Earnings Call Transcript - BMRC Q2 2025

Krissy Meyer, Corporate Secretary

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the second quarter ended June 30, 2025. I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. Joining us today are Bank of Marin President and CEO, Tim Myers; and Chief Financial Officer, Dave Bonaccorso. Our earnings news release and supplementary presentation, which were issued this morning, can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Post captioning is available during the live webcast as well as on the webcast replay. Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non-GAAP measures. Additionally, the discussion on the call is based on information we know as of Friday, July 25, 2025 and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion on these risks and uncertainties, please review the forward-looking statements disclosure in our earnings news release as well as our SEC filings. Following our prepared remarks, Tim, Dave and our Chief Credit Officer, Misako Stewart will be available to answer your questions. And now, I'd like to turn the call over to Tim Myers.

Timothy D. Myers, CEO

Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. We executed well in the second quarter and saw positive trends in a number of key areas, including continued expansion in our net interest margin, effective expense management, and stable asset quality. Our pretax pre-provision net income increased 15% compared to the prior quarter and 85% compared to the prior year-to-date. Our improving financial performance and continued benefits from prudent balance sheet management resulted in increases in both book value and tangible book value per share growth in Q2. And as we announced in early July, our second quarter securities repositioning is expected to have a 13 basis points of net interest margin lift and $0.20 of annual earnings per share lift with the vast majority of those benefits beginning in the third quarter. Our banking team, reinforced with continued additions, and the positive impact of the hires we have made over the past couple of years, continue to do a more consistent job of developing attractive lending opportunities and generating new relationships for the bank. We are excited to add new leaders to our banking teams and are optimistic that they will contribute to our future growth in key markets. We are seeing a very competitive market environment where we are maintaining our disciplined underwriting and pricing criteria. During the quarter, the total loan originations were $68.8 million of commitments, including $50.2 million in fundings, which was relatively consistent with the level we had in the prior quarter. Our originations were a nicely diversified and granular mix across commercial banking categories, industries, and property types. While we are more consistently funding new loans, we continue to see payoffs and paydowns due to asset sales and cash deleveraging, as well as elevated payoffs in our acquired residential mortgage portfolio. Our total deposits declined in the second quarter, which was primarily due to normal client activity, including business expenses, payroll and distributions, asset purchases, and seasonal outflows for tax payments. However, with our continued success in adding new deposit relationships, total deposits have grown year-to-date and we expect to see the typical seasonal inflows of deposits during the second half of the year. Thus far in July, we have recouped more than 70% of the deposit outflows that occurred in the second quarter. The rate environment remains competitive and clients remain very sensitive. However, we are seeing limited attrition of deposits due to rate. Our customers continue to bank with us for our service levels, accessibility, and commitment to our communities, and not entirely based on pricing. As a result, we continue to be able to reduce our deposit costs, which helped drive further expansion in our net interest margin in the second quarter. And similar to the actions taken early in the second quarter, last week, we completed additional targeted deposit rate cuts. Given our solid financial performance and prudent balance sheet management, our capital ratios remain very strong, with a total risk-based capital ratio of 16.25% and a TCE ratio of 9.95%. Given our high level of capital, during the quarter, we repurchased $2.2 million of shares within the limited window we had for repurchases. With that, I'll turn the call over to Dave Bonaccorso to discuss our financial results in more detail.

