (in thousands) | | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net interest income | $95,680 | $91,544 | | Provision for loan losses | $900 | $0 | | Non-interest income | $9,084 | $10,139 | | Non-interest expense | $57,970 | $58,266 | | **Net income** | **$34,241** | **$32,622** | [Note 1: Summary of Significant Accounting Policies](index=56&type=section&id=Note%201%3A%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines key accounting policies, including the adoption of ASC 842 for leases in 2019 and the upcoming CECL model effective January 1, 2020, which is expected to increase the allowance for credit losses by **5% to 15%** - The company adopted the new lease accounting standard (**ASC 842**) on January 1, 2019, resulting in the recognition of **$13.4 million** in right-of-use assets and **$15.4 million** in lease liabilities[368](index=368&type=chunk)[369](index=369&type=chunk) - The company will adopt the **Current Expected Credit Loss (CECL) model** effective January 1, 2020, estimating a **5% to 15%** increase to its allowance for credit losses, recorded as an adjustment to retained earnings[372](index=372&type=chunk)[374](index=374&type=chunk) [Note 3: Loans and Allowance for Loan Losses](index=75&type=section&id=Note%203%3A%20Loans%20and%20Allowance%20for%20Loan%20Losses) The loan portfolio totaled **$1.84 billion** at year-end 2019, with **88%** secured by real estate, maintaining strong credit quality with minimal non-accrual loans and a **$16.7 million** allowance for loan losses - At December 31, 2019, **88%** of the total loan portfolio was secured by real estate, with a significant concentration in commercial real estate[400](index=400&type=chunk) Credit Quality Indicators | (in thousands) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Loans | $1,843,286 | $1,763,864 | | Non-accrual loans | $226 | $697 | | Loans 30-89 days past due | $1,481 | $1,121 | | Troubled Debt Restructurings (TDRs) | $11,333 | $14,406 | Allowance for Loan Losses (ALLL) Rollforward (Year ended Dec 31, 2019) | (in thousands) | Amount | | :--- | :--- | | Beginning balance | $15,821 | | Provision | $900 | | Charge-offs | ($78) | | Recoveries | $34 | | **Ending balance** | **$16,677** | [Note 15: Regulatory Matters](index=99&type=section&id=Note%2015%3A%20Regulatory%20Matters) Both Bancorp and its bank subsidiary exceeded all minimum Basel III regulatory capital requirements as of December 31, 2019, with the Bank significantly above 'well capitalized' thresholds Capital Ratios as of December 31, 2019 | Ratio | Bancorp Actual | Bank Actual | Well Capitalized Threshold | | :--- | :--- | :--- | :--- | | Total Capital (to risk-weighted assets) | 15.07% | 14.63% | ≥ 10.000% | | Tier 1 Capital (to risk-weighted assets) | 14.24% | 13.79% | ≥ 8.000% | | Common Equity Tier 1 (to risk-weighted assets) | 14.11% | 13.79% | ≥ 6.500% | | Tier 1 Capital (to average assets) | 11.66% | 11.29% | ≥ 5.000% | [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 reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[559](index=559&type=chunk) [Controls and Procedures](index=105&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2019 - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[559](index=559&type=chunk) - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2019[560](index=560&type=chunk) - There were no significant changes in internal control over financial reporting during the quarter ended December 31, 2019[564](index=564&type=chunk) [Other Information](index=106&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) The company reports no other information for this item - None[566](index=566&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=106&type=section&id=ITEM%2010.%20DIRECTORS,%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the **Proxy Statement**[566](index=566&type=chunk) [Executive Compensation](index=106&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the **Proxy Statement**[567](index=567&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) The information required for this item is incorporated by reference from ITEM 5 of this report, Note 8 to the financial statements, and the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the **Proxy Statement** and other sections of the 10-K[568](index=568&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=106&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS,%20AND%20DIRECTOR%20INDEPENDENCE) The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the **Proxy Statement**[569](index=569&type=chunk) [Principal Accountant Fees and Services](index=106&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the **Proxy Statement**[570](index=570&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=107&type=section&id=ITEM%2015.%20EXHIBITS,%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists the documents filed as part of the Form 10-K report, including financial statements and a list of exhibits filed or incorporated by reference - Lists the financial statements filed under **ITEM 8** and all exhibits filed with or incorporated by reference into the report[573](index=573&type=chunk)[574](index=574&type=chunk) [Form 10-K Summary](index=108&type=section&id=ITEM%2016.%20FORM%2010-K%20SUMMARY) The company reports no summary for this item - None[576](index=576&type=chunk)

Bank of Marin Bancorp. (NASDAQ:BMRC) Q4 2019 Results Earnings Conference Call January 27, 2020 11:30 AM ET Company Participants Andrea Henderson - Director, Marketing Russ Colombo - President and Chief Executive Officer Tani Girton - Executive Vice President and Chief Financial Officer Conference Call Participants Jeff Rulis - D.A. Davidson Matthew Clark - Piper Sandler Jackie Bohlen - KBW Andrea Henderson Good morning and thank you for joining the Bank of Marin Bancorp’s Earnings Call for the Fourth Quarte ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's unaudited consolidated financial statements, including condition, income, equity, and cash flows, along with detailed explanatory notes [ITEM 1. Financial Statements](index=3&type=section&id=ITEM%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements of Bank of Marin Bancorp and its subsidiary, including the Statements of Condition, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows, along with detailed notes explaining the basis of presentation, accounting standards, fair value measurements, investment securities, loans, borrowings, stockholders' equity, commitments, and derivative instruments [Consolidated Statements of Condition](index=3&type=section&id=Consolidated%20Statements%20of%20Condition) This statement provides a snapshot of the company's financial position, detailing its assets, liabilities, and stockholders' equity at specific reporting dates | Metric | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total Assets | $2,592,071 | $2,520,892 | | Total Liabilities | $2,259,006 | $2,204,485 | | Total Stockholders' Equity | $333,065 | $316,407 | | Loans, net | $1,782,450 | $1,748,043 | | Total Deposits | $2,224,524 | $2,174,840 | [Consolidated Statements of Comprehensive Income](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This statement reports the company's net income and other comprehensive income, reflecting overall financial performance over specific periods | Metric | Three months ended Sep 30, 2019 (in thousands) | Three months ended Sep 30, 2018 (in thousands) | Nine months ended Sep 30, 2019 (in thousands) | Nine months ended Sep 30, 2018 (in thousands) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net Income | $9,448 | $8,680 | $25,162 | $22,960 | | Basic EPS | $0.70 | $0.63 | $1.84 | $1.66 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | | Comprehensive Income | $10,194 | $7,340 | $35,110 | $16,466 | [Consolidated Statements of Changes in Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) This statement outlines the changes in each component of stockholders' equity, including net income, other comprehensive income, and stock repurchases | Metric | Nine months ended Sep 30, 2019 (in thousands) | Nine months ended Sep 30, 2018 (in thousands) | | :--------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Balance at January 1 | $316,407 | $297,025 | | Net income | $25,162 | $22,960 | | Other comprehensive income (loss) | $9,948 | $(6,494) | | Stock repurchased, net of commissions | $(13,170) | $(1,539) | | Balance at September 30 | $333,065 | $308,603 | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This statement details the cash inflows and outflows from operating, investing, and financing activities over specific periods | Cash Flow Activity (9 months ended Sep 30) | 2019 (in thousands) | 2018 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $31,201 | $31,284 | | Net cash provided by (used in) investing activities | $95,475 | $(149,088) | | Net cash provided by financing activities | $21,589 | $56,977 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $148,265 | $(60,827) | | Cash, cash equivalents and restricted cash at end of period | $182,486 | $142,718 | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes provide essential details and explanations supporting the consolidated financial statements, covering accounting policies, fair value, and specific financial instruments [Note 1: Basis of Presentation](index=10&type=section&id=Note%201:%20Basis%20of%20Presentation) The consolidated financial statements include Bank of Marin Bancorp and its wholly-owned bank subsidiary, Bank of Marin, prepared in accordance with SEC rules and GAAP. The NorCal Community Bancorp Trusts I and II are not consolidated, with subordinated debentures shown as liabilities and Bancorp's investment accounted for under the equity method - The consolidated financial statements include Bank of Marin Bancorp and its wholly-owned bank subsidiary, Bank of Marin[19](index=19&type=chunk) - NorCal Community Bancorp Trusts I and II are not consolidated; subordinated debentures are shown as liabilities, and Bancorp's investment is accounted for under the equity method[20](index=20&type=chunk) Weighted Average Shares Outstanding and EPS | Metric | 3 months ended Sep 30, 2019 | 3 months ended Sep 30, 2018 | 9 months ended Sep 30, 2019 | 9 months ended Sep 30, 2018 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Weighted average basic shares outstanding (thousands) | 13,571 | 13,900 | 13,654 | 13,872 | | Weighted average diluted shares outstanding (thousands) | 13,735 | 14,110 | 13,825 | 14,062 | | Basic EPS | $0.70 | $0.63 | $1.84 | $1.66 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | [Note 2: Recently Adopted and Issued Accounting Standards](index=11&type=section&id=Note%202:%20Recently%20Adopted%20and%20Issued%20Accounting%20Standards) The company adopted new accounting standards in 2019, including ASU 2016-02 (Leases), which resulted in recording operating and finance lease right-of-use assets and liabilities. Other adopted ASUs (2018-07, 2018-16) had no material impact. Future standards, notably CECL (ASU 2016-13), are expected to increase the allowance for credit losses with a one-time adjustment to retained earnings upon adoption in 2020 - Adoption of ASU 2016-02, Leases (Topic 842), on January 1, 2019, resulted in recording **$13.4 million** in operating and finance lease right-of-use assets and **$15.4 million** in operating and finance lease liabilities, with no cumulative-effect adjustments to retained earnings[25](index=25&type=chunk) - ASU 2016-13, Financial Instruments - Credit Losses (CECL model), effective for fiscal years beginning after December 15, 2019, is expected to increase the allowance for credit losses, resulting in a one-time cumulative-effect adjustment to retained earnings at adoption. The primary methodology will be a discounted cash flow approach[30](index=30&type=chunk)[31](index=31&type=chunk) - ASU 2018-07 (Stock Compensation) and ASU 2018-16 (Derivatives and Hedging) were adopted effective January 1, 2019, with no impact on financial condition or results of operations[26](index=26&type=chunk)[27](index=27&type=chunk) [Note 3: Fair Value of Assets and Liabilities](index=13&type=section&id=Note%203:%20Fair%20Value%20of%20Assets%20and%20Liabilities) The company categorizes fair value measurements into a three-level hierarchy. As of September 30, 2019, all recurring fair value measurements for available-for-sale securities and derivative financial instruments were classified as Level 2, with no Level 1 or Level 3 securities. No transfers between levels occurred in 2019 or 2018 - Fair value hierarchy categorizes assets and liabilities into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[38](index=38&type=chunk)[39](index=39&type=chunk)[40](index=40&type=chunk) - As of September 30, 2019, all available-for-sale securities and derivative financial instruments measured at fair value on a recurring basis were classified as **Level 2**, with no Level 1 or Level 3 securities[42](index=42&type=chunk)[44](index=44&type=chunk) Fair Value of Financial Instruments | Financial Instrument | September 30, 2019 (Carrying Amount, in thousands) | September 30, 2019 (Fair Value, in thousands) | Fair Value Hierarchy | | :--------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------- | | Cash and cash equivalents | $182,486 | $182,486 | Level 1 | | Investment securities held-to-maturity | $142,213 | $145,118 | Level 2 | | Loans, net | $1,782,450 | $1,792,192 | Level 3 | | Time deposits | $98,077 | $97,150 | Level 2 | | Subordinated debentures | $2,691 | $3,094 | Level 3 | [Note 4: Investment Securities](index=15&type=section&id=Note%204:%20Investment%20Securities) The investment portfolio comprises held-to-maturity and available-for-sale securities, primarily government-sponsored enterprise securities and obligations of state and political subdivisions. As of September 30, 2019, total investment securities were $500.9 million, with a significant portion in unrealized gains. The company held non-marketable FHLB stock and Visa Inc. Class B common stock, with the latter having a zero carrying value due to resale restrictions and conversion rate uncertainty Investment Securities by Type | Investment Securities | September 30, 2019 (Fair Value, in thousands) | December 31, 2018 (Fair Value, in thousands) | | :--------------------------------- | :-------------------------------------------- | :--------------------------------------------- | | Total held-to-maturity | $145,118 | $153,894 | | Total available-for-sale | $358,724 | $462,464 | | Total investment securities | $503,842 | $616,358 | Pledged Investment Securities | Pledged Investment Securities | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total investment securities pledged to the State of California | $85,319 | $126,430 | | Collateral for Wealth Management and Trust Services checking account | $625 | $2,000 | - As of September 30, 2019, **37 securities** were in unrealized loss positions, with **25** in continuous loss for twelve months or more. Management determined that these were not other-than-temporarily impaired, as there was no intent to sell and recovery of amortized cost was more likely than not[61](index=61&type=chunk)[64](index=64&type=chunk) - The company held **$11.7 million** in FHLB stock (recorded at cost) and **10,439 shares** of Visa Inc. Class B common stock with a zero carrying value due to resale restrictions and conversion rate uncertainty. The converted value of Visa Class B shares was **$2.9 million** at September 30, 2019[65](index=65&type=chunk)[67](index=67&type=chunk) [Note 5: Loans and Allowance for Loan Losses](index=21&type=section&id=Note%205:%20Loans%20and%20Allowance%20for%20Loan%20Losses) Total loans increased to $1.799 billion at September 30, 2019. The company maintains a risk rating system for credit quality, with 'Pass,' 'Watch,' 'Special Mention,' 'Substandard,' and 'Doubtful' categories. Troubled Debt Restructurings (TDRs) decreased, and impaired loans totaled $12.4 million. The Allowance for Loan Losses (ALLL) was $16.2 million, with a ratio of 0.90% to total loans Loan Portfolio Summary | Loan Class | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total loans | $1,798,690 | $1,763,864 | | Total past due | $780 | $1,121 | | Non-accrual loans | $422 | $697 | Loans by Risk Grade (September 30, 2019) | Risk Grade (September 30, 2019) | Commercial and industrial (in thousands) | Commercial real estate, owner-occupied (in thousands) | Commercial real estate, investor (in thousands) | Construction (in thousands) | Home equity (in thousands) | Other residential (in thousands) | Installment and other consumer (in thousands) | Purchased credit-impaired (in thousands) | Total (in thousands) | | :--------------------------------- | :--------------------------------------- | :------------------------------------ | :------------------------------------ | :-------------------------- | :------------------------- | :------------------------------- | :------------------------------------ | :--------------------------------------- | :------------------- | | Pass | $219,346 | $290,074 | $893,574 | $50,254 | $120,400 | $130,781 | $28,313 | $2,059 | $1,734,801 | | Special Mention | $41,092 | $10,198 | $1,664 | — | $1,000 | — | — | — | $53,954 | | Substandard | $386 | $9,061 | — | — | $340 | — | $148 | — | $9,935 | | Total loans | $260,824 | $309,333 | $895,238 | $50,254 | $121,740 | $130,781 | $28,461 | $2,059 | $1,798,690 | Loan Loss Metrics | Metric | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Recorded Investment in Troubled Debt Restructurings | $12,162 | $14,406 | | Total recorded investment in impaired loans | $12,351 | $15,038 | | Specific allowance for impaired loans | $389 | $778 | | Ending Allowance for Loan Losses (ALLL) | $16,240 | $15,821 | | Ratio of ALLL to total loans | 0.90% | 0.90% | - Pledged loans to FHLB totaled **$1.083 billion** and to FRB (TIC loans) totaled **$111.5 million** at September 30, 2019[109](index=109&type=chunk) - Related party loans decreased to **$9.0 million** at September 30, 2019, from **$10.6 million** at December 31, 2018[111](index=111&type=chunk) [Note 6: Borrowings and Other Obligations](index=30&type=section&id=Note%206:%20Borrowings%20and%20Other%20Obligations) The company maintains unsecured lines of credit with correspondent banks and FHLB, and a line of credit with the FRBSF, with no outstanding overnight borrowings at September 30, 2019. Subordinated debentures from an acquisition are recorded at fair value and accreted into interest expense, with Bancorp guaranteeing payments on trust preferred securities - No overnight borrowings were outstanding under federal funds purchased lines of credit (**$92.0 million** capacity) or FHLB lines of credit (**$615.9 million** capacity) at September 30, 2019[112](index=112&type=chunk)[113](index=113&type=chunk) - The Federal Reserve line of credit had a borrowing capacity of **$76.5 million** with no outstanding borrowings at September 30, 2019[114](index=114&type=chunk) - Subordinated debentures due to NorCal Community Bancorp Trust II (maturing March 15, 2036) had an interest rate of **3.52%** at September 30, 2019. Accretion on these debentures totaled **$51 thousand** for the nine months ended September 30, 2019[115](index=115&type=chunk) [Note 7: Stockholders' Equity](index=30&type=section&id=Note%207:%20Stockholders'%20Equity) Bancorp declared a $0.21 per share cash dividend payable in November 2019. Share-based payments, including stock options and restricted stock, are expensed over the service period. The company adopted ASU 2018-02, reclassifying $638 thousand from AOCI to retained earnings. A share repurchase program, extended to February 28, 2020, saw $13.2 million in repurchases during the first nine months of 2019 - A cash dividend of **$0.21 per share** was declared on October 18, 2019, payable November 8, 2019[117](index=117&type=chunk) - Share-based compensation expense is recorded for stock options and restricted stock awards over their service period. During the nine months ended September 30, 2019, **7,795 shares** totaling **$326 thousand** were withheld for cashless exercises[119](index=119&type=chunk)[123](index=123&type=chunk) - ASU 2018-02 was adopted in Q1 2018, reclassifying **$638 thousand** from Accumulated Other Comprehensive