In the following pages, Management discusses its analysis of the financial condition and results of operations for the first quarter of 2009 compared to the first quarter of 2008 and to the prior quarter (fourth quarter of 2008). This discussion should be read in conjunction with the related consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our 2008 Annual Report. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

Forward-Looking Statements

This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "1934 Act"). Those sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.

Our forward-looking statements include descriptions of plans or objectives of Management for future operations, products or services, and forecasts of its revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may."

Forward-looking statements are based on Management's current expectations regarding economic, legislative, and regulatory issues that may impact our earnings in future periods. A number of factors- many of which are beyond Management's control - could cause future results to vary materially from current Management expectations. Such factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, real estate values and competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services. These and other important factors are detailed in the Risk Factors section of our 2008 Form 10-K as filed with the SEC, copies of which are available from us at no charge. Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.

Executive Summary

Despite a severe and rapid downturn in the economy, we produced healthy financial results in the first quarter of 2009 and continued our steady growth while focusing on supporting the local economy. We reported first quarter 2009 earnings of $3.2 million, compared to $3.3 million in the first quarter of 2008 and $2.8 million in the fourth quarter of 2008.

In March 2009, we repurchased all 28,000 shares of preferred stock issued on December 5, 2008 to the U.S. Department of Treasury (the "Treasury") under the Treasury Capital Purchase Program ("TCPP"). Continuing changes to the TCPP rules resulted in concerns by Management about unforeseen negative implications as to how we can best run our business and maintain a competitive advantage. As a result, our Board of Directors and senior management team have determined it is in the best interest of our shareholders, customers and employees to end our participation in the TCPP and continue operating independently. A total of $28.2 million was paid to the Treasury, including accrued dividends of $179 thousand. During the quarter ended March 31, 2009, we accelerated the remaining accretion of the preferred stock totaling $945 thousand through retained earnings, reducing our net income available to common stockholders. The preferred stock repurchase was funded with deposit growth, FHLB borrowings and Federal funds purchased. The warrant that was issued to the U.S. Treasury as part of the TCPP to purchase 154,242 shares of our common stock at a per share exercise price of $27.23 remains outstanding. After repayment of the TCPP capital, Bancorp's total risk-based capital totaled 11.3% at March 31, 2009, which exceeds regulatory well-capitalized standards.

Diluted earnings per common share in the first quarter of 2009 were $0.37, compared to $0.63 in the first quarter of 2008. The 2009 first-quarter earnings per common share were reduced by $0.25 as a result of the non-recurring accelerated accretion of the redemption premium resulting from our early repurchase of the preferred stock, and dividends on the preferred stock. In accordance with accounting guidance, upon repurchase of preferred stock, the excess of the repurchase price and the carrying amount of the preferred stock should be subtracted from net earnings to arrive at net earnings available to common stockholders in the calculation of earnings per share. Further, the first-quarter 2008 net income includes a pre-tax non-recurring gain of $457 thousand related to the mandatory redemption of a portion of our shares in Visa Inc. and the reversal of a pre-tax charge of $242 thousand that was originally recorded in the fourth quarter of 2007, for the potential obligation to Visa Inc. in connection with certain litigation indemnifications provided to Visa Inc. by Visa member banks. Therefore, first quarter 2008 diluted earnings per share were positively impacted by $0.09 as a result of these non-recurring items.

We have been operating in the spirit of the TCPP by continuing our responsible lending practices and helping stimulate our local economy during a very volatile time in the financial markets. Loans increased $152.0 million, or 19.8%, over March 31, 2008 and totaled $921.6 million at March 31, 2009. The mix of loans reflects an increase in the percentage of home equity lines of credit, as well as a slight increase in the percentage of commercial loans and a slight decrease in commercial real estate loans. Such shift in the mix of loans is in line with our strategic plan to diversify loan concentrations.

While we serve an affluent community, we are not immune from the impact of the ongoing national economic recession. In the quarters ended March 31, 2009, December 31, 2008 and March 31, 2008, our loan loss provision totaled $1.2 million, $2.2 million and $615 thousand, respectively, and net charge-offs (recoveries) totaled $846 thousand, $1.5 million and ($9) thousand in the same periods. The allowance for loan losses as a percentage of loans totaled 1.12% at March 31, 2009 compared to 1.07% a year ago. Non-accrual loans totaled $7.4 million or 0.8% of our loan portfolio at March 31, 2009, compared to $6.7 million or 0.8% at December 31, 2008, and a nominal amount a year ago.

Net interest income of $12.8 million in the quarter ended March 31, 2009 increased $1.5 million, or 13.4% from the prior year, reflecting growth in interest earning assets and a drop in the cost of funds, partially offset by lower loan yields in a declining rate environment in 2008. The tax-equivalent net interest margin was 5.15% in the first quarter of 2009 compared to 5.41% in the first quarter of 2008, and 5.36% for the fourth quarter of 2008. Decreases in the tax-equivalent net interest margin were primarily due to: 1) the downward repricing of our loan portfolio in a declining rate environment; 2) interest foregone on non-accrual loans (representing 6 and 7 basis points in the quarters ended March 31, 2009 and December 31, 2008, respectively); and 3) a larger-than-usual quarterly adjustment to mortgage-backed security prepayment speeds (representing 3 basis points in the quarter ended March 31, 2009), due to a higher level of mortgage refinancing activities recently, which accelerated the amortization of premiums on investment securities.

