Earnings Call Transcript - BMRC Q3 2025

Krissy Meyer, Corporate Secretary

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the third quarter ended September 30, 2025. I'm Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. Joining us on the call today are Bank of Marin President and CEO, Tim Myers; and Chief Financial Officer, Dave Bonaccorso. Our earnings news release and supplementary presentation, which were issued this morning can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay. Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non-GAAP measures. Additionally, the discussion on the call is based on information we know as of Friday, October 24, 2025, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion on these risks and uncertainties, please review the forward-looking statements disclosure in our earnings news release as well as our SEC filings. Following our prepared remarks, Tim, Dave and our Chief Credit Officer, Misako Stewart, will be available to answer your questions. And now I'd like to turn the call over to Tim Myers.

Timothy Myers, President and CEO

Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. We executed well in the third quarter and generated positive trends in a number of key areas, including loan and deposit growth, continued expansion in our net interest margin, effective expense management and improvement in our asset quality. As a result, we saw an acceleration in our level of profitability that we expected, with our net income increasing 65% compared to the third quarter of 2024 as we continue to benefit from the actions we've taken to put us in a good position to grow our balance sheet. Our improving financial performance and continued benefits from prudent balance sheet management resulted in increases in both book value and tangible book value per share in the third quarter, while we continue to invest in the company to support future profitable growth. Our banking team, driven largely by recent additions, continues to develop attractive lending opportunities and bring new relationships to the bank, including in areas like the Greater Sacramento region. While we continue to navigate a competitive market environment on both pricing and structure, we've been able to add new clients and maintain our disciplined underwriting and pricing criteria. During the quarter, our total loan originations were $101 million, including $69 million in fundings, the largest since Q2 of 2022. Our originations were a nicely diversified and granular mix across commercial banking categories, industries and property types, and we are seeing a healthy increase in CRE loan demand that meets our standards. This quarter's payoffs included the proactive workout of a $7 million loan that benefits the health of the overall portfolio. Our total deposits increased in the third quarter due to a combination of increased balances from long-time clients as well as continued activity bringing in new relationships. The rate environment remains competitive and clients remain rate sensitive. However, they continue to bank with us for our service levels, accessibility and commitment to our communities. And while our quarterly cost of deposits increased 1 basis point during Q3 due to existing relationship expansion, we've seen improvements in our spot cost of deposits, as Dave will discuss later. Given our solid financial performance and prudent balance sheet management, our capital ratios remain very strong with a total risk-based capital ratio of 16.13% and a TCE ratio of 9.72%. Given our high level of capital during the quarter, we repurchased $1.1 million of shares at prices below tangible book to further build value for our shareholders. With that, I'll turn the call over to Dave Bonaccorso to discuss our financial results in greater detail.

Dave Bonaccorso, Chief Financial Officer

Thanks, Tim. Good morning, everyone. We had net income of $7.5 million in the third quarter or $0.47 per share. This was significantly higher than the prior quarter, which included the impact of the loss on security sales we had as part of our balance sheet repositioning. Stripping out some of the noise, though, our pretax pre-provision net income increased by 28% on a sequential quarter basis and confirms the enhancements we've made to our core earnings stream. Our net interest income increased from the prior quarter to $28.2 million, primarily due to a higher balance of average earning assets as well as a 17 basis point increase in our asset yield. Although our cost of deposits increased just 1 basis point during the quarter and negatively impacted net interest margin, our spot cost of deposits declined 4 basis points during the quarter to finish at 1.25%. And we've seen a further decline in our spot cost of deposits to 1.24% as of October 23. Though Fed funds rate cuts resume later in the year than many forecasters expected, we have made targeted cuts to deposit rates throughout the year as well as larger cuts in response to the September Fed funds rate cut, which has resulted in a 15 basis point decline in our cost of deposits year-over-year. We are well positioned to continue to reduce deposit costs going forward, in line with the expectation of additional Fed funds rate cuts over the remainder of the year, which will contribute to margin expansion. Our noninterest expense was down slightly from the prior quarter with small reductions in a number of areas. Moving to noninterest income. Setting aside the securities losses, we had a decline of $370,000 during the quarter that is mostly attributable to a BOLI debt benefit paid in Q2. Disciplined credit management remains a hallmark of Bank of Marin as well. Due to the improvement we saw in asset quality in our loan portfolio and the substantial level of reserves we have already built, we did not require any provision for credit losses in the third quarter, and our allowance for credit losses remained strong at 1.43% of total loans. Overall trends in our level of problem assets reflect our proactive and conservative approach to credit management, where we are aggressive to downgrade and cautious to upgrade. Due to the improvement we saw in the performance of some borrowers, we had a number of upgrades during the third quarter that resulted in a reduction in nonaccrual and classified loans. Subsequent to quarter end, an additional $3.6 million in nonaccrual loans paid off in full, including interest and fees. Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on October 23, the 82nd consecutive quarterly dividend paid by the company. With that, I'll turn it back over to you, Tim, to share some final comments.

