Q3 2026 Earnings Call - 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, 2026. I am Chrissy Meyer, Corporate Secretary for Bank of Marine Bancorps. 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 Maine 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 begin, 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 available as of Friday, October 23, 2026, 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. Our third quarter results reflected another period of improved financial performance. We increased earnings per share and return on average tangible common equity, expanded net interest margin, grew loans and non-interest bearing deposits, bolstered core non-interest income, and continued our prudent expense management. Our net interest margin expanded 10 basis points in the quarter, which drove sequential quarter EPS growth of 7% and year-to-date EPS growth that was 62% higher than the prior year period. Quarterly return on tangible common equity topped 12%, return on average assets exceeded 1%, our efficiency ratio improved to below 60%, and pre-tax, pre-provision earnings increased by 17%. Higher loan yields, higher core fee income, lower deposit costs, healthy loan production, and disciplined expense management all contributed to stronger profitability during the quarter. Taken together, these results reflect continued progress across the core drivers of our business and provide further evidence that our efforts are translating into stronger and more reliable core financial performance. During the quarter, we originated $102 million in new loan commitments, which improved year-to-date originations to $281 million, a level that is 21% higher than last year. While funded loans of $64 million were relatively flat in the third quarter compared to the prior quarter, the higher level of unfunded commitments in the quarter includes $25 million of construction loan commitments, which will contribute to growth in subsequent quarters at relatively high interest rates as projects fund. newly funded loans were originated at a weighted average rate that was 12 basis points higher than the prior quarter which contributed to our net interest margin expansion during the quarter and will provide additional benefits in the fourth quarter despite competitive pressures the yield profile of new production remains attractive and is accretive to our overall portfolio yield and we believe this healthy production continued relationship development and discipline underwriting will continue to translate into sustainable improvement in asset yields and earnings over time. Though organic loan funding has resulted in loan growth for the quarter, we supplemented that growth by using a portion of our excess liquidity to purchase a $31 million pool of California residential loans, which we expect to provide attractive risk-adjusted returns. Turning to credit quality, special mention loans decreased by $36 million, while classified loans increased by $15 million. The movement in both categories was primarily due to the downgrade of one $14 million owner-occupied commercial real estate relationship facing a borrower-specific issue. The borrowers' paying is agreed, and we do not expect any loss given the strong collateralization. Special mention loans also benefited from $18 million in upgrades and payouts. Net charge-offs were minimal. Primarily driven by loan growth and higher commitments, we did record a $500,000 provision for credit losses on loans and a $325,000 provision for unfunded commitments. Our allowance for credit losses was 1.07% of total loans, consistent with that of the prior quarter. Total deposit balances increased $25.3 million, including a $45 million increase in non-interest-bearing balances, partially offset by decreases in money market and time accounts. We were especially pleased to see meaningful growth in non interest-bearning deposits during the quarter, which we view as a reflection of the strong relationships our teams have built with clients over time. To that end, our focused outreach continued to result in strong new client activity, generating $23.2 million in new relationships, including $13 million in non-interest-bearing deposits. Non-interest bearing deposits represented 37.8% of total deposits at quarter end, continuing to differentiate our franchise and provide a meaningful funding advantage in a very competitive market. With financial markets expecting additional hikes in the Fed funds target rate range, we believe our high non-interest-beary deposit concentration positions us well to achieve a relatively low rising rate deposit beta as we've experienced in previous rising rate cycles. Overall, the third quarter reflected continued progress across the franchise, including higher earnings, continued margin expansion, and loan growth. With that, I'll turn the call over to Dave Bonacorso to discuss our financial results in more detail. Thanks, Tim. Good morning, everyone. Our third quarter net income was $9.9 million, or $0.62 per share, compared with $9,200,000, or 0.58 cents per share in the prior quarter. Return on average assets increased to 1.05%. Return on average tangible common equity grew to 12.26% and our efficiency ratio improved to 58.65%. Our net interest income increased from the prior quarter to $31.4 million due to both higher interest income and lower interest expense. We recorded higher interest on loan due to an increase in average loan yields from 5.12% in the second quarter to 5.23% in the third quarter. Additionally, we recorded lower interest expense largely due to a higher proportion of non-experiment deposits and active balance sheet management through sales of one-way deposits, which drove a reduction in average total deposit costs from 1.28% to 1.24%. Our yield on new loan fundings increased to 6.65% during the quarter, which was a 12 basis point improvement over the prior quarter. The 142 basis point spread between the yield on new loan fundings and the yield on the entire loan portfolio is evidence of the opportunity we have to improve net interest margin through loan remixing and repricing over the coming quarters. Importantly, with a loan-to-deposit ratio of 63% and high levels of cash flow expected from our shorter-duration securities portfolio, we have substantial capacity to support loan growth without utilizing wholesale funding. Our non-interest income