Bank of Marin Bancorp

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the third quarter ended September 30th, 2025. I'm Christy 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 bankofmarine.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 gap and non-gap measures. Additionally, the discussion on the call is based on information we know as of Friday, October 24th, 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, Chrissy. 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 the 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 discipline 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 longtime 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 one 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 Bonicorso to discuss our financial results in greater detail.

Thanks, Tim. Good morning, everyone. We had net income of $7.5 million in the third quarter or 47 cents 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 pre-tax pre-provision net income increased by 28% on a sequential quarter basis and confirms the enhancements we've made to our core earning 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 the 17 basis point increase in our asset yield. Although our cost of deposits increased just one basis point during the quarter and negatively impacted net interest margin, our spot cost of deposits declined four 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 23rd. 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 Fund's 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 Fund rate cuts over the remainder of the year, which will contribute to margin expansion. Our non-interest expense was down slightly from the prior quarter with small reductions in a number of areas. Moving to non-interest income, setting aside the securities losses, we had a decline of $370,000 during the quarter that is mostly attributable to a bully death benefit paid in Q2. Discipline credit management remains a hallmark of Bank of Moran 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 remains 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 non-accrual and classified loans. Subsequent to quarter end, an additional $3.6 million in non-accrual 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 23rd, 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.

Thank you, Gabe. 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.

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. Please unmute and ask your question.

Hey, good morning. Morning, Matt. 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?

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.

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

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

Okay, great. Thank you.

Our next question will come from Jeff Rulis with DA Davidson.

Thanks. Good morning. Dave, you commented on... The progress on the deposit costs and just kind of looking at the slide five, you've got your rate sensitivities kind of signaling asset sensitive, but the reality is sounds like kind of pointing to further margin expansion. Could you have, and I guess absent maybe some interest in fees you might collect on the subsequent non-accrual payoff, just the core margin and expectations ahead?

Sure. So let me give you a three-part answer. The first one relates to what you're talking about on page five, 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, you know, that we finished the quarter and then 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 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, 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, just working your way down. Cash, of course, if you believe Fed funds rate expectations, that'll 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 444. So there's not much you can do there. The HTM portfolio has a book yield of 240. And so we can reinvest cash flows off that portfolio at much higher rates. We expect about 76 or so million payoffs 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, The year over year, we expect our loan yield on a monthly basis to be about 20 basis points higher, September 26 compared to September 25. So that's what the flat balance sheet and pay offset at market rates. We had a three 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, um, 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 six 32 to nine 30. So that I think speaks to, to the benefits we're going to get from, uh, further cuts, uh, moving ahead if they play out. So, you know, that, that quick look at instruments, uh, suggests that, um, there's quite a bit of benefit to NIM expansion in a falling rate environment.

That sounds good. I appreciate it. It sounds fairly positive. Maybe the link quarter, a lot of still some flow through from the securities restructure, but kind of core seems like it's got some positive. So I appreciate the detail. Maybe if I just hop to credit, that also sounds fairly positive, maybe Tim or Masako, just the upgrades. Is that a function of some rate relief early on as a better occupancy? Maybe just overall CRE improvement, if you could speak to the, or maybe it's project specific. We'd love to check in on that.

Yeah, I think if you talk 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 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.

And Tim, I guess if you roll forward these appraisals too, 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?

Yeah, I mean, we haven't done those same kind of appraisals on those same properties, but we are seeing valuations improve. In San Francisco, the magnitude of that over time, it's really hard to say, but we are seeing valuations come up, yes.

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?

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

Fair enough. Thanks.

You're welcome. Your next question will come from Woody Lay with KBW.

Hey, good morning, guys.

Morning, Woody.

I wanted to follow along on the line of thinking there. And, you know, 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, you know, AI tailwinds and political impacts. Are you seeing that optimism carry over to your loan demand?

I think we are. We had a higher proportion of investors CRA this quarter, because I do think people are coming back into the market. although the property types are really diverse there. Markets were diverse. Sacramento continues to be a big area of our growth. And so probably 20 million, more than 20 million of our deals this quarter were CRA related with some affordable housing. So I don't really attribute that to that same kind of trend in San Francisco, but we are seeing increased activity. If you look at our construction team, You know, financing developers, a lot of those projects are in San Francisco or immediately around, and we're seeing a higher degree of interest and activity on their part. That takes some time to translate into outstandings, but I would say that's a fair statement as well.

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?

For high quality deals, yes, pricing competition is aggressive. We are also seeing a return of the non-recourse. 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.

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. You know, we saw a really nice profitability inflection in the third quarter. Just how do you think about continued positive operating leverage from here?

So I'll start on the growth aspect of it and Dave can jump in on any margin comments. But You heard his comments on the NIM expansion built into the balance sheet today. I think that can really help us. We are seeing a continuation of the loan growth. The pipeline was bigger at the start of this quarter than last quarter, and that was a great quarter. And so there's really not a lot controllable in the payoff area, but if we can continue to outrun that and accelerate that further. We've got new hires. We have a new hire in Sacramento. that we expect to add, you know, be additive to this effort. And so there's a lot of traction internally, obviously externally, being generated to keep the growth rate going. You know, deposits fluctuate. And as Dave mentioned, that's really hard to predict all the seasonality of the inflows and outflows. But I do think the key trends there, we expect them to continue. And that's obviously first and foremost. Comment on the margins earlier.

Nothing else to add on 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.

Yeah. All right. Well, I appreciate you all taking my questions.

Thank you, Wade. As a reminder, if you would like to ask a question, please click on the raise hand button at the bottom of your screen. And our next question will come from Andrew Terrell with Stevens.

Hey, good morning. Good morning. Maybe just start with Dave. Thanks for the color on the spot deposit cost. I think you mentioned October 1.24% total, October 23rd. Do you have the equivalent interest bearing costs on that day?