Timothy Myers, President and CEO

Thank you, Dave. In closing, we believe we are very well positioned for continued improvements in our core financial performance in areas, including balance sheet growth, net interest margin, expense management and asset quality. While broadly, there is economic uncertainty, our credit quality continues to improve and our loan demand remains healthy. Our loan pipeline remains strong, and we expect to generate solid loan production in the fourth quarter. While we always tightly manage expenses, we will also continue to take advantage of opportunities to add banking talent and enhance efficiency through technology that we believe will help support the continued profitable growth of our franchise into the future. With the strength of our balance sheet, we believe we are very well positioned to increase our market share at attractive new client relationships and further enhance the value of our franchise in 2025 and beyond. With that, I want to thank everyone on today's call for your interest and your support.

Operator, Operator

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

Matthew Clark, Analyst

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

Timothy Myers, President and CEO

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

Matthew Clark, Analyst

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

Dave Bonaccorso, Chief Financial Officer

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

Operator, Operator

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

Jeff Rulis, Analyst

Dave, you mentioned the progress on deposit costs. Looking at Slide 5, your rate sensitivities indicate asset sensitivity, but it seems to suggest further margin expansion. Could you elaborate on the core margin and expectations moving forward, aside from any interest and fees you might receive from the subsequent nonaccrual payoff?

Dave Bonaccorso, Chief Financial Officer

Sure. So let me give you a 3-part answer. The first one relates to what you're talking about on Page 5, the traditional ALM sensitivity. So historically, we've been pretty neutral. We typically talk about shades of slightly asset-sensitive or slightly liability sensitive. This quarter, well, every quarter, we do our ALM run mid-quarter. And at that point in time, we probably had more cash than we finished the quarter and that as normal. And so I think that's adding to the asset sensitivity you see in that illustration. But I think some of that has gone away in my estimation. So that's dimension one, is the pure ALM sensitivity. Dimension two is just pure napkin math and when you look at our floating rate liabilities, which is to say, interest-bearing non-maturity deposits, those are roughly $1.7 billion. And then look at our floating rate assets, those are about $525 million between loans, securities and interest-earning cash. So the assets have a 100% beta and if you try to solve for what the beta needs to be. On the liability side, you get to around a 31% beta needed to break even. And our cycle to date non-maturity interest-bearing beta has been 35%, and we model 34% in our ALM run. So I think that speaks to near-term benefits from rate declines, though some of that does drift or fade away over time just because of the way assets reprice over time. And then I guess the third dimension is just go instrument by instrument on the balance sheet. It's just working your way down. Cash, of course, if you believe Fed funds rate expectations, that will probably be a drag down the road, but that's by far the smallest of the components. Securities, we have an AFS portfolio. It's been fully repositioned or almost fully repositioned with a book yield of 4.44%. So there's not much you can do there. The HTM portfolio has a book yield of 2.40%. And so we can reinvest cash flows off that portfolio at much higher rates. We expect about $76-or-so million payouts from that HTM portfolio in the next 12 months. So that gives you a sense of what could reprice there. And then on the loan side, year-over-year, we expect our loan yield on a monthly basis to be about 20 basis points higher at September 26 compared to September 25. So that's with a flat balance sheet and payoffs at market rates. We had a 3 basis point increase this quarter, so that tracks with that. And obviously, if we have loan growth on top of that, that would give you some upside to the loan side. And then on the deposit side, we had the small increase this quarter. But of course, the Fed funds cut came in the last 10% or 15% a quarter. So the benefit we got from that wasn't as large as if it was translated over a full quarter. Our spot rate of deposits came down from 6.30% to 9.30%. So that, I think, speaks to the benefits we're going to get from further cuts moving ahead if they play out. So that quick look at instruments suggests that there's quite a bit of benefit to NIM expansion in a falling rate environment.

Jeff Rulis, Analyst

That sounds good. I appreciate it. It seems fairly positive. In the linked quarter, there is still some flow-through from the securities restructure, but overall, it appears to have a positive outlook. I appreciate the detail. If I may switch to credit, that also seems fairly positive. Tim or Misako, could you clarify if the upgrades are a result of some rate relief early on and better occupancy, or perhaps an overall improvement in commercial real estate? I would love to get more information on that.

Timothy Myers, President and CEO

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

Jeff Rulis, Analyst

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

Timothy Myers, President and CEO

Yes, we haven't conducted those specific appraisals on the same properties, but we are noticing an improvement in valuations in San Francisco. It's difficult to quantify the extent of this improvement over time, but we are seeing valuations rise.

Jeff Rulis, Analyst

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

Timothy Myers, President and CEO

No, you already nailed it. It's procedural, things that needed to be extended or in the process of that negotiating. And so these are not increasing people not paying us. It's getting lines mature or extended.

Operator, Operator

Your next question will come from Woody Lay with KBW.

Woody Lay, Analyst

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

Timothy Myers, President and CEO

I believe we are experiencing a higher proportion of investor commercial real estate this quarter as more people return to the market, although the property types are quite varied. The markets are also diverse, with Sacramento remaining a significant growth area for us. This quarter, over $20 million of our deals were related to community reinvestment activities, including some affordable housing projects. However, I don't see the same trend occurring in San Francisco. Nonetheless, we are observing increased activity. If you examine our construction team and financing developers, many of their projects are in or around San Francisco, and there's been a noticeable increase in their interest and activity. It will take some time for this interest to translate into outstanding loans, but I'd say that statement is accurate.

Woody Lay, Analyst

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

Timothy Myers, President and CEO

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

Woody Lay, Analyst

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

Timothy Myers, President and CEO

I will begin by discussing growth, and Dave can add any insights on margins. As you noted, there's positive momentum regarding the NIM expansion reflected in our balance sheet today, which is promising for us. We are experiencing ongoing loan growth, with a larger pipeline at the beginning of this quarter compared to last, which was strong. While there are limited controllable factors in payoff, we aim to keep surpassing previous levels and accelerating our progress. We recently made a new hire in Sacramento to support this initiative. Internally, we're building significant momentum, and externally, we are generating efforts to sustain our growth rate. While deposits can vary and, as Dave pointed out, predicting the seasonal fluctuations in inflows and outflows is challenging, I believe the fundamental trends will persist, which is our primary focus. You can also address the margins.

Dave Bonaccorso, Chief Financial Officer

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

Operator, Operator

And our next question will come from Andrew Terrell with Stephens.

Andrew Terrell, Analyst

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

Dave Bonaccorso, Chief Financial Officer

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

Andrew Terrell, Analyst

Got you. Okay. Yes. And I guess where I was going to go with that is it looks like I understand that growth seems like later in the quarter, at a higher cost, somewhat impede what all else equal is kind of a good repricing story later in the quarter and early into October. And I guess I just wanted to get a sense for incremental new money as it's coming on the balance sheet. Is it coming on similarly priced overall to your overall deposit franchise right now? Just given you're starting at a low base, I'm trying to get a better sense of whether this 35% interest-bearing beta is kind of a good frame of reference to use given it's on a static balance sheet or once we factor in new money being brought in at potentially higher rates, if that could somewhat impede the beta that we're kind of looking for?

