Bank of Marin Bancorp - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 GAAP results were dominated by a strategic securities repositioning: BMRC reported a net loss of $8.5M and diluted EPS of $(0.53), driven by a $18.7M pre-tax realized loss on sale of $185.8M AFS securities; excluding this item, non-GAAP net income was $4.7M and diluted EPS $0.29 (or $0.36 using the quarter’s effective tax rate).
• Core trends improved: tax-equivalent net interest margin (NIM) rose 7 bps sequentially to 2.93% as higher-rate loan originations and targeted deposit pricing cuts took effect; non-GAAP efficiency ratio improved to 74.03% from 76.44%.
• Management expects the repositioning to add ~13 bps to annualized NIM beginning in Q3 and ~$0.20 EPS accretion over the next four quarters; the Board declared a $0.25 dividend and authorized up to $25M share repurchase (100k shares, $2.2M repurchased in Q2).
• Versus Street: adjusted EPS modestly exceeded consensus, while “total revenue” missed materially due to the realized loss; consensus EPS $0.344 vs actual adjusted $0.36, consensus revenue $25.2M vs actual $10.3M (reflecting net interest income plus non-interest income) [GetEstimates]*.
• Potential stock catalysts: near-term NIM uplift and buyback authorization vs headline GAAP loss; management’s tone was confident on loan growth, deposit cost management, and prospective credit upgrades into Q3.

What Went Well and What Went Wrong

What Went Well

• Continued NIM expansion: tax-equivalent NIM increased to 2.93% from 2.86% sequentially, with higher yields on loans and securities, and targeted deposit rate cuts contributing 7 bps QoQ.
• Core profitability metrics (ex-loss) improved: non-GAAP pre-tax, pre-provision income rose to $7.54M (from $6.56M), and non-GAAP efficiency ratio improved to 74.03% (from 76.44%).
• Management quote: “Our recent securities repositioning… should lead to further net interest margin expansion. With stable asset quality… and a healthy loan pipeline, we expect further improvement in our financial performance in the coming quarters.” — Tim Myers, CEO.

What Went Wrong

• Headline GAAP results: realized AFS securities loss of $18.7M drove GAAP net loss of $8.5M and a GAAP efficiency ratio of 208.81% for Q2.
• Deposits declined $56.9M QoQ, largely from non-interest-bearing balances due to client business expenses, payroll/distributions, asset purchases, and seasonal tax outflows; non-interest-bearing mix fell to 42.5% from 43.2%.
• Classified loans rose to 2.95% of total loans (from 2.77%) on downgrades of two CRE relationships totaling $3.9M, partly offset by paydowns/payoffs.

Transcript

Speaker 1

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. 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 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, 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 and 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. I would like to turn the call over to Tim Myers.

Speaker 0

Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. We executed well this 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. As we announced in early July, our second quarter securities repositioning is expected to add 13 basis points of net interest margin lift and $0.20 of annual EPS lift, with the vast majority of those benefits beginning in the third quarter.

Our banking team reinforced the continued addition 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 nicely diversified and granular mixed 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 helped drive further expansion in our net interest margin in the second quarter. Similar to 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.

Speaker 4

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 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. Disciplined credit management remains a hallmark of Bank of Marin Bancorp 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 $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.

Speaker 0

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.

Speaker 5

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.

Speaker 0

Morning, Matthew.

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, what drove that migration, and any plans for resolution there?

Yeah, they're generally retail and/or mixed use. They're obviously smaller loans. They're not in San Francisco. They're in areas that were experiencing tenancy or cash flow issues, so we downgraded them, but there is good sponsorship there. They'll continue to ten it up, and there's a number of loans we're working on remargining because of the support of our guarantors, and they're not loans that we're particularly concerned about.

Got it. 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. It is something we continue to look at, just cautious of the impact on capital and potential dilution to shareholders. We continue to juggle all that with the prospect of unleashing those earnings off the balance sheet.

Great. Last one from 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. Just your appetite on the buyback, how aggressive you might get or continue to be in the market.

Yeah, 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 at the 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 we will continue to juggle that concept with, as you said, some more securities portfolio repositionings and continue to evaluate. It was very attractive for us to do that below tangible book. We just ran out of time there.

Understood. Thanks for the questions.

Speaker 5

Our next question comes from Andrew Terrell with Stephens. Please go ahead.

Speaker 4

Hey, good 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 how should we think about that? I'm assuming the timing was right at the end of the quarter, but any clarity there would be helpful.

Sure. The sales and purchases occurred throughout June. 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.

Got it. Okay. I think in the prepared remarks, you guys mentioned that.

That's correct, the repositioning itself. We'd buy other bonds during the quarter, you know, before that. 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 5% on an average basis. The repositioning and related trades, the purchases were just above 5%.

