Bank of Marin Bancorp [BMRC] Filings

10-Q 1 bmrc-20240930.htm 10-Q bmrc-20240930

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 September 30, 2024

☐ 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)

California

20-8859754

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

504 Redwood Blvd.

Suite 100

Novato

94947

(Address of principal executive office)

(Zip Code)

Registrant’s telephone number, including area code: (415) 763-4520

Not Applicable

(Former name, former address and formal fiscal year, if changed since last report)


Securities registered pursuant to 12(b) of the Act:
Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value	BMRC	The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of October 31, 2024, there were 16,082,881 shares of common stock outstanding.

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION	3

ITEM 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Condition	3
	Consolidated Statements of Comprehensive Income (Loss)	4
	Consolidated Statements of Changes in Stockholders' Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk	49

ITEM 4.	Controls and Procedures	50

PART II	OTHER INFORMATION	51

ITEM 1.	Legal Proceedings	51

ITEM 1A.	Risk Factors	51

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

ITEM 3.	Defaults Upon Senior Securities	52

ITEM 4.	Mine Safety Disclosures	52

ITEM 5.	Other Information	52

ITEM 6.	Exhibits	53

SIGNATURES

Page-2

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CONDITION


(in thousands, except share data; unaudited)	September 30, 2024		December 31, 2023
Assets
Cash, cash equivalents and restricted cash	$	229,172	$	30,453


Investment securities:
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at September 30, 2024 and December 31, 2023)	888,804		925,198
Available-for-sale, at fair value (net of zero allowance for credit losses at September 30, 2024 and December 31, 2023)	368,188		552,028
Total investment securities	1,256,992		1,477,226
Loans, at amortized cost	2,090,091		2,073,720
Allowance for credit losses on loans	(30,675)		(25,172)
Loans, net of allowance for credit losses on loans	2,059,416		2,048,548
Goodwill	72,754		72,754
Bank-owned life insurance	70,595		68,102
Operating lease right-of-use assets	19,745		20,316
Bank premises and equipment, net	7,010		7,792
Core deposit intangible, net	3,028		3,766

Interest receivable and other assets	74,121		74,946
Total assets	$	3,792,833	$	3,803,903
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	1,473,379	$	1,441,987
Interest bearing:
Transaction accounts	181,001		225,040
Savings accounts	222,588		233,298
Money market accounts	1,156,483		1,138,433
Time accounts	275,798		251,317
Total deposits	3,309,249		3,290,075
Borrowings and other obligations	193		26,298

Operating lease liabilities	22,278		22,906
Interest payable and other liabilities	24,153		25,562
Total liabilities	3,355,873		3,364,841
Commitments and contingent liabilities (Note 8)
Stockholders' Equity
Preferred stock, no par value, Authorized - 5,000,000 shares, none issued	—		—
Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,082,881 and 16,158,413 at September 30, 2024 and December 31, 2023, respectively	215,465		217,498
Retained earnings	247,983		274,570
Accumulated other comprehensive loss, net of taxes	(26,488)		(53,006)
Total stockholders' equity	436,960		439,062
Total liabilities and stockholders' equity	$	3,792,833	$	3,803,903

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

Page-3


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
	Three months ended						Nine months ended
(in thousands, except per share amounts; unaudited)	September 30, 2024		June 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Interest income
Interest and fees on loans	$	25,483	$	25,109	$	24,704	$	75,612	$	73,541
Interest on investment securities	7,594		8,299		9,345		24,698		29,371
Interest on federal funds sold and due from banks	3,242		924		1,055		4,487		1,159
Total interest income	36,319		34,332		35,104		104,797		104,071
Interest expense
Interest on interest-bearing transaction accounts	339		274		270		874		758
Interest on savings accounts	565		511		229		1,447		545
Interest on money market accounts	8,714		8,641		5,988		25,804		11,365
Interest on time accounts	2,431		2,291		1,555		7,002		2,724
Interest on borrowings and other obligations	1		148		2,593		240		10,182

