President’s Corner

Strong Deposit Growth Bolsters Balance Sheet

Regardless of the economic environments we’ve faced, one thing is certain: Bank of Marin has always placed its unwavering commitment to its guiding principles of relationship banking, disciplined fundamentals and community commitment at the center. It is this guiding light that helped us establish a strong foundation and—in turn—positioned us to successfully navigate economic cycles.  These last six months were no exception.

The second quarter reflected the full impact of the bank failures that occurred late in the first quarter, specifically net interest margin compression due largely to the higher cost of funds on Federal Home Loan Bank borrowings and deposits paired with slower lending activity. Yet, in the face of adversity, we made significant progress in strengthening our balance sheet by attracting new customers, raising deposits, and improving our liquidity to position the Bank for growth and stronger profitability.

Below are a few key items we highlighted during our second quarter earnings call to investors.

• The funding pressure of rising interest rates was dramatically compounded by the deposit outflows that followed the failures of multiple regional banks during the quarter. At the same time, increased borrowing costs tapered loan demand. Our NIM contracted 59 basis points to 2.45% as a result.
• Our Federal Home Loan Bank borrowings declined significantly in the second quarter and thereafter as a result of deposit growth and cash flows from investments. We have robust capital levels and ample liquidity, and we maintain one of the strongest deposit bases among our peers.
• We continue to maintain a high level of liquidity that covers all of our uninsured deposits by more than 200%. Notably, our uninsured deposits declined to 29% from 33% of our total deposits at quarter‐end.
• As of July 18, 2023, half of our deposits are in non‐interest bearing accounts, giving Bank of Marin one of the lowest cost deposit bases in the industry and a robust base from which to fund prudent lending growth.
• Our credit quality is excellent. We continue to carefully monitor the portfolio for any signs of stress. Second quarter non‐accrual loans represented just 0.10% of total loans, unchanged from the previous quarter.

We believe the impact on our earnings is temporary in nature and will not be an indicator of future performance. We also believe that we will be able to increasingly identify compelling lending opportunities to drive interest income.

In summary, because of our intense focus on the balance sheet, we considerably enhanced our prospects for NIM and earnings improvement going forward while doing nothing outside of our established, proven relationship‐based banking model.