Income (AOCI) to retained earnings[124](index=124&type=chunk) - The Share Repurchase Program, approved for up to **$25.0 million**, was extended through February 28, 2020. During the nine months ended September 30, 2019, **313,651 shares** were repurchased for **$13.2 million**[125](index=125&type=chunk)[129](index=129&type=chunk) [Note 8: Commitments and Contingencies](index=32&type=section&id=Note%208:%20Commitments%20and%20Contingencies) The company extends credit through loan commitments and standby letters of credit, with an allowance for losses on these off-balance sheet commitments totaling $1.1 million. Operating and finance leases are recognized on the balance sheet, with future minimum payments detailed. Legal proceedings, particularly related to Visa's Covered Litigation, are not expected to have a material adverse effect, as the company's indemnification liability is covered by an escrow account Commitments and Standby Letters of Credit | Commitments and Standby Letters of Credit | September 30, 2019 (in thousands) | | :---------------------------------------- | :-------------------------------- | | Commercial lines of credit | $239,465 | | Revolving home equity lines | $190,230 | | Undisbursed construction loans | $40,101 | | Personal and other lines of credit | $9,888 | | Standby letters of credit | $2,014 | | Total commitments and standby letters of credit | $481,698 | | Allowance for losses on off-balance sheet commitments | $1,100 | Lease Balances (September 30, 2019) | Lease Balances (September 30, 2019) | Amount (in thousands) | | :---------------------------------- | :-------------------- | | Operating lease right-of-use assets | $11,934 | | Operating lease liabilities | $13,665 | | Finance lease right-of-use assets, net | $252 | | Finance lease liabilities | $255 | - The company is responsible for a proportionate share of Visa U.S.A.'s Covered Litigation indemnifications. Visa deposited an additional **$300 million** into the litigation escrow account on September 27, 2019, which is expected to cover settlement obligations. The probability of losses requiring future cash settlement payments from member banks is considered remote[143](index=143&type=chunk)[144](index=144&type=chunk)[145](index=145&type=chunk) [Note 9: Derivative Financial Instruments and Hedging Activities](index=34&type=section&id=Note%209:%20Derivative%20Financial%20Instruments%20and%20Hedging%20Activities) The company uses interest rate swap agreements as fair value hedges to mitigate interest rate risk on long-term fixed-rate loans, converting fixed-rate payments to floating-rate. As of September 30, 2019, there were five such agreements, with a total fair value liability of $1.6 million - Interest rate swap agreements are used as fair value hedges to mitigate interest rate risk on long-term fixed-rate loans, converting fixed-rate interest payments to floating-rate[146](index=146&type=chunk)[148](index=148&type=chunk) Derivative Financial Instruments Summary | Derivative Financial Instruments | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Interest rate contracts notional amount | $17,199 | $9,016 | | Interest rate contracts fair value (liability) | $1,603 | $375 | - Net losses on fair value hedging relationships recognized in interest income were **$(89) thousand** for the nine months ended September 30, 2019, compared to **$(123) thousand** for the same period in 2018[150](index=150&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's discussion highlights the company's financial performance, including increased earnings and diluted EPS for both the third quarter and first nine months of 2019. Key drivers include loan growth, strong credit quality, and deposit increases. The company maintains robust capital ratios and liquidity, supporting organic growth and potential acquisitions. No material changes to critical accounting policies or risk factors were noted [Forward-Looking Statements](index=36&type=section&id=Forward-Looking%20Statements) This section contains forward-looking statements regarding future operations, products, services, revenues, and earnings, identified by words like 'believe,' 'expect,' or 'intend.' These statements are based on current management expectations but are subject to various risks, including economic conditions, interest rate changes, and regulatory factors, as detailed in the Risk Factors section - Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues, but future results may vary materially due to factors beyond management's control[159](index=159&type=chunk)[160](index=160&type=chunk) - The company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date they are made[162](index=162&type=chunk) [Critical Accounting Policies and Estimates](index=38&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) There have been no material changes to the company's critical accounting policies, which include Allowance for Loan Losses, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes, and Fair Value Measurements - No material changes have occurred to the critical accounting policies, which include Allowance for Loan Losses, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes, and Fair Value Measurements[163](index=163&type=chunk) [Executive Summary](index=39&type=section&id=Executive%20Summary) The company reported increased earnings and diluted EPS for Q3 and the first nine months of 2019, driven by loan growth, strong credit quality, and deposit increases. Capital ratios remain strong, exceeding regulatory requirements, and a $0.21 cash dividend was declared. The company emphasizes relationship banking, disciplined fundamentals, and community commitment for future success Earnings and EPS Summary | Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--------------------------------- | :------ | :------ | :------ | :------ | | Earnings (in millions) | $9.4 | $8.7 | $25.2 | $23.0 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | - Loans totaled **$1.799 billion** at September 30, 2019, a net increase of **$34.8 million** from December 31, 2018, driven by **$156.1 million** in new originations[166](index=166&type=chunk) - Non-accrual loans decreased to **$422 thousand** (**0.02%** of loan portfolio) at September 30, 2019, from **$697 thousand** (**0.04%**) at December 31, 2018, reflecting strong credit quality[166](index=166&type=chunk) - Total deposits increased **$49.7 million** in the first nine months of 2019 to **$2.225 billion**, with non-interest bearing deposits representing **50%** of the total[166](index=166&type=chunk) - All capital ratios exceeded regulatory 'well-capitalized' requirements, with a total risk-based capital ratio for Bancorp of **15.3%** at September 30, 2019[166](index=166&type=chunk) [RESULTS OF