Higher net interest income has also led to improved efficiency. The first quarter 2009 efficiency ratio of 53.81% improved eight basis points from the same quarter last year. Non-interest income totaled $1.2 million in the first quarter of 2009. Excluding a $457 thousand pre-tax non-recurring gain on the sale of Visa Inc. shares in the first quarter of 2008, non-interest income is essentially unchanged between the two periods.

Non-interest expense totaled $7.6 million in the first quarter of 2009. Excluding the first quarter 2008 reversal of the $242 thousand Visa Inc. litigation liability initially recorded in the fourth quarter of 2007, non-interest expense increased $314 thousand, or 4.3%, from the same period a year ago. The increase reflected higher personnel costs associated with branch expansion, higher FDIC premiums related to increased deposits levels and significantly higher FDIC premium assessments, increased legal fees in connection with our participation and termination in the TCPP as well as legal fees associated with non-accrual loans, partially offset by lower information technology costs.

We are planning to expand our franchise with an additional branch to be open in Greenbrae, California in the fall of 2009.

Critical Accounting Policies

Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and require Management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Management has determined the following five accounting policies to be critical:
Allowance for Loan Losses, Other-than-temporary Impairment in Investment Securities, Share-Based Payment, Accounting for Income Taxes and Fair Value Measurements.

Allowance for Loan Losses

Allowance for loan losses is based upon estimates of loan losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan portfolio. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In periodic evaluations of the adequacy of the allowance balance, Management considers our past loan loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors. We formally assess the adequacy of the allowance for loan losses on a quarterly basis. These assessments include the periodic re-grading of loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, and other factors as warranted. Loans are initially graded when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Larger problem loans are monitored continuously and formal impairment analysis for the purpose of applying Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS No.114") occurs at least quarterly.

Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits, and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for loan categories are based on analysis of local economic factors applicable to each loan category. Allowances for changing environmental factors are Management's best estimate of the probable impact these changes have had on the loan portfolio as a whole.

Other-than-temporary Impairment in Investment Securities

At each financial statement date, we assess whether declines in the fair value of held-to-maturity and available-for-sale securities below their costs are deemed to be other than temporary. We consider, among other things, (i) the length of time and the extent to which the fair value has been less than cost,
(ii) the financial condition and near-term prospects of the issuer, and (iii) our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. Evidence evaluated includes, but is not limited to, the remaining payment terms of the instrument and economic factors that are relevant to the collectability of the instrument, such as current prepayment speeds, the current financial condition of the issuer(s), industry analyst reports, credit ratings, credit default rates, interest rate trends and the value of any underlying collateral. Through March 31, 2009, other-than-temporary-impairment resulted in a charge to earnings and the corresponding establishment of a new cost basis for the security. Upon adoption of FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which will be effective April 1, 2009, credit-related other-than-temporary-impairment will result in a charge to earnings and the corresponding establishment of a new cost basis for the security. Non-credit-related other-than-temporary impairment will result in a charge to other comprehensive income, net of applicable taxes, and the corresponding establishment of a new cost basis for the security. The other-than-temporary impairment recognized in other comprehensive income for debt securities classified as held-to-maturity will be accreted from other comprehensive income to the amortized cost of the debt security over the remaining life of the debt security in a prospective manner on the basis of the amount and timing of future estimated cash flows.

Share-Based Payment

On January 1, 2006, we adopted the provisions of SFAS No.123R, Share-Based Payment ("SFAS No. 123R"), which requires that all share-based payments, including stock options and nonvested restricted common shares, be recognized as an expense in the income statement based on the grant-date fair value of the award with a corresponding increase to common stock.

We determine the fair value of stock options at grant date using the Black-Scholes pricing model that takes into account the stock price at the grant date, the exercise price, the expected dividend yield, stock price volatility and the risk-free interest rate over the expected life of the option. The Black-Scholes model requires the input of highly subjective assumptions, including the expected life of the stock-based award (derived from historical data on employee exercise and post-vesting employment termination behavior) and stock price volatility (based on the historical volatility of the common stock). The estimates used in the model involve inherent uncertainties and the application of Management's judgment. As a result, if other assumptions had been used, our recorded stock-based compensation expense could have been materially different from that reflected in these financial statements. The fair value of nonvested restricted common shares generally equals the stock price at grant date. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those share-based awards expected to vest. If our actual forfeiture rate is materially different from the estimate, the share-based compensation expense could be materially different.

Accounting for Income Taxes

Income taxes reported in the financial statements are computed based on an asset and liability approach in accordance with FASB Statement No. 109, Accounting for Income Taxes ("SFAS No. 109"). We recognize the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences that have been recognized in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We record net deferred tax assets to the extent it is more likely than not that they will be realized. In evaluating our ability to recover the deferred tax assets, Management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, Management develops assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates being used to manage the underlying business. Bancorp files consolidated federal and combined state income tax returns.