Give me a moment. I'll actually give me a very quick moment. It's a 218. That's totally not maturity interest bearing 211.

Gotcha. Okay. Yeah, 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 impeded what all else equal was 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.

Well, I think part of the story this quarter was that we had growth from existing accounts that made up a pretty big chunk of it. And so it's new money technically, but it's not new relationships, I'd say. And of course, we encourage our existing customers to bring more to the bank. But in terms of what would be new flows, I'd say it's not dissimilar from from our overall cost. I mean, we're not chasing high cost money. That's never really been part of what we do. So, you know, for that reason, I think the estimate is, the beta estimate you talked about is still, still makes sense to me. There's nothing that would make me think otherwise.

Yeah, if you look at the growth in deposits by customer, the largest chunk of growth came from those customers with the longest tenured relationship. So, you know, you have to be careful in how you, you know, 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 non-interest bearing to help offset that.

Yeah, yeah, gotcha. Yeah, good problem to have, Tim. I want to ask about the buyback. It looks like you were somewhat active this quarter. The stock's up a bit, but you've also still got really strong capital as well. Just thinking through the puts and takes on the buyback, should we assume you're still going to be active going forward?

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, you know, next few quarters, obviously we'll see how the market plays out, but we, we, our intent is to, uh, you know, make the right decision for the broadest swath of shareholders possible.

Yep. Okay. Um, and then last for me, I know you, 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?

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.

Fair enough. Okay. Thank you.

Your next question will come from David Feaster with Raymond James. David, you may unmute your line and ask your question.

Hey, good morning. Good morning, David. I just kind of wanted to follow up on that, I guess the pipeline to some degree. Just looking at your originations, originations are up really nicely quarter over quarter. It seems like an increasing contribution from CNI. 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.

It is really dispersed, David. So I would say the prior quarter had a higher component of CNI. This quarter had a lot of commercial real estate with some unfunded components. So the unused commitments made it look like that was CNI, 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's out in Sacramento. And so people fall in relationships. So we're seeing a really nice, again, disbursement of effort, of opportunity, 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.

OK, that's great. And, you know, you talk about some new you talk about the hire that you made in Sacramento, as well as some some tweaks to maybe comp programs and calling programs that you reference in the deck. Could you I guess could you first off touch on on your hiring appetite? Is there an appetite for additional hires there? And what kind of lenders are you looking for? And then could you just maybe give some detail on as to the extent that you can on the change in the comp program and the calling programs that you guys have made?

Yeah, so we are, as you noted, made another hire in Sacramento following hiring a new regional leader the prior quarter. So we expect activity to pick up considerably in that region. We will look to make opportunistic hires throughout the footprint. We think that makes sense. And the people we're hiring have done a really good job for us. And so, you know, that has a contagious effect of activity. Activity begets more activity. So if you ask about, I'll kind of reverse the order of the last part of your question, much more active calling. If you look at, you know, a couple years ago when we had really, you know, a few years ago, compared to a higher production year, most of that came out of the existing portfolio for a handful of people, one or two people. Now it is almost entirely new customers, in some cases existing, but from a much more active calling activity base. And so David Bloom, head of commercial banking, has been very active in managing a sales process, weekly sales calls with everybody, blocking and tackling. And the people we're hiring are used to and capable of operating within that. So, you know, I'm not totally sure the comp plan is that dramatically different. It's aimed at incenting the right behavior. It certainly doesn't go to the lengths of some of our former competitors, you know, and how they paid people. But it is designed to incent, you know, the right behavior. And so we're seeing all that sort of come together. It's been a little while in the making, but we're starting to get a lot of traction.

Okay, that's helpful. And then I know, I mean, payoffs and paydowns have been a headwind across the industry. And I know it's just kind of curious what you guys are seeing on that front. How much of that is, we just, we touched on the competitive landscape. Um, you know, then you've got natural asset sales and some of those kinds of things, but just looking at the payoffs and paydowns that you've seen, just kind of curious how much of it is, is maybe again, losing deals to, to another bank, um, versus, you know, natural asset, you know, just payoffs and paydowns and asset sales and those kinds of things or, or versus strategic deleveraging.

Well, I think part and parcel to getting a more active, uh, lender program activity is managing relationships as well. So of the 24 million in commercial loan payoffs last quarter, only two of that came from third-party refinancing, David. So four was related assets, almost 10 was just cash deleveraging, people just paying off debt with cash. We had about a $7 million of work out 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.

Okay. And just one quick one. I may have missed it. But for that $3.6 million non-accrual 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?

I do not. Okay. It's a little less than 700,000. I think 670-ish is the number.

OK. That's all. Thank you.

You're welcome. Your next question will come from Tim Coffey with Jenny Montgomery Scott. Tim, you may unmute your line and ask your question.

Morning, everybody. Just looking at the deposit growth this quarter and the number of new accounts open in the quarter 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?

No, it's really hard to forecast for us. That roughly 1,000 new accounts a quarter has been pretty consistent all year. But the really the large fluctuations are in the end what will drive what the balances are. And, you know, we've already moved some off balance sheet that we thought were maybe more volatile. But it is really hard to predict how some of the customers, you know, inflows and outflows of some of our larger depositors. You know, the people that are affecting the balances are sort of the usual suspects and nothing strange or unexpected there. But. It's really hard to predict. So I was a long winded way of saying I don't know.

Sure. I can appreciate that. The flip side of that question then is, I mean, you know, typically we see kind of seasonal deposit alphas for tax payments and the like coming up. Do you see any sense that the payments this year will be any larger than they've been previous years?

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's... 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.

All right. Great. Thanks. Those are my questions.

Thank you.

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

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 for