ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition as of December 31, 2025 and 2024 and results of operations for each of the years in the three-year period ended December 31, 2025 should be read in conjunction with our consolidated financial statements and related notes thereto, included in Part II ITEM 8 of this report.
The Company restated its Consolidated Statements of Condition and revised its Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2024 and 2023, and the quarters ended September 30, 2025, June 30, 2025, March 31, 2025, September 30, 2024, June 30, 2024, and March 31, 2024, (the “Affected Periods”) for misstatements between the balance sheet and income statement that were determined, in the aggregate, to be material to previously issued financial statements. Generally, the restatements and revisions related to the misclassification of certain deposits and expenses related thereto as non-interest bearing deposits and non-interest expense when they should have been classified as interest bearing deposits and interest expense. See “Note 19, Restatement of Prior Period Financial Statements (Quarterly Information Unaudited)” in Item 8 of this Form 10-K, for additional information related to the restatement and revision, including descriptions of the misstatements and the impacts on our consolidated financial statements. All affected tables and narrative disclosures herein from the Affected Periods have likewise been corrected.
Forward-Looking Statements
The disclosures set forth in this item are qualified by important factors detailed in Part I captioned Forward-Looking Statements and ITEM 1A captioned Risk Factors of this report and other cautionary statements set forth elsewhere in the report.
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation and uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. We consider accounting estimates to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. Management has determined the following accounting estimates and related policies to be critical.
Allowance for Credit Losses on Loans and Unfunded Commitments
The allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis at the balance sheet date to present the net amount of loans expected to be collected. The allowance for credit losses on unfunded loan commitments is based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity, and loss rates as determined for pooled funded loans. The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities. Management estimates these allowances quarterly using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Credit loss experience among the Bank and peer groups provides the basis for the estimation of expected credit losses.
The allowance for credit losses ("ACL") model utilizes a discounted cash flow ("DCF") method to measure the expected credit losses on loans collectively evaluated that are sub-segmented by loan pools with similar credit risk characteristics, which generally correspond to federal regulatory reporting codes. In addition, the DCF method incorporates assumptions for probability of default ("PD"), loss given default ("LGD"), and prepayments and curtailments over the contractual terms of the loans. Under the DCF method, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows using the loan's effective rate.
Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable and supportable forecasts of economic conditions to differ from the conditions that existed during the historical period included in the development of PD and LGD.
Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which was 5.5% at December 31, 2025 and December 31, 2024. The ACL model incorporates a one-year forecast. For period s beyond the forecast horizon, the economic factors revert to historical averages on a straight-line basis over a one-year period through the remaining lives of the loans. We performed a sensitivity analysis as of December 31, 2025, and estimated that a 100 basis point change (e.g., 5.5% to 6.5%) in the forecasted unemployment rates over the next four quarters would result in about a 5% change to our allowance for credit losses on loans. T his impact does not consider changes to other assumptions for either the quantitative factors, such as probability of default, loss given default, loan mix or cash flows, prepayment/curtailment rates, and individually analyzed loans, or qualitative factors as discussed in Note 1 - Summary of Significant Accounting Policies. Additionally, b ecause current economic conditions and forecasts can change, as future events are inherently difficult to predict, the estimated credit on loans and commitments could change significantly.
While we believe we use the best information available to determine the allowance for credit losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. For information regarding critical estimates related to our allowance for credit losses methodology, the provision for credit losses, and risks to asset quality and lending activity, see ITEM 1A - Risk Factors, the Allowance for Credit Losses section in ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 3 - Loans and Allowance for Credit Losses on Loans in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.
Fair Value Measurements
We use fair value measurements to record certain financial instruments and to determine fair value disclosures. Available-for-sale securities and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis. Additionally, we record at fair value other financial assets on a nonrecurring basis, such as collateral dependent loans and other real estate owned. These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets. We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement. Fair value is discussed further in Note 1 - Summary of Significant Accounting Policies, and Note 9 - Fair Value of Assets and Liabilities in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.
RESULTS OF OPERATIONS
Overview
This discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this Form 10-K. As noted above, the Company restated its financial statements for the Affected Periods for misstatements between the balance sheet and income statement that were determined, in the aggregate, to be material to previously issued financial statements. Generally, the restatements related to the misclassification of certain deposits and expenses related thereto as non-interest bearing deposits and non-interest expense when they should have been classified as interest bearing deposits and interest expense. See below and “Note 19, Restatement of Prior Period Financial Statements (Quarterly Information Unaudited)” in Item 8 of this Form 10-K, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our consolidated financial statements. All affected tables and narrative disclosure herein from the Affected Periods has likewise been corrected.
Financial Highlights
The following are highlights of our financial condition and results of operations. The data was derived from the audited consolidated financial statements of Bank of Marin Bancorp.
At December 31,
(dollars in thousands, except per share data)
Selected financial condition data:
Total assets
Investment securities
Loans, net of allowance for credit losses on loans
Deposits
Borrowings and other obligations
Subordinated notes, net
Stockholders' equity
Book value per share
Tangible book value per share
Asset quality ratios:
Allowance for credit losses to total loans
Allowance for credit losses to non-accrual loans
Non-accrual loans to total loans
Classified loans (graded substandard and doubtful) as a percentage of total loans
Capital ratios:
Equity to total assets
Tangible common equity to tangible assets
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Common equity Tier 1 capital (to risk-weighted assets)
Other data:
Loan-to-deposit ratio
Number of branches
Full-time equivalent employees
For the Years Ended December 31,
(dollars in thousands, except per share data)
Selected operating data:
Net interest income
Provision for credit losses on loans
Provision for (reversal of) credit losses on unfunded loan commitments
Non-interest income
Non-interest expense
Net (loss) income
Net (loss) income per common share:
Basic
Diluted
Performance and other financial ratios:
Return on average assets
Return on average equity
Tax-equivalent net interest margin
Cost of deposits
Cost of funds
Efficiency ratio
Net charge-offs
Net charge-offs to average loans
Cash dividend payout ratio on common stock 1
Cash dividends per common share
1 Calculated as cash dividends per common share divided by basic net income per common share.
NM - Not meaningful.
Restatement and Revision of Prior Period Financial Statements and Financial Highlights
See below for the restated and revised prior period financial statements and affected financial highlights referred to above and in Form 8-K filed February 17, 2026.
Summary of Reclassifications and Impacts
($ in thousands)
Non-interest-Bearing Deposits - end of period
As reported
As Adjusted
Change
Interest-Bearing Deposits - end of period
As reported
As Adjusted
Change
Non-interest-Bearing Deposits as a percentage of Total Deposits - end of period
As reported
As Adjusted
Change
Non-interest-Bearing Deposits - average
As reported
As Adjusted
Change
Interest-Bearing Deposits - average
As reported
As Adjusted
Change
Interest Expense
As reported
As Adjusted
Change
Net Interest Income
As reported
As Adjusted
Change
Non-interest Expense
As reported
As Adjusted
Change
Net Interest Margin, reported
As reported
As Adjusted
Change
Net Interest Margin, tax-equivalent
As reported
As Adjusted
Change
Cost of Deposits
As reported
As Adjusted
Change
Cost of Interest-Bearing Deposits
As reported
As Adjusted
Change
Efficiency Ratio, GAAP
As reported
As Adjusted
Change
Efficiency Ratio, non-GAAP excluding losses on securities sales
As reported
As Adjusted
Change
Executive Summary
Our annual loss was $35.7 million in 2025, compared to an annual loss of $8.4 million in 2024. Diluted loss was $2.24 per share in 2025, compared to a diluted loss of $0.52 per share in 2024.
