Bank of Marin Bancorp Stock

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the second quarter ended June 30, 2026. I'm Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. [Operator Instructions]

Joining us on the call today are Bank of Marin President and CEO, Tim Myers; and Chief Financial Officer, David Bonaccorso. Our earnings news release and supplementary presentation, which were issued this morning can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay.

Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non measures. Additionally, the discussion on the call is based on information we knew as of Friday, July 24, 2026, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion on these risks and uncertainties, please review the forward-looking statements disclosure in our earnings release as well as our SEC filings. Following our prepared remarks, Tim, Dave and our Chief Credit Officer, Misako Stewart will be available to answer your questions.

And now I'd like to turn the call over to Tim Myers.

Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. Our second quarter results reflected another quarter of improving financial performance, increasing profitability and enhanced earnings power for Bank of Marin Bancorp. We expanded net interest margin, reduced funding costs, improved operating profitability, further reduced credit risk and strengthen capital, all while continuing to build the client relationships and platforms that support long-term sustainable growth. As a result of our efforts, net income and earnings per share nearly doubled compared to the second quarter of 2025.

Our tax equivalent net interest margin expanded 14 basis points to 3.38%, reflecting improved loan yields, targeted deposit rate cuts and disciplined balance sheet management. These results demonstrate that the platform we have been building is translating into improved profitability and increasing operating leverage. We are now focused on translating improving loan production, relationship growth, disciplined deposit management and continued proactive credit management in a durable earnings power over time.

During the quarter, we originated $98 million in new loan commitments, of which $63 million funded, a 23% increase over the prior year's period. This reflects the continued efforts of our commercial banking team and our focus on relationship-driven growth across existing and newer markets, including the greater Sacramento area. To support this momentum, we continue to invest in talent in key markets, adding a regional manager to oversee our East Bay commercial banking offices and expanding our commercial banking team in San Francisco. At the same time, period-end loan balances declined modestly in the quarter to $2.1 billion, due primarily to elevated payoff activity, including the planned exit of a $19 million criticized relationship. While this payout was an important derisking action, it offset positive production trends. Importantly, the yield profile of new production remains attractive, and we believe this healthy production continued relationship development and disciplined underwriting will continue to translate into sustainable balance sheet growth over time.

Credit quality continued to improve as special mention loans declined meaningfully following the planned exit of the previously mentioned $19 million relationship. Nonaccrual loans declined from 0.41% of total loans to 0.4%. Net charge-offs were minimal and we recorded a $320,000 reversal of provisions for credit losses. Our allowance for credit losses remained stable and sufficient at 1.07% of total loans. On deposits, total balances declined to $58.2 million in the second quarter. The decrease was primarily attributable to a small number of relationships and reflected seasonal customer activity and investment policy decisions rather than any underlying shift in deposit trends.

Deposits remained the strongest levels in recent years and were up nearly 4% from prior year quarter. While deposit pricing and structure remain competitive, our balanced approach to relationship management and our focused outreach to customers seeking alternative banking solutions continue to generate strong new client activity. We added nearly 1,000 new accounts during the quarter, of which 41% came from new relationships.

Our relationship banking approach combined with disciplined pricing enabled us to reduce our average cost of total deposits to 1.28% in the quarter. Overall, the second quarter showed that we are building momentum across the areas that matter most, stronger earnings and wider margin, reduced credit risk and a stronger capital base.

With that, I'll turn the call over to David Bonaccorso to discuss our financial results in more detail.

Thanks, Tim. Good morning, everyone. Our second quarter net income was $9.2 million or $0.58 per share compared with prior quarter net income of $8.5 million or $0.53 per share. Return on average assets increased to 0.96%. Return on average tangible common equity grew to 11.6%, and our efficiency ratio improved to 63.6%. Our net interest income increased from the prior quarter to $30.8 million, driven by higher interest income on loans due to an increase in yields and lower interest expense on deposits.

Our yield on new loan fundings increased to 6.53% during the second quarter, which was a 62 basis point improvement over the prior quarter. We continue to make targeted cuts and deposit rates, which resulted in a 7 basis point decline in our quarterly cost of deposits and a 3 basis point decline in our spot cost of deposits from March 31 and June 30. Our noninterest income was down by $665,000 during the quarter, almost all of which was attributable to a decrease in dividend income on FHLB stock, including a special dividend. As well as BOLI death benefits received in the first quarter that were not repeated in the second.

Setting aside these special items, noninterest income increased by $293,000, portion of which is attributable to fees earned on one-way sales and deposits as part of our active balance sheet management strategy. In addition to growing noninterest income, these runway sales lowered our quarterly cost of deposits and contributed to our 14 basis point expansion in net interest margin. As we expected, our noninterest expense improved by $942,000 during the second quarter, following last quarter's elevated seasonal levels and salaries and related benefits as well as charitable contributions.

For the second half of 2026, we expect noninterest expense to continue near the first half 2026 pace as we invest in people and technology, which we believe will fuel our growth and ultimately track shareholder returns. As Tim mentioned, we recorded a reversal of provision for credit losses on loans of $320,000 during the quarter, and our allowance for credit losses remained stable at 1.07% of total loans.

We strengthened our capital position during the quarter. Our tangible common equity ratio increased 19 basis points to 8.52%, and our total capital ratio increased 32 basis points to 15.58%. Our Tier 1 leverage ratio increased 43 basis points to 8.66%. And our tangible book value per share increased $0.15 to $19.92. Given this continued strength, our Board of Directors declared a cash dividend of $0.25 per share on July 23, the 85th consecutive quarterly dividend paid by the company.

With that, I'll turn it back over to Tim for closing comments.

Thank you, Dave. To close, the second quarter was another quarter in which Bank of Marin materially advanced our strategic focus areas: improving profitability, expanding margin reducing balance sheet risk, strengthening capital and continuing to build new client relationships. Our work over the past several quarters has created a stronger earnings trajectory and reduce risk. We are now focused on translating improved loan and deposit trends and relationship growth into a more optimized balance sheet to continue driving operating leverage and shareholder returns. We believe our success this quarter provides encouraging evidence across each of those areas.

With that, I want to thank everyone on today's call for your interest and support, and we will now open the call to your questions.

[Operator Instructions] Our first question will come from David Feaster with Raymond James.

I wanted to start on the loan side. Exclusive of the wine loan runoff loans, pretty stable quarter-over-quarter. You talked about increasing production. How do you think about -- and also look in the slide deck, you talked about -- it sounds like pipeline has actually improved pretty well as well. I'm just curious if you could elaborate a bit on the strategy to increase production and drive accelerating loan growth, pipeline growth that you're seeing there and the composition? And just, again, how do you think about loan growth as we look forward?

Yes. Thank you. So a lot of that has been driven by over the last year or so, new hires we made to the bank, and we continue to be opportunistic. So during the quarter, we hired a team of 3 people in San Francisco. And just hire a new leader for our East Bay market. So if you look at a map of where the production come from, those areas, which historically have been some of our better producers have fallen off. And so a lot of it's trying to keep doing what we do right, improve what we're not doing right, and that would be getting more [indiscernible] firing at one time.

So part of that is hiring driven -- I would say the mix looks very similar, although we continue to have an increased focus on C&I, I don't want to say we've hired exclusively to do that with some of the hires should accelerate that. But if you look at the outstanding plus commitments year-to-date through June, we're almost double what we were last year. So certain industries aren't real heavy borrowers, but that brings the noninterest-bearing deposits, the treasury management fee income.

So we will continue to attack all those angles. There's no real immediate business lines that we're going after right now outside of being pretty industry agnostic. But we will continue through that hiring to look for opportunities where maybe there's some verticals we need to take advantage of. So I hope that answers your question, but it really is the blocking and tackling of calling activity, building a pipeline, a smoother, more fish process internally to close those in a timely manner or bid on them. You get a commitment then close and just managing the entire process better. And I think over the last 1.5 years, that's where we've gotten much better at and we'll continue to try to hire into that and get more out of the folks that have been here for a while and again, get that tide rise so that the totals continue to rise with it.

Okay. So it sounds like there's a pretty high degree of confidence that productivity -- production is going to continue to increase. And look, I mean there's been a lot of disruption across your footprint. When you talk about where you're seeing productivity, there's been a lot of disruption. I'm curious, how do you think about -- I guess, have you seen any opportunities to capitalize on that yet? Or is it still to come? And then just appetite for continued hiring coming out of that and potential client acquisition? And just when do you think that, that could all start to manifest?

The timing of that is hard, I'll answer that in reverse or all 4 of those hires that I mentioned, all came out of some degree of disruption. Some were immediate or recently than others, but all of them came from that. And with those people tend to come opportunities. And so we're not going to dance on any grades from any disruption, but our job is to be opportunistic, hire people and then take advantage of what they bring to the table. And so without giving too much specifics, that's exactly what we're doing.

Okay. And maybe let's shift gears to deposits. Could you just talk about -- first of all, the competitive landscape for funding and your ability to continue to defend your deposit franchise because your deposit base is phenomenal. And then there's just a lot of moving parts, right? I mean, with the one-way sales, the other deposit sales that you had and some of the seasonality, I guess, how do you think about utilizing the deposit networks that you guys are a part of? How do you think about core deposit growth going forward? And some of just some of the other -- just the competitive landscape for funding today?

I'll start at the back end and then refer to Dave on how he manages the deposit networks because he's done a great job to take advantage of the benefits that provides as a big arrow in our quiver. But our deposit franchise, if you will, is outstanding, as you noted. But nothing about a change. So the decline, if you look at the reasons we've had a number of big customers that we've talked about fairly repeatedly that have fairly big seasonal inflows, outflows that don't always match direct calendar year type seasonality, whether it's campaigns, marketing campaigns. And so we had one customer with the $74 million outflow in the quarter. They continue to open accounts, they continue to move money in but that moves the total needle.

A couple of other instances, albeit although it was a smaller piece of the total pie was people with investment policies or, I would call it, government-funded activities where there behold to look for other investment rate opportunities or investment teams at a higher rate than we're willing to provide, but we maintain all the operating business. And so most of it falls into that. Obviously, there's some tax outflow in the quarter. But nothing there of any note of people leaving the bank. And so we will continue to see that degree of volatility, if you will -- sorry, money coming in and out. None that signifies anything as long as we continue to add a lot of new accounts, a lot of new relationships, build granularity, which you see with that number of new relationship accounts being opened every quarter.

And again, with a greater focus on C&I effort that's going to bring more noninterest-bearing, again, the related treasury management fees, and it's just continuing on that path. It's a very active sport for us. I think we mentioned the word a couple of times, targeted rate cuts. We don't just move rack rates up and down. We figure out where we can do it to have the best and least impact on the bank for the positive and negative.