Total interest expense	12,050		11,865		10,635		35,367		25,574
Net interest income	24,269		22,467		24,469		69,430		78,497
Provision for credit losses on loans	—		5,200		425		5,550		1,275
Reversal of credit losses on unfunded loan commitments	(233)		—		—		(233)		(342)
Net interest income after provision for (reversal of) credit losses	24,502		17,267		24,044		64,113		77,564
Non-interest income
Wealth management and trust services	706		585		515		1,844		1,585
Service charges on deposit accounts	543		541		508		1,613		1,561
Earnings on bank-owned life insurance, net	426		421		371		1,282		1,438
Debit card interchange fees, net	423		444		456		1,275		1,458
Dividends on Federal Home Loan Bank stock	365		366		324		1,108		916
Merchant interchange fees, net	67		10		117		244		377
Gains (losses) on sale of investment securities	1		(32,542)		14		(32,541)		14
Other income	357		420		293		1,062		923
Total non-interest income	2,888		(29,755)		2,598		(24,113)		8,272
Non-interest expense
Salaries and related benefits	10,822		12,364		10,741		35,270		33,087
Occupancy and equipment	2,097		2,049		1,973		6,115		6,367
Professional services	1,879		1,043		757		4,000		2,677
Data processing	1,051		1,005		1,009		3,126		2,976
Deposit network fees	927		916		1,227		2,688		1,843
Federal Deposit Insurance Corporation insurance	582		426		469		1,443		1,424
Information technology	404		448		411		1,254		1,138
Depreciation and amortization	358		379		423		1,125		1,705
Directors' expense	293		306		272		916		893
Amortization of core deposit intangible	241		246		335		738		1,020
Charitable contributions	30		604		20		647		707
Other real estate owned	—		—		—		—		48
Other expense	1,733		2,108		2,110		6,158		6,307
Total non-interest expense	20,417		21,894		19,747		63,480		60,192
Income (loss) before provision for (benefit from) income taxes	6,973		(34,382)		6,895		(23,480)		25,644
Provision for (benefit from) income taxes	2,403		(12,480)		1,600		(9,070)		6,359
Net income (loss)	$	4,570	$	(21,902)	$	5,295	$	(14,410)	$	19,285
Net income (loss) per common share
Basic	$	0.28	$	(1.36)	$	0.33	$	(0.90)	$	1.21
Diluted	$	0.28	$	(1.36)	$	0.33	$	(0.90)	$	1.20
Weighted average shares:
Basic	16,038		16,108		16,028		16,076		16,002
Diluted	16,066		16,108		16,036		16,076		16,017
Comprehensive income (loss):
Net income (loss)	$	4,570	$	(21,902)	$	5,295	$	(14,410)	$	19,285
Other comprehensive income (loss):
Change in net unrealized gains or losses on available-for-sale securities	8,041		559		(13,792)		4,032		(8,507)
Reclassification adjustment for realized (gains) losses on available-for-sale securities in net income	(1)		32,542		2,793		32,541		2,793
Reclassification adjustment for gains or losses on fair value hedges	(1,584)		282		367		(85)		367

Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity	385		403		411		1,149		1,325
Other comprehensive income (loss), before tax	6,841		33,786		(10,221)		37,637		(4,022)
Deferred tax expense (benefit)	2,022		9,981		(3,021)		11,119		(1,188)
Other comprehensive income (loss), net of tax	4,819		23,805		(7,200)		26,518		(2,834)
Total comprehensive income (loss)	$	9,389	$	1,903	$	(1,905)	$	12,108	$	16,451

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

Page-4


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended September 30, 2024 and 2023


(in thousands, except share data; unaudited)	Common Stock			Retained Earnings		Accumulated Other Comprehensive Loss, Net of Taxes		Total
	Shares	Amount
	Three months ended September 30, 2024
Balance at July 1, 2024	16,278,260	$	218,773	$	247,477	$	(31,307)	$	434,943
Net income	—	—		4,570		—		4,570
Other comprehensive income, net of tax	—	—		—		4,819		4,819


Stock issued under employee stock purchase plan	439	8		—		—		8
Stock issued under employee stock ownership plan	30,000	561		—		—		561

Restricted stock surrendered for tax withholdings upon vesting	(294)	(6)		—		—		(6)
Restricted stock forfeited / cancelled	(21,001)	—		—		—		—
Stock-based compensation - stock options	—	5		—		—		5
Stock-based compensation - restricted stock	—	103		—		—		103
Cash dividends paid on common stock ($0.25 per share)	—	—		(4,064)		—		(4,064)

Stock issued in payment of director fees	15,477	255		—		—		255

Stock repurchased	(220,000)	(4,234)		—		—		(4,234)
Balance at September 30, 2024	16,082,881	$	215,465	$	247,983	$	(26,488)	$	436,960
	Three months ended September 30, 2023
Balance at July 1, 2023	16,107,192	$	216,589	$	276,732	$	(69,380)	$	423,941
Net income	—	—		5,295		—		5,295
Other comprehensive loss, net of tax	—	—		—		(7,200)		(7,200)