OPERATIONS](index=40&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes the company's financial performance, focusing on net interest income, loan loss provisions, non-interest income, and expenses [Net Interest Income](index=41&type=section&id=Net%20Interest%20Income) Net interest income increased by $612 thousand to $24.2 million in Q3 2019 and by $3.5 million to $71.8 million in the first nine months of 2019, primarily due to higher average loan balances and increased yields on earning assets, partially offset by higher deposit rates. The net interest margin also improved to 4.00% in Q3 2019 and 3.99% for the first nine months Net Interest Income and Margin | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | 9M 2019 (in thousands) | 9M 2018 (in thousands) | | :--------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net interest income | $24,151 | $23,539 | $71,786 | $68,272 | | Reported net interest margin | 4.00% | 3.91% | 3.99% | 3.86% | - The increase in net interest income was driven by higher average loan balances and higher yields across earning asset categories, partially offset by increased rates on deposit accounts[183](index=183&type=chunk)[185](index=185&type=chunk) - The FOMC lowered the federal funds rate by **0.25%** in July, September, and October 2019, to a range of **1.50% to 1.75%**, which could put pressure on the net interest margin as the Bank is asset sensitive[187](index=187&type=chunk)[188](index=188&type=chunk) [Provision for Loan Losses](index=44&type=section&id=Provision%20for%20Loan%20Losses) A $400 thousand provision for loan losses was recorded in Q3 2019, consistent with loan growth, compared to no provision in the prior year. Impaired loans and classified assets decreased, while special mention loans increased due to unique circumstances, though not indicative of deteriorating credit quality - A **$400 thousand** provision for loan losses was recorded in the quarter ended September 30, 2019, consistent with loan growth. No provision for loan losses was recorded in the three and nine months ended September 30, 2018[192](index=192&type=chunk) - Impaired loan balances totaled **$12.4 million** at September 30, 2019, down from **$15.0 million** at December 31, 2018[191](index=191&type=chunk) - Classified assets (loans with substandard or doubtful risk grades) decreased to **$9.9 million** at September 30, 2019, from **$12.6 million** at December 31, 2018, primarily due to a paydown and upgrade of a land development loan[191](index=191&type=chunk) - Special mention loans increased to **$54.0 million** at September 30, 2019, from **$17.3 million** at December 31, 2018, due to four new loans with unique circumstances, not indicative of deteriorating credit quality[191](index=191&type=chunk) - The ratio of loan loss reserves to total loans was **0.90%** at both September 30, 2019, and December 31, 2018[193](index=193&type=chunk) [Non-interest Income](index=45&type=section&id=Non-interest%20Income) Non-interest income increased by $485 thousand to $2.7 million in Q3 2019, primarily driven by a $562 thousand benefit collected on bank-owned life insurance (BOLI) policies. For the first nine months, non-interest income increased by $50 thousand to $6.8 million, also benefiting from BOLI income and net gains on investment securities, despite decreases in wealth management and other fee income Non-interest Income (Q3) | Non-interest Income Component | Q3 2019 (in thousands) | Q3 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest income | $2,721 | $2,236 | $485 | 21.7% | | Earnings on bank-owned life insurance, net | $795 | $227 | $568 | 250.2% | | Other income | $305 | $439 | $(134) | (30.5)% | Non-interest Income (9M) | Non-interest Income Component | 9M 2019 (in thousands) | 9M 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest income | $6,766 | $6,716 | $50 | 0.7% | | Earnings on bank-owned life insurance, net | $970 | $685 | $285 | 41.6% | | Gains (losses) on investment securities, net | $55 | $(79) | $134 | NM | | Wealth Management and Trust Services | $1,406 | $1,493 | $(87) | (5.8)% | - The increase in BOLI earnings in Q3 2019 was primarily due to a **$562 thousand** benefit collected on BOLI policies. For the nine months, this was partially offset by **$283 thousand** in non-refundable underwriting costs for new policies[198](index=198&type=chunk)[199](index=199&type=chunk) [Non-interest Expense](index=46&type=section&id=Non-interest%20Expense) Non-interest expense increased slightly by $229 thousand to $14.2 million in Q3 2019, mainly due to higher salaries and benefits, partially offset by a reversal of FDIC insurance expense. For the first nine months, the increase was $83 thousand to $44.6 million, with higher salaries and benefits and a provision for off-balance sheet commitments offsetting lower data processing and professional services costs from prior year acquisition-related expenses Non-interest Expense (Q3) | Non-interest Expense Component | Q3 2019 (in thousands) | Q3 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest expense | $14,200 | $13,971 | $229 | 1.6% | | Salaries and related benefits | $8,412 | $8,069 | $343 | 4.3% | | Federal Deposit Insurance Corporation insurance | $1 | $186 | $(185) | (99.5)% | | Professional services | $580 | $727 | $(147) | (20.2)% | Non-interest Expense (9M) | Non-interest Expense Component | 9M 2019 (in thousands) | 9M 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest expense | $44,644 | $44,561 | $83 | 0.2% | | Salaries and related benefits | $26,426 | $25,402 | $1,024 | 4.0% | | Data processing | $2,942 | $3,354 | $(412) | (12.3)% | | Professional services | $1,701 | $2,836 | $(1,135) | (40.0)% | | Provision for losses on off-balance sheet commitments | $129 | — | $129 | 100.0% | - The increase in salaries and related benefits was due to additional full-time equivalent (FTE) staff and annual merit increases. The decrease in FDIC insurance expense was due to a reversal when the Deposit Insurance Fund reserve exceeded its billing threshold[203](index=203&type=chunk) [Provision for Income Taxes](index=47&type=section&id=Provision%20for%20Income%20Taxes) The provision for income taxes decreased to $2.8 million in Q3 2019, with an effective tax rate of 23.0%, due to higher tax-exempt BOLI income and a deferred tax liability true-up adjustment. For the first nine months, the provision increased to $8.3 million, with an effective tax rate of 24.9%, reflecting higher pre-tax income and lower discrete tax benefits compared to the prior year Income Tax Provision and Effective Tax Rate | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | 9M 2019 (in thousands) | 9M 2018 (in thousands) | | :--------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Provision for income taxes | $2,824 | $3,124 | $8,346 | $7,467 | | Effective tax rate | 23.0% | 26.5% | 24.9% | 24.5% | - The decrease in the Q3 2019 provision was due to higher tax-exempt BOLI income from death benefits and a **$327 thousand** deferred tax liability true-up adjustment[207](index=207&type=chunk) - The increase in the 9M 2019 provision and effective tax rate was primarily due to higher pre-tax income and lower discrete tax benefits from stock option exercises and restricted stock vesting compared to 2018[208](index=208&type=chunk) [FINANCIAL CONDITION SUMMARY](index=47&type=section&id=FINANCIAL%20CONDITION%20SUMMARY) This section provides an overview of the company's financial position, including investment securities, loans, liabilities, capital adequacy, and liquidity [Investment Securities](index=47&type=section&id=Investment%20Securities) The investment securities portfolio decreased by $118.7 million to $500.9 million at September 30, 2019, primarily due to calls, paydowns, maturities, and sales, partially offset by new purchases and an increase in fair value of available-for-sale securities. The company sold $66 million in lower-yielding, shorter-term securities to manage interest rate spread and cash - The investment securities portfolio decreased by **$118.7 million** to **$500.9 million** at September 30, 2019, from December 31, 2018[211](index=211&type=chunk) - The decrease was primarily due to **$150.5 million** in calls, paydowns, maturities, and sales, partially offset by **$18.9 million** in purchases and an increase in the fair value of available-for-sale securities[211](index=211&type=chunk) - The company sold **$66 million** in lower yielding, shorter term securities in early 2019 to manage its interest rate spread and cash position[211](index=211&type=chunk) Obligations of State and Political Subdivisions | Obligations of State and Political Subdivisions | September 30, 2019 (Fair Value, in thousands) | % of Total | | :---------------------------------------------- | :-------------------------------------------- | :--------- | | Within California | $11,786 | 20.3% | | Outside California | $45,581 | 79.7% | | Total | $57,367 | 100.0% | [Loans](index=48&type=section&id=Loans) Total loans increased by $34.8 million to $1.799 billion at September 30, 2019. New loan originations of $156.1 million in the first nine months of 2019, distributed across Commercial and Consumer Banking, outpaced payoffs of $107.8 million - Loans increased by **$34.8 million** to **$1.799 billion** at September 30, 2019[216](index=216&type=chunk) - New loan originations totaled **$156.1 million** in the first nine months of 2019, distributed across Commercial Banking and Consumer Banking[216](index=216&type=chunk) - Loan payoffs totaled **$107.8 million** in the first nine months of 2019, primarily reflecting asset sales and completed construction projects[216](index=216&type=chunk) [Liabilities](index=48&type=section&id=Liabilities) Total liabilities increased by $54.5 million to $2.259 billion in the first nine months of 2019, driven by a $49.7 million increase in deposits. Non-interest bearing deposits grew by $35.2 million and represented 49.5% of total deposits. The company also repaid a $7.0 million FHLB overnight borrowing and recorded $13.7 million in operating lease liabilities due to new accounting standards - Total liabilities increased by **$54.5 million** to **$2.259 billion** during the first nine months of 2019[217](index=217&type=chunk) - Deposits increased **$49.7 million** in the first nine months of 2019. Non-interest bearing deposits increased **$35.2 million** to **$1.101 billion**, representing **49.5%** of total deposits at September 30, 2019[217](index=217&type=chunk) - The company repaid a **$7.0 million** overnight borrowing from FHLB and recorded **$13.7 million** in operating lease liabilities in 2019 due to the adoption of the new lease accounting standard[217](index=217&type=chunk) [Capital Adequacy](index=48&type=section&id=Capital%20Adequacy) The company consistently exceeds all regulatory 'well capitalized' requirements under Basel III, with Bancorp's total risk-based capital ratio at 15.31% and the Bank's at 14.60% as of September 30, 2019. Bancorp is no longer subject to separate minimum capital requirements due to an increased asset threshold for 'Small Bank Holding Company' definition - Both Bancorp and the Bank's capital ratios exceed the regulatory definition of 'well capitalized' for all periods presented[221](index=221&type=chunk) - Basel III capital rules, fully phased in on January 1, 2019, require minimum ratios for Tier 1 capital (**8.5%**) and Common Equity Tier 1 (**7.0%**), including a **2.50%** capital conservation buffer[222](index=222&type=chunk) Capital Ratios (September 30, 2019) | Capital Ratios (September 30, 2019) | Bancorp Actual Ratio | Bank Actual Ratio | | :---------------------------------- | :------------------- | :---------------- | | Total Capital (to risk-weighted assets) | 15.31% | 14.60% | | Tier 1 Capital (to risk-weighted assets) | 14.46% | 13.75% | | Tier 1 Capital (to average assets) | 11.92% | 11.33% | | Common Equity Tier 1 (to risk-weighted assets) | 14.33% | 13.75% | - 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**[222](index=222&type=chunk) [Liquidity](index=50&type=section&id=Liquidity) The company maintains strong liquidity through liquid assets, formal lines of credit, and a stable core deposit base, managed by its ALCO. Liquid assets increased to $471.0 million at September 30, 2019. Key liquidity sources include investment security paydowns and deposit inflows, while uses include loan originations, security purchases, and stock repurchases. Bancorp's cash position is sufficient to cover operational needs and dividends through mid-2020 - Liquid assets, including unencumbered available-for-sale securities and cash, totaled **$471.0 million** at September 30, 2019, an increase of **$37.8 million** from December 31, 2018[231](index=231&type=chunk) - Cash and cash equivalents increased **$148.3 million** from December 31, 2018[231](index=231&type=chunk) - Significant liquidity sources in the first nine months of 2019 included **$150.5 million** from investment security paydowns/maturities/sales, **$49.7 million** in deposit increases, and **$30.6 million** net cash from operating activities[231](index=231&type=chunk) - Significant liquidity uses included **$32.9 million** in net loan originations, **$18.9 million** in investment securities purchases, **$13.3 million** in common stock repurchases, and **$8.1 million** in cash dividends[231](index=231&type=chunk) - Bancorp held **$14.3 million** of cash at September 30, 2019, deemed sufficient to cover operational needs, share repurchases, and cash dividends