Sure, yes. So on one way sales in general, I'll justice, we're always looking to actively manage the balance sheet, one-way sales has persisted for a few quarters now, a little bit larger this quarter. Part of that is to manage expected deposit volatility. But it's also a risk management tool. It gives us some balance sheet flexibility. We have a securities portfolio that's 100% AFS now. And so by shrinking the balance sheet rather than keeping it the same size, we're avoiding additional AOCI risk if we purchase securities.

So if you look at the NIM calculation, really what the runway sales do is it reduces our excess cash, which is a relatively low yielding asset, and we're moving relatively high-cost deposits off the balance sheet. So the numerator of the NIM calculation gets more efficient and the denominator is you're reducing your earning assets. And so with the reduction in earning assets, you're also providing some benefits to ROA, leverage ratio, et cetera, things that are a function of average assets over time. So overall, we like the strategy. It was a little bit larger this quarter, and it's something we think we can persist.

Your next question will come from Jeffrey Rulis with D.A. Davidson.

Maybe, Dave, just staying on that margin. I appreciate the commentary sort of reaccelerated higher and it sounded like I was a little bit on the high side, but if you could just tell us about future momentum with the margin, where you see that? And if you could, if you had a June average for the month?

Sure. So 14 basis point improvement on a quarterly basis is a pretty high bar, but I think there's plenty of reasons why a major portion of that could persist. It's probably harder to reduce deposit rates than it was 6 months ago, let's say, not seeing any real upward pressure there. So that's the good news. And then we continue to have benefits from repricing the CD portfolio. And as Tim mentioned, we do some targeted cuts from time to time where we can.

But the bigger opportunity is really on the loan side, we had a large increase in our loan yield in the quarter, 8 basis points up. The yield on new funded loans was quite a bit higher than last quarter. And by definition, those have been on the books for a partial quarter. So that provides some tailwind there. Our June loan yield was 5.18%. So that's sort of the exit level you may want to consider.

A couple of other things. We continue to do our typical ALM run and look at where we think loan yields will be a year from now on a monthly basis, and we still think we're looking at about 20 basis points or so of monthly loan yield benefit a year from now. Let's see, you asked about -- one more thing when I get there. I'd say it's a little small, but unfunded construction commitments are up a little bit, and those haven't drawn yet. And so that could be a little bit of a tailwind, too because those tend to be relatively high yielding loans.

You asked about NIM for the month, I believe. Tax equivalent NIM for June 3.48%, that was with a relatively high level of one-way sales benefit. And so I think probably a better loss point for a more normalized level of one-way sales was probably 3.44%, 3.45%, something like that. That's a good proxy for where we are.

I appreciate it. And maybe, Tim, if I could ask you about just kind of rerun the capital priorities as that -- those levels continue to build and we sell where the dividend is kind of layering in repurchase opportunity versus any M&A helpful to kind of reads it?

Sure. I do want to touch on something Dave said, and it also will answer something that David Feaster asked. We're talking about margin loan production. We are starting to see a revival of our construction lending activity. And much of what we've done in the past and continue to do are things like condo and single-family resident infill projects in San Francisco and nearby areas. And that really production had fallen off for a couple of years for obvious reasons. And we're really seeing that come back to life. That was a big contributor to the outstanding balances growth in the quarter or at least compared to the prior year.

And so that, as Dave mentioned, is a higher-yielding loan for us. All the same borrowers, excellent credit quality, but that is another test in that hasn't been firing for us, and it's nice to see that back. And so that should help our balances and those projects are just kicking off. So we won't see the payoffs project inflation for a while.

On the capital priorities, obviously, we're making some small purchases when our tangible book value or we were trading below tangible book or right at it, and we still have about $24 million approved. We are beholden for approval of the shareholder dividend with the California regulator to their calculation of what's permitted, which requires us -- because of the losses we've taken on the balance sheet restructurings potentially could cause us to go back and ask for permission.

As we've said before, when we got working together with them to execute on the balance sheet trade, the large held-to-maturity trade with just sub debt. It was going to manage all that and then build the capital back up to some level of peer median or something. Within distance of that, that would give them comfort. And so we continue to build through the improved earnings, and we'll start to have those conversations, but I wouldn't call any buybacks imminent for that reason.

Your next question will come from Woody Lay with KBW.

Wanted to start on the loan yields and follow-up there. I was just hoping for some more color on -- obviously, dependent on mix, but it sounded like new loan rates are coming at higher yields quarter-over-quarter. Just any incremental color you could provide there? And maybe if you also had any color on the rate on the loan payoffs you saw in the quarter?

So we had a comment -- I'm trying to remember the exact delta between...

I can give you the payoffs. The yield on payoffs per quarter was 5.86%. So it was 6.53% on new originations, 5.86% on payoffs.

Got it. And were there any like onetime interest recoveries that flow through on yields? Or was it all...

[indiscernible] on the order of $35,000, $40,000 for the quarter -- yes. Not like, for example, Q4 of last year, which was pretty material.

So we've been trying to be very disciplined, Woody, at funding quality loans, new loans as close as we can to 200 over relevant index. Sometimes we get more, sometimes we get less, but certainly try not to get into the race to the bottom for really aggressively structured fixed rate type pricing. But again, a higher proportion of C&I kind of construction is helping that.

Yes. And could -- maybe as it relates to there, could you just talk about the competition you're seeing and how that's impacting pricing or structure because it feels like a major theme this earnings season has been on the competition side?

Sorry, I came down this cold over the weekend, caused me to [indiscernible]. We are seeing aggressive pricing. I don't want to throw anyone onto the bus, we're walking away from things that the $150 million over in that range. We are seeing more deals go out with the nonrecourse request, and we're being very cautious of those.

Yes, nothing else to add. Stepping away for a moment.

Yes. All right. Maybe just last for me, Dave, 1 follow-up. For you, you mentioned expenses in the third quarter. It could look like kind of the trend we've seen over the first half of the year. The salaries line was there's a little bit of a gap between the first and second quarter. Do we split the difference there? How should we think about that gap in salaries and what that implies going forward?

I think Q3 salaries-wise is probably a little bit closer to Q2 than it would be for Q1. There's just a lot of things that are unique to Q1 in terms of the annual resets and incentive comp, et cetera. So I think probably closer to Q2, probably a little bit higher than Q2 would be my guess. And just other lines, I think we have some projects that will be accelerating in Q3. And so that would be -- that could lead to a little bit higher expense in projects. But I think overall, we're going to be somewhere between the Q1 level and the Q2 level or said differently, second half looks a lot like the first half on average overall.

Our next question will come from Matthew Clark with Piper Sandler.

Just on the securities portfolio, it's been coming down the last few quarters. I want to get a sense for whether or not that might continue as you try to fund loan growth or should we anticipate that you might start to reinvest in SKU?

So overall, I mean, our portfolio is large relative to the size of the balance sheet. So we're working hard to make that smaller piece, make loans to larger piece. I believe we haven't bought anything since January. I think that probably changes sometime in Q3, just kind of legging into the market a little bit, maybe in line with what tends to be our usual positive flows deposit-wise. So that's my expectation. But I don't expect the portfolio to grow significantly over time.

We do get about $200 million or so in -- or we're expecting $200 million in payoffs over the next 12 months. So I think the portfolio likely comes down, and we'll be looking to just manage the balance sheet a bit more efficiently and get that percentage lower and loans up.

Okay. I'm not sure if Tim is back or not and -- but I wanted to touch on M&A, unless I missed it a little earlier, but any update on the M&A front and your appetite there?

No. No update. I'm sorry -- thank you for reminding me, I feel to answer the second part of Jeff's question, which was that's always going to remain a priority for us over episodic buybacks if there's something that provides attractive franchise value enhancement. There's nothing imminent or in the works. But that remains a priority to the bank to explore those opportunities.

[Operator Instructions] And we have no further questions at this time. I'll hand it back to Tim Myers for closing remarks.

Thank you, everybody. Again, I apologize for the coughing fit there with my cold, but I appreciate all the good questions. And as always, please reach out if you need anything further. Thank you.

Good morning. Thank you for joining Bank of Marin Bancorp's earnings call for the first quarter ended March 31, 2026. I'm Krissy Meyer, Corporate Secretary for the Bank of Marin Bancorp. [Operator Instructions]

Joining us on the call today are Bank of Marin, President and CEO, Tim Myers; and Chief Financial Officer, Dave Bonaccorso, Our earnings news release and supplementary presentation which were issued this morning can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay.

Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non-GAAP measures. Additionally, the discussion on the call is based on information we knew as of Friday, April 24, 2026, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in our earnings news release as well as our SEC filings. Following our prepared remarks, Tim, Dave and our Chief Credit Officer, Misako Stewart will be available to answer your questions.

And now I'd like to turn the call over to Tim Myers.

Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. We are very pleased that are executing in the first quarter across a number of key areas resulted in continued improvement in year-over-year profitability metrics, loan production, net interest margin expansion and improved credit quality. I'd like to discuss our first highlights. Compared to the first quarter of 2025 net income and earnings per share grew by 75% and 77%, respectively, in the first quarter of this year, largely due to the repositioning of our balance sheet our net interest margin increased 6 basis points on a sequential quarter basis to 47 basis points over the prior year's period.

During the quarter, we originated $81 million in new loans [ $61 million ] of which was funded an almost 30% increase over the prior year's period. While the first quarter is a seasonally slower [indiscernible] production, the additional hires we made to our banking team the generally favorable economic conditions we continue to see in our markets and a healthy increase in commercial real estate loan demand led to our strongest first quarter in a number of years. New loan product allocation was roughly in line with our existing portfolio with a slight skewing towards C&I.

During the quarter, we worked diligently to improve our credit quality. We sold our longest tenure classified and nonaccrual loans totaling $16.3 million, which were downgraded to substandard in 2021 and moved to nonaccrual in 2024. At that time, we took specific reserves to $7.3 million based on property valuations. The no sale proceeds validated our reserve assumptions with the charge-offs equaling the specific amounts reserved. While other workouts were offset by new downgrades, the impact of the no sales on credit metric was substantial.

Nonaccrual loans declined from 1.27% of assets to 0.41% and the ratio of classified to total loans decreased from 1.51% to 0.85%. Notably, following the no sales, virtually all of the remaining nonaccrual balances are comprised of one nonowner-occupied commercial real estate loan that has no loss expectations based on underlying valuation and cash flow. Despite strong seasonal loan originations, Q1 loan growth was negatively impacted by our nonaccrual loan resolutions. Excluding these purposeful exits, loan paths were roughly in line with the prior year's period and were generally driven by asset sales and cash payoffs.