Results for 2025 were significantly impacted by our strategic balance sheet repositioning which included the sale of available-for-sale ("AFS") securities with a book value of $185.8 million, resulting in a pre-tax loss of $18.7 million in the second quarter of 2025, the sale of AFS securities of $593.2 million in low yielding investment securities at a $69.5 million pre-tax loss in the fourth quarter of 2025, the purchase and origination of higher yielding loans and securities and the replenishment of our capital ratios through the issuance of $45.0 million of subordinated debt. We continue to proactively identify and manage credit risk within the loan portfolio, reflected in the percentage of non-accrual loans which decreased from the prior year, and improvements in credit quality trends during the fourth quarter. We believe the strength of our balance sheet, higher level of loan origination productivity that we are seeing from our banking teams, and positive trends in our net interest margin and operating leverage are key factors that should help mitigate any unforeseen credit quality deterioration that may arise and drive further in our financial performance in the year ahead.
The following are highlights of operating and financial performance for the year ended December 31, 2025:
• Loans increased $37.6 million during the year ended December 31, 2025, to $2.121 billion, compared to $2.083 billion at December 31, 2024. The growth was spread across multiple geographic regions in Northern California and primarily within the commercial and commercial real estate sectors. Loan originations funded totaled $273.5 million for the year ended December 31, 2025, compared to $152.6 million for the prior year.
• Classified loans made up 1.51% of total loans as of December 31, 2025, compared to 2.17% as of December 31, 2024. The Bank continues to proactively identify and manage credit risk within the loan portfolio. Classified loans decreased by $13.0 million to $32.1 million as of December 31, 2025, compared to $45.1 million as of December 31, 2024. The decrease was largely due to upgrades of $6.9 million and payoffs and paydowns of $7.0 million during 2025. This was partially offset by downgrades to classified loans totaling approximately $942 thousand in 2025.
• Non-accrual loans totaled $26.9 million, or 1.27% of the loan portfolio, compared to $33.9 million, or 1.63%, as of December 31, 2025 and 2024, respectively. The decrease of $7.0 million in 2025 was primarily due to payoffs of $4.4 million, the sale of one $2.1 million commercial real estate loan which resulted in an $809 thousand charge-off, and paydowns of $1.6 million in addition to upgrades of approximately $700 thousand. Of the total non-accrual loans as of December 31, 2025, approximately 68% were paying as agreed, 97% were real estate secured, and all are being closely managed and monitored.
• We recorded a $375 thousand provision for credit losses on loans in 2025 primarily due to loan growth and a modest deterioration in the economic forecast, compared to a $5.6 million provision for credit losses on loans in 2024, including a $6.6 million specific reserve taken on a commercial real estate loan as a result of declining collateral values, partially offset by other factors. The allowance for credit losses as of December 31, 2025 was 1.42% of total loans, compared to 1.47% as of December 31, 2024 .
• Total deposits increased by $195.5 million to $3.416 billion as of December 31, 2025, from $3.220 billion as of December 31, 2024. Non-interest bearing deposits c ontinue to remain strong and made up 36.7% of total deposits as of December 31, 2025, compared to 39.6% as of December 31, 2024. We believe we are appropriately competitive in regard to deposit pricin g, given our relationship banking model, which differentiates Bank of Marin through exceptional service. Estimated uninsured and/or uncollateralized deposits comprised 31% of total deposits as of December 31, 2025.
• At December 31, 2025, the Bank had no outstanding short-term borrowings compared to $26.0 million at December 31, 2024, as a result of our strategic balance sheet restructuring in 2025 and 2024. Total available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and total available borrowing capacity, were $2.148 billion, or 63% of total deposits and 209% of estimated uninsured and/or uncollateralized deposits as of December 31, 2025.
• During the fourth quarter of 2025, we issued Fixed-to-Floating Subordinated Notes of $45.0 million with a final maturity date of December 1, 2035, to certain investors in a private placement to strengthen capital ratios as part of our fourth quarter 2025 balance sheet repositioning. The interest rate of the Bank’s subordinated notes is 6.75%, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2026. After December 1, 2030, the interest rate will be variable and equal Three-Month Term SOFR plus 335 basis points, resetting quarterly.
• The tax-equivalent net interest margin was 2.94% for 2025, compared to 2.55% for 2024. The increase of 39 basis points was primarily attributable to the favorable impacts of the investment securities restructuring performed in 2025 and 2024, lower deposit costs and higher average deposit balances year over year, higher loan yields and loan balances, and higher interest-earning deposit balances with the Federal Reserve.
• All capital ratios were above well-capitalized regulatory requirements. Bancorp's total risk-based capital ratio was 15.25% as of December 31, 2025, compared to 16.54% as of December 31, 2024. Tangible common equity to tangible assets ("TCE ratio") decreased to 8.35% as of December 31, 2025, from 9.93% as of December 31, 2024.
• The Board of Directors declared a cash dividend of $0.25 per share on January 22, 2026, which was the 83 rd consecutive quarterly dividend paid by Bancorp. The dividend was paid on February 12, 2026 to shareholders of record at the close of business on February 5, 2026.
Net Interest Income
Net interest income is the interest earned on loans, investments and other interest-earning assets minus interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in net interest income and/or margin due to an imbalance in the timing of repricing or maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income.
Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders’ equity.
The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for the years indicated.
Average Statements of Condition and Analysis of Net Interest Income
Year ended
Year ended
Year ended
December 31, 2025
December 31, 2024
December 31, 2023
Interest
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
Average
Income/
Yield/
(dollars in thousands; unaudited)
Balance
Expense
Rate
Balance
Expense
Rate
Balance
Expense
Rate
Assets
Interest-earning deposits with banks 1
Investment securities 2, 3
Loans 1, 3, 4, 5
Total interest-earning assets 1
Cash and non-interest-bearing due from banks
Bank premises and equipment, net
Interest receivable and other assets, net
Total assets
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts
Savings accounts
Money market accounts
Time accounts, including CDARS
Borrowings and other obligations 1
Subordinated notes
Total interest-bearing liabilities
Demand accounts
Interest payable and other liabilities
Stockholders' equity
Total liabilities & stockholders' equity
Tax-equivalent net interest income/margin 1,3
Reported net interest income/margin 1
Tax-equivalent net interest rate spread
1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.
2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly.
3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.
4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.
5 Net loan origination (costs) fees included in interest income totaled $(1.7) million, $(1.6) million, and $(1.3) million in 2025, 2024, and 2023, respectively.
Analysis of Changes in Net Interest Income
The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the years indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances.