Understood.

Overall, thank you for clarifying.

If I could also just ask on the, I think you mentioned in 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.

Speaker 0

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

Speaker 4

The most recent piece, I think, 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. That's worth 2 basis points roughly to interest bearing deposit cost and 1 basis point to total deposit cost. Small benefits to them. Along the way, we've been cutting time deposits. As you probably saw, we cut time deposits 31 basis points in the quarter. There is definitely more ability with Fed moves, but we're being targeted in how we make smaller modifications away from Fed cuts.

Understood.

Speaker 0

Some of the.

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 is with a slightly higher rate. We continue to gather new households, new relationships, and build a more granular portfolio. It is toggling to have the ability to attract new customers while managing the cost of existing deposits.

Okay. If I could sneak one more in, 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. 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? Any more color on the net loan growth outlook in the back half?

Yeah, 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. The commercial was less than we forecast. We do have a couple of key hires coming in, new market leaders that have joined the bank. Yes, the pipeline, despite the loans that closed, is slightly higher than it was the prior quarter. We've actually had some deals push out into July and have had a good amount of closings going into August. Timing is everything with that stuff and the commercial relationship. I can't guarantee the amount, the volume within a quarter, but all those things continue to move in the right direction.

Awesome. Okay. Thank you for taking the questions.

Speaker 5

Our next question comes from Jeffrey Rulis with D.A. Davidson. Please go ahead.

Great. Thanks. Good morning. Maybe just to clarify, Tim, on the growth front, you know, loans are pretty flat year to date. We know there's a lot of churn. It sounds like you're optimistic. On a net growth, 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? I just wanted to kind of gauge where you are on a net basis by year end, what your expectations are.

Speaker 0

Yeah, we are still targeting net growth, Jeff. We feel like we have the pipeline and the activity to justify that plan. It is hard to, I do not mean to sound like I am hedging. It is hard to answer that question of how the net, we had told everybody about mid-single-digit growth for the year. You know, can I double that for the second half of the year and target that mid-single-digit? That is our goal, obviously that becomes harder as you get later in the year. We are targeting an acceleration of fundings and have net growth for the year.

Thank you. Dave, on the margin, look, a nice pickup of this restructuring kind of pulls you up. I guess if we just point to point, we're closer to 3.05 margin. You had 7 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.

Speaker 4

Correct. Maybe I can cover some of the drivers. 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, 2026. We had about six or seven basis points of loan yield increases most recently. That tracks well with the estimate I just gave. Obviously, you 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 wildcards there. Overall, still a very good trend on the loan side. The yield on funded loans this quarter was 72 basis points higher than prior quarter. 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. The bulk of those benefits really occur in Q3. On deposits, we continue to do targeted things. We continue to reprice time deposits down. The question is, what do we get from the Fed that would allow us to do bigger things on the deposit side? 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. A margin kind of closer to 3.5% in the next year, is that, 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.

I think loan growth would be a question there. You know, what do we get there that would help us? I'd say 3.5 is probably more a back half of 2026 number than a front half of 2026 number.

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

Speaker 0

It's really all over the place. There's some substandard or non-accrual CNI real estate where we're getting remargining. I don't want to jinx it or give away too much information, but refinancing some of these problematic credits out. 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, or 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 market. 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. The retail portion of that is problematic. I think that's reflective of what we're seeing in San Francisco overall. We are seeing leasing activity pick up, certainly at lower rates. That's where you go back to our guarantors, our sponsorship, and remargining at the right amount. No, some of the loans that we're talking about are some of the bigger ones we've had conversations with you all about. We're optimistic.

It's not over till that all happens. We've made a lot of progress.

Appreciate the detail. Thanks.

Speaker 5

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 Timothy Coffey at Janney Montgomery Scott. Please unmute your line and ask your question.

Great. Thank you. Morning, gentlemen.

Speaker 0

Morning, Tim.

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. I'd rather speak more about it next time because some of this is still in the process of being announced in various places. 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 were done in other commercial banking groups, so they have those relationships. With those hires, just like the activity we've seen year to date, for our top five producers, our new, brand new, or reasonably new to the bank, we're seeing that play out in the Sacramento market as well. They're splattered throughout kind of the footprint, but they are making a difference when you look at our stock rankings.

Okay, that's a great call. I appreciate that. How does this information translate to the expense outlook? 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?

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

Speaker 4

Sure. 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 EIP projects we talked about and that expense. 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. 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.

That includes giving some thought to the fact that our employee vacancy rate is actually lower than usual, including and also including some of these new folks that we're bringing on or potentially bringing on. That's embedded in that thought that the second half is close to the first half expense-wise.

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

Speaker 0

Thank you, Tim.

Speaker 5

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.