We continue to experience elevated payoffs in consumer-related loans primarily within acquired portfolios, including auto and mortgage loans. Despite these dynamics, our net interest margin benefited as new loans came on to the books at an average rate that was 40 basis points higher than the average rate on payoffs. The Q4 interest recovery of $667,000 not repeated in Q1 and the decreased number of days in the first quarter [indiscernible] benefit. Excluding other unique transactions, we believe our loan portfolio will positively impact the net interest margin in 2026 going forward.

Our banking team continues its relationship-based approach to attract lending opportunities and drive to cultivate new deeply rooted relationships with particularly strong momentum in the first quarter in the Greater Sacramento area. While we continue to navigate a competitive market environment on pricing and structure, we have attracted a significant amount of new client relationships while maintaining our disciplined underwriting and pricing criteria.

Our total deposits increased in the first quarter due to a combination of increased balances from long-time clients as well as continued activity bringing in new relationships. The rate environment remains competitive and clients remain rate sensitive. However, they continue to bank with us for our service levels, accessibility and commitment to our communities allowing us to continue reducing our cost of deposits while growing our deposit base.

With that, I'll turn the call over to Dave Bonaccorso to discuss our financial results in greater detail.

Thanks, Tim, and good morning, everyone. Our net income was $8.5 million or $0.53 per share. Our net interest income increased from the prior quarter to $30.3 million due to average balance sheet growth and higher investment security yields and reduce deposit costs as well as the positive churn in the loan portfolio that Tim discussed, resulting in a 6 basis point increase in our net interest margin. Adjusting for the fourth quarter recovery of interest and fees on a paid off nonaccrual loan relationship our sequential quarter net interest margin growth would have been even more impressive than 14 basis points.

During the quarter, the expansion of the deposit relationship with a relatively high cost was a headwind to net interest margin. At quarter end, we moved a portion of these funds off balance sheet to take advantage of a relatively high one-way sale rate, which boosts our overall net income and contributes to noninterest income. This opportunity has persisted into Q2, and we will continue to look for opportunities like these to actively manage our balance sheet to improve shareholder returns.

Moving to noninterest income. Most areas of fee income were relatively consistent with the prior quarter, although we did receive a special dividend on FHLB stock as well as [ bowling death ] benefit, which positively impacted our total noninterest income in the first quarter. Our noninterest expense increased by $2.5 million in the prior quarter, primarily due to higher salaries and employee benefits related to seasonal salary and benefit accrual resets, including payroll taxes, incentive compensation accruals, profit sharing, insurance and 401(k) matching. The first quarter also included a higher level of our annual charitable giving, which we expect will comprise almost 70% of total for 2026.

Overall, Q1 noninterest expense was broadly in line with our expectations. Though charitable giving is expected to return to more normalized levels. During the coming quarters, we otherwise expect noninterest expense to continue near current levels as we continue to invest in people and technology, which we believe will fuel our growth and ultimately drive shareholder returns. Due to the improvement in asset quality in our loan portfolio and a substantial level of reserves we have already built, we did not require a provision for credit losses in the first quarter, and our allowance for credit losses remained strong at 1.08% of total loans which we believe is an appropriate level following the sale of our nonperforming loans. Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on April 23, the 84th consecutive quarterly dividend paid by the company.

With that, I'll turn it back over to you, Tim, to share some final comments.

Thank you, Dave. We continue to see stable economic conditions in our markets. Our credit quality continues to improve. Our loan pipeline remains strong and had healthy demand, and we continue to expect to generate solid loan growth in 2026, while also continuing to grow deposits through the addition of new relationships and expansion of existing client relationships. Given the positive trends we are seeing in many key metrics, we expect to continue to deliver strong financial performance for our shareholders as we move through the year.

With that, I want to thank everyone on today's call for your interest and your support. We will now open the call to questions.

[Operator Instructions] Our first question will come from Matthew Clark with Piper Sandler.

How much was the interest reversal that negatively impacted the loan yield on a dollar basis?

That was a -- it was, I believe, $667,000.

Okay. I'm sorry. I think I misheard you. I thought there was another one here in 1Q.

There's not...

[indiscernible] over quarter. And part of the decline was impacted by that $670,000 interest accrual reversal in Q4.

Got it. Okay. Okay. And then I saw the spot rate on deposits. How are you thinking about deposit costs kind of beyond that spot rate with the fit on hold? And what would you suggest is your marginal cost of new deposits these days?

So I think similar to what we've done in recent quarters, we'll continue to look at targeted adjustments away from Fed cuts. Obviously, probably fewer Fed cuts. expected than compared to what the market was expecting to start the year. So that's how we'll continue to address that. We also have time deposit repricing happening in the background. I believe that was a 24 basis point decline sequential quarter. So those are a couple of data points. Anything else you want to add, Tim?

No. I think some of the total -- or the pressure on total deposits continues to be just large existing clients that have relationship rates that continue to go up. Some of that's -- we're managing with one-way cells, et cetera. But now overall, we continue to look for off-cycle reductions. And as you noted, the spot rate is 4 bps lower than the total deposit rate at the end of the quarter -- or sorry, end of the year.

Yes. Okay. Great. And then you haven't bought back stock for the last couple of quarters. You've got credit. A lot of your credit pretty much resolved here? How do you think about -- how should we think about the buyback here going forward?

So as we described when we did the balance sheet restructure, given that we got support from the regulators and all our constituents to do without any equity raises with sub debt. we had said we were going to earn our way back into a median leverage ratio or CET1 ratio coming back towards peer level. And certainly, at the time, that was -- the perception was holding more capital is better in the event that the credit situation with those loans worsen. As you noted, taking that off the table, brings us closer to having a comfort level to do that.

So it's a conversation we're going to start having, but we still want to earn our way back into a bit of a higher ratio before maybe embarking on that. But certainly not needing to keep capital for the risk inherent in those deals we shed during the quarter, we'll feel better about having that conversation. So I don't want to overpromise, but that did remove a big hurdle for sure.

Your next question will come from Jeff Rulis with D.A. Davidson.

I guess kind of following the restatement you had during the quarter, trying to get my bearings on the margin and expense levels. I think you kind of outline the expense expectation sounds like pretty flat from here, a pretty front-end loaded Q1 and then leveling off. But I guess if I try to get into NII and the margin I think we had sort of had discussions of a terminal margin level in the high 3s given kind of the adjusted number is sort of mid-3 figure. I'm trying to get a sense for -- you've had a lot of restructuring and repositioning. It sounds like still an upward bias to the margin but kind of all in whether specific or not kind of a margin level you think that's indicative of the balance sheet today?

I think on a full year basis, mid-3s is probably still appropriate or appropriate in line with the comment you just made, obviously, adjusted downward given the restructuring. And we covered deposit costs a little bit, but we still think there are decent tailwinds with regard to loan repricing.

So Dave, the step-up this quarter linked quarter I guess, or the jump off rate of March is $26 million and you so to say, by the end of the year, a mid-3s is doable. I guess that would put the kind of the linked quarter margin increase. Is that give or take a pretty good proxy?

Yes. I guess I would look at it a different way. I mean you're probably looking at a handful of basis points a quarter. I mean there's some movements comparing off the prior quarter with that nonaccrual loan payoff, et cetera. But that's how I would think about it moving ahead is with the benefits to loan repricing, that's probably worth a few basis points and then any other deposit repricing benefits we have along the way would add to that, such that you get to potentially up to a mid-3s number for the year.

That's great. And then maybe just one other question on the credit side. The timing of the large loan resolution, is that its own independent path? Or do you find that's indicative or something moving in the market that you feel like you can move forward on this other larger $8 million owner occupied CRE or do you view them really independently, that's something that you are chasing down separately? And this remaining loan you expect the workout base to continue for quarters to come?

Yes. So they're completely different animals, Jeff. The notes we sold were the ones we downgraded. That was our endemic special that we've been talking about ad [ nauseam ] for a number of years. The market just wasn't going to recover in time for that to be properly restructured. We're not going to maintain a book -- a loan on our books where we need to take a charge off. So we elected to sell the note and [indiscernible] done a really good job of estimating value and negotiating that sales such that we didn't have any further provisioning impact.

The other loan we've mentioned on the call is something where, again, the loan-to-value, the debt service coverage ratio, all the metrics are adequate. We're in a dispute over terms of an extension or renewal -- I'm sorry, extension. And so that's really what's keeping it. So we're in the middle of a legal process on that. And so there really isn't -- they're not -- it's not apples-to-apples. And so we will look to -- continue to look to resolve that, but we don't have any loss expectations on that credit, whereas the other one had a serious valuation impact, as you know.

Appreciate it. Tim, maybe most importantly, interested in your view of the -- just the general market and on the CRE side. And as you view vacancy rates and the general kind of broader Bay Area sort of firming up? Or how would you characterize kind of recent CRE trends in the area?

Yes. So I would continue to bifurcate Bay Area between San Francisco, particularly for office and the rest of Bay Area. We never saw the significant value degradation or lease rate declines in the outer markets that we saw in San Francisco, which, as you know, plummeted. The trends continue to be very positive. Certainly, a lot of that driven by AI-related investments. And even on the property on the note we sold, we were looking at 20% to 30% a year of improving NOI. So the market is rebounding.

There's news about retail coming back in the retail areas. It has to hit a bottom. You see people being opportunistic now for those of us that had assets at prior valuations, that was going to take a long time. But we certainly see more opportunism in the market. Some of our activity over the last couple of quarters has been related to people taking advantage and making purchases. And so I view all of that as a positive. Again, I would bifurcate between dealing with an asset that was on the book before the value degradation and what's happening now. But overall, the trends remain very positive in San Francisco.

Your next question will come from Woody Lay with KBW.

I was just hoping that you could sort of walk through the higher expenses in the first quarter, the jump from 1Q to 4Q. And then it sounds like the forecast, excluding the charitable contribution should remain relatively flat. Does that embed any additional hiring from here?

Sure. I'll start that one off. So just zooming out a little bit, I think the company has a long-standing history of very strong expense management. If you go back the last 10 years or so, our noninterest expense to average assets has been in the favorable top 30% of peers. So it's important to what we do. I think we're pretty thoughtful around it, and that's despite operating in some pretty expensive markets. I think where the deviation may have happened is if an estimate was jumping off of Q4 for personnel expense, keep in mind, we did have some incentive bonus reversals in Q4.

And I think historically Q3 has probably been a better predictor of Q1 than Q4 has. And so our Q3 actually looks -- relative to Q3, our Q1 looks similar to where it has been in the last couple of years. And then you put on top of that the annual resets that we discussed in our earnings materials like payroll taxes, profit sharing, et cetera. That's how we get to the key driver of our overall number this quarter, which is in personnel.