Stock issued under employee stock purchase plan	879	15		—		—		15
Stock issued under employee stock ownership plan	5,800	120		—		—		120
Restricted stock granted	12,550	—		—		—		—

Restricted stock forfeited / cancelled	(850)	—		—		—		—
Stock-based compensation - stock options	—	21		—		—		21
Stock-based compensation - restricted stock	—	209		—		—		209
Cash dividends paid on common stock ($0.25 per share)	—	—		(4,031)		—		(4,031)

Stock issued in payment of director fees	13,750	248		—		—		248


Balance at September 30, 2023	16,139,321	$	217,202	$	277,996	$	(76,580)	$	418,618

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


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2024 and 2023


(in thousands, except share data; unaudited)	Common Stock			Retained Earnings		Accumulated Other Comprehensive Loss, Net of Taxes		Total
	Shares	Amount
	Nine months ended September 30, 2024
Balance at January 1, 2024	16,158,413	$	217,498	$	274,570	$	(53,006)	$	439,062
Net loss	—	—		(14,410)		—		(14,410)
Other comprehensive income, net of tax	—	—		—		26,518		26,518


Stock issued under employee stock purchase plan	1,811	30		—		—		30
Stock issued under employee stock ownership plan	54,600	986		—		—		986
Restricted stock granted	106,964	—		—		—		—
Restricted stock surrendered for tax withholdings upon vesting	(3,798)	(64)		—		—		(64)
Restricted stock forfeited / cancelled	(42,396)	—		—		—		—
Stock-based compensation - stock options	—	42		—		—		42
Stock-based compensation - restricted stock	—	694		—		—		694
Cash dividends paid on common stock ($0.75 per share)	—	—		(12,177)		—		(12,177)

Stock issued in payment of director fees	27,287	513		—		—		513

Stock repurchased	(220,000)	(4,234)		—		—		(4,234)
Balance at September 30, 2024	16,082,881	$	215,465	$	247,983	$	(26,488)	$	436,960
	Nine months ended September 30, 2023
Balance at January 1, 2023	16,029,138	$	215,057	$	270,781	$	(73,746)	$	412,092
Net income	—	—		19,285		—		19,285
Other comprehensive loss, net of tax	—	—		—		(2,834)		(2,834)

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	11,530	230		—		—		230
Stock issued under employee stock purchase plan	2,035	36		—		—		36
Stock issued under employee stock ownership plan	39,800	967		—		—		967
Restricted stock granted	61,978	—		—		—		—
Restricted stock surrendered for tax withholdings upon vesting	(2,498)	(70)		—		—		(70)
Restricted stock forfeited / cancelled	(21,024)	—		—		—		—
Stock-based compensation - stock options	—	159		—		—		159
Stock-based compensation - restricted stock	—	425		—		—		425
Cash dividends paid on common stock ($0.75 per share)	—	—		(12,070)		—		(12,070)

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


Balance at September 30, 2023	16,139,321	$	217,202	$	277,996	$	(76,580)	$	418,618

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

Page-5


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2024 and 2023


(in thousands; unaudited)	2024		2023
Cash Flows from Operating Activities:
Net (loss) income	$	(14,410)	$	19,285
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for credit losses on loans	5,550		1,275
Reversal of credit losses on unfunded loan commitments	(233)		(342)

Noncash contribution expense to employee stock ownership plan	986		967
Noncash director compensation expense	513		398
Stock-based compensation expense	736		584
Amortization of core deposit intangible	738		1,020
Amortization of investment security premiums, net of accretion of discounts	3,050		5,529
Accretion of discounts on acquired loans, net	(228)		(461)

Net change in deferred loan origination costs/fees	109		(800)
Write-down of other real estate owned	—		40
Loss (gain) on sale of investment securities	32,541		(14)
Depreciation and amortization	1,125		1,705



Earnings on bank-owned life insurance policies	(1,282)		(1,438)




Net changes in interest receivable and other assets	(10,199)		196
Net changes in interest payable and other liabilities	(1,345)		6,928
Total adjustments	32,061		15,587
Net cash provided by operating activities	17,651		34,872
Cash Flows from Investing Activities:

Purchase of available-for-sale securities	(133,485)		—
Proceeds from sale of available-for-sale securities	292,621		79,840
Proceeds from paydowns/maturities of held-to-maturity securities	36,820		37,046
Proceeds from paydowns/maturities of available-for-sale securities	26,409		50,749
Proceeds from sale of Visa Inc. Class B restricted common stock	—		2,807