Dave Bonaccorso, Chief Financial Officer

I think a significant part of our growth this quarter came from our existing accounts, which contributed a large portion of that growth. While it's technically new money, it isn't from new relationships. We encourage our current customers to bring in more funds, but when it comes to new flows, it's similar to our overall costs. We're not pursuing high-cost money, as that's not part of our strategy. Therefore, I believe the beta estimate you mentioned still makes sense, and I see no reason to think otherwise.

Timothy Myers, President and CEO

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

Andrew Terrell, Analyst

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

Timothy Myers, President and CEO

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

Andrew Terrell, Analyst

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

Timothy Myers, President and CEO

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

Operator, Operator

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

David Feaster, Analyst

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

Timothy Myers, President and CEO

It is really dispersed, David. So I would say the prior quarter had a higher component of C&I. This quarter had a lot of commercial real estate with some unfunded components. So the unused commitments made it look like that was C&I. But honestly, it was pretty CRE oriented this time. It really is coming across the footprint. If you look at the lending groups that are doing the best are primarily centered in the North Bay, Marin, Napa. But a lot of the growth, meaning where those deals are at, a lot of that is out in Sacramento. And so people following relationships. So we're seeing a really nice, again, disbursement of effort of opportunity. We had a really nice component of CRA and affordable housing this time. And so which is somewhat unique compared to prior quarters. So it really has been very diverse.

David Feaster, Analyst

Okay. That's great. You mentioned the recent hire in Sacramento and some adjustments to your compensation and calling programs that you highlighted in the presentation. Can you first address your hiring plans? Is there interest in bringing on more staff? What type of lenders are you looking for? Additionally, could you provide some details about the changes in the compensation and calling programs you've implemented?

Timothy Myers, President and CEO

Yes. We have made another hire in Sacramento after bringing on a new regional leader in the previous quarter. We anticipate a significant increase in activity in that region. We plan to make strategic hires throughout our network, which we believe is beneficial, and the individuals we are bringing on board have performed exceptionally well for us. This creates a positive cycle where increased activity leads to even more activity. In terms of calling, compared to a couple of years ago when our production largely came from a limited number of people, we are now engaging with almost entirely new customers, although some are existing ones but driven by a much more proactive calling effort. David Bloom, our Head of Commercial Banking, has been actively managing the sales process, conducting weekly sales calls with the team, and addressing key tasks. The individuals we are hiring are accustomed to this environment. While the compensation plan may not be drastically different, it is structured to encourage the right behaviors. It may not be as extensive as some of our previous competitors' plans, but it is meant to motivate the right actions. We're starting to see all these elements come together, and though it has taken some time to develop, we are beginning to gain substantial momentum.

David Feaster, Analyst

Okay. That's helpful. I'm curious about the payoffs and paydowns that are affecting the industry. How much of that involves losing deals to another bank versus factors like natural asset sales, payoffs, paydowns, and strategic deleveraging?

Timothy Myers, President and CEO

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

David Feaster, Analyst

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

Timothy Myers, President and CEO

I do not.

Dave Bonaccorso, Chief Financial Officer

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

Operator, Operator

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

Timothy Coffey, Analyst

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

Timothy Myers, President and CEO

It's difficult for us to make forecasts. The addition of approximately 1,000 new accounts each quarter has remained relatively stable throughout the year. However, significant fluctuations will ultimately affect the balances. We've already transferred some accounts off balance sheet that we deemed potentially more volatile, but predicting customer inflows and outflows among our larger depositors remains a challenge. The factors impacting the balances are the typical ones, so nothing unusual there, but it's hard to anticipate. So, to summarize, I don't have a definitive answer, Tim.

Timothy Coffey, Analyst

Sure. I appreciate that. The other side of that question is, typically we see seasonal deposit outflows due to tax payments and similar factors. Do you have any sense that the payments this year will be larger than in previous years?

Timothy Myers, President and CEO

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

Operator, Operator

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

Timothy Myers, President and CEO

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