And then you hit on charitable contributions. We expect that to normalize. I think one other area that was a little bit of an outlier this quarter was the FDIC insurance expense. And due to the repositioning, we had a lower leverage revenue and negative earnings in our last assessment because of those losses. That was applied to a higher assessment base and given the balance sheet growth and also lower tangible equity. So that, I think, explains some of the expenses you're seeing in Q1, and we expect that to normalize as more of the benefits of the repositioning flow through.

Got it. That's helpful. And then maybe just last for me, sort of putting some of the moving pieces together. I mean, it sounds like there's continued tailwind to the margin. You've got a slightly higher expense base, but it should be relatively stable versus 1Q. So I mean the expectation is still for positive operating leverage throughout the year.

Yes, I agree with that.

Yes. I believe that's the case. Whether we are looking to be opportunistic, though, and continue to add higher [indiscernible] that can help us drive the growth. I can't really predict the timing for that. But we are looking to make strategic growth efforts in some of the markets that maybe have been lesser performing for us to kind of round out, get more pistons firing. And so if we can make some hires that can help drive the growth. Certainly, we'll be doing that with a mind towards adding interest-bearing assets to the books, but that could impact the run rate over the year. But as Dave said, I think when you take all the noise out, starts to flatten out, minus any adds.

Your next question will come from Andrew Terrell with Stephens.

Maybe going back to the margin. I was hoping we could maybe get a finer point on some of the loan repricing dynamics and maybe -- just curious where new origination yields are coming in today, how that compares to what's rolling off. And if you have kind of the cadence of what you expect to reprice or turn over on the loan book throughout the year?

Sure. So the usual statistic we gave us a 12-month look at monthly loan yields and that number is probably 15 to 20 basis points comparing the monthly loan yield in March 2027 to March 2026. That's interest rates flat and flat balance sheet. So there's that. And then I think you asked about yields on new loans. Those were [ 591 ] most in Q1, which compares to [ 551 ] for paid off loans. We have about 17% of the portfolio repricing in the next year and 34% over the next 3 years, and that is on Page 25 of the deck. Not much change in those numbers and then still a relatively low level of rate 8%.

One of the headwinds is obviously naives because I think for the prior couple of quarters, it was a pretty flat trend on new asset yields versus -- or loan yields versus those paying off. As we continue to have headwinds in the payoff of some of the acquired mortgage or auto loans that we've talked about. And that was one of the larger payoff categories in the quarter again, and those are at higher yields. And so getting a 40 basis point lift in -- despite that is encouraging, but that has been a headwind because those are some of our better yielding loans and the payoffs on that because of the rates have been slightly higher.

Yes. Okay. Great. I appreciate it. And then if I could shift over to -- I know you talked about a little bit on the question on the buyback. But your CET1 and capital ratios have normalized post the restructure last year. It seems like you're relatively in line with peer levels. I guess can you just reframe post restructure now that the credit picture looks a lot cleaner right now post this quarter. Where would you like to be from a CET1 or leverage ratio standpoint? I guess, can you remind us kind of the north stars there, the binding of strange?

We really haven't established a level where we need to be. It's all relative to the risk on your balance sheet, obviously. And so as I mentioned before, that's a conversation we're going to be more willing to have now that we have less risk within our loan book and less of a chance of large surprising provisioning or charge-offs. So I'm reluctant to give a target there, but I would say a conversation we're going to be more willing to have as a management board.

And I'll just add because I think a lot of the intention gets paid to holding company capital ratios, an important consideration for us is our bank level capital ratios and relative to peers there. And I think that's where we have probably more to do in terms of rebuilding those.

Got it. Okay. Makes sense. And I guess just last question for me. your earnings, your profitability is up quite a lot since the restructure, but the ROTCE on an operating basis, still kind of around that 10%-ish level. I'm just curious, your thoughts -- will obviously improve as the margin continues to move higher throughout the year. But as you step back and kind of look at your forecast, where do you see the kind of incremental levers to pull to improve profitability closer to peer levels?

So I mean the 2 we're most internally focused is building loan activity and particularly while yields are where they are and also driving more fee income. And we have some strategic initiatives around that. And so I can't remember if it was you earlier in this or someone else mentioned building more operating leverage into the model. That's really what we're looking to do.

So if we make ads, it will be mainly around -- the staff story, mainly around driving loan growth. If that happens quickly enough and you get that almost immediate positive operating leverage, and again, some strategies around driving fee income that we'd rather not give any color on, but nothing overly dramatic, but things that we think can add meaningfully to the bottom line. So we'll continue in that area. I don't see any big cost reduction activity. The goal at this point is not to cut our way into more profitability.

[Operator Instructions] Our next question will come from David Feaster with Raymond James.

On the growth side for a minute, there's some really encouraging trends there with the originations and the pipeline growth. I was hoping you could maybe elaborate a bit on some of the drivers behind this, right? You've alluded to new hires, that makes obvious sense as to increasing productivity, but you also discussed in the deck, you talked about comp program enhancements, updates to calling programs. So maybe you can elaborate on what you did there and how much of the growth in originations you're seeing in this quarter is from the new hires versus increasing productivity from existing hires just as we think of the success on some of those adjustments that you've made.

Yes. Thanks, David. I would say the majority of the production came from those hires we've been referencing over the last year. The top people continue to be the top people. We've made some leadership changes in our Sacramento market that certainly realizing we need to better post the American River Bank acquisition to capture the opportunities out there, and that is paying dividends. I would say the Sacramento market overall because a good portion of the growth that was booked in other offices are loans to borrowers that are in Sacramento just other people's relationships.

So I think it's doing a better job in Sacramento is doing a better job with the hiring. It's having an incentive plan that pays people fairly without so many caps so that you're incenting a more of a hockey stake approach. I think, was key to that. So maybe people have to do more enter into the incentive component. But if accelerate or exceed their higher hurdles, then the payouts get bigger. And I think you combine good people with a better plan and you're going to get results.

And that's what we're seeing. We're starting to see strength in the construction market. Our construction group has gotten a lot more active, going back to my comments earlier. I think Jeff Rulis question about activity in San Francisco, a lot more people stepping in to buy properties for development for condos and/or single-family residences. So we're starting to see that come back as well. So it's not any one thing. It's a combination of all those things.

Maybe just touch on the credit side. credit cleanup exclusive of that, with that in the rearview, I mean, things look pretty benign, at least on your balance sheet. I'm curious what -- if you could touch on what you're seeing on credit broadly. I know the wine industry is under a bit of pressure. You've done a deep dive into kind of some upcoming CRE maturities. Curious if you could just talk away some of the takeaways from that high-level credit commentary and just whether you're seeing more pressure on underwriting just -- or credit broadly just given increasing industry competition.

Well, I'll start at your end there. I think competition has picked up, loan-to-value, debt coverage, recourse versus nonrecourse. We certainly see the market getting frothy at times, particularly in certain asset classes like multifamily Wine is a big weak spot I think we're a gigaton our exposure is not all that big there anymore. But in terms of headwinds to part of the North Bay economy, yes, that industry is struggling. We don't see a lot of impact within our customer base or prospects of things that are making the national news like tariffs or cost of oil transportation, not that it's not out there, but we're generally seeing stable and healthy economic trends with what we're looking at.

So I would say we feel good about our commercial real estate and minus some ups and downs and individual performance. I don't see any trends that caused me to worry that we're going to see -- revert back to some of these larger downgrades into substandard or nonaccrual. And again, if you -- if you take out the legal aspect of what we're dealing with -- with pretty much the singular nonaccrual loan we have, we'd be back to almost 0, which, as you know, is where we love to be.

That's helpful. And then just looking at your slide deck, on Slide 6, you got those 4 top priorities for you all that are to drive long-term value. But #3, scaling through efficiency gains in M&A. We've already talked a bit about #4 and #1, and you said you're not going to talk about #2. So I was hoping you could talk a bit about #3, where you're seeing opportunities for efficiency gains and any thoughts that you might have on M&A?

Yes. So I will talk about #2. It's not that I won't. It's just giving guidance is something that we are very reluctant to do. But we do have specific initiatives around treasury management, fee income, wealth management, trust income. There's a number of components to that that will add up to a meaningful increase in that component, but no one thing that's overly dramatic to discuss, all part of getting better.

M&A, obviously, getting our valuation back and continuing to build on that. opens more doors for us. So it's certainly something we remain open to and haven't shut the door on that at all just for a while. It was challenging on deal metrics or deal economics with where we were trading. But again, we're hoping that continues to make improvements and we can -- that can become a more realistic opportunity for us. We are looking at efficiency over the last couple of years. We have done some staff adjustments.

We've closed some branches, and now we have a -- well, going on the second year now, pretty significant efficiency strategies within the technology or back office world and now going forward around AI, using that intelligently to build efficiencies into the system and more operating leverage. So again, it's lots of arrows in the quiver as opposed to any 1 or 2 big things. But those are the main things we mean in that #3.

Your next question will come from Tim Coffey with Brean Capital.

Okay. So I got a couple of questions on kind of the loan side. When it comes to the spreads in the market right now, are you at all concerned about some of that starting to -- those spreads starting to compress given one general love competition, but also some of the new entrants to the market?

There's no question. There's been pretty incredible compression in pricing. We really try to stick hard to an approach that meets our ROA hurdles. Generally, loans priced in the 200 over treasury depending on the type alone or above are going to meet that. We regularly see people bidding at the 1.5 to 1.75 level. And so our job is to parse through or what we've been doing is parsing through those really attractive opportunities, get as much as we can, not race to the bottom to get high-quality credit as high as we can. But there is no question the market is very aggressive on pricing.

And as you grow loans this year, book new loans, are you agnostic to the type? Or do you prefer one or the other, like commercial or commercial real estate for instance?

Well, I've been saying for a while, I would love to do a higher proportion of C&I. That's not -- that's a slow ship to turn, in terms of more aggressively building that, but we are seeing a higher proportion. If you look at the breakdown of loans we booked this quarter, pretty much mirrors that of the overall portfolio. But within that breakdown, there was a skewing towards C&I as a percentage. So we're hoping to have almost $9 million of unfunded commitments within that C&I bucket for the quarter. So we'd love to continue to drive that.

We are seeing a higher mix over the last few quarters of multifamily, I think all of which has been CRA qualified. And so that accomplishes a number of things. So if we can win a multifamily deal at a good spread and get that. That's something worth being moderately aggressive over I expect construction to pick back up. Obviously, there's always risk in that book, you have to manage, but that's been a piece or a piston that wasn't firing given the kind of construction projects we did in the geographies as we did them, it's nice to see that coming back as well.

So you're right, we are generally agnostic, but I think if we continue those trends, it will help from both a concentration standpoint, but also just the growth aspect of. But I think where we're doing a good job and what the growth in the market is right now seem to align pretty well.

Okay. Further growth in C&I and construction all else equal, would probably put upward pressure on your allowance ratio. Is that about right?

