Bank of Marin Bancorp

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the second quarter ended June 30th, 2025. I am Chrissy Meyer, Corporate Secretary for Bank of Marin Bancorp. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question and answer session. Joining us on the call today are Bank of Marin President and CEO Tim Myers and Chief Financial Officer Dave Bonacorso. Our earnings news release and supplementary presentation which were issued this morning, can be found in the investor relations section of our website at bankofmoran.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, 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.

Thank you, Christy. 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 pre-tax, 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 add 13 basis points of net interest margin lift and 20 cents of annual earnings per share left with the vast majority of those benefits beginning in the third quarter. Our banking team, reinforced with continued additions we are making and the positive impact of the hires we have made over the past couple of years, continues to do a more consistent job of developing attractive lending opportunities and generating new relationships to 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, but we are maintaining our discipline 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 rate-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 help 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 Bonicorsa to discuss our financial results in more detail. 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 53 cents 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 seven basis point increase in our net interest margin. The expansion in our net interest margin was attributable to a one basis point decrease in our cost of deposits, while our average yield on interest earning assets increased six basis points from the prior quarter. Our average yield on loans increased seven basis points from the prior quarter, as the average rate on new loan production was higher than the average rate on 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 non-interest expense was slightly up from the prior quarter due to expected costs of technology and branch upgrades, annual events and regulatory agency fees. Over the remainder of the year, we expect that our non-interest expense will be similar to the first half of 2025. Moving to non-interest income, it was negative this quarter due to the loss we incurred on the securities portfolio repositioning. Aside from this one-time non-recurring item, most other areas of non-interest income were relatively consistent with the prior quarter. Discipline 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 do 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 25 cents per share on July 24th. 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.

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 accreted 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.

If you would like to ask a question, please click on the raise hand button at the bottom of your screen. Once prompted, please unmute your line and ask your question. We will now pause a moment to assemble the queue. Our first question will come from Matthew Clark with Piper Sandler. You may now unmute your audio and ask your question.

Hey, good morning. Good morning, Matthew. Um, 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? Um, and you know, what drove that migration, um, and any plans for resolution there?

Yeah, they're generally retail and or mixed use. They're, they're obviously smaller loans. They're in, they're not in San Francisco. They're in areas, they were experiencing tenancy or cashflow issues. So we downgraded them, but there is good sponsorship there. And so we, you know, they'll continue to tenant up and we'll, there's a number of loans where we're working on re-margining because the support of our guarantors and they're not loans that we're particularly concerned about.

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?

Yeah, 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 markets seem 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.

Great. And then last one for me, just on the buyback, kind of renewing or 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.

Yeah, 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, et cetera, from the regulatory body that limited our time, given the blackout, that we could execute that within. Obviously, that's 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 a tangible book. We just ran out of time there.

Understood. Thanks for the questions.

Thank you. Our next question comes from Andrew Terrell with Stevens. Please go ahead.

Hey, good morning. Morning. Hey, maybe just to start, probably for Dave, just on the securities restructuring the AFS book in the second quarter, it looks like the majority of that was kind of already traded and kind of repurchased. Just curious, you know, what the performance was like relative to, I think your assumption was for a 5% reinvestment rate. Were you able to do better than that or in line or just how should we think about that? And I'm assuming the timing was like right at the end of the quarter, but any clarity there would be helpful.

Sure. Excuse me. The sales and purchases occurred throughout June. And I believe the final yield on purchases was just a touch over 5%, I believe 502, somewhere around there, but five is a pretty good number to work with.

Got it. Okay. I think in the prepared remarks, you guys mentioned that... I was going to say, that's for the repositioning itself.

They buy other bonds during the quarter, you know, so before that, so... 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%. Thank you for clarifying.

If I could also just ask on the, I think you mentioned the prepared remarks maybe some additional deposit rate cuts more recently. Can you just elaborate on that a little bit more? I think we're seeing in most examples, just kind of a stalling out of ability to lower deposit rates. Just would love to hear a little bit more about what you guys are doing there.