Decrease in loans receivable, net	19,508		6,634
Purchase of loans	(35,874)		—
Purchase of bank-owned life insurance policies	(1,211)		—
Proceeds from bank-owned life insurance policies	—		766
Purchase of premises and equipment	(356)		(1,737)
Proceeds from sale of premises and equipment	21		—
Proceeds from sale of other real estate owned	—		420


Cash paid for low income housing tax credit investment	(1)		(39)
Net cash provided by investing activities	204,452		176,486
Cash Flows from Financing Activities:
Net increase (decrease) in deposits	19,174		(129,664)
(Repayment of) proceeds from short-term borrowings, net	(26,000)		8,000
Repayment of finance lease obligations	(113)		(112)
Proceeds from stock options exercised	—		230
Restricted stock surrendered for tax withholdings upon vesting	(64)		(70)
Cash dividends paid on common stock	(12,177)		(12,070)
Stock repurchased	(4,234)		—
Proceeds from stock issued under employee and director stock purchase plans	30		36


Net cash used in financing activities	(23,384)		(133,650)
Net increase (decrease) in cash, cash equivalents and restricted cash	198,719		77,708
Cash, cash equivalents and restricted cash at beginning of period	30,453		45,424
Cash, cash equivalents and restricted cash at end of period	$	229,172	$	123,132
Supplemental disclosure of cash flow information:
Interest paid on deposits and borrowings	$	35,417	$	23,036
Income taxes paid, net of refunds	$	2,100	$	—
Supplemental disclosure of noncash investing and financing activities:

Change in net unrealized gains or losses on available-for-sale securities	$	4,032	$	(8,507)


Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	$	1,149	$	1,325








Stock issued to employee stock ownership plan	$	986	$	967
Restricted cash1	$	—	$	—

1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco and other cash pledged. The Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020.

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

Page-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1: Basis of Presentation

The consolidated financial statements include the accounts of Bancorp, a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin, a California state-chartered commercial bank. References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes. The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations.

Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our 2023 Annual Report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income (loss), changes in stockholders’ equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period.

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


	Three months ended				Nine months ended
(in thousands, except per share data)	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Weighted average basic common shares outstanding	16,038		16,028		16,076		16,002
Potentially dilutive common shares related to:
Stock options	—		—		—		5
Unvested restricted stock awards	29		8		—		10
Weighted average diluted common shares outstanding	16,066		16,036		16,076		16,017
Net income (loss)	$	4,570	$	5,295	$	(14,410)	$	19,285
Basic earnings (loss) per common share	$	0.28	$	0.33	$	(0.90)	$	1.21
Diluted earnings (loss) per common share 1	$	0.28	$	0.33	$	(0.90)	$	1.20
Weighted average anti-dilutive common shares not included in the calculation of diluted EPS	296		362		392		368
1 Because Bancorp was in a net loss position for the nine months ended September 30, 2024, diluted net loss per share is the same as basic net loss per share, as the inclusion of potentially dilutive common shares would have been anti-dilutive.

Note 2: Recently Adopted and Issued Accounting Standards

Accounting Standards Adopted in 2024

In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendment reduces diversity in practice by clarifying that a separate contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. In addition, this ASU

Page-7

provided amended examples to illustrate that a restriction that is a characteristic of the equity security, which market participants would take into account when pricing them, would be considered in measuring fair value. This ASU also introduced new disclosure requirements. The amendments were effective prospectively for years beginning after December 15, 2023. As discussed in Note 4, Investment Securities, in 2023 we sold our remaining shares of Visa Inc. Class B restricted common stock. As a result of the sale, this update had no impact on our financial condition, results of operations or disclosures.

In March 2023, the FASB issued ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements. For public companies, the amendment requires entities to amortize leasehold improvements associated with common control lease arrangements over the useful life of the improvements to the common control group, as opposed to the shorter of the remaining lease term and the useful life of the improvements for all other operating leases. The amendments were effective for years beginning after December 15, 2023, and may be adopted either prospectively or retrospectively. We currently do not have common control lease arrangements, and therefore the adoption of the amendments had no impact on our financial condition, results of operations or disclosures.