Say that last part again, put upward pressure on what?

If you see more production in C&I and construction, that would probably put an upward bias on your allowance ratio?

Well, I guess possibly, yes. I guess it depends on the individual credits. But yes, it depends is almost always the answer. But that's possible, yes.

Okay. And then one for you, Dave. What's the appropriate tax rate to use?

What we experienced this quarter, I think it's pretty indicative for the full year. As you hear from a tax perspective than last year.

We have no further questions at this time. I will hand back to Tim Myers for closing remarks.

Thank you again to everybody. If you need any follow-up information, by all means, please reach out to Dave and or myself, and we will get you answers. Looking forward to seeing you guys on the next quarterly call.

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the fourth quarter ended December 31, 2025. I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. [Operator Instructions]

Joining us on the call today are Bank of Marin President and CEO, Tim Myers; and Chief Financial Officer, Dave Bonaccorso. Our earnings news release and supplementary presentation, which were issued this morning, can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay.

Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non-GAAP measures. Additionally, the discussion on the call is based on information we knew as of Friday, January 23, 2026, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion on these risks and uncertainties, please review the forward-looking statements disclosure in our earnings news release as well as our SEC filings.

Following our prepared remarks, Tim, Dave and our Chief Credit Officer, Misako Stewart, will be available to answer your questions.

And now I'd like to turn the call over to Tim Myers.

Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. We are very excited that our execution in the fourth quarter across a number of key areas resulted in continued positive trends for core profitability metrics, loan and deposit growth, effective expense management and improved credit quality. We completed a balance sheet restructuring during the quarter that did result in a net loss but meaningfully improved net interest margin and net interest income, while we maintain strong capital levels due to a targeted approach to security sales and a successful subordinated debt offering. Before Dave goes into more detail about the restructuring and its benefits, I'd like to discuss our fourth quarter highlights related to loan and deposit growth and asset quality improvements.

During the quarter, our total loan originations were $141 million, including $106 million funded with over 90% of that activity in commercial loans. This was one of our strongest quarters in the past decade. Our originations were a more diversified and granular mix across commercial banking categories, geographies, industries and property types, and we are seeing a healthy increase in commercial real estate loan demand that meets our disciplined underwriting standards.

Our overall loan growth, although quite robust, was offset moderately by $50 million in payoffs during the quarter, predominantly within nonowner-occupied commercial real estate and residential real estate. For the full year, we originated $374 million in new loans, including $274 million funded, which was 79% higher than the prior year. Our banking team continues to develop attractive lending opportunities and bringing new deeply rooted relationships to the bank, including in key growth markets such as the Greater Sacramento area.

While we continue to navigate a competitive market environment on pricing and structure, we have attracted a significant amount of new client relationships while maintaining our disciplined underwriting and pricing criteria. Our total deposits increased during the fourth quarter due to a combination of increased balances from long-time clients as well as continued activity bringing in new relationships. The rate environment remains competitive and clients do remain rate sensitive. However, they continue to bank with us for our service levels, accessibility and commitment to our communities, allowing us to continue reducing our cost of deposits by 10 basis points while growing our deposit base.

Proactive credit management led to improved credit quality trends this quarter, driven by borrower upgrades, reflecting strong financial performance and successful targeted loan workout efforts. Classified loans declined 35% quarter-over-quarter, decreasing to 1.5% of total loans from 2.4% in the prior quarter. Nonaccrual loans also improved, declining 14% to 1.3% of total loans compared with 1.5% in the prior quarter. Past due loans decreased significantly as well in the quarter, reaching the lowest level since the fourth quarter of 2023.

With that, I'll turn the call over to Dave Bonaccorso to discuss our financial results in greater detail.

Thanks, Tim. Good morning, everyone. As Tim mentioned, the balance sheet repositioning we completed in the middle of the fourth quarter is performing as expected with contributions to profitability metrics already flowing through during the quarter. On a 12-month basis from the time of execution, we expect approximately $0.40 of earnings per share accretion and 25 basis points of net interest margin lift.

Regarding the structure of the repositioning, while we transferred the entire held-to-maturity portfolio to available for sale, we only sold 74% of the legacy held-to-maturity portfolio as we sought to optimize the level of incremental income on reinvestment relative to the realized loss on the securities sale, which impacted our capital ratio. Through this optimization, we were able to replenish capital using only subordinated debt, which avoided the dilution to earnings per share that a common stock issuance would have created.

As a result of the losses on security sales, we had a net loss of $39.5 million in the fourth quarter or $2.49 per share, which was attributable to the $69 million loss that we recorded related to the securities portfolio repositioning in the fourth quarter. On a non-GAAP basis, excluding the loss on the securities portfolio repositioning, our net income was $9.4 million or $0.59 per share. Non-GAAP pretax pre-provision net income increased 31% over the quarter and 51% over the year.

Our net interest income increased from the prior quarter to $31.2 million due to balance sheet growth as well as higher investment security yields and reduced deposit costs. Loan yields also benefited from $667,000 of recovered interest from the payoff of a nonaccrual relationship. Based on current market expectations for 25 to 50 basis points of easing in the Fed funds rate during 2026, we will remain prepared to make targeted deposit cost reductions, which we believe will continue to contribute to margin expansion.

Moving to noninterest income. Setting aside the securities losses, most areas of fee income were relatively consistent with the prior quarter. Our noninterest expense increased by $100,000 from the prior quarter. While salaries and employee benefits declined in the fourth quarter due to incentive bonus and profit sharing accrual adjustments, in the first quarter, we expect this category to be elevated due to seasonal salary and benefit accrual resets, including payroll taxes, incentive compensation accruals and 401(k) matching.

Similar to last year, in the first quarter, we also expect to complete the majority of our annual charitable giving. Due to the improvement in asset quality in our loan portfolio and the substantial level of reserves we have already built, we had just a minor provision for credit losses in the fourth quarter, and our allowance for credit losses remained strong at 1.42% of total loans. Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on January 22, the 83rd consecutive quarterly dividend paid by the company.

With that, I'll turn it back over to you, Tim, to share some final comments.

Thank you, Dave. We continue to see relatively healthy economic conditions in our markets, and our credit quality continues to improve. Our loan pipeline remains strong amid healthy demand, and we expect to generate solid loan growth in 2026 while also continuing to grow deposits through the addition of new relationships and expansion of existing client relationships, although we do expect to see the seasonal outflows that we typically experience in the first half of the year.

In closing, we successfully executed on balance sheet restructuring and growth initiatives as anticipated, achieving the expected net interest margin and balance sheet expansion. Our expanded earnings stream enhances our ability to further invest in people and initiatives that we believe will help support the continued profitable growth of our franchise.

With that, I want to thank everyone on today's call for your interest and support, and we will now open the call to your questions.

[Operator Instructions] Our first question will come from Matthew Clark with Piper Sandler.

First one for me, just on the loan side, really good production. Can you give us a sense for how much or what percent of that production came from recent hires and maybe how much they account for the current pipeline as well?

Yes. Thank you. I would say a significant part. I don't have the exact percentage for that particular group. I mean they're becoming less recent hires. But I would say a lot of the production is predominantly oriented towards them. I think the pipeline is a little more diverse than that, but those teams that are contributed the most of that growth, those new people on those teams.

Okay. And on the deposit cost side, I see the average deposit cost of 2.08% in December, I think 2.09% in November, so only down a basis point. And given the December rate cut, do you happen to have the kind of the end of period, the 12/31 spot rate? Or I know there's some lag effect in your cutting the deposits, but I would have thought that number would have been a little lower in December.

So December spot rate for interest-bearing was 2.08% and for total -- the 12/31, I should say. And total was 1.17% and we're roughly in the same place as of last week.

Okay. But there's an expectation, I assume, given the kind of what you alluded to or mentioned in the deck about kind of a lag effect. I assume those will drop more meaningfully in January or first quarter?

Well, I think a big chunk has already occurred. We put through a lot of the rate reductions late in December. So there's some residual effect, but that should be captured mostly in the spot rates.

Okay. Okay. And then just the increase in special mention this quarter, any color there?

I would say the biggest contributor to that was the downgrade of a wine industry credit. That's -- yes, I'm sorry.

And also upgrades from substandard.

Yes. We -- well, I'm sorry, that's right. So we -- while we don't normally do this, we upgraded a couple from substandard to special mention from a conservative approach. For example, we have one commercial property that had been 100% vacant, an issue from the pandemic down in the Palo Alto area. That is now 100% leased. The cash flow is sufficient to upgrade to pass. But those tenants have yet to take occupancy. So in the meantime, we upgrade to special mention. When they take occupancy, we'll go upgrade that to pass. And then we did have a downgrade of a wine industry credit from pass to special mention or from watch to special mention. So those were the 2 big contributors. So there's -- half of that is a positive or a good portion.

Your next question will come from David Feaster with Raymond James.

It sounds like just kind of going back to the loan growth side, I mean it's really encouraging what you guys have been able to do. And obviously, originations have improved pretty materially. It sounds like -- I mean, you alluded to some improvement in demand, but the new hires are really having a lot of success. I'm just curious, how do you think about new hires today? I mean, are you seeing opportunities across the footprint? And where are you looking to add talent?

We are seeing opportunities. I will say one thing back to Matthew's question, too. I mean, when these people come in and sort of set a new standard, you start to see the tide rise and all the other boats start to rise with it. So we are seeing improved behavior from other folks within the lending team. So I don't want to just give them all the credit. But we are going to continue to look to hire people that can come in and really move the needle on new loan originations.

I would say we're less geographically sensitive to where that is. For example, if you look at the teams that did the best, the North Bay still is far and away the biggest producer or the biggest producer, a lot of those assets and borrowers are in other parts of the Bay Area. And so as we make hires that were with bigger banks that might not be so geographically constrained within the regional commercial banking offices, we're not seeing a direct correlation between where they're domiciled and where the deals they are. And that's giving us a better approach to the market overall.

So we'll continue to look for those hires, continued hiring in Sacramento, the East Bay and/or San Francisco, depending on where they're at and what markets they cover. We want to continue to -- our production was much better dispersed across regions by teams this quarter than we've seen in a long time, and we want to continue to take advantage of that. So I'm not trying to be an evasive question. It is all over the place, but we are seeing better activity in virtually every market.

That's great. And then maybe just switching gears to deposits. I mean your deposit trends have been really impressive. I mean the amount of NIB growth that you're able to put on and continuing to grow deposits while reducing deposit costs is no easy feat. I'm just kind of curious, could you just touch on, I guess, first of all, the receptivity of your clients to reducing deposit rates at this point? And if you've seen any attrition, if at all? And then just kind of how do you think about deposit growth and where are you having the most success today?