David Bonaccorso, CFO

Thanks, Tim. Good morning, everyone. Our results this quarter were impacted by the additional securities repositioning that we executed at the end of the quarter and the resulting loss that we incurred on the sale of the securities. We had a net loss of $6.5 million in the second quarter or $0.53 per share. However, excluding the loss in the security sales and the related tax impact based on our Q2 effective tax rate, our net income and EPS each grew by 18% compared to the prior quarter. Our net interest income increased from the prior quarter to $25.9 million, primarily due to a higher balance of average earning assets and a 7 basis point increase in our net interest margin. The expansion in our net interest margin was attributable to a 1 basis point decrease in our cost of deposits, while our average yield on interest-earning assets increased 6 basis points from the prior quarter. Our average yield on loans increased 7 basis points from the prior quarter as the average rate on new loan production was higher than the average rate of the loans that paid off during the quarter. We also continue to see an increase in the average yield on our securities portfolio, which was bolstered by the securities repositioning that occurred in June. Our noninterest expense was slightly up from the prior quarter due to expected cost of technology and branch upgrades, annual events, and regulatory agency fees. Over the remainder of the year, we expect that our noninterest expense will be similar to the first half of 2025. Moving to noninterest income, it was negative this quarter due to the loss we incurred on the securities portfolio repositioning. Aside from this one-time nonrecurring item, most other areas of noninterest income were relatively consistent with the prior quarter. Disciplined credit management remains a hallmark of Bank of Marin as well. Due to the stability in our loan portfolio and the high level of reserves we have already built, we did not require any provision for credit losses in the second quarter. Overall trends in our level of problem assets reflect our proactive and conservative approach to credit management where we are aggressive to downgrade and cautious to upgrade. The allowance for credit losses remained at 1.44% of total loans. So far in July, we are seeing indications that there will be additional loan upgrades during the third quarter. Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on July 24, the 81st consecutive quarterly dividend paid by the company. With that, I'll turn it back over to you, Tim, to share some final comments.

Timothy D. Myers, CEO

Thank you, Dave. In closing, we believe we are very well positioned to continue generating solid financial performance in 2025 as we expect to continue to see positive trends in our net interest margin and revenue. Given the strength of our balance sheet and the high levels of capital that we have, we were able to execute on another securities portfolio repositioning at the end of the second quarter that will be accretive to earnings and result in further expansion of our net interest margin. While broadly there is economic uncertainty, we are not seeing this adversely impact our clients, and loan demand remains healthy. Our loan pipeline remains strong, and we are continuing to see solid loan production thus far in July. As such, we expect to see loan growth during the second half of the year. While we always tightly manage expenses, we will also continue to take advantage of opportunities to add banking talent and enhance efficiency through technology that we believe will help support the continued profitable growth of our franchise. Given the positive trends we expect to see in loan growth, net interest margin, and expense management, we expect to generate improved financial performance over the remainder of the year. With the strength of our balance sheet, we believe we are very well positioned to increase our market share, add attractive new client relationships, generate profitable growth, and further enhance the value of our franchise in 2025 and the coming years. With that, I want to thank everyone on today's call for your interest and your support. We will now open the call to questions.

Operator, Operator

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

Matthew Timothy Clark, Analyst

First one for me on the two CRE loans that migrated this quarter. Could you just give us some color on the types of CRE loans, and what drove that migration, and any plans for resolution there?

Timothy D. Myers, CEO

Yes, they are generally retail and mixed-use properties. They involve smaller loans and are located in areas facing tenancy or cash flow challenges, rather than in San Francisco. We have downgraded these loans; however, there is strong sponsorship, which will help in securing tenants. We are actively working on remargining several loans with the support of our guarantors, and we are not particularly worried about them.

Matthew Timothy Clark, Analyst

Got it. And then now that you've cleaned up the AFS portfolio, what's your appetite to consider doing something similar in the HTM securities portfolio?

Timothy D. Myers, CEO

Yes, sure. We've talked about that, obviously, quite a bit with you all, and it's something we continue to look at. I think we're seeing some more examples in the market, albeit not all apples-to-apples, but the capital market seems to be willing to support, and that would be the next mountain to climb there. So it's something we continue to look at, just cautious of the impact on capital and potential dilution to shareholders. So we continue to juggle all that with the prospect of unleashing those earnings off the balance sheet.

Matthew Timothy Clark, Analyst

Great. And then last one for me, just on the buyback, kind of renewing or I think you guys renewed it or re-upped it. I just can't recall off the top of my head, I might be confusing you with someone else. But just your appetite on the buyback, how aggressive you might get or continue to be in the market?