was up by $501,000 during the quarter, primarily due to a $251,000 increase in service charges on business deposit accounts, resulting from an updated pricing strategy effective July 1st, and an increase in dividend income due to special dividend on FHLV stock of $199,000. Importantly, the increase in service charges reflects initiatives we implemented earlier this year, which are helping diversify our revenue streams and build a more durable source of recurring fee income, and we expect to see these continued benefits and our results going forward. Our non-interest expense improved by approximately $1 million, primarily related to an incentive bonus accrual adjustment, prior quarter annual event expense that was not repeated, a reduction in professional services expense, and more normalized FDIC insurance expense levels. Looking ahead, we expect expenses to remain well-managed while continuing to make targeted investments in areas that support future growth. Although quarterly expense levels may vary, our focus remains on balancing discipline cost management with investments in our people, technology, and client-facing capabilities. With quarterly improvement in interest income, interest expense, non-interest income, and non-interest expense, our pre-tax pre-provision net income improved by 17% on a sequential quarter basis. As Tim noted earlier, growth in both loan fundings and loan commitment stroke provisions this quarter, which impacted net income, though quarterly net income still improved 7% compared to the prior quarter and 32% compared to the third quarter of 2025. Our regulatory capital ratios continue to improve, with our common equity Tier 1 ratio increasing to 12.96%, our total capital ratio increasing 15.59%, and our Tier 1 leverage ratio increasing 9.04%. The rising market interest rates negatively impacted AOCI by $24.8 million during the quarter, which lowered our tangible common equity ratio to 8.05% and tangible book value per share to $18.81. Given our continued strength, our board of directors declared a cash dividend of $0.25 per share on October 22nd, the 86th consecutive quarterly dividend paid by the company. With that, I'll turn it back over to Tim for closing comments. Thank you, Dave. To close, the third quarter was another quarter of strengthening profitability through our strategic focus areas. We delivered improved earnings, expanded net interest margin, resumed balance sheet growth, and generated meaningful improvement in core fee income, while maintaining strong liquidity, capital levels, and overall credit performance. While the current operating environment remains competitive, we are encouraged by the opportunities we see to continue growing relationships, add earning assets and attractive yields and maintain disciplined deposit pricing. Together with our ongoing focus on balance sheet management and expense control, we believe these efforts position us well to continue building long-term shareholder value. With that, I want to thank everyone on today's call for your interest and support. We will now open the call to your 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'll pause a moment to allow the queue to form. We will take our first question from Woody Lay with KBW. Please unmute your line, and ask a question. Hey, good morning guys. Good morning, Woody. I wanted to start on the net interest margin. It was great to see the quarter-over-quarter improvement, and was just curious if you had the NIM in the month of September to kind of get an idea of the starting point for next quarter? And then just any additional thoughts on the magnitude of NIM expansion we could see over the coming quarters? So the September NIM was $354,000 tax equivalent, $352,000 reported. That includes about $145 million of one-way sales. So that definitely has a positive impact there. If you were to completely eliminate one-day sales, you're probably in the 346 area but i think we have the intent and capacity to continue those and quarter to date we are about 115 or so million which gives you sort of a 351 level if we kept that length if we keep that uh level of one-way sales going so a roundabout way uh to give it to you but there is some nuance to it yeah and i and i guess on the one-ways strategy so y'all were at a hundred call it 131 million uh this past quarter but on an average basis you think that can go to 300 million um next quarter no no i i no i think uh you know slightly higher um would be the way to go 300 million would be out of the out of range but you know could we be $150,000, $160,000. Yes. Could it be $120,000 or $100,000? Yes. Those are the magnitudes I have in mind. The income from one-way sales this quarter, I believe, was $489,000 compared to $386,000 last quarter. I know there's a lot of attention on net interest income, but if you adjust for that, you basically assume that the deposits we have, if they weren't in one-day sales, were on the balance sheet, our net interest income would have been about $489,000 higher. So another way of thinking about that. You asked a question about margin trajectory. And if you think of the higher rate environment we're in now, if you Think about our greatest challenge and our greatest strength, our greatest challenges, loan yields, you know, so the higher environment gives us more time to reprice loans, allows variable rate loans to reset higher than new originations at higher yields than previously thought. And then our biggest strength is our deposit franchise. And, you know, I think clearly we get questions from customers about deposit rates. I wouldn't say it's been that material so far, but I think we've proven over a cycle, partly due to the high level of not just bearing deposits, we've tended to outperform. And if you look at peers in the last cycle, our total deposit beta was 29% compared to 43% for peers. So I think on a relative basis, we're positioned very well for the rising rate environment, both managing deposit costs and then also continued loan repricing. And there's lots of information about the repricING schedule on page 13 of the deck. Yeah, I think, Woody, if you look at, as our originations continue to improve, we are looking at a pipeline right now for the Q4, pretty similar to where we were last year. Obviously, that ended up being a blowout quarter, but a lot of the new lift here in the quarter was due to new loan