2025 compared to 2024
2024 compared to 2023
(in thousands, unaudited)
Volume
Yield/Rate
Mix
Total
Volume
Yield/Rate
Mix
Total
Interest-earning deposits with banks
Investment securities 1
Loans 1
Total interest-earning assets
Interest-bearing transaction accounts
Savings accounts
Money market accounts
Time accounts, including CDARS
Borrowings and other obligations
Subordinated notes
Total interest-bearing liabilities
Tax-equivalent net interest income
1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.
2025 Compared to 2024
Net interest income totaled $106.0 million in 2025, compared to $91.6 million in 2024. The $14.4 million increase from the prior year was primarily due to higher average yields on investment securities and loans and higher average earning asset balances on interest-bearing deposits with banks during the year contributing an increase in interest income of $11.2 million. In addition, interest-bearing deposit costs decreased by 27 basis points on an increased average balance contributing a reduction of $3.4 million in interest expense on deposits.
The tax-equivalent net interest margin was 2.94% for 2025, compared to 2.55% in 2024. The increase of 39 basis points was primarily attributable to the favorable impacts of the investment securities restructuring performed in 2025 and 2024, lower deposit costs, higher average deposit balances year over year, higher loan yields, and higher interest-earning deposit balances with the Federal Reserve.
2024 Compared to 2023
Net interest income totaled $91.6 million in 2024, compared to $100.4 million in 2023. The $8.8 million decrease from the prior year was primarily due to higher deposit costs of $21.9 million, partially offset by the reduction of $11.3 million in borrowing costs.
The tax-equivalent net interest margin was 2.55% for 2024, compared to 2.56% for 2023. Higher yields on loans increased the margin while higher deposit costs resulted in a reduction in the margin. In addition, the year's balance sheet restructuring activities affected the borrowings, interest-bearing cash and investments factors.
Market Interest Rates
Market interest rates are, in part, based on the target federal funds interest rate (the interest rate banks charge each other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC").
Primarily due to declining inflation, the Federal Reserve lowered the target for the federal funds rate by 100 basis points, to a range of 4.25% to 4.50% in the later months of 2024. At the January 2025 meeting, the FOMC left rates unchanged and signaled slower than originally anticipated rate cuts are in 2025. Due to a significant easing of inflationary pressures, the FOMC began decreasing rates in September 2025, and made a total of three rate decreases in 2025 ending the year at a range of 3.50% to 3.75%.
During the second and fourth quarters of 2025, we sold additional securities with relatively low yields and redeployed the proceeds to further reposition our balance sheet, by investing in higher yielding securities. Management and the Board are continuously monitoring and analyzing the impact of market rates on the Company's financial condition and results of operations to enhance performance, safety and soundness and returns to shareholders. See ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk for further information.
Provision for Credit Losses on Loans
Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors, including growth or contraction of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans. The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off.
The following table shows the activity for the periods presented.
Years ended December 31,
(dollars in thousands)
Provision for (reversal of) credit losses on loans
The provision in 2025 was due primarily to the $37.6 million net increase in loans during the year including the $92.7 million increase in non-owner occupied commercial real estate loans, partially offset by the $32.6 million decrease in other residential real estate loans. In addition to this pooled loan growth, the peer group used in our loss driver analysis was updated in 2025, and the fourth quarter of 2025 showed a modest deterioration in Moody's economic forecast over the next four quarters. Partially offsetting these increases were qualitative risk factor improvements in areas including staff experience and graded/delinquent/non-accrual loans and specific reserve adjustments.
The provision in 2024 was due primarily to increases in qualitative risk factors to account for continued uncertainty about inflation and recession risks, and from continued negative trends in adversely graded loans and/or collateral values on our non-owner occupied commercial real estate office and multi-family real estate portfolios including $5.2 million taken in the second quarter due to a $6.6 million increased individual reserve for one non-owner occupied commercial real estate loan totaling $16.7 million that, although current, had experienced a deterioration in the collateral value and, therefore, a material increase in the loan-to-value
The provision in 2023 was due primarily to adjustments to qualitative risk factors from continued uncertainty about inflation and recession risks, the potential impact of rapidly increasing interest rates and other external factors on both our non-owner-occupied commercial real estate and construction portfolios, loan and collateral concentration risks in our construction and commercial real estate portfolios, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values for our non-owner occupied commercial real estate office and multi-family real estate portfolios.
Non-interest Income
The table below details the components of non-interest income.
2025 compared to 2024
2024 compared to 2023
Years ended December 31,
Amount Increase (Decrease)
Percent Increase (Decrease)
Amount Increase (Decrease)
Percent Increase (Decrease)
(dollars in thousands; unaudited)
Wealth management and trust services
Service charges on deposit accounts
Earnings on bank-owned life insurance, net
Debit card interchange fees, net
Dividends on Federal Home Loan Bank stock
Merchant interchange fees, net
Earnings on bank-owned life insurance death benefits
Losses on sale of investment securities, net
Other income
Total non-interest income
2025 Compared to 2024
Non-interest income showed a loss of $76.7 million for 2025, a $55.3 million decrease from a loss of $21.4 million for 2024. The decrease in 2025 was primarily due to the $88.2 million net loss on the sales of available-for-sale investment securities in the second and fourth quarters related to our balance sheet restructuring. Excluding losses on sale of securities in both years, non-interest income increased by $371 thousand, which included $306 thousand death benefit on bank-owned life insurance in 2025, partially offset by a $108 thousand year-over-year decrease in wealth management and trust services income due to decreased assets.
2024 Compared to 2023
Non-interest income showed a loss of $21.4 million for 2024, a $26.3 million decrease from income of $5.0 million for 2023. The decrease in 2024 was primarily due to the $32.5 million net loss on the sale of available-for-sale investment securities in 2024 related to our balance sheet restructuring. Excluding losses on sale of securities in both years, non-interest income increased by $300 thousand, which included a $275 thousand year-over-year increase in wealth management and trust services income due to increased assets and an increase of $226 thousand in net earnings on bank-owned life insurance due to increased rates. These were partially offset by the reduction of $314 thousand in bank-owned life insurance death benefits recorded in 2023 and not repeated in 2024.
Non-interest Expense
The table below details the components of non-interest expense.
2025 compared to 2024
2024 compared to 2023
Years ended December 31,
Amount Increase (Decrease)
Percent Increase (Decrease)
Amount Increase (Decrease)
Percent Increase (Decrease)
(dollars in thousands; unaudited)
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional services
Information technology
Federal Deposit Insurance Corporation insurance
Depreciation and amortization
Directors' expense
Amortization of core deposit intangible
Charitable contributions
Deposit network fees
Other real estate owned
Other non-interest expense:
Advertising
Other expense
Total other non-interest expense
Total non-interest expense
2025 Compared to 2024
Non-interest expenses increased $2.6 million to $81.3 million in 2025 from $78.7 million in 2024. Salaries and employee benefits increased by $2.8 million primarily due to an increase in annual incentives due to performance and increased employee insurance and profit share expenses. These were partially offset by an increase in deferred loan costs. Partially offsetting increases were the decrease of $828 thousand in p rofessional services expenses, mainly from the legal resolution of a Private Attorneys General Act / putative class action lawsuit of $615 thousand and $354 thousand in the new loan operating system platform and implementation costs in the prior year.
2024 Compared to 2023
Non-interest expenses increased $1.7 million to $78.7 million in 2024 from $77.1 million in 2023 . Significant fluctuations were as follows:
• Professional services expenses increased by $1.5 million , mainly from the legal resolution of a Private Attorneys General Act / putative class action lawsuit of $615 thousand and $354 thousand in the new loan operating system platform and implementation costs.
• Salaries and employee benefits increased by $1.2 million primarily due to severance and salaries paid in relation to the reduction in force in the second quarter, the filling of open positions and the hiring of several key employees and officers, higher insurance costs, and lower deferred loan origination costs. Increases to salaries and employee benefits were partially offset by a decrease in profit sharing expense mainly from accrual adjustments, a decrease in accrued incentive bonuses, and a decrease in stock-based compensation from changes in award structure and estimated performance award payouts.
• Depreciation and amortization expenses decreased by $632 thousand, mainly from the acceleration of lease-related costs for four branch closures in 2023.
• Amortization of the core deposit intangible decreased by $375 thousand as the Bank of Alameda amortization completed in 2023.
Provision for Income Taxes
Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, bank-owned life insurance ("BOLI"), low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).
The benefit from income taxes totaled $16.8 million at an effective tax rate of 32.0% in 2025, compared to the benefit from income taxes of $5.4 million at an effective tax rate of 39.2% in 2024 and a provision of $6.1 million at an effective tax rate of 23.6% in 2023. The increase in the benefit from income taxes in 2025 reflected the impact of the net loss before taxes in the year of $52.5 million compared to net loss before taxes of $13.8 million in 2024. The 7.2% decrease in the effective tax rate in 2025, as compared to 2024, was due to the treatment of certain permanent differences while in a larger loss position, such as in 2025. The 15.60% increase from 2023 to 2024 was primarily due to a larger proportional effect of permanent tax differences on lower pretax income and higher tax-exempt BOLI income. This increase was partially offset by a reduction in the tax-exempt interest exclusion (due to a larger IRC Section 291(e) interest expense disallowance), compared to 2023.
We file a consolidated return in the U.S. federal tax jurisdiction and a combined return in the State of California and the State of New Jersey due to interest on purchased auto loans registered in New Jersey. There were no ongoing federal or state income tax examinations at the time of the issuance of this report. As of December 31, 2025 and 2024, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits.
FINANCIAL CONDITION
Investment Securities
We maintain an investment securities portfolio to provide liquidity and generate earnings on funds that have not been loaned to customers. Management determines the maturities and types of securities to be purchased based on liquidity and interest rate risk position, and the desire to attain a reasonable investment yield balanced with risk exposure. The tables below show the composition of the debt securities portfolio by weighted average life at December 31, 2025 and 2024. Weighted average life takes into account the issuer's right to call or prepay obligations, with or without call or prepayment penalties. The weighted average life of the investment portfolio at December 31, 2025 and 2024 was approximately 4.2 and 5.9 years, respectively. The effective duration of the investment portfolio was 2.8 and 4.6 at December 31, 2025 and 2024, respectively.
In the fourth quarter of 2025, the Bank completed a balance sheet repositioning and reclassified its HTM portfolio into AFS resulting in no HTM securities at December 31, 2025.
December 31, 2025
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total
(dollars in thousands; unaudited)
AmortizedCost 1
Average Yield 2
AmortizedCost 1
Average Yield 2
AmortizedCost 1
Average Yield 2
AmortizedCost 1
Average Yield 2
Amortized Cost 1
Fair Value
Average Yield 2
Available-for-sale:
CMBS/MBS/CMOs issued by U.S. government agencies
Debentures of government sponsored agencies
Obligations of state and political subdivisions - tax-exempt 3
Obligations of state and political subdivisions - taxable
Total available-for-sale
December 31, 2024
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total
(dollars in thousands; unaudited)
AmortizedCost 1
Average Yield 2
AmortizedCost 1
Average Yield 2
AmortizedCost 1
Average Yield 2
AmortizedCost 1
Average Yield 2
Amortized Cost 1
Fair Value
Average Yield 2
Held-to-maturity:
CMBS/MBS/CMOs issued by U.S. government agencies
SBA-backed securities
Debentures of government-sponsored agencies
Obligations of state and political subdivisions - tax-exempt 3
Obligations of state and political subdivisions - taxable
Corporate bonds
Total held-to-maturity
Available-for-sale:
CMBS/MBS/CMOs issued by U.S. government agencies
SBA-backed securities
Debentures of government sponsored agencies
U.S. Treasury securities
Obligations of state and political subdivisions - tax-exempt 3
Obligations of state and political subdivisions - taxable
Corporate bonds
Total available-for-sale
Total
1 Book value reflects cost, adjusted for accumulated amortization and accretion.
2 Weighted average calculation is based on amortized cost of securities.
3 Yields on tax-exempt municipal bonds are presented on a taxable equivalent basis, using a federal tax rate of 21%.
The amortized cost of our investment securities portfolio increased by $55.5 million, or 4.3%, in 2025. In 2025, we sold $778.9 million in available-for-sale securities with an average yield of 1.99%, as part of a balance sheet restructuring, including $279.8 million in agency collateralized mortgage obligations ("CMOs"), $270.8 million in agency mortgage-backed securities ("MBSs"), $98.1 million in debentures of government sponsored agencies, $95.7 million in obligations of state and political subdivisions, $21.0 million in corporate bonds, $12.0 million in U.S. Treasury securities and $1.5 million in SBA-backed securities. The sales of available-for-sale securities generated a net pre-tax loss of $88.2 million. Sales proceeds were deployed into securities with a higher yield and lower effective duration than the securities sold.
We consider agency debentures and CMOs issued by U.S. government sponsored entities to have low credit risk as they carry the credit support of the U.S. federal government. The debentures, CMBSs, CMOs and MBS issued by U.S. government sponsored agencies made up 95.5% of the portfolio as of December 31, 2025, compared to 85.1% at December 31, 2024. See the discussion in the section captioned “Securities May Lose Value Due to Credit Quality of the Issuers” in ITEM 1A Risk Factors above.
At December 31, 2025 and 2024, distribution of our investment in obligations of state and political subdivisions was as follows:
December 31, 2025
December 31, 2024
(dollars in thousands; unaudited)
Amortized Cost
Fair Value
Percent of
State and Municipal Securities
Amortized Cost
Fair Value
Percent of
State and Municipal Securities
Within California:
General obligation bonds
Revenue bonds
Total within California
Outside California:
General obligation bonds
Revenue bonds
Total outside California
Total obligations of state and political subdivisions
Percent of investment portfolio
The portion of the portfolio outside the state of California is distributed among twelve states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside California are in Texas (44.3%), Wisconsin (24.1%) and Virginia (6.7%). Our investments in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF"), rated AAA without enhancement, or backed by revenue sources from essential services (such as utilities and transportation).
Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring. Key considerations include:
• The soundness of a municipality’s budgetary position and the stability of its tax revenues
• Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer
• Local demographics and economics including unemployment data, the largest local taxpayers and employers, income indices, and home values
• For revenue bonds, the source and strength of revenue for municipal authorities, including obligors' financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurers' strength)
• Credit ratings by major credit rating agencies
Loans
Loans Outstanding by Class and Percent of Total
December 31, 2025
December 31, 2024
(in thousands; unaudited)
Amortized Cost
Percent of Total
Amortized Cost
Percent of Total
Commercial and industrial
Real estate
Commercial owner-occupied
Commercial non-owner occupied
Construction
Home equity
Other residential
Installment and other consumer
Total loans, at amortized cost
Allowance for credit losses on loans
Total loans, net of allowance for credit losses
Loans increased by $37.6 million in 2025, or 1.8%, to $2.121 billion as of December 31, 2025, from $2.083 billion as of December 31, 2024 and was primarily due to a $92.7 million increase in commercial non-owner occupied real estate loans, offset by a decrease of $32.6 million in residential real estate loans and a decrease of $21.9 million in
construction loans. Organic loan originations were $273.5 million in 2025, compared to $152.6 million in 2024. There were loan purchases of approximately $250 thousand in 2025 compared to $35.7 million in 2024. Payoffs were $145.7 million in 2025, compared to $120.6 million in 2024. The majority of the payoffs were a result of asset sales and cash payoffs. In addition, $90.2 million of loan amortization from scheduled repayments, net of credit line utilization, contributed to the change in loan balances for 2025.
Approximately 90% and 89% of total loans were secured by real estate as of December 31, 2025 and 2024, respectively. For additional inf ormation on loan concentration risk, see ITEM 1A, Risk Factors.
The following table summarizes our commercial real estate loan concentrations by the county in which the property was located as of December 31, 2025 and 2024.
Commercial Real Estate Loans Outstanding by County
(dollars in thousands; unaudited)
December 31, 2025
December 31, 2024
County
Amount
Percent of Commercial Real Estate Loans
County
Amount
Percent of Commercial Real Estate Loans
Marin
Marin
Sonoma
Sonoma
Alameda
San Francisco
San Francisco
Alameda
Sacramento
Napa
Napa
Sacramento
Contra Costa
Contra Costa
Solano
Solano
San Mateo
Placer
Placer
San Mateo
Santa Clara
Santa Clara
San Joaquin
San Joaquin
Orange
El Dorado
Other
Other
Total
Total
Commercial real estate loans increased by $80.9 million in 2025 to $1.676 billion from $1.596 billion at December 31, 2024. The increase in 2025 was comprised of the $92.7 million increase within the non-owner occupied loan portfolio, partially offset by the $11.7 million decrease within the owner-occupied loan portfolio. Of the commercial real estate loans as of December 31, 2025, 81% were non-owner occupied and 19% were owner-occupied. Almost the entire commercial real estate loan portfolio is comprised of term loans for which the primary source of repayment is either the cash flow from leasing activities of the real estate collateral or the operating cash flow of the owner occupant.
Non-owner and Owner Occupied Real Estate Loans by Type
(unaudited)
Percent of Non-owner Occupied Commercial Real Estate Loans
Percent of Owner-Occupied Commercial Real Estate Loans
County
December 31, 2025
December 31, 2024
December 31, 2025
December 31, 2024
Office
Retail
Multi-family
Warehouse & industrial
Mixed use
School
Wine
Church
Gas/auto
Health club
Other
Total
Commercial Real Estate Loans by Type and County
Non-owner occupied
Owner-occupied
(unaudited)
Retail
Warehouse & industrial
Multi-family
Office
Office
County
Dec 31, 2025
Dec 31, 2024
Dec 31, 2025
Dec 31
Dec 31, 2025
Dec 31,
Dec 31, 2025
Dec 31,
Dec 31, 2025
Dec 31,
Sacramento
Marin
Napa
Sonoma
Alameda
San Francisco
Other bay area
Other
Total
With the heightened market concern about non-owner-occupied commercial real estate, and in particular the office sector, we are providing the following additional information: We continue to maintain diversity among property types and within our geographic footprint. In particular, our office commercial real estate portfolio in the City of San Francisco represents just 3% of our total loan portfolio and 4% of our total non-owner-occupied commercial real estate portfolio.
The following table shows an analysis of construction loans by type and county as of December 31, 2025 and 2024.
Construction Loans Outstanding by Type and County
(dollars in thousands; unaudited)
December 31, 2025
December 31, 2024
Loan Type
Amount
Percent of Construction Loans
Amount
Percent of Construction Loans
Apartments and multifamily
Commercial real estate
1-4 Single family residential
Total
(dollars in thousands; unaudited)
December 31, 2025
December 31, 2024
County
Amount
Percent of Construction Loans
County
Amount
Percent of Construction Loans
San Francisco
San Francisco
Napa
Contra Costa
Marin
Marin
Santa Clara
Napa
Placer
Placer
Total
Total
Construction loans decreased by $21.9 million in 2025 to $15.1 million from $37.0 million at December 31, 2024. The decrease in 2025 was primarily due to payoffs of $28.7 million offset by $6.7 million in advances on existing construction loans.
Undisbursed construction loan commitments at December 31, 2025 and 2024 were $10.5 million and $8.3 million, respectively.
The following table presents the amortized costs and maturity distribution of our loans by portfolio class as of December 31, 2025 based on their contractual maturity dates. Maturities do not include scheduled payments or potential prepayments.
Loan Maturity Distribution
Due within 1 year
Due after 1 through 5 years
Due after 5 through 15 years
Due after 15 years
Total
(in thousands; unaudited)
Commercial and industrial
Real estate
Commercial owner-occupied
Commercial non-owner occupied
Construction 1
Home equity
Other residential
Installment and other consumer loans
Total
1 Construction loans that mature after 5 years are structured to convert to permanent financing after the initial construction period.
The following table shows the mix of variable-rate loans and fixed-rate loans due after one year by portfolio class as of December 31, 2025. The large majority of variable-rate loans are tied to independent indices, such as the Prime Rate or a Treasury Constant Maturity Rate. Most loans with original terms of more than five years have provisions for the fixed rates to reset, or convert to variable rates, after three, five or seven years. These loans are included in the variable-rate balances below.
Loan Interest Rate Sensitivity - Due After One Year
(in thousands; unaudited)
Fixed
Variable
Total
Commercial and industrial
Real estate
Commercial owner-occupied
Commercial non-owner occupied
Construction
Home equity
Other residential
Installment and other consumer loans
Total
Allowance for Credit Losses on Loans
The allowance for credit losses on loans is calculated in accordance with ASC 326 based on management's best estimate of current expected credit losses over the loans' contractual terms, adjusted for estimated prepayments where applicable. The contractual terms exclude anticipated extensions, renewals and modifications. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. All specifically identifiable and quantifiable losses are charged off against the allowance. The ultimate adequacy of the allowance depends on a variety of complex factors, some of which may be beyond management's control, such as volatility in the real estate market, changes in interest rates and economic and political environments. Based on the current conditions of the loan portfolio and reasonable and supportable forecasts, management believes that the $30.1 million allowance for credit at December 31, 2025 was adequate to absorb expected credit in our loan portfolio. For additional information on our allowance for credit methodology, refer to Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.
The ratio of the allowance for credit losses to total loans was 1.42% at December 31, 2025 and 1.47% at December 31, 2024.
The $567 thousand decrease in the allowance for credit losses on loans in 2025 was largely due to the $942 thousand in net charge-offs, primarily due to a $2.1 million acquired non-owner occupied commercial real estate loan with a partial charge-off in the first quarter of 2025 of $809 thousand that the Bank had previously reserved $449 thousand for as of December 31, 2024. There was an additional decline in the financial condition of the borrower and guarantor and the value of the collateral during the first quarter that led to the Bank proactively selling the note in March rather than pursuing the additional costly steps of liquidating after foreclosure. It had been on non-accrual since late 2023. This decline was partially offset by the $375 thousand provision recorded in 2025.
For further information, refer to the Provision for Credit Losses section above, and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.
The following table presents the allowance for credit losses on loans by loan portfolio class in accordance with the methodology described in Note 1 to the Consolidated Financial Statements in ITEM 8 of this report, as well as the per centage of total loans in each of the same loan portfolio classes as of December 31, 2025 and 2024.
Allocation of the Allowance for Credit Losses
(dollars in thousands; unaudited)
Commercial and industrial
Commercial real estate, owner-occupied
Commercial real estate, non-owner occupied
Construction
Home equity
Other residential
Installment and other consumer
Unallocated
Total
December 31, 2025
Modeled expected credit losses
Qualitative adjustments
Specific allocations
Total
Loans as a percent of total loans
December 31, 2024
Modeled expected credit losses
Qualitative adjustments
Specific allocations
Total
Loans as a percent of total loans
The table below shows the activity in the allowance for credit losses for each of the three years presented below.
Allowance for Credit Losses on Loans Rollforward
(dollars in thousands; unaudited)
Beginning balance
Provision for (reversal of) credit losses
Loans charged-off:
Commercial and industrial
Real estate:
Commercial real estate, owner-occupied
Commercial, non-owner occupied
Installment and other consumer
Total loans charged-off
Loans recovered:
Commercial and industrial
Real estate:
Commercial, non-owner occupied
Construction
Installment and other consumer
Total loans recovered
Net loans charged-off
Ending balance
Total loans, at amortized cost
Average total loans outstanding during year
Ratio of allowance for credit losses to total loans at end of year
Net charge-offs (recoveries) to average loans
NM - Not meaningful.
The following table shows non-performing assets as of December 31, 2025 and 2024.
Non-Performing Assets
(dollars in thousands; unaudited)
December 31, 2025
December 31, 2024
Non-accrual loans:
Commercial and industrial
Real estate:
Commercial, owner-occupied
Commercial, non-owner occupied
Home equity
Other residential
Installment and other consumer
Total non-accrual loans
Other real estate owned
Repossessed personal properties
Total non-performing assets
Criticized and classified loans:
Special mention
Substandard
Doubtful
Allowance for credit losses to non-accrual loans
Non-accrual loans to total loans
Non-performing assets to total assets
Non-Accrual Loans
Non-accrual loans decreased by $7.0 million in 2025, primarily due to $4.4 million in payoffs including a $3.6 million commercial relationship paid off in full in the fourth quarter and a $2.1 million non-owner occupied real estate loan sale in the first quarter.
Non-accrual loans increased by $25.9 million in 2024, primarily due to three relationships designated as non-accrual in the second and third quarters.
Approximately 97% of the non-accrual loans as of December 31, 2025 were well-secured by either commercial or residential real estate.
Criticized and Classified Loans
Loans designated as special mention, which are not considered adversely classified, increased by $9.1 million in 2025 with downgrades from the pass or watch category of $49.3 million primarily within commercial real estate and commercial with an average balance of $2.7 million and upgrades from substandard of $6.9 million, partially offset by payoffs and paydowns of $38.7 million and $7.3 million, respectively.
Loans designated as special mention decreased by $26.3 million in 2024, primarily due to net downgrades of $2.6 million from the pass or watch category and downgrades of $25.0 million to substandard. Of the downgrades to special mention, $15.3 million was attributed to one recently completed construction loan that will be marketed for sale or paid down to a conforming debt service level. The remaining balance changes consisted of paydowns, payoffs and upgrades from substandard risk rating.
Loans classified as substandard decreased by $13.0 million in 2025 largely due to upgrades to special mention of $6.9 million mentioned above and payoffs and paydowns of $5.3 million and $1.7 million, respectively. Downgrades from pass or watch of $2.1 million in the year were offset by the $2.1 million loan that was sold.
Loans classified as substandard increased by $12.8 million in 2024, primarily due to downgrades from special mention totaling $25.0 million and from pass totaling $2.7 million, partially offset by $11.9 million in paydowns and payoffs and $2.8 million in upgrades to pass or special mention. Of the downgraded loans, $17.1 million (or 82%)
was secured by commercial real estate, $3.5 million was to commercial borrowers, and the remaining $222 thousand were personal loans.
Refer to Note 3 to the Consolidated Financial Statements in ITEM 8 of this report for an allocation of criticized and classified loans by loan portfolio class.
Other Assets
BOLI totaled $71.3 million as of December 31, 2025, compared to $71.0 million at December 31, 2024. The $279 thousand increase was primarily due to increased earnings from higher yields on policies in 2025.
Interest receivable and other assets totaled $84.4 million and $72.3 million at December 31, 2025 and 2024, respectively. The $12.1 million increase was primarily due to a $12.3 million increase in net deferred tax assets, as discussed below.
Net deferred tax assets totaled $42.9 million and $30.6 million at December 31, 2025 and 2024, respectively. Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to temporary differences such as allowances for credit losses and unfunded loan commitments, net operating loss carryforwards, and deferred compensation and salary continuation obligations. The $12.3 million increase in 2025 was primarily due to the $12.8 million increase in net operating loss carryforwards resulting from the Bank's higher pre-tax loss of $52.5 million in 2025 compared to $13.8 million in 2024. Also contributing to the increase were a $4.4 million increase in operating and finance lease liabilities and a $2.8 million increase in the allowance for credit losses on loans and unfunded loan commitments. The increases in net deferred tax assets were partially offset by a $4.9 million decrease in the net unrealized losses on available-for-sale securities. Management believes deferred tax assets will be realizable due to our expectation that earnings will continue to be at a level adequate to realize such tax benefits. Therefore, no valuation allowance was established as of December 31, 2025 or 2024. For additional information, refer to Note 11 to the Consolidated Financial Statements in ITEM 8 of this report.
We held $16.7 million of FHLB stock recorded at cost in other assets at both December 31, 2025 and 2024. We received $1.5 million, $1.5 million and $1.3 million in cash dividends in 2025, 2024 and 2023, respectively. For additional information, refer to Note 2 to the Consolidated Financial Statements in ITEM 8 of this report.
Deposits
Deposits increased by $195.5 million, to $3.416 billion at December 31, 2025, compared to $3.220 billion at December 31, 2024. Non-interest bearing deposits were 36.7% of total deposits at December 31, 2025, compared to 39.6% at December 31, 2024. We continued our disciplined and focused approach to relationship management and customer outreach, adding over 4,000 new accounts in 2025, 43% of which were new relationships, and 51% were non-interest bearing (excluding new reciprocal accounts).
As of December 31, 2025 , 62% of deposit balances were held in business accounts, with average balances of $141 thousand per account. The remaining 38% were consumer accounts, with average balances of $40 thousand per account. The largest depositor represented 3.8% of total deposits, and the combined four largest depositors represented 7.3% of total deposits.
Balances in reciprocal deposit networks increased by $54.2 million during 2025 to $458.9 million as of December 31, 2025. Costs associated with network deposits fees are recorded as non-interest expense and totaled $476 thousand, $448 thousand, and $374 thousand for the years ended December 31, 2025, 2024 and 2023 , respectively. The interest the bank pays on balances in the deposit networks is recorded in deposit interest expense.
Estimated uninsured and/or uncollateralized deposits totaled 31% of total deposits as of December 31, 2025, compared to 29% as of December 31, 2024 .
Our liquidity policies require that compensating cash balances be held against concentrations over a certain level. See ITEM 1A, Risk Factors, for a discussion of potential risks associated with concentrations and volatility due to the activity of our large deposit customers.
Distribution of Average Deposits
The table below shows the relative composition of our average deposits for 2025 and 2024. For average rates paid on deposits, refer to the Average Statements of Condition and Analysis of Net Interest Income table in ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations.
For the year ended December 31,
(in thousands; unaudited)
Average Amount
Percent of Total
Average Amount
Percent of Total
Non-interest bearing
Interest-bearing transaction
Savings
Money market 1
Time deposits, including CDARS
Total average deposits
1 Money market balances include Insured Cash Sweep ® ("ICS") in both 2025 and 2024.
Maturities of Uninsured Time Deposits
The following table shows time deposits by account that are in excess of $250,000 by time remaining to maturity at December 31, 2025.
December 31, 2025
(in thousands; unaudited)
Total
Uninsured Portion
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
Network Deposits
Our deposit portfolio includes deposits offered through the Promontory Interfinancial Network that are comprised of Certificate of Deposit Account Registry Service ® ("CDARS") balances included in time deposits and Insured Cash Sweep ® ("ICS") balances included in money market deposits. In addition, we offer deposits through R&T Deposit Solutions comprised of Demand Deposit Marketplace SM ("DDM") balances. Through these two networks we are able to offer our customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through CDARS, ICS and DDM, on behalf of a customer, we have the option of receiving matching deposits through the network's reciprocal deposit program, or placing deposits "one-way" for which we receive no matching deposits. The following table shows the composition of our network deposits at December 31, 2025 and 2024.
(in thousands)
December 31, 2025
December 31, 2024
Reciprocal 1
One-Way 1
Reciprocal 1
One-Way 1
CDARS
ICS
DDM
Total network deposits
1 Reciprocal deposits are on-balance-sheet while one-way deposits are off-balance-sheet.
Borrowings
As of December 31, 2025 and 2024, our borrowing capacity with the Federal Home Loan Bank ("FHLB") under secured lines of credit totaled $967.2 million and $948.1 million, respectively.
The Bank had a line of credit through the Discount Window at the Federal Reserve Bank of San Francisco ("FRBSF") totaling $344.7 million as of December 31, 2025, secured by investment securities and residential loans. As of December 31, 2024, the Bank had a line of credit through the Discount Window totaling $358.0 million, secured by investment securities and residential loans .
I n addition, as of December 31, 2025 and 2024 we had $140.0 million and $125.0 million, respectively, in unsecured lines of credit with correspondent banks to cover short-term borrowing needs.
As of December 31, 2025 and 2024, the Bank had no outstanding short-term borrowings and our bank lines of credit were not utilized as of December 31, 2025 or 2024.
For additional information, see Note 7, Borrowings and Other Obligations, in ITEM 8 of this report.
Subordinated Notes
During the fourth quarter of 2025, we issued Fixed-to-Floating Subordinated Notes of $45.0 million with a final maturity date of December 1, 2035, to certain investors in a private placement, to strengthen capital ratios as part of our balance sheet repositioning. Subordinated notes outstanding was $43.9 million, net of issuance costs, at December 31, 2025. Bancorp made a capital contribution of $30.0 million to the Bank in the fourth quarter. The subordinated notes qualify as Tier 2 capital for the consolidated Company (Bancorp) for regulatory purposes and the portion that Bancorp contributed to the Bank is treated as Tier 1 capital for the Bank. At December 31, 2025, we were in compliance with all covenants under our long-term debt subordinated notes agreement.
For additional information, see Note 13, Subordinated Notes, in ITEM 8 of this report.
Deferred Compensation Obligations
We maintain a non-qualified, unfunded deferred compensation plan for certain key management personnel. Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for up to, but not exceeding, fifteen years commencing upon retirement, death, disability or termination of employment. A similar Deferred Director Fee Plan entitles participating members of the Board of Directors to receive payments as elected by the participant upon separation from service, death, disability or termination of service. At December 31, 2025 and 2024, our aggregate payment obligations under both plans totaled $5.4 million and $6.0 million, respectively, and was recorded in interest payable and other liabilities in the consolidated statements of condition. Decreases in the deferred compensation plans in 2025 mainly resulted from increases in benefit payments to terminated employees.
We have entered into supplemental executive retirement plans ("SERPs") with a select group of executive officers, providing for certain retirement benefits at age 65 and reduced benefits upon early retirement. The annual amount of benefits in either pre-retirement scenario is based on a vesting schedule unique to each executive. The SERP also provides for lump sum benefits in the event of a change in control followed by the termination of the executive. Payments under the SERPs are expected to be funded by income from bank-owned life insurance policies. On December 31, 2025 and 2024, our liabilities under the SERPs totaled $4.8 million and $4.6 million, respectively, and were recorded in interest payable and other liabilities in the consolidated statements of condition. The SERPs are unfunded and non-qualified for tax purposes and subject to Title I of the Employee Retirement Income Security Act of 1974.
For additional information, see Note 10 to the Consolidated Financial Statements in ITEM 8 of this report.
Capital Adequacy
As discussed in Note 15 to the Consolidated Financial Statements in ITEM 8 of this report, the Bank's capital ratios were above regulatory guidelines to be considered "well capitalized" and Bancorp's ratios exceeded the required minimum ratios for capital adequacy purposes. For further discussion of bank capital requirements, refer to the SUPERVISION AND REGULATION section in ITEM 1 of this report.
The total risk-based capital ratio for Bancorp was 15.25% at December 31, 2025, compared to 16.54% at December 31, 2024. The reduction is primarily related to losses recognized on securities sales in 2025.
Bancorp's tangible common equity to tangible assets ("TCE ratio") decreased to 8.35% at December 31, 2025, from 9.93% at December 31, 2024, primarily due to increases in unrealized losses attributed to the HTM securities reclassification and the subsequent loss from sales of securities during 2025 . The Bank's total risk-based capital ratio decreased to 13.90% at December 31, 2025, from 16.13% at December 31, 2024 .
Bancorp's share repurchase program and activity are discussed in detail in ITEM 5 and in Note 8 to the Consolidated Financial Statements in ITEM 8 of this report. We expect to maintain strong capital levels and do not expect that we will be required to raise additional capital in 2026. Our anticipated sources of capital in 2026 include future earnings and shares issued under the stock-based compensation program.
Liquidity and Capital Resources
The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as seen in the table below and discussed in Note 7 to the Consolidated Financial Statements in ITEM 8 of this report. Our Asset Liability Management Committee ("ALCO"), which is comprised of Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies. The Bank has long-established minimum liquidity requirements that are regularly monitored using metrics and tools similar to those used by larger banks, such as the liquidity coverage ratio, and multi-scenario, long-horizon stress tests. Our c on tingency funding plan provides for early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a liquidity crisis. Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs. We also have relationships with third-party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash management strategy as discussed in Note 6 to the Consolidated Financial Statements in ITEM 8 of this report.
Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and total available borrowing capacity, totaled $2.148 billion, or 63% of total deposits, and 209% of estimated uninsured and/or uncollateralized deposits as of December 31, 2025.
The following table details the components of our contingent liquidity sources as of December 31, 2025.
(in thousands)
Total Available
Amount Used
Net Availability
Internal Sources
Unrestricted cash 1
Unencumbered securities at market value
External Sources
FHLB line of credit
FRB line of credit
Lines of credit at correspondent banks
Total Liquidity
1 Excludes cash items in transit as of December 31, 2025.
Note: Brokered deposits available through third-party networks are not included above.
We obtain funds from the repayment and maturity of loans, deposit inflows, investment securities sales, maturities and paydowns, federal funds purchases, FRBSF and FHLB advances, other borrowings, and cash flow from operations. Although available as a liquidity source, we have not chosen to utilize brokered deposits. Our primary uses of funds are the origination of loans, the purchase of investment securities and loans, withdrawals of deposits, maturities of certificates of deposit, dividends to common stockholders, share repurchases and operating expenses.
Customer deposits are a significant component of our daily liquidity position. The attraction and retention of deposits depend upon the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength. The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.
Our cash and cash equivalents increased by $88.0 million to $225.3 million at December 31, 2025, from $137.3 million at December 31, 2024. The most significant sources of liquidity during 2025 were proceeds from sales,
principal paydowns, calls and maturities of investment securities totaling $935.3 million, $195.5 million in increased deposits, loan payoffs of $145.7 million, $87.4 million in amortization of principal, a net $2.8 million decrease in utilization of credit lines, $45.0 million in proceeds from the issuance of subordinated notes and $39.1 million in net cash was provided by operating activities.
Significant uses of liquidity during 2025 were $1.069 billion in investment securities purchased, and $273.5 million in loan fundings. Additionally other uses included $16.1 million in cash dividends paid on common stock to our shareholders, and $3.3 million in common stock repurchases. Refer to the Consolidated Statement of Cash Flows in this Form 10-K for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position, as detailed in this report, and contingent funding sources are adequate to support our operational needs.
Unfunded credit commitments, as discussed in Note 17 to the Consolidated Financial Statements in ITEM 8 of this report, totaled $464.7 million at December 31, 2025. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, principal paydowns of investment securities, and liquid assets.
Over the next twelve months, $198.2 million of time deposits will mature. We expect that a high percentage of these funds will remain with the Bank either through renewals or shifts to other deposit products. Any outflows can be absorbed by the Bank's excess liquidity. We believe our emphasis on local deposits, combined with our immediately available funding sources, provides a very stable base for our liquidity needs.
We had no outstanding short term borrowings under our credit facilities as of December 31, 2025, and 2024, as discussed in Note 7 to the Consolidated Financial Statements in ITEM 8 of this report. We issued Fixed-to-Floating Subordinated Notes of $45.0 million with a final maturity date of December 1, 2035, during 2025, to certain investors in a private placement, to strengthen our capital ratios as part of our balance sheet repositioning, as discussed in Note 13 to the Consolidated Financial Statements in ITEM 8 of this report.
Because Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period. The Bank received approval from the State of California - Department of Financial Protection and Innovation on May 30, 2025, for a dividend of $32.0 million which was paid to Bancorp on May 30, 2025. The primary uses of funds for Bancorp are shareholder dividends, subordinated notes servicing, share repurchases and ordinary operating expenses. Bancorp held $35.2 million in cash as of December 31, 2025 , which is expected to cover cash needs throughout 2026 .
Statement Regarding Use of Non-GAAP Financial Measures
Financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures. Management believes that, given industry turmoil that largely began in the first quarter of 2023, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after tax impact of unrealized losses on held-to-maturity securities provides useful supplemental information to investors because it reflects the level of capital remaining after a hypothetical liquidation of the entire securities portfolio. In addition, management believes that providing selected financial measures excluding the loss on sale of securities discussed above is useful to investors as the strategic short-term loss taken for long-term profitability makes the operational performance difficult to compare to the prior period. Because there are limits to the usefulness of this or any other non-GAAP measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the Securities and Exchange Commission, and not to rely on any single financial measure. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below. There were no held-to-maturity securities held at December 31, 2025, resulting in the non-GAAP TCE ratio being equal to the GAAP TCE ratio.
Reconciliation of GAAP and Non-GAAP Financial Measures
(in thousands, unaudited)
December 31, 2025
December 31, 2024
Tangible Common Equity - Bancorp
Total stockholders' equity
Goodwill and core deposit intangible
Total TCE
Unrealized losses on HTM securities, net of tax 1
Unrealized losses on HTM securities included in AOCI, net of tax 2
TCE, net of unrealized losses on HTM securities (non-GAAP)
Total assets
Goodwill and core deposit intangible
Total tangible assets
Unrealized losses on HTM securities, net of tax 1
Unrealized losses on HTM securities included in AOCI, net of tax 2
Total tangible assets, net of unrealized losses on HTM securities (non-GAAP)
Bancorp TCE ratio
Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP)
Tangible Book Value Per Share
Common shares outstanding
Book value per share
Tangible book value per share
1 There were no held-to-maturity securities as of December 31, 2025. Unrealized losses on held-to-maturity securities as of December 31, 2024 were $126.6 million including the unrealized losses that resulted from the transfer of securities from AFS to HTM, net of an estimated $37.4 million in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%. 2 The remaining unrealized losses that resulted from the transfer of securities from AFS to HTM, as of December 31, 2024, net of an estimated $3.2 million, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56% are added back as they are already included in AOCI.
(in thousands, except per share amounts; unaudited)
Years ended
Net (loss) income
December 31, 2025
December 31, 2024
Net (loss) income (GAAP)
Adjustments:
Losses on sale of investment securities from portfolio repositioning
Related income tax benefit
Adjustments, net of taxes
Comparable net income (non-GAAP)
Diluted (loss) earnings per share
Weighted average basic and diluted shares
Diluted (loss) earnings per share (GAAP)
Comparable basic earnings per share (non-GAAP)
Return on average assets
Average assets
Return on average assets (GAAP)
Comparable return on average assets (non-GAAP)
Return on average equity
Average stockholders' equity
Return on average equity (GAAP)
Comparable return on average equity (non-GAAP)
Return on average tangible common equity
Average goodwill and intangibles
Average tangible common equity
Return on average tangible common equity (GAAP)
Comparable return on average tangible common equity (non-GAAP)
Efficiency ratio
Non-interest expense
Net interest income
Non-interest income (GAAP)
Losses on sale of investment securities from portfolio repositioning
Non-interest income (non-GAAP)
Efficiency ratio (GAAP)
Comparable efficiency ratio (non-GAAP)