Timothy D. Myers, CEO

Yes. So you're right. We did just re-up that allocation with the Board. The reason, frankly, we had said we would love to buy back shares below tangible book by the time we went through the exam process and then got approval for the capital plan, the dividend, etc., from the regulatory body that limited our time given the blackout that we could execute that within. Obviously, that's a competing use of capital. And so we'll continue to juggle that concept with, as you said, some more securities repositionings and continue to evaluate, but it was very attractive for us to do that below tangible book. We just ran out of time there.

Operator, Operator

Our next question comes from Andrew Terrell with Stephens.

Robert Andrew Terrell, Analyst

To start, I have a question for Dave regarding the securities restructuring. In the second quarter, it seems that most of the AFS book was already traded and repurchased. Can you share how the performance compared to your assumption of a 5% reinvestment rate? Were you able to exceed that, or were the results in line with expectations? Additionally, I assume that the timing was right at the end of the quarter, so any clarification on that would be appreciated.

David Bonaccorso, CFO

Sure. The sales and purchases occurred throughout June. And I believe the final yield on purchases was just a touch over 5%, I believe, 5.02%, somewhere around there, but 5% is a pretty good number to work with.

Robert Andrew Terrell, Analyst

Got it. Okay. I think in the prepared remarks, you mentioned that, sorry, go ahead.

David Bonaccorso, CFO

I was going to say that for the repositioning, we did buy other bonds during the quarter before that. So I don't know if you're asking specifically for the repositioning or if you're asking for what we did for the entire quarter. What we did for the entire quarter was a little below on an average basis. The repositioning-related trades, the purchases were just above 5%. Overall, we bought...

Robert Andrew Terrell, Analyst

Could you provide more details on the recent deposit rate cuts you mentioned in your prepared remarks? I've noticed that there seems to be a slowdown in the ability to further reduce deposit rates, and I would appreciate hearing more about your strategies in this area.

Timothy D. Myers, CEO

Yes. I wouldn't qualify that as ability; it's just targeted. So whether you're taking reciprocal type deposits or other buckets, we look at buckets where we can do that and have a manageable impact. And so I think it was about $250 million, $300 million that we did recently in April. So we'll continue to look targeted and selectively where we can do that without too much adverse impact.

David Bonaccorso, CFO

The most recent actions involved some measures taken in early April and early July. The early July action was approximately $185 million, and the weighted average cut was about 15 basis points. This translates to roughly a 2 basis point benefit to interest-bearing deposit costs and 1 basis point to total deposit costs, resulting in small improvements to net interest margin. Additionally, we've been reducing time deposits, cutting them by 31 basis points in the quarter. While there is certainly more flexibility with Federal Reserve moves, we are being strategic about making smaller adjustments in response to those cuts.

Timothy D. Myers, CEO

I would add the reason it didn't have a larger overall impact is because we, as we noted in the presentation, continue to bring in a lot of new customers. The preponderance of that, the majority of that was interest-bearing. That's at a slightly higher rate, but we continue to gather new households, new relationships, and build a more granular portfolio. So it's toggling to have the ability to attract new customers while managing the cost of existing deposits.

Robert Andrew Terrell, Analyst

Yes. Okay. And if I could sneak one more in. Just I mean, it sounds like you're optimistic about loan growth stepping up a little bit in the second half of the year. It sounded like originations were pretty flat sequentially. But I'm curious how you expect to drive positive loan growth in the back half? Is it more from accelerating origination levels? Do you feel like payoffs should subside a bit from here? Just any more color on kind of the net loan growth outlook in the back half?

Timothy D. Myers, CEO

Yes. So the payoffs for the quarter are at or below where we expected them. Where we have had the higher degree of payoffs than forecast was on the acquired mortgage portfolio. That's been considerably higher, but the commercial was less than we forecast. We do have a couple of key hires coming in, some new market leaders that have joined the bank. And so yes, the pipeline despite the loans that closed is slightly higher than it was the prior quarter. And we've actually had some deals pushed out into July and have had a good amount of closings going into August. So timing is everything with that stuff and the commercial relationship. So I can't guarantee the amount, the volume within a quarter, but all those things continue to move in the right direction.

Operator, Operator

Our next question comes from Jeff Rulis with D.A. Davidson & Co.