Under the provisions of FASB Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, we utilize a "more-likely-than-not" recognition threshold to determine whether a tax benefit can be recognized in the financial statements. For tax positions that meet the more-likely-than-not threshold, we may recognize only the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the taxing authority. Management believed that all tax positions met the more-likely-than-not recognition threshold; therefore, there were no adjustments to retained earnings as a consequence of adopting FIN No. 48 and no subsequent adjustments to the provision for income taxes related to FIN No. 48. To the extent tax authorities disagree with these tax positions, our effective tax rates could be materially affected in the period of settlement with the taxing authorities.

Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale, derivatives, and loans held for sale, if any, are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-temporary impaired. These nonrecurring fair value adjustments typically involve application of lower-of-cost or market accounting or write-downs of individual assets.

We have established and documented a process for determining fair value. We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in SFAS No. 157. Whenever there is no readily available market data, Management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of Management's judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these financial statements. For detailed information on our use of fair value measurements and our related valuation methodologies, see Note 3 to the interim Consolidated Financial Statements in this Form 10-Q.

                             BANK OF MARIN BANCORP

RESULTS OF OPERATIONS

Overview

Highlights of the financial results are presented in the following table:

                                                              As of and for the three months ended
(dollars in thousands, except per share data;                                                      March 31,
unaudited)                                            March 31, 2009        December 31, 2008           2008
For the period:
Net income                                           $         3,229      $             2,793     $    3,276
Net income per share
Basic                                                           0.38                     0.52           0.64
Diluted                                                         0.37                     0.52           0.63
Return on average equity                                      10.28%                   10.59%         14.63%
Return on average common equity                                7.77%                   11.00%         14.63%
Return on average assets                                       1.23%                    1.10%          1.48%
Common stock dividend payout ratio                            36.84%                   26.84%         21.88%
Efficiency ratio                                              53.81%                   50.56%         53.89%
At period end:
Book value per common share                          $         19.46      $             19.14     $    17.68
Total assets                                         $     1,074,828      $         1,049,557     $  919,839
Total loans                                          $       921,559      $           890,544     $  769,530
Total deposits                                       $       859,449      $           852,290     $  760,162
Loan-to-deposit ratio                                         107.2%                   104.5%         101.2%

Net Interest Income

Net interest income is the difference between the interest earned on loans, investments and other interest-earning assets and the interest expense on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the amounts and composition of interest-earning assets and interest-bearing liabilities. The table below indicates net interest income, net interest margin, and net interest rate spread for each period presented. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders' equity.

Interest rate changes can create fluctuations in the net interest margin due to an imbalance in the timing of repricing or maturity of assets or liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest margin.

                             BANK OF MARIN BANCORP

The following table, Distribution of Average Statements of Condition and
Analysis of Net Interest Income, compares interest income and interest-earning
assets with interest expense and interest-bearing liabilities for the quarters
ended March 31, 2009, December 31, 2008 and March 31, 2008. The table also
indicates net interest income, net interest margin and net interest rate spread
for each quarter presented.

  Distribution of Average Statements of Condition and Analysis of Net Interest
                                     Income

                                Three months ended March 31, 2009                        Three months ended December 31, 2008                     Three months ended March 31, 2008
(Dollars in                                       Interest                                                  Interest                                             Interest
thousands;                                         Income/                                                   Income/                           Average            Income/
unaudited)             Average Balance             Expense       Yield/ Rate      Average Balance            Expense       Yield/ Rate         Balance            Expense       Yield/ Rate
Assets
Federal funds sold
and other
short-term
investments           $            199                 ---               ---     $            452                ---               ---     $    11,156                112              4.02 %
Investment
securities
U.S. Government
agencies (1)                    75,429                 868              4.60 %             74,373                914              4.89 %        73,108                867              4.77 %
Other (1)                        5,373                   1              0.07 %              5,460                 15              1.09 %         7,444                 89              4.82 %
Obligations of
state and political
subdivisions (2)                25,637                 374              5.84 %             21,481                309              5.72 %        16,866                225              5.36 %
Loans and banker's
acceptances (2) (3)            902,628              13,526              5.99 %            859,970             13,930              6.44 %       735,888             13,312              7.28 %
Total
interest-earning
assets                       1,009,266              14,769              5.85 %            961,736             15,168              6.27 %       844,462             14,605              6.96 %
Cash and due from
banks                           22,262                                                     21,127                                               21,531
Bank premises and
equipment, net                   8,205                                                      8,468                                                7,866
Interest receivable
and other assets,
net                             21,768                                                     18,407                                               16,332
Total assets          $      1,061,501                                           $      1,009,738                                          $   890,191
Liabilities and
Stockholders'
Equity
Interest-bearing
transaction
accounts                        85,154                  24              0.11 %             79,686                 67              0.33 %        78,527                 88              0.45 %
Savings and money
. . .