through mid-2020[235](index=235&type=chunk) Performance Metrics | Metric | 3 months ended Sep 30, 2019 | 3 months ended Sep 30, 2018 | 9 months ended Sep 30, 2019 | 9 months ended Sep 30, 2018 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (in thousands) | $9,448 | $8,680 | $25,162 | $22,960 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | | Return on average assets | 1.49% | 1.38% | 1.33% | 1.24% | | Return on average equity | 11.34% | 11.20% | 10.40% | 10.17% | Financial Condition Data | Financial Condition Data | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total assets | $2,592,071 | $2,520,892 | | Loans, net | $1,782,450 | $1,748,043 | | Deposits | $2,224,524 | $2,174,840 | | Non-accrual loans to total loans | 0.02% | 0.04% | | Total capital (to risk-weighted assets) | 15.31% | 14.93% | - The Board of Directors declared a cash dividend of **$0.21 per share** on October 18, 2019, representing a **30%** payout ratio[166](index=166&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosure about Market Risk](index=52&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosure%20about%20Market%20Risk) The company manages interest rate risk, a significant form of market risk, to minimize its impact on net interest margin, earnings, and capital. Interest rate swap contracts are used as fair value hedges. The Asset Liability Management Committee (ALCO) and Board of Directors regularly review exposure using simulation models, and as of September 30, 2019, interest rate risk was within policy guidelines - Market risk, primarily interest rate risk, is managed to minimize exposure to net interest margin, earnings, and capital[236](index=236&type=chunk) - Interest rate swap contracts are used as fair value hedges to mitigate changes in the fair value of long-term fixed-rate loans[238](index=238&type=chunk) - The Asset Liability Management Committee (ALCO) and Board of Directors review interest rate risk at least quarterly using simulation models. As of September 30, 2019, interest rate risk was within policy guidelines[239](index=239&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 400 | (1.7)% | | up 300 | (1.0)% | | up 200 | (0.4)% | | up 100 | —% | | down 100 | (4.2)% | | down 200 | (7.9)% | [ITEM 4. Controls and Procedures](index=53&type=section&id=ITEM%204.%20Controls%20and%20Procedures) The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019. There were no significant changes to internal control over financial reporting during the quarter ended September 30, 2019 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[245](index=245&type=chunk) - There were no significant changes that materially affected, or are reasonably likely to affect, the company's internal control over financial reporting during the quarter ended September 30, 2019[246](index=246&type=chunk) [PART II. OTHER INFORMATION](index=53&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional disclosures on legal proceedings, risk factors, equity sales, and other miscellaneous information not covered in the financial statements [ITEM 1. Legal Proceedings](index=53&type=section&id=ITEM%201.%20Legal%20Proceedings) The company refers to Note 8 of the Consolidated Financial Statements for information on legal proceedings, which indicates no material adverse effects are expected from ongoing litigation, including Visa's Covered Litigation - Refer to Note 8 to the Consolidated Financial Statements for details on legal proceedings[247](index=247&type=chunk) [ITEM 1A. Risk Factors](index=53&type=section&id=ITEM%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's 2018 Form 10-K - There have been no material changes from the risk factors previously disclosed in the company's 2018 Form 10-K[248](index=248&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=54&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The Board of Directors extended the Share Repurchase Program, allowing for repurchases of up to $25.0 million of common stock through February 28, 2020. During Q3 2019, 65,127 shares were repurchased for $2.7 million - The Share Repurchase Program, approved for up to **$25.0 million**, was extended through February 28, 2020[250](index=250&type=chunk) Share Repurchases (Q3 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--------------------------------- | :------------------------------- | :--------------------------- | | July 1-31, 2019 | 19,070 | $42.62 | | August 1-31, 2019 | 26,019 | $41.21 | | September 1-30, 2019 | 20,038 | $41.76 | | Total (Q3 2019) | 65,127 | $41.79 | - During the three months ended September 30, 2019, Bancorp repurchased **65,127 shares** for a total cost of **$2.7 million**[251](index=251&type=chunk) [ITEM 3. Defaults Upon Senior Securities](index=54&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) This section confirms that no defaults upon senior securities occurred during the reported period - No defaults upon senior securities were reported[252](index=252&type=chunk) [ITEM 4. Mine Safety Disclosures](index=54&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations and therefore contains no disclosures - This item is not applicable[253](index=253&type=chunk) [ITEM 5. Other Information](index=54&type=section&id=ITEM%205.%20Other%20Information) This section confirms that no other material information is required to be reported under this item - No other information is reported[254](index=254&type=chunk) [ITEM 6. Exhibits](index=55&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed as part of the report or incorporated by reference, including various agreements, plans, and certifications - The section lists exhibits filed as part of the report or incorporated by reference, including merger agreements, articles of incorporation, bylaws, stock plans, and certifications[256](index=256&type=chunk)[257](index=257&type=chunk) [SIGNATURES](index=56&type=section&id=SIGNATURES) The report is duly signed on behalf of Bank of Marin Bancorp by its President & Chief Executive Officer, Chief Financial Officer, and Vice President & Financial Reporting Manager on November 8, 2019 - The report was signed on November 8, 2019, 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)[258](index=258&type=chunk)[259](index=259&type=chunk)