So I'll start with the latter on the deposit growth. So we opened almost another 1,000 accounts, about 45% of those are new to the bank. And that's been a relatively consistent trend over the last 4 or 6 quarters. But that has a higher percentage of interest-bearing as we bring in new customers to the bank, opening consumer accounts. They're going to have a different mix. But our continued success on the commercial banking side are bringing deposits.

That being said, the quarterly fluctuations in our deposits are generally driven by movements within our large deposit, in some cases, deposit-only customers, and that continues to be the case. We did have some money that came in during the third or fourth quarter last year that we knew was going to flow out. It was an outcome of a real estate transaction. So we already moved that off balance sheet. But it is hard to predict how those large account fluctuations, whether they be public fiduciary type or contractor funds, many with government contracts, those can have some volatility to them, and that is where we tend to see the fluctuations. Remind me of the very first part, David, sorry.

Yes, just the -- how they -- have your clients been receptive to deposit cost reductions at this point and any attrition?

Yes. We've tried to be very targeted in how we've approached that over the last few quarters. We've sort of segmented where we can target next in terms of having those conversations, and we've tried to have those decreases be moderate. And you can never -- I wouldn't pretend to argue that people enjoy that, but I think we do a really good job of understanding where the market is at and do our best to drive value and have the conversations in a way that eases that. And so the only real transition or runoff we've had or expect to have are people that were more rate shoppers that will then go chase a 4.25% rate at a CD somewhere, and we're just not going to grow our deposit base via that mechanism.

So we'll probably see some outflows that won't necessarily move the needle, but we will continue to balance that rational approaching model versus potential runoff. But every quarter, we'll see a rate shopper respond in that way, and that's a prerogative, but we want to maintain the exact profile that you described.

Okay. And then maybe last one for me, just kind of switching gears to the margin side. I mean, obviously, there's been a lot of moving parts with the balance sheet restructuring maybe brought forward a little bit of the margin expansion. Looking at the slides, you screen as modestly asset sensitive. But I mean, obviously, there's still huge back book repricing potential. And kind of, Dave, here in your commentary about being able to reduce deposit costs is still drive margin expansion over the course of the year even with a couple of cuts. Is that the right way to think about it? Could you just help us think through maybe the pace of margin expansion? And any thoughts on the trajectory?

Sure. So I think a variety of angles here as usual. So one angle is just looking at the monthly NIMs that we've had. And when you take out the loan -- the nonaccrual loan interest recovery in October, the adjusted NIM for that month was 3.12% and the actual NIM for December was 3.42%. So you have 30 basis points of expansion during the quarter that sort of validates what we did with the repositioning, also includes the benefits of some targeted deposit cuts along the way.

So one thing to think about as a launch point from December is a good chunk of our loan growth in Q4 was skewed to the last -- certainly the last month, if not the last 2 weeks, if not the last 3 or 4 days of December. So you have a lot of momentum coming out in terms of the loan growth that we had there.

And then you think about the instruments beyond that, I mean, starting with loans, though, we continue to think there's the back book repricing you talked about. A year ago, that might have been 30 basis points of yield pickup on a monthly basis over a 12-month period. It's probably closer to 20 now. But there's still opportunity there, no doubt. Certainly, as you alluded to, on the securities side, we pulled forward some of the benefits there. There are about $25 million, let's say, of non-repositioned bond cash flows that occur each for each of the next 2 years with yields in the low 3s. So there's still some opportunity from that perspective.

And then on the deposit side, as we've done in the last couple of years, it's been, let's say, bigger cuts aligned with Fed funds rate cuts and more targeted cuts away from that. And so there's that opportunity this year with markets looking for 1 to 2 25 basis point rate cuts. We have all the tools in place to make cuts appropriately there while also balancing retention and deposit growth.

Okay. And -- yes, go ahead.

Yes, David, I just wanted to add one point to your question, I think this and the prior one and maybe Matthew's. As we're bringing in this new granularity and deposit base, if you look at Page 9 of the investor presentation, the average weighted cost for those interest-bearing accounts for that proportion was 1.9%. So there is some impact of improving granularity, but we continue to think whether it's from the standpoint of uninsured deposits or just the concept of strategically being more granular, that's important. So that's always going to have some offset to our work on our large interest and noninterest-bearing customer balances.

And I'll add a couple of things, too. I assume you're referring to Page 5 of the presentation that has the traditional rate shock parallel cuts. And I think we screen probably a little bit more asset sensitive there than we have in recent quarters. But on a ramp basis, I would say rates down, we still continue to see some benefits. It kind of depends on the time horizon you're talking about, but more on a ramp basis for about 6 quarters, we benefit from rates down. And then as more of the back book reprices we benefit more from rates up.

So our sensitivity is a little bit nuanced. It's probably oversimplifying just looking at the disclosure on that page. The other way of thinking about it is we have a little over 3x the amount of floating rate assets relative to floating rate liabilities. So as long as we continue to reprice our non-maturity interest-bearing deposits at a 33% or better beta, we win in the near term. And cycle to date, we've been 36%. So just a variety of ways to think about it.

Just staying on the margin, pre-pandemic, you guys were at a plus 4% margin. Just given the strength of your deposit base, is that -- I mean, obviously, you're not going to get there this year, but is that still a reasonable target over time?

Yes. When you think about the incremental new pieces of business we're putting on, I don't see any reason why that wouldn't be. It certainly would take time as the back book, particularly in loans now reprices. But yes, that I don't see any structural impediments to that over the medium to -- like you said, not a 2026 then.

Our next question will come from Jeff Rulis with D.A. Davidson.

Tim, on the -- I just wanted to kind of get into the loan growth and I appreciate kind of some of the seasonal outflow headwinds to start the year. But I mean, originations at decade highs here. I want to try to get a sense for -- and I know you're not going to guide to it, but I'm trying to think about a net loan growth figure for the year. you've been working at new team hires and getting that up. But it seems like a brighter year than you've had in the years past. Any kind of expectations of kind of a mid-single-digit or better net growth for the year? Where do you guys see that sort of settling in?

Well, I think you just -- you did a great job answering your own question, Jeff. I think we are continuing to target a much more consistent mid-single-digit production. That being said, we have the opportunity depending on how payoffs behave to hit a number higher than that. We continue to be faced with a number of payoff reasons that are largely out of our control. I've said this before, but that as the rate environment continues to get more prolonged, that gets a little bit harder. A lot of the loans that were higher rates before later in their maturity life have paid off. But our biggest components to the payoffs were still asset sales and cash deleveraging.

We have purposely continued to exit some credits that I would call structural imbalances there relative to the pandemic. And so about $10 million of the payoffs in the quarter were from us working those out. They weren't horrible credits. One of the largest one there was paid off by a bank, but it is deals that were always going to kind of languish in an area that caused us a lot of time. And so it's a cost-benefit analysis.

So the goal is to continue to focus on the things we can control, keep those originations higher. The pipeline is about 30% higher right now than it was last year at this time despite all the closings. So usually, with the end of fourth quarter, particularly very end of fourth quarter, production like that, you tend to see a really big drop-off in the pipeline, and it's bigger.

So it will be, again, continuing to control the payoff side where we can, but also -- and I would say a significant amount of our payoffs last year were also came from the residential mortgage portfolio that we purchased the prior year to help with the yield on the reinvestment of the AFS sale proceeds, and those had a much higher prepay rate than -- much lumpier than we anticipated. And again, that was not something we control. So we continue to believe if we control the things we can, but a lot of the headwinds on the payoff side will continue to moderate, and it will be much easier to hit that consistent mid-single digit.

Appreciate it. And then one other question or topic would just be on the credit side. I can -- you could view that special mention move as somewhat of a silver lining in that and then other upgrades and payoffs in the classified bucket, what would you sort of assign is there some rate relief going on, the macro is better. But just overriding thought on the credit trends that you're seeing. It certainly seems more positive by the quarter.

Yes. No, I would say none of that I mentioned has anything to do with rate relief. Some of this has just been an ongoing recovery of the real estate market in the Bay Area. So the one I mentioned where special mention went up because we upgraded from classified was that was 100% vacant property in an area where that had probably never happened, and it took some time, but that property is now fully leased with multiple tenants at above market rates, and we're just waiting for all those tenants to occupy the property before we upgrade the pass.

So we continue to see positively upward trends in some of the other areas impacted. Office real estate continues to improve. The overall economic environment in San Francisco continues to improve, sorry. So we continually see improvement in some of the key areas that were causing the downgrades in the first place. And certainly, the wine industry downgrade, that industry is going through its own struggles right now. We continue to maintain an active and proactive approach working with our clients, but you can read almost anywhere about the decline in whether it's wine sales, visitation to tasting rooms, et cetera. We have a fairly limited exposure to that overall industry, but we are going to continue to be proactive in our risk rating based on trends.

Your next question will come from Woody Lay with KBW.

I wanted to start on expenses. A couple of moving pieces in the fourth quarter and then I know we get some seasonality impact in the first quarter. But I was just hoping you could give some clarity on how you're thinking about the run rate going forward.

Sure. So yes, setting aside the seasonality components, and I can beat them quickly. I mean some benefits in Q4 for personnel-related items and then some reversion of that in Q1. And then also in Q1, the contribution cycle, we get a big chunk of what we do there on an annual basis. So that's the near term. I'd say, as we talked about the repositioning, we, of course, communicated the benefits to net interest income.

We also talked about some additional investments in the company, and I think that's what we'll probably end up seeing more of this year is additional investments in people, initiatives, systems, et cetera, to further generate growth both in interest income and noninterest income. We think there's some opportunities to improve fee income. So there is a cost of that. And so I would say we had 4.5% expense growth in 2025. I think a reasonable assumption would be there plus the additional investments we're looking to make to further generate revenue and growth.

And we expect those investments will have a commensurate income to help offset.

Got it. That's helpful. And then last for me on capital. It looks like capital levels came slightly better than what you were projecting. But it's obviously lower than historical levels, but it's a testament you were able to reconfigure the balance sheet without having to raise any additional capital. So how do you think about current capital levels and thoughts on potential excess capital deployment?

Well, I would start with saying we just execute on the balance sheet restructure. And so we want to -- obviously wanted to see how that played out before making any longer-term decisions on capital. While the capital ratios, as you noted, Woody, are lower than historical levels, we think they're more than adequate relative to the risk profile of our balance sheet. We talked already about a lot of the cleanup we've done on problematic credits. We expect further continued improvement in that category. And so we certainly feel good from that standpoint.

We do have a Board authorization for a share repurchase that we'll continue to look at. Obviously, a continued improving valuation, our stock price makes the idea of M&A a little bit more feasible as we get a better currency. So we want to continue to keep our options open now. And so no current plans, but similar to all of my other answers around this topic, we continue to maintain all those options.