In March 2023, the FASB issued ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. Under current GAAP, an entity can only elect to apply the proportional amortization method to investments in low-income housing tax credit ("LIHTC") structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the consolidated statements of income as a component of income tax expense (benefit). The amendments will allow entities to elect to account for all other equity investments made primarily for the purpose of receiving income tax credits to using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, when certain conditions are met. The amendments were effective for fiscal years beginning after December 15, 2023, and may be adopted either on a modified retrospective basis or retrospectively. Other than investments in LIHTC funds, as disclosed in Note 4, Investment Securities, we currently have no other equity investments made primarily for the purpose of receiving income tax credits, and therefore the adoption of this ASU had no impact on our financial condition, results of operations or disclosures.

Accounting Standards Not Yet Effective

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, enhanced interim disclosure requirements, clarifying circumstances in which an entity can disclose multiple segment measures of profit or loss, providing new segment disclosure requirements for entities with a single reportable segment, and requiring other disclosures. The amendments are effective for annual reporting periods beginning after December 15, 2023 (i.e., 2024 Form 10-K) and interim periods within fiscal years beginning after December 31, 2024, and shall be applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. Since this ASU only requires additional disclosure, adoption of this ASU will not have an impact on our financial condition, results of operations or cash flows.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments require disaggregated information about the effective tax rate reconciliation and additional disclosures on reconciling items and taxes paid that meet a quantitative threshold. The amendments are effective for annual reporting periods beginning after December 15, 2024, and may be adopted either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact of the amendments on our financial statement disclosures upon adoption.

In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The amendments are intended to improve income statement expense disclosure requirements, primarily through enhanced disclosures about certain costs and expenses included in income statement expense captions. The amendments are effective for annual reporting periods beginning after December 15, 2026 (i.e., 2027 Form 10-K) and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. We are currently evaluating the impact of the amendments on our financial statement disclosures upon adoption.

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Note 3: Fair Value of Assets and Liabilities

Fair Value Hierarchy and Fair Value Measurement

We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant management judgment and estimation.

Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation process in the reporting period during which the event or circumstances that caused the transfer occurred. No such transfers occurred in the years presented.

The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.


(in thousands) Description of Financial Instruments	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Measurement Categories: Changes in Fair Value Recorded In1
September 30, 2024
Securities available-for-sale:
Commercial mortgage-backed securities, mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	257,458	$	—	$	257,458	$	—	OCI
SBA-backed securities	$	314	$	—	$	314	$	—	OCI
Debentures of government sponsored agencies	$	7,508	$	—	$	7,508	$	—	OCI
U.S. Treasury securities	$	10,975	$	10,975	$	—	$	—	OCI

Obligations of state and political subdivisions	$	86,355	$	—	$	86,355	$	—	OCI
Corporate bonds	$	5,578	$	—	$	5,578	$	—	OCI

Derivative financial assets (interest rate contracts)	$	181	$	—	$	181	$	—	NI
Derivative financial liabilities (interest rate contracts)	$	1,466	$	—	$	1,466	$	—	NI
December 31, 2023
Securities available-for-sale:
Commercial mortgage-backed securities, mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	352,472	$	—	$	352,472	$	—	OCI
SBA-backed securities	$	19,471	$	—	$	19,471	$	—	OCI
Debentures of government sponsored agencies	$	66,862	$	—	$	66,862	$	—	OCI
U.S. Treasury securities	$	10,623	$	10,623	$	—	$	—	OCI

Obligations of state and political subdivisions	$	91,882	$	—	$	91,882	$	—	OCI
Corporate bonds	$	10,718	$	—	$	10,718	$	—	OCI

Derivative financial assets (interest rate contracts)	$	287	$	—	$	287	$	—	NI
Derivative financial liabilities (interest rate contracts)	$	1,361	$	—	$	1,361	$	—	NI

1 Other comprehensive income ("OCI") or net income ("NI").

Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves,

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prepayment speeds, probability of default, loss severity and credit spreads (Level 2). Level 2 securities include obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued securities, and corporate bonds. As of September 30, 2024 and December 31, 2023, there were no Level 3 securities.

Held-to-maturity securities may be subject to an allowance for credit losses as a result of our evaluation of expected losses due to credit quality factors. We did not record any credit loss expense on held-to-maturity securities during the nine months ended September 30, 2024 or September 30, 2023. Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities.

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. These unobservable inputs are not considered significant inputs to the fair value measurement overall. Level 2 inputs for the valuations are limited to observable market prices for Secured Overnight Financing Rate ("SOFR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for SOFR futures contracts, observable market prices for SOFR and OIS swap rates, and one-month and three-month SOFR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as of the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose