Tani Girton
Thanks, Tim. Good morning, everyone. Bank of Marin continues to focus on further strengthening our core deposit franchise and maintaining robust liquidity and capital levels while delivering an exceptional service to existing and new customers. As we position for further earnings improvement in the future.
We generated $4.6 million in net income for the third-quarter or $0.28 per share. As we began to realize the full anticipated benefit to profitability of the balance sheet restructuring we did during the second quarter, our net interest income increased 8% from the prior quarter to $24.3 million, largely driven by an 18 basis points increase in our net interest margin. Primarily due to balance sheet repositioning and a shift in deposit pricing that reversed the upward trend in deposit costs while staying aligned with the broader market.
By the middle of the third-quarter, our net interest margin had increased by 30 basis points over the level just prior to the balance sheet repositioning, consistent with our expectations and we continue to see that benefit. The yield on loans was negatively impacted by 9 basis points in the third-quarter as a result of interest reversals on two non-accrual loans reducing that interest margin for the quarter by 6 basis points.
Our non-interest expense decreased by $1.5 million from the prior quarter, mostly due to a decline in salaries and benefits expense due to staff reductions made in the second-quarter and continued all reallocation of staffing to align with the strategic direction of the bank.
Additionally, the decline resulting from charitable contributions annually granted in the second-quarter was offset by a $615,000 accrual for a non-repeatable legal resolution which negatively impacted earnings per share by $0.04.
Moving to non-interest income excluding the loss on security sales that impacted our second-quarter results. We had an increase in non-interest income largely due to an increase in wealth management revenue.
Our total deposits were $3.3 billion at September 30. As Tim mentioned, we typically see seasonal inflows in the third-quarter and due to the nature of our client base with many professional services firms, we expect to see some seasonal outflows in the fourth-quarter due to bonus payments, profit and other distributions and larger business expenses.
Our average cost of total deposits increased just 1 basis points in the third-quarter compared to a 7 basis points increase in the prior quarter.
Not only does that continue the deceleration of the deposit cost increases seen in the first and second quarters, but it also reflects a turn in deposit costs late in the third-quarter.
Since initiating our declining rate deposit pricing strategy, the average spot rate on deposit non-deposit network interest bearing balances declined 18 basis points while the balances themselves went up approximately $10 million by September 30.
Our pricing strategy weighs rate reductions in the context of relationship pricing balance sheet growth and net interest margin considerations.
Disciplined credit management remains a Hallmark of Bank of Marin as well, classified assets were down primarily due to one classified non-accrual loan for $1.8 million that was paid off in full including all accrued interest.
Non-accrual loans had a net increase primarily related to an $8.1 million real estate loan whose renewal negotiations remain ongoing with no expectations for actual losses.
As Tim mentioned overall, there were no new issues and increases were partially offset by paydowns, payoffs and returns to accrual status.
50% of non-accrual loans are paying as agreed and 80% are secured by real estate, due to the stability in our loan portfolio. We did not record any provision for credit losses in the third-quarter and we reversed $233,000 in provisions for losses on unfunded commitments.
The allowance for credit losses remains high at a level of 1.47% of total loans, loan balances of $2.1 billion at the end of the third-quarter were up $8 million from the prior quarter. We had some movement from construction loans to CRE loans while the largest area of growth was in residential mortgages, primarily due to the portfolio of high quality in market residential mortgage loans that we purchased with part of the proceeds from the security sales in the second-quarter.
Given the continued strength of our capital ratios. Our board of directors declared a cash dividend of $0.25 per share on October 24, the 78th consecutive quarterly dividend paid by the company.
With that. I'll turn it back over to you Tim to share some final comments.
Timothy Myers
Thank you, Tani. In closing, we are seeing the positive results of proactive strategic balance sheet and expense management actions taken in the second-quarter and we expect these trends to continue resulting in further improvement in our level of profitability.
We started reducing rates in late August on liquid funds earning higher price exception rates, positive rates simultaneously with fed rate cuts in September.
We have not seen any meaningful outflow of deposits which is consistent with the historical experience of our business model leading with service and relationship pricing, not solely on higher than average rates. We expect to see more declines in our cost of deposits which should contribute to further expansion in our net interest margin as the yield curve normalizes.
We continue to be more active in our business development efforts while remaining conservative in new loan production and maintaining our disciplined underwriting and pricing criteria and are seeing an increase in the loan pipeline due to the higher level of productivity from our banking teams.
We typically see some seasonal strength and loan production in the fourth-quarter each year. And based on current trends, we expect that to be the case again this year, the pipeline is well diversified across industries and our markets.
And while we continue to carefully manage expenses and reduce costs in certain areas of the company we are also continuing to make investments in both talent and technology that will further enhance our level of efficiencies, improve the overall customer experience we can offer and increase our ability to attract new clients to the bank.
We also continue to have a very strong balance sheet with high levels of capital, liquidity and reserves, given the strength of our balance sheet and the banking talent we have added in the past several quarters, we believe we are very well positioned to increase our market share at attractive new client relationships and generate a higher level of loan growth, as economic conditions and loan demand improves.
We believe that this will help us to consistently generate profitable growth in the future and further enhance the value of our franchise for our shareholders.
With that. I want to thank everyone on today's call for both your interest and support. We will now open the call to your questions.
Operator
(Operator Instructions)
Wood Lay.
Wood Lay
Hey, good morning guys. Wanted to start on expenses. They came in a little bit better than what I was expecting. You had the recent staffing restructures and it sounded originally like a lot of those savings would be reinvested into the company. But just wanted to get your updated thoughts on, sort of the expectation for Q4 expenses and, and just how you think the expenses trend from here.
Timothy Myers
Yeah, so I'll, talk high level, Wood, and then Tani can add any other details. So the expense savings are yes, both from the reduction in force other cost saving measures. And frankly, we're ahead of cost, spend expectations on a number of our technology and digitalization initiatives.
So we'll continue to look for ways to accomplish our strategic objectives there. There are some positions still left to fill, but overall, I believe we're still ahead of what we thought we would accomplish vis-a-vis those cost saving efforts. Tani, anything to add.
Tani Girton
Yeah, I I think that that actually no, nothing to add. I think that sums it up quite well. Why will -- we will have net some reductions in our original projections for those investments? There also have been some delays. So some of those costs don't hit exactly when we projected. But I think and then also, you know, we continue to look for talent, but those expenses will hit when we find the right talent.
Wood Lay
Yeah. All right. That's, great color may maybe shifting over to the margin. So we got the bump from the, the recent restructure and it, it sounds like some interest reversals were ahead within the third-quarter. So we, we should get a night, take up in the fourth-quarter. But, how do you think, you know, additional rate cuts from here impact the forward outlook for the margin?
Tani Girton
So, if we look at the September net interest margin versus the third quarter average, it was higher by about 2 basis points, but some of that noise was still in there. So I think we're going to get some lift from that. We still have 26 basis points and upward loan repricing embedded. Considering a flat balance sheet and flat rates. You know, our proactive deposit strategy, we're closely monitoring but continuing forward with that strategy.
So, that should be a tailwind for us on that, the cash position, you know, that can fluctuate. So, depending on, you know, what's going on with deposit balances and our cash position and then, you know where the fed goes with rates, that could have some impact on it.
But if you consider that the most likely scenario is a fed move in November with a steeper yield curve that could also help.
So, while I don't want to put a number on it, I think, you know, you identified some of the bigger movers and then we still have some, you know, there's some things that obviously we can't control but the things we can control, we're still watching and working on very diligently.
Wood Lay
Yeah. Got it. And then last for me, I just wanted to shift to the buyback. You know, the first time you all repurchased some shares since the start of 2022. Could, you just talk about what made you comfortable reengaging on the buyback and, is there further appetite from here?
Timothy Myers
Yeah. Certainly our credit quality, you know, as we got more comfortable with the credit quality, the lost potential, certainly in light of our capital ratios are very strong capital ratios and the valuation, obviously, we continue to believe the stock is undervalued. And once we got a better sense that we didn't think there were you know, a lot of hits to capital lurking in there and we got a lot more comfortable.
So we'll continue to look at that. You know, we always have to juxtapose that option with all the other available options, but we'll continue to keep an eye on that.
Wood Lay
All right. Thanks for taking my question.
Timothy Myers
Thanks, Wood.
Operator
Matthew Clark.
Matthew Clark
Hey, good morning, everyone. Just want to get back to the expense run rate if you could be a little more specific. I mean, do we net, do we think we're, flat here in Q4 or do we grow? And then what's your expectation for the seasonal increase in the first-quarter? I think, historically, it's, you know, it's been high, single digit, I think. But more recently, I think you guys have obviously tamped down on that seasonal increase. Just want to get your updated thoughts there too.
Tani Girton
Yes. So, you know, typically we do have some expenses hit in the fourth-quarter, sort of for all our true ups. We also try to true up our bonus expect, you know, an incentive payment accruals to the extent we can. And as you said, we are trying very, very hard to minimize the reversals in the first-quarter associated with that, but it's always really hard to project exactly what those are going to be. But we will still have, you know, the annual resets of the [401k]. And then, the bonuses. So we will have the typical pop in the first-quarter in expenses that we normally see.
Matthew Clark
Okay. And then you could, you also give us the all in spot rate on deposits. I know you excluded some balances there, but just want to get the all-in cost of deposits, either total or interest earning.
Tani Girton
Yeah, let me grab that.
Matthew Clark
And the average margin in September, even if it's, you know, adjusted or unadjusted either one.
Tani Girton
The average margin in September, you mean the net interest margin?
Matthew Clark
Yeah.
Tani Girton
Yeah, that was 2.70%.
Matthew Clark
Okay. Consistent with the quarter. Does that include the 6 basis points negative impact or is that excluding--
Tani Girton
Yes, that includes it.
Matthew Clark
Okay.
Tani Girton
And let's see, you said you wanted the spot rate on the deposits. Let me, come back to you with that. I've got a lot of pieces of paper in front of me and I want to make sure I'm looking at the right one. Was there one other thing you had Matthew?
Matthew Clark
One other question just around the San Fran office from last quarter, I think your reserves were $6.7 million and just want to get an update their whether or not that's the number has changed and is it fair to assume those are realized, you know, out of existing reserves in the fourth quarter?
Timothy Myers
So you're talking about the reserve we took in the prior quarter. No, nothing's changed there. In fact, the leasing activities picked up, they've signed three new leases in Q3 on that property. So we continue to see that kind of trend overall in San Francisco. But no, we -- that provision was down to, you know, a less than 100% loan to value on a recent valuation prior to these new leases being signed. So no further deterioration or further provision on that large property.
Matthew Clark
Okay, thank you.
Timothy Myers
You're welcome.
Tani Girton
Matthew. The spot rate on deposits on September 30, was 1.43%.
Matthew Clark
Perfect. Thank you.
Operator
David Feaster.
David Feaster
Hey, good morning, everybody. Maybe just touching on the growth side. I mean, curious kind of what you guys are seeing, you know, origination slowed a little bit. I'm curious is that a function of demand. And just where are you seeing opportunities and the appetite to continue to supplement organic growth with potential pool purchases?
Timothy Myers
Sure. So you know, yes link core originations were down, but that's just a function of timing. We don't have a real granular pool of loan types that we do. So there is going to be some lumpiness. We expect it to be better.
We have closed $10 million since quarter end that just got pushed over and we feel very good about the quarterly pipeline. So when you're looking from a longer term growth perspective, we're very happy with the trends we're seeing in activity begets originations, obviously that begets results.
So we see a consistent trend in higher levels of activity that are generating higher pipelines that's pretty diverse for our footprint. The loans that closed were diverse rather footprint. We're seeing kind of a shift from C&I last quarter to more CRE this quarter. But again, that's, you know, their lumpy as that.
So that will shift, I think, quarter-to-quarter, you know, construction loans. We've had some refinancing into permanent. The new ones we're seeing are much smaller, more granular $2 million to $3 million for intel projects. So no real big projects coming from there.
So it's a lot of blocking and tackling David. It's a nice mix between our new people. We did hire a new producer in Q3 and that's already resulted in closings. But it's a nice mix between that and our existing team. So it's just getting a more consistent approach. You again calling activity that leads to pipeline building that leads to closing. So while every quarter won't be on the exact same trend line, we're optimistic about what we're seeing.
David Feaster
Okay. And then where are you seeing new loan yields on production today? And then just following up on your commentary about hiring where, you know, you talked about an appetite for continued hires. Obviously, it's got to be the right people at the right time. Curious where you're seeing opportunity, how those conversations are going and what segments or markets you're looking to add to at this point.
Timothy Myers
Yeah. So if you look at the people we both hired and the ones we're talking to, it's really speckled throughout the footprint. So, and if you look at some of the banks that, you know, we're hiring from, they might not have had as much of a regional micro, regional focus as we did. Meaning they focus on the entire Bay area.
So their specific location is not necessarily indicative within the Greater Bay area where that growth might come from, back to the yield question. Just looking at the commercial loans last quarter, we're about a 6.5% yield on new loans versus the [5.63%] that paid off. So, you know, it's still very competitive for high quality loans, but those are the loans we're booking.
David Feaster
Okay. And then maybe last one for me, just, you know, touching on the core deposit side, it's great to see the growth, especially on the NIB front. You touched on some of the seasonal impacts there. I was hoping maybe you could quantify how much, you know, is seasonal versus I mean, you guys have been, you know, pretty successful opening new accounts like you talked about.
So just kind of curious what some of those seasonal if you could quantify the seasonal impacts and just how do you think about core deposits going forward and where you're having success?
Timothy Myers
Yeah, thank you. We did have the seasonal inflows but we also had some seasonal outflows. About $18 million of the growth in non-interest bearing came from new relationships. You know, those are deposit accounts we expect to fund up. But again, the timing of that's unclear.
So a lot of that was seasonality, but we did have a nice, game from new fund and new account openings. And about that was about split pretty evenly between consumer and business.
Tani Girton
And I would say that the new accounts that's been pretty consistent over the last several quarters. I mean, we've been getting around 1,200 to 1,300 new accounts every quarter for several quarters running now.
David Feaster
Okay. That's great. Thanks everybody.
Timothy Myers
Thank you, David.
Operator
(Operator Instructions)
Jeff Rulis.
Jeffrey Rulis
Thanks. Good morning. Question on the -- maybe a couple of follow ups, Tani, if I could the expense level, $20.4 million this quarter, but included, you know, elevated legal accrual that you called out that $600,000-plus. So thinking about fourth quarter and you mentioned some resets or some true ups in the fourth-quarter and the bump in maybe first-quarter. But, you know, I think quarter-to-quarter or sequentially if we safe to assume that the legal don't recur and we're flat to down in the fourth-quarter or I just wanted to clarify that.
Tani Girton
Yes. I can't, there's nothing I'm aware of in particular that would take them higher and that legal settlement, that type of claim is not a repeatable. Once it's settled, that one's finished. So that won't come back again.
Jeffrey Rulis
Okay. And if we net all that out, I just looking for a broader, if we're thinking about 2025, and given the efficiency improvements you've undergone this year. What's a good growth rate for next year? Understanding that you'd be opportunistic on talent if it comes up. But as you budget today, it should we assume sort of a 3%, 4% growth rate in '25.
Tani Girton
You know, I think typically when we start our strategic planning process, we will start with 3% and go from there. But we still have the tail end of, you know, some of our strategic investments in there. But if we look forward, you know, '25 and forward, we're looking at efficiency improvements every year going forward. So, you know, over the next 4 to 5 years. So I know that's not a specific problem as you want, but that's how we do it.
Jeffrey Rulis
We started at three and you're going to be working hard to -- okay, fair enough. And then on the margin, I just wanted to clarify Tani, I thought you said that the September margin was a couple of basis points above the quarterly average.
Tani Girton
Yes. Oh, and I said you're right. I said that wrong. It was [$2.72] in September, not [$2.70]. Thank you.
Jeffrey Rulis
Got it. Okay. And, with inclusive of some negative headwinds that maybe I think you framed it up as there's tailwinds to that going forward even exiting at [$2.72] right?
Tani Girton
Yeah.
Jeffrey Rulis
Okay. Thank you. And then just on the credit side, you know, it sounds like the loan that moved to not a rule kind of administrative in nature. Any more color on that loan or I think you had mentioned maybe real estate.
Timothy Myers
Yeah, it's office CRE, some of our loans have a mechanism whereby if certain conditions are met, the loan extends out beyond its original maturity. There are times depending on an agreement or disagreement about whether those conditions have been met.
It's in a part of San Francisco that has actually an attractive trends for obviously activity and there is sponsorship. It's just a protracted process of negotiating those conditions such that that extension can take place. So it's a little more technical and administrative in nature than certainly some of the other ones.
Jeffrey Rulis
Okay. Last one for me, Tim, you mentioned the pipeline a couple of times. Do you happen to have the quarter-over-quarter? Like what, where we sit today versus where you entered the third-quarter? Just in dollar terms?
Timothy Myers
It's quite a bit bigger, but I'm really reluctant, Jeff as you know how to do that, it fluctuates and again, there's a lumpiness aspect to it. So we don't give that guidance, but it's considerably bigger today than it was at the start of the quarter last quarter.
Jeffrey Rulis
Okay. So I lied on the tax rate. Tani, do you have any read on what we should model or think about, go forward on taxes?
Tani Girton
Yeah, so for this year, because we had the big loss, the tax rate is inflated because we, you know, every time we, every quarter that we have income, we're basically reversing some of the tax benefit from that loss. But I anticipate that the tax rate will return to normal levels in 2025.
Jeffrey Rulis
Which is around 25%. I think you've said previously 25%.
Tani Girton
It was, I think closer to 26.5%.
Jeffrey Rulis
Thank you.
Timothy Myers
Thank you, Jeff.
Operator
David Feaster.
David Feaster
Hey, sorry. I just wanted to hop back in and maybe ask a little bit about the margin trajectory as we look forward I mean, you touched on a lot of the dynamics but you know that 26 basis points of embedded loan repricing is that all next year?
I'm just looking at the repricing chart and you know, we talked about loan growth coming on in the mid-6s, but you know, some of what's maturity is coming on like coming off around the low-7s. So I'm just kind of curious like how do you think about the trajectory of the margin as we look out to next year?
Tani Girton
Yeah, that 26 basis points is over the next 12 months.
David Feaster
Okay.
Tani Girton
So, but the margin, you know, is marching higher. You know, but not in any big steps, you know, it's just kind of a March.
David Feaster
Okay. Thank you.
Timothy Myers
Thank you David.
Operator
Matthew Clark.
Matthew Clark
Okay, thank you. Your beta, your deposit beta on the way up interest bearing, I think was 47%. This cycle, what are your thoughts on the beta on the way down this time around?
Tani Girton
We use a lower beta than that on the way down and we also lag it. And so on the interest rate risk position, you'll see a different position this quarter when we publish the queue than we saw last quarter because of the repositioning.
So we are a little more sensitive to falling rates because we have a higher cash position and also the investments that we made in new securities were at shorter durations.
And then, you know, I think we also have some swaps on the books that if as rates go down, those will also have a negative impact. So again, the cash position has a pretty big impact on our sensitivity and that is somewhat dependent on the cash flows associated with our deposits.
Matthew Clark
Okay, great. Thank you.
Operator
We have no further questions at this time. I'll hand it back to Tim Myers, for closing remarks.
Timothy Myers
Thank you, everybody. We appreciate your interest and your questions. Please feel free to reach out if you have any further ones. Thanks.