[Operator Instructions] Our next question will come from Andrew Terrell with Stephens. Okay. Well, we have no further questions at this time. So I'll hand back to Tim Myers for closing remarks.

I appreciate all the questions. Thank you all for being a part of this. If you have any additional ones, obviously, please let Dave or I know. Thank you for your interest and attention.

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the third quarter ended September 30, 2025. I'm Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. [Operator Instructions]

Joining us on the call today are Bank of Marin President and CEO, Tim Myers; and Chief Financial Officer, Dave Bonaccorso. Our earnings news release and supplementary presentation, which were issued this morning can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay.

Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non-GAAP measures. Additionally, the discussion on the call is based on information we know as of Friday, October 24, 2025, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion on these risks and uncertainties, please review the forward-looking statements disclosure in our earnings news release as well as our SEC filings. Following our prepared remarks, Tim, Dave and our Chief Credit Officer, Misako Stewart, will be available to answer your questions.

And now I'd like to turn the call over to Tim Myers.

Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. We executed well in the third quarter and generated positive trends in a number of key areas, including loan and deposit growth, continued expansion in our net interest margin, effective expense management and improvement in our asset quality. As a result, we saw the acceleration in our level of profitability that we expected with our net income increasing 65% compared to the third quarter of 2024 as we continue to benefit from the actions we've taken to put us in a good position to grow our balance sheet.

Our improving financial performance and continued benefits from prudent balance sheet management resulted in increases in both book value and tangible book value per share in the third quarter, while we continue to invest in the company to support future profitable growth. Our banking team, driven largely by recent additions, continues to develop attractive lending opportunities and bring new relationships to the bank, including in areas like the Greater Sacramento region.

While we continue to navigate a competitive market environment on both pricing and structure, we've been able to add new clients and maintain our disciplined underwriting and pricing criteria.

During the quarter, our total loan originations were $101 million, including $69 million in fundings, the largest since Q2 of 2022. Our originations were a nicely diversified and granular mix across commercial banking categories, industries and property types, and we are seeing a healthy increase in CRE loan demand that meets our standards. This quarter's payoffs included the proactive workout of a $7 million loan that benefits the health of the overall portfolio. Our total deposits increased in the third quarter due to a combination of increased balances from long-time clients as well as continued activity bringing in new relationships. The rate environment remains competitive and clients remain rate sensitive. However, they continue to bank with us for our service levels, accessibility and commitment to our communities.

And while our quarterly cost of deposits increased 1 basis point during Q3 due to existing relationship expansion, we've seen improvements in our spot cost of deposits, as Dave will discuss later. Given our solid financial performance and prudent balance sheet management, our capital ratios remain very strong with a total risk-based capital ratio of 16.13% and a TCE ratio of 9.72%. Given our high level of capital during the quarter, we repurchased $1.1 million of shares at prices below tangible book to further build value for our shareholders.

With that, I'll turn the call over to Dave Bonaccorso to discuss our financial results in greater detail.

Thanks, Tim. Good morning, everyone. We had net income of $7.5 million in the third quarter or $0.47 per share. This was significantly higher than the prior quarter, which included the impact of the loss on security sales we had as part of our balance sheet repositioning. Stripping out some of the noise, though, our pretax pre-provision net income increased by 28% on a sequential quarter basis and confirms the enhancements we've made to our core earnings stream. Our net interest income increased from the prior quarter to $28.2 million, primarily due to a higher balance of average earning assets as well as a 17 basis point increase in our asset yield. Although our cost of deposits increased just 1 basis point during the quarter and negatively impacted net interest margin, our spot cost of deposits declined 4 basis points during the quarter to finish at 1.25%. And we've seen a further decline in our spot cost of deposits to 1.24% as of October 23.

Though Fed funds rate cuts resume later in the year than many forecasters expected, we have made targeted cuts to deposit rates throughout the year as well as larger cuts in response to the September Fed funds rate cut, which has resulted in a 15 basis point decline in our cost of deposits year-over-year. We are well positioned to continue to reduce deposit costs going forward, in line with the expectation of additional Fed fund rate cuts over the remainder of the year, which will contribute to margin expansion. Our noninterest expense was down slightly from the prior quarter with small reductions in a number of areas.

Moving to noninterest income. Setting aside the securities losses, we had a decline of $370,000 during the quarter that is mostly attributable to a BOLI debt benefit paid in Q2. Disciplined credit management remains a hallmark of Bank of Marin as well. Due to the improvement we saw in asset quality in our loan portfolio and the substantial level of reserves we have already built, we did not require any provision for credit losses in the third quarter, and our allowance for credit losses remained strong at 1.43% of total loans.

Overall trends in our level of problem assets reflect our proactive and conservative approach to credit management, where we are aggressive to downgrade and cautious to upgrade. Due to the improvement we saw in the performance of some borrowers, we had a number of upgrades during the third quarter that resulted in a reduction in nonaccrual and classified loans. Subsequent to quarter end, an additional $3.6 million in nonaccrual loans paid off in full, including interest and fees. Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on October 23, the 82nd consecutive quarterly dividend paid by the company.

With that, I'll turn it back over to you, Tim, to share some final comments.

Thank you, Dave. In closing, we believe we are very well positioned for continued improvements in our core financial performance in areas, including balance sheet growth, net interest margin, expense management and asset quality.

While broadly, there is economic uncertainty, our credit quality continues to improve and our loan demand remains healthy. Our loan pipeline remains strong, and we expect to generate solid loan production in the fourth quarter. While we always tightly manage expenses, we will also continue to take advantage of opportunities to add banking talent and enhance efficiency through technology that we believe will help support the continued profitable growth of our franchise into the future. With the strength of our balance sheet, we believe we are very well positioned to increase our market share at attractive new client relationships and further enhance the value of our franchise in 2025 and beyond.

With that, I want to thank everyone on today's call for your interest and your support.

[Operator Instructions] Our first question will come from Matthew Clark with Piper Sandler.

I'm sure you're getting tired of being asked this question, but what are your latest thoughts on HTM securities loss trade given all your capital?

Well, there's a lot of moving parts to consider. We continue to evaluate all those moving parts, but no final decision has been made.

Okay. And then just on expenses going forward? Any updated thoughts on the run rate there? And how should we think about seasonality and just the pace of growth you're looking to manage to next year?

So I think Q4 probably looks quite a bit like Q3. What's historically been the wildcard for Q4. You mentioned seasonality. In Q4 in recent years, we've had adjustments to payroll-related items. And so that's probably the wildcard this year as well, probably to a smaller degree in my estimation. But there are kind of puts and takes on both sides. And overall, you probably come in pretty close to where we were in Q3.

Our next question will come from Jeff Rulis with D.A. Davidson.

Dave, you commented on the progress on the deposit costs. And just kind of looking at the Slide 5, you've got your rate sensitivities kind of signaling asset sensitive, but the reality is it sounds like kind of pointing to further margin expansion. Could you have -- and I guess, absent maybe some interest in fees you might collect on the subsequent nonaccrual payoff just the core margin and expectations ahead?

Sure. So let me give you a 3-part answer. The first one relates to what you're talking about on Page 5, the traditional ALM sensitivity. So historically, we've been pretty neutral. We typically talk about shades of slightly asset-sensitive or slightly liability sensitive. This quarter, well, every quarter, we do our ALM run mid-quarter. And at that point in time, we probably had more cash then that we finished the quarter and then as normal. And so I think that's adding to the asset sensitivity you see in that illustration. But I think some of that has gone away in my estimation. So that's dimension one, is the pure ALM sensitivity.

Dimension two is just pure napkin math and when you look at our floating rate liabilities, which is to say, interest-bearing non-maturity deposits, those are roughly $1.7 billion. And then look at our floating rate assets, those are about $525 million between loans, securities and interest-earning cash. So the assets have a 100% beta. And if you try to solve for what the beta needs to be. On the liability side, you get to around a 31% beta needed to break even and our cycle to date non-maturity interest-bearing beta has been 35%. And we model 34% in our ALM run.

So I think that speaks to near-term benefits from rate declines, though some of that does drift or fade away over time just because of the way assets reprice over time. And then I guess the third dimension is just go [ instead ] by instrument on the balance sheet. It's just working your way down. Cash, of course, if you believe Fed funds rate expectations, that will probably be a drag down the road, but that's by far small so the components.

Securities, we have an AFS portfolio. It's been fully repositioned or almost fully repositioned with a book yield of [ 4.44 ]. So there's not much you can do there. The HTM portfolio has a book yield [ 2.40 ]. And so we can reinvest cash flows off that portfolio at much higher rates. We expect about 76-or-so million payouts from that HTM portfolio in the next 12 months. So that gives you a sense of what could reprice there.

And then on the loan side, year-over-year, we expect our loan yield on a monthly basis to be about 20 basis points higher at September 26 compared to September 25. So that's with the flat balance sheet and payoffs at market rates. We had a 3 basis point increase this quarter, so that tracks with that. And obviously, if we have loan growth on top of that, that would give you some upside to the loan side. And then on the deposit side, we had the small increase this quarter. But of course, the Fed funds cut came in the last 10% or 15% a quarter. So the benefit we got from that wasn't as large as it was translated over a full quarter. Our spot rate of deposits came down from [ $6.30 to $9.30 ]. So that, I think, speaks to the benefits we're going to get from further cuts moving ahead if they play out. So that quick look at instruments suggests that there's quite a bit of benefit to NIM expansion in a falling rate environment.

That sounds good. I appreciate it. It sounds fairly positive. Maybe the linked quarter, a lot of -- still some flow-through from the securities restructure, but kind of core, it seems like it's got some positive. So I appreciate the detail. Maybe if I just hop the credit, that also sounds fairly positive maybe Tim or Misako. Just the upgrades, is that a function of some rate relief early on as a better occupancy, maybe just overall CRE improvement, if you could speak to the -- or maybe it's project specific, I would love to check in on that.

Yes. I think you talked about the classified upgrades, it was a mix of what you just said, Jeff, there was improved leasing activity on multifamily in San Francisco that got us above requisite debt coverage ratio. And then there was another property that had been burned down in one of the fires that finally got construction started. So there's an end in sight or light at the end of the tunnel for repayment source but it's all been idiosyncratic. I mean, overall, we are seeing improved leasing activity in San Francisco. Again, the other markets have held up fine, but the upgrades were idiosyncratic.

And Tim, as I guess, if you roll forward these appraisals to, I know that on the larger credit, you had a recent one maybe last quarter and that was year-over-year positive. Is that -- is that a trend that you continue to see into the third quarter?

Yes. I mean we haven't done those same kind of appraisals on those same properties, but I do -- we are seeing valuations improve in San Francisco. The magnitude of that over time, it's really hard to say, but we are seeing valuations come up, yes.