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

The most recent piece, I mean, I think, so we did some in early April and some in early July. The early July piece was around 185 million or so. And the weighted average cut of those was about 15 basis points. So that's worth two basis points roughly to interest-bearing deposit cost and one basis point to total deposit cost. Small benefits to NIM. And then along the way, we've been cutting time deposits. As you probably saw, we cut time deposits 31 basis points in the quarter. But yeah, there's definitely more ability with Fed moves, but we're being- targeted and how we make smaller modifications away from bed cuts.

Understood. I appreciate it.

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.

Yep. Okay. And if I could sneak one more in, just, I mean, it sounds like you're optimistic about, you know, loan growth stepping up a little bit in the second half of the year. It sounded like originations were pretty flat sequentially, but you know, I'm curious, you know, 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 kind of net loan growth outlook in the back half?

Yeah. So the payoffs for the quarter at or below where we expected them, you know, 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, new market leaders and that have joined the bank. And so, yes, the pipeline, despite the loans that close is slightly higher than it was the prior quarter. And we've actually had some deals push out into July and have had a good amount of closings going into August. So, you know, Timing is everything with that stuff in a commercial relationship. So I can't guarantee the amount, you know, the volume within a quarter, but all those things continue to move in the right direction.

Awesome. Okay. Thank you for taking the questions.

Thank you. Our next question comes from Jeff Rulis with DA Davidson & Co. Please go ahead.

Great. Thanks. Good morning. Maybe just to clarify, Tim, on the growth front, loans pretty flat year to date. We know there's a lot of churn. It sounds like you're optimistic. But on a net, are you saying you anticipate net growth in the second half? Or is it, hey, we feel good about originations. Payoffs could negate that. And we're flat through the end of the year. Just wanted to kind of gauge where you are on a net basis by year end, your expectation.

Sure. Yeah, we are still targeting net growth, Jeff. And we feel like we have the pipeline and the activity to justify that plan. It is hard to, I don't mean to sound like I'm hedging, it is hard to answer that question of how the net, we had told everybody about mid single digit growth for the year. Can I double that for the second half of the year and target that mid single digit? That's our goal, but obviously that becomes harder as you get later in the year. But we are targeting an acceleration of fundings and have net growth for the year.

Okay, thank you. And Dave, on the margin, look at a nice pickup of this restructuring kind of pulls you up. I guess if we just point the point, we're closer to 305 margin today. He had seven basis points of lift this last quarter with targeted rate cuts. Sounds like the core, you know, absent the restructure is on the way up. If you could kind of maybe bake in the restructuring benefit and kind of talk about maybe the second half of what you think total reported margin. Sounds like an upward trend above the restructuring benefit.

Correct. So maybe I can cover some of the drivers. So on the loan side, the usual statistic we share is that point-to-point monthly loan yield benefit over the course of a year. We think we have about 20 to 25 basis points of natural loan repricing yield over the next 12 months. getting out to June 26. We had about six or seven basis points of loan yield increases most recently, so that tracks well with the estimate I just gave. Obviously, you'd have upside if you had loan growth and higher intermediate term rates, let's say, for variable rate loans. Headwinds could potentially be lower short-term rates. Things like prepayment changes and non-accrual positives or negatives are wild cards there. But overall, still a very good trend on the loan side. And the yield on funded loans this quarter was 72 basis points higher than prior quarter. So again, good trends there. I think we've mostly covered what's available on the security side with the repositioning, adding the 13 basis points, primarily beginning. I think there's just a touch of impact in June, just given when we did those trades. But the bulk of those benefits really occur in Q3. And then on deposits, we continue to do targeted things. We continue to reprice time deposit down. And then the question is, what do we get from the Fed that would allow us to do bigger things on the deposit side? But overall, there's still plenty of opportunity to remix assets and again, have the demonstrated ability to lower deposit rates.

Got it. I mean, that sounds like pretty good visibility on the loan side. I mean, we'll wait to see what the yield curve gives us. But I mean, a margin kind of closer to three and a half well in the next year. Is that, you know, as you guys talk in-house, is that a realistic goal or just trying to gauge? It sounds like a long runway of benefit absent any other further restructuring efforts.

Yeah, so I think loan growth would be a question there. What do we get there that would help us? And I'd say three and a half is probably more a back half of 26 number than a front half of 26 number.