Financial Data and Key Metrics Changes - Net income for Q3 2019 was $9.4 million, an increase from $8.2 million in Q2 2019 and $8.7 million in Q3 2018 [5] - Diluted earnings per share rose to $0.69 in Q3 2019 from $0.60 in Q2 2019 and $0.62 in Q3 2018 [5] - Year-to-date earnings reached $25.2 million, with a return on assets of 1.33% and return on equity of 10.4% [7] - Net interest income increased to $24.2 million, up from $23.8 million in Q2 2019 and $23.6 million in Q3 2018 [8] - Non-interest income was $2.7 million, an increase of over $400,000 from both Q2 2019 and Q3 2018 [9] Business Line Data and Key Metrics Changes - Loan originations increased to $77 million in Q3 2019 from $53 million in Q3 2018, resulting in total loans of $1.8 billion [5] - Deposits increased by $122.5 million in Q3 2019, totaling $2.22 billion at quarter end [5] - Non-interest bearing deposits accounted for 50% of total deposits, with a low cost of deposits at only 21 basis points [5] Market Data and Key Metrics Changes - Non-accrual loans declined to 0.02% of the total loan portfolio, down 1 basis point from the prior quarter [6] - The efficiency ratio improved to 56.8%, reflecting ongoing expense control amid revenue growth [10] Company Strategy and Development Direction - The company is focused on organic growth initiatives and maintaining exceptional credit quality [4] - A strong pipeline of new opportunities is expected to fuel continued growth across key markets [4] - The transition to an enhanced digital platform has been completed, eliminating costs associated with running two platforms [10] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism for the remainder of the year, citing strong performance in Q3 as a reflection of consistent business practices [12] - The company maintains a strong base of low-cost, non-interest bearing deposits, which should support performance in varying interest rate environments [12] - Management is cautiously optimistic about the economy in the Bay Area, with no significant signs of a downturn anticipated [32] Other Important Information - The Board of Directors declared a cash dividend of $0.21 per share, representing a 30% payout ratio and a 2% dividend yield based on the share price as of September 30, 2019 [6] - The company is in the process of searching for a new CEO as the current CEO plans to retire [13] Q&A Session Summary Question: Can we anticipate any further synergies from the systems transition? - Management indicated that expenses in Q3 are indicative of future levels, with no significant new projects expected to increase expenses [16][19] Question: Were there any temporary balances in deposits? - Management clarified that fluctuations are typical due to large clients' cash inflows and outflows, with no unusual patterns anticipated [22][24] Question: Did the company make accommodations on loan pricing to support growth? - Management confirmed that they did not lower interest rates significantly to drive loan growth, maintaining discipline in pricing [28] Question: How does the pipeline for loans compare to last year? - Management reported a significantly higher pipeline than the previous year, indicating strong production opportunities [29] Question: What are the plans for excess cash liquidity? - Management stated that they are focused on maintaining appropriate liquidity while looking for good buying opportunities in the market [37] Question: What is the coverage ratio relative to reserves? - Management noted that the coverage ratio can vary based on the mix of the portfolio and acquisitions, making it difficult to determine if it has bottomed [41]

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, 2019 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) (State o ...

Start Time: 11:30 End Time: 11:57 March 1, 0000 ET Q2 2019 Earnings Conference Call July 22, 2019, 11:30 AM ET Company Participants Russ Colombo - President and CEO Tani Girton - EVP and CFO Andrea Henderson - First VP, Director of Marketing Conference Call Participants Luke Wooten - KBW Jeff Rulis - D.A. Davidson Tim O’Brien - Sandler O’Neill & Partners Matthew Clark - Piper Jaffray Andrea Henderson Good morning and thank you for joining Bank of Marin Bancorp's Earnings Call for the Second Quarter ended Ju ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 OR o 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 net income of $7.5 million for Q1 2019, down from $9.7 million in the previous quarter but up from $6.4 million in the same quarter last year [7] - Diluted earnings per share were $0.54 in Q1 2019 compared to $0.69 last quarter and $0.46 in the same quarter a year ago [8] - Net interest income totaled $23.8 million in Q1 2019, up from $23.3 million in the prior quarter and $21.9 million in the same quarter a year ago [13] - The tax equivalent net interest margin was 4.02% in Q1 2019, an increase from 3.85% in both the prior quarter and the year-ago quarter [15] - Return on assets was 1.19% and return on equity was 9.54% for the quarter [22] Business Line Data and Key Metrics Changes - Loans increased to $1.77 billion at March 31, 2019, from $1.76 billion at December 31, 2018, and were up 6% from $1.67 billion in Q1 2018 [8] - Total deposits increased by $3.8 million in Q1 to $2.18 billion, with non-interest bearing deposits increasing by $10.3 million [9] Market Data and Key Metrics Changes - The company is expanding its presence in key markets, including opening a loan production office in Walnut Creek and making strategic hires in Napa and Santa Rosa [11] Company Strategy and Development Direction - The company is focused on organic growth and relationship banking, which has proven effective in a competitive environment [5][25] - The company is investing in talent acquisition to strengthen its foundation for future growth [26] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the growth outlook for 2019, citing healthy loan demand and strong underlying fundamentals [6] - The competitive landscape remains intense, particularly for attracting talent, but management sees opportunities arising from mergers in the banking sector [38][40] Other Important Information - The Board declared a cash dividend of $0.19 per share, marking the 56th consecutive quarterly dividend [12] - The company is considering an extension of its $25 million share repurchase program [12] Q&A Session Summary Question: Can you provide details on the expenses and what to expect going forward? - Management indicated that many Q1 expenses are recurring, particularly related to retirement eligible employees and stock-based compensation [29][30] Question: How do you view the competitive landscape and talent acquisition? - Management noted that mergers create opportunities for talent acquisition, but competition for skilled employees remains high [38][40] Question: Can you provide an update on the parallel systems and associated costs? - Management confirmed that parallel processing costs are expected to increase in Q2, with an estimated incremental expense of $30,000 to $40,000 [48] Question: What is the outlook for loan pricing and deposit pricing? - Management indicated that loan yields are improving slightly, while deposit pricing is expected to stabilize due to the Fed's current stance [66][69]