Okay. And last is just the 30- to 89-day bucket increase. Is that largely procedural? Or is it just against specific credits, anything to touch on with that move?

Now you already know that it's procedural things that needed to be extended or in the process of that negotiating. And so these are not an increase in people not paying us. It's getting lines mature or extended.

Your next question will come from Woody Lay with KBW.

I wanted to follow along on the line, I think in there. And it feels like we're seeing much more positive headlines come out of the bay here and it feels like there's macro momentum at play with AI tailwinds and political impacts. Are you seeing that optimism carry over to your loan demand?

I think we are. We had a higher proportion of investor CRE this quarter because I do think people are coming back into the market, although that -- the property types are really diverse there. Markets were diverse. Sacramento continues to be a big area of our growth. And so probably $20 million, north the $20 million of our deals this quarter were [ CRA ] related with some affordable housing. So I don't really attribute that to that same kind of trend in San Francisco. But we are seeing increased activity.

If you look at our construction team, financing developers. A lot of those projects are in San Francisco were immediately around. And we're seeing a higher degree of interest and activity on their part. That takes some time to translate into outstandings, but I would say that's a fair statement as well.

Got it. And then anything to note on the loan competition side, I feel like we've been hearing a lot about intense pricing competition? Are you seeing that as well? And anything to note on the structural side?

For high-quality deals, yes, pricing competition is aggressive. We are also seeing a return of the nonrecourse. We do our best not to participate in that and only do and we have enough other things we could do to mitigate those risks. So it's rare for us. But we are seeing a return of that degree of competition, yes.

Got it. And then last for me, it feels like we're seeing tailwinds to the NIM. We're seeing loan growth move a little bit higher, continued expense management. We saw a really nice profitability inflection in the third quarter. Just how do you think about continued positive operating leverage from here?

So I'll start on the growth aspect of it, and Dave can jump in on any margin comments. But you heard his comments on the NIM expansion built into the balance sheet today. I think that can really help us. We are seeing a continuation of the loan growth, the pipeline is bigger at the start of this quarter than last quarter, and that was a great quarter. And so there's really not a lot controllable in the payoff area, but if we can continue to outrun that and accelerate that further. We've got new hire, we have a new hire in Sacramento that we expect to be additive to this effort. And so there's a lot of traction internally, obviously, externally being generated to keep the growth rate going. Deposits fluctuate and as Dave mentioned, that's really hard to predict all the seasonality of the inflows and outflows but I do think the key trends there, we expect them to continue, and that's obviously first and foremost comment on the margins out there.

Nothing else to add on the margin, but just one other thing to mention on expenses. Year-to-date 2025 versus 2024, our expenses are only up 90 basis points. So I think it speaks to the ability to scale without adding a lot to the expense base.

[Operator Instructions] And our next question will come from Andrew Terrell with Stephens.

Maybe just start with Dave. Thanks for the color on the spot deposit cost. I think you mentioned October 1.24% total October 23. Do you have the equivalent interest-bearing costs for that day?

Give me a moment, I'll actually give me a very quick moment. It's [ 2.18 ]. That's a maturity interest-bearing [ 2.11 ].

Got you. Okay. Yes. And I guess where I was going to go with that is it looks like I understand that growth seems like later in the quarter, at a higher cost, somewhat impede what all else equal is kind of a good repricing story later in the quarter and early into October. And I guess I just wanted to get a sense for incremental new money as it's coming on the balance sheet.

Is it coming on similarly priced overall to your overall deposit franchise right now? Just given you're starting at a low base, I'm trying to get a better sense of whether this 35% interest-bearing beta is kind of a good frame of reference to use given it's on a static balance sheet or once we factor in new money being brought in at potentially higher rates if that could somewhat impede the beta that we're kind of looking for?

Well, I think part of the story this quarter was that we had growth from existing accounts that made up a pretty big chunk of it. And so it's new money technically, but it's not new relationships, I'd say. And of course, we encourage our existing customers to bring more to the bank. But in terms of what we're -- what would be new flows, I'd say it's not dissimilar from our overall costs. I mean we're not chasing high-cost money. That's never really been part of what we do.

So for that reason, I think the estimate is the beta estimate you talked about is still makes sense to me. There's nothing that would make me think otherwise.

Yes, if you look at the growth in deposits by customer, the largest chunk of growth came from those customers with the longest tenured relationships. So you have to be careful on how you encouraging them to bring over more funds, fairly compensate them. Yes, new money came on at a slightly higher rate, but overall, continue to get a nice inflow of noninterest-bearing to help offset that.

Yes, yes. Got you. Yes. Good problem to have, too. I wanted to ask about the buyback. It looks like you were somewhat active this quarter. The stocks up a bit, but you've also still got really strong capital as well. Just thinking through the puts and takes on the buyback. Should we assume you're still going to be active going forward?

Well, that always comes with a big caveat of the potential uses of capital, right? So we certainly did that when we were trading below tangible book. We think that always makes sense for our shareholders. But we do continue to, as Matthew asked, explore the potentiality of further balance sheet restructurings. And that's obviously a big use of capital. And so we want to make sure we're being sensitive to those various options. And at few quarters, obviously, we'll see how the market plays out. But our intent is to make the right decision for the broadest swap to shareholders as possible.

Yes. Okay. And then last for me. I know you mentioned the pipeline coming into the fourth quarter was greater than that going into the third quarter. Are you able to quantify the change in the pipeline?

No. And I appreciate the question, but as you know, we don't give guidance. But we are expecting at this point in time a quarter similar to what we just experienced.

Your next question will come from David Feaster with Raymond James.

I just kind of wanted to follow up on that kind of, I guess, the pipeline to some degree. Just looking at your originations. Originations were up really nicely quarter-over-quarter. It seems like an increasing contribution from C&I. Has the complexion of your pipeline changed at all? I'm just kind of curious where you're seeing the most opportunities for growth near term?

It is really dispersed, David. So I would say the prior quarter had a higher component of C&I. This quarter had a lot of commercial real estate with some unfunded components. So the unused commitments made it look like that was C&I. But honestly, it was pretty CRE oriented at this time. It really is coming across the footprint. If you look at the lending groups that are doing the best are primarily centered in the North Bay, [ Marin, Napa ] but a lot of the growth, meaning where those deals are at, a lot of that is out in Sacramento. And so people following relationships.

So we're seeing a really nice, again, disbursement of effort of opportunity. We had a really nice component of CRA and affordable housing this time. And so which is somewhat unique compared to prior quarters. So it really has been very diverse.

Okay. That's great. And you talked about some new -- you talked about the hire that you made in Sacramento as well as some tweaks to maybe comp programs and calling programs that you referenced in the deck. Could you -- I guess, could you, first off, touch on your hiring appetite? Is there an appetite for additional hires? And what kind of lenders are you looking for? And then could you just maybe give some detail on as to the extent that you can on the change in the comp program and the calling programs that you guys have made?

Yes. So we are, as you noted, made another hire in Sacramento following -- hiring a new regional leader the prior quarter. So we expect activity to pick up considerably in that region. We will look to make opportunistic hires throughout the footprint. We think that makes sense and the people we're hiring have done a really good job for us. And so that has a contagious effect of activity. Activity begets more activity. So if you ask about I'll kind of reverse the order of your -- the last part of your question, much more active calling.

If you look at a couple of years ago when we had really a few years ago compared to a higher production year. Most of that came out of the existing portfolio or a handful of people, 1 or 2 people. Now it is almost entirely new customers, in some cases, existing but from a much more active calling activity base. And so [ David Bloom ], Head of Commercial Banking has been very active in managing a sales process, weekly sales calls with everybody, blocking and tackling, and the people we're hiring are used to and capable of operating within that.

So I'm not totally sure the comp plan is that dramatically different. It's aimed at in sending the right behavior. Certainly doesn't go to the length of some of our former competitors on how they pay people, but it is designed to incent the right behavior. And so we're seeing all that sort of come together. It's been a little while in the making, but we're starting to get a lot of traction.

Okay. That's helpful. And then I know -- I mean, payoffs and paydowns have been a headwind across the industry, and I know it's -- just kind of curious what you guys are seeing on that front? How much of that is -- we just -- we touched on the competitive landscape. Then you've got natural asset sales and some of those kinds of things. But just looking at the payoffs and pay downs that you've seen, just kind of curious how much of it is maybe again, losing deals to another bank versus natural asset, just payoffs and pay downs and asset sales and those kinds of things or versus strategic deleveraging?

I think part and parcels are getting a more active lender program activity is managing relationships as well. So the $24 million in commercial loan payoffs last quarter, only 2 of that came from third-party refinancing, David. So 4 was related assets, almost 10 was just cash deleveraging. People are just paying up debt with cash. We had about a $7 million workout that we pushed out, which was a good thing. And we mentioned that in the release. But again, only $2 million in the quarter came from losing money to another bank.

Okay. And just one quick one. I may have missed it, but for that $3.6 million nonaccrual that was paid off after quarter end, do you have the amount of interest recovered from that we should expect in the fourth quarter?

I do not.

It's a little less than $700,000. I think 670-ish is the number.

Your next question will come from Tim Coffey with Janney Montgomery Scott.

Good morning, everybody. Yes, just looking at the deposit growth this quarter and the number of new accounts referenced in the -- opened the quarter reference in the press release, I'm wondering, do you have a line of sight to deposit balance growth in the fourth quarter that might offset any kind of seasonality?

No, that's -- it's really hard to forecast for us. That roughly 1,000 new accounts a quarter has been pretty consistent all year. But really the large fluctuations are in the end, what will drive what the balances are. And we've already moved some off balance sheet that we thought were maybe more volatile, but it is really hard to predict how some of the customers inflows and outflows in some of our larger depositors. The people that are affecting the balances are sort of the usual suspects, so nothing range or unexpected there, but it's really hard to predict. So that was a long-winded way of saying, I don't know, Tim.

Sure. I appreciate that. The flip side of that question is, I mean, typically, we see kind of seasonal deposit outflows for due to tax payments and the like coming up. Do you see -- do you give any sense that the payments this year will be any larger than they've been in previous years?

We have not gotten any indication of that. And we do a pretty active job of talking to our clients in an effort to forecast. And we don't see any big outflows or abnormally large outflows for any particular reason happening. But again, it is hard to predict, and we inevitably will not talk to the one client that will have a big change in deposit balances. So it's -- it is a wait-and-see game, but we are actively managing talking to our customers and trying to, again, forecast some big changes. And right now, we don't see anything dramatic on the horizon.

We have no further questions at this time. I will hand it back to Tim Myers for closing remarks.

Thank you, everybody. We appreciate it. We're proud of the quarter, and we are happy to share that with you and answer all your questions. Thanks again.