Fair enough. Got it. Then one last one for you, Dave, you did mention the credit upgrades anticipated or, or into the third quarter is any kind of segment detail on, on where you're seeing some, some of those upgrades.

It's really all over the place. There's some, you know, substandard or non-accrual CNI real estate where we're getting remargining and, Yeah, I don't want to jinx it and or give away too much information, but refinancing some of these problematic credits out. So we've made a lot of progress. I wish the timing had worked so we could share that with you. But we feel optimistic that a considerable portion of substandard, some non-accrual and special mentions will get upgraded in the near future.

Tim, are those sizable? I mean, I hate to, you don't want to spill all of it, but any of the larger credits that you're seeing, are these sort of on the edges, granular stuff?

No, there's some meaningful amounts in there. If you're talking specifically about our largest loan that we've talked so much about, that's still a work in progress. We are seeing progress in the markets. You know, we just did a new appraisal and over the last year, the value of that went up 23%. Now it went down a lot. So we have more room to make up. The office space in that building is now in San Francisco, almost 100% leased. But the retail portion of that is problematic. And I think that's reflective of what we're seeing in San Francisco overall. We are seeing leasing activity pick up. but at certainly lower rates. And that's where you go back to our guarantors, our sponsorship and re-margining at the right amount. So no, some of the loans that we're talking about are some of the bigger ones we've had conversations with you all about. So we're optimistic. It's not over until that all happens, but we've made a lot of progress.

Appreciate the detail. Thanks.

As a reminder, if you would like to ask a question, please click on the raise hand button at the bottom of your screen. Once prompted, please unmute your line and ask your question. Our next question comes from Tim Coffey at Jani Montgomery Scott. Please unmute your line and ask your question.

Great. Thank you. Morning, gentlemen. Morning, Tim. Hey, can you talk a little bit more about the hires that you made? I think you mentioned that one of them or a couple of them were market leaders.

Yes, we've got, I'd rather speak more about it next time because some of this is still, you know, in the process of being announced various places, but we have a new manager in San Francisco. We continue to hire in the Sacramento market. That's making a meaningful difference in the activity out there. If you look at where the bulk of activity is coming, actually Sacramento is a market, probably our most active market. Some of those loans are done in other commercial banking groups where they have those relationships. But with those hires, again, just like the activity we've seen year to date, you know, for our top five producers, our new, brand new or reasonably new bank, we're seeing that play out in the Sacramento market as well. And so they're splattered throughout kind of the footprint, but they are making a difference when you look at our staff rankings.

Okay, that's great color. Appreciate that. And how does this, you know, kind of translate to kind of the expense outlook? Because I think if I look at last year, core expenses first half of the year, about where they are now, before trailing off in the second half of the year, it doesn't seem like that's going to happen this time. Am I reading that correctly?

You know, I'll let Dave talk about the expenses. But in terms of the hiring, that's either already reflected in here, or there's some replacement offsets. And so There might be some modest net difference there, but I'll let Dave talk about that run rate overall.

Sure. So last quarter, we talked about a 4% compound annual growth rate of expenses. Historically for us since 2021, being a good place to start the forecasting. We also talked about the moves in our charitable contributions from Q2 to Q1. excuse me, that played out as expected. Same with the IT projects we talked about and that expense. So the other categories of expense growth included occupancy. We had some branch upgrades and relocations where the expense was higher in Q2, but there's some cost saves, I think, coming ahead for that. We also had some one-time or annual events, I should say, in Q2 that make Q2 higher than Q1 in that category. So Our outlook really is that there'll be movements within the buckets, but the second half of the year is going to look probably quite a bit like the first half of the year. And that includes giving some thought to the fact that our employee vacancy rate is actually lower than usual, and also including some of these new folks that we're bringing on or potentially bringing on. So that's embedded in that thought that The second half is close to the first half expense-wise.

Okay. That's all great, Connor. I really appreciate the candor. I'll step back. Thank you.

Yeah, thank you, Tim.

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

Again, thank you, everyone, for your interest, the excellent questions, and we look forward to talking to you next quarter.