originations as dave mentioned the repricing over the next 12 or 3 to 12 months variable plus x-ray repricings you know we continue to think we have good tail winds there and also we talked about in the loan section we have some nice tailwinds from construction lending given the type of stuff we do in the geographies we do it in uh that was really a headwind for a number of years uh primarily in san francisco and so a lot of unused Commendant's going to borrow up on construction loans, and those are our highest-priced commercial real estate loans. So, you know, no real silver bullet there for everything, but a lot of things they're going to add up to, I think, continued left. Yeah, and a statistic we've given out over the years is monthly loan yield 12 months from now, and based on our ALM forecasting with the flat balance sheet, we're looking at probably 25-ish basis points of monthly loan-yield benefit a year from now, which I believe compares favorably to closer to 20 basis points last quarter. So that just shows a little bit more benefit in rising rates. And again, flat balance sheet there. So if we have bone growth that we expect, there's some upside to that. Yeah, that's great to hear. And maybe just one more follow-up on the deposit side, deposit betas. You mentioned a 29% historical beta. Do you think that's the right way to think about it to the extent we get additional rate hikes from here? Yeah, I don't see why it would differ. The last cycle had the complication of the regional bank failures in our market impacting things. And so relative to our nationwide peer group, you could argue we were disproportionately affected by that. And we were still at 29 percent relative to the 43. So I don'T see why we would differ from that. And we've had a long history of high non-transpiring balances. which really gets you off on the right foot from that perspective in a rising rate environment. Yep. All right. Well, that's all for me. Thanks for taking my questions. Thank you, Woody. Thank you. Our next question comes from Jeff Rulis with DA Davidson. Please unmute your line and ask your question. Thanks. Good morning. I think you mentioned $102 million in origination activity. How does that compare Link Quarter And then similar question if you had payoffs both in the current and past quarter. Yeah, so sequential quarter originations went from $98 million to $102 million, roughly. Fundings went from 62.8 million to 63.6 million. Payoffs went from a pretty high mark of $71 million down to $31.6. and there is a table in our earnings release that has all this information to catch all that the 31 million in mortgage purchases are excluded from the numbers he just gave so a nice trend in the payoffs and certainly a big chunk of our year-to-date payoffs have been working out some of those historical problem loans on the real estate and wine side so we feel much better about the trend of that as well okay that was sort of the payoff visibility is historically pretty tough, but based on what you see, is that, are you encouraged by maybe the payoff wall that you've seen that maybe is lower going forward? Or is there particularly, I guess, if we get higher rates, maybe also, but I guess the question is your expectations on payoff activity ahead? No, that's fair. So there were two big headwinds there over the last year to date period says we have about 28 million of the problem problematic loans are big pandemic special CRA loan in the city, and our large wine industry loan that we've talked about for both of which we talked about, for some time, I was 28 million of the payoffs. We also had a lot of construction projects that we're completing, which really, you know, the flip side of that is it brought our balances down to almost zero like 16 million, but now Now we have added a bunch of new loans. Those will fund up over the next 18, 24 months. So those are two of the two ofthe larger headwinds for payoffs. So, again, it's hard to predict timing. It's hard to predict resolution of workout credits or whatever. But we feel like it's a normalizing trend. And this is the first quarter in a year where we sort of our last couple of year average. We've averaged about 40, 40 or so million between 38 and 42 million, let's say, depending on your timeframe over the last couple of years and payoffs, you know, so we've had a lot of headwinds the last few quarters. This is the first quarter we've got a little bit early from a payoff perspective. Okay. And jumping off that, I guess the further appetite for, for loan purchases, was this a one-off? Would you have more? And the kind of a related question is what, what rate did the mortgage pool come on this quarter? I'll start with the first part. I'll let Dave answer about the mortgage pool. I mean, it's something we want to be selective about. This is not how we're trying to drive our franchise value, but we can be strategic given our loan-to-deposit ratio. That mortgage pool we acquired a couple of years ago to help boost the yield and offset the impact or drive the earnings impact from the larger AFS trade that we did before the HDM trade, that had a much faster prepay rate than we expected. So when we looked at this year, we said, well, if we can find an opportunistic portfolio in the geography we're comfortable with, that the metrics we're comfortable with we'll try to offset that. So that's effectively how we measured that out. We'll continue to be opportunistic about that. That's not our intent about how we're going to grow the bank, but we do have the liquidity and the loan to deposit ratio to continue to look at So do you want to answer the rate question? Sure, yeah. The coupon on the pool was about 620, and we paid a small premium for it. So our expectation is, with pretty conservative prepaid speeds, probably yielding around 6%, which we actually entered into this about three months ago. That was about 160 basis points spread to treasuries at the time. That's great. Thank you. Thank you, Joe. Thank you for your time. Thank you very much. Our next question comes from Matthew Clark with Piper Sandler. please unmute your line and ask your question hey good morning uh tim and dave um just to round out that conversation on the single family resi pool what was the expected duration on that purchase so we ran at a 25 cpr which gets you to about a 3.3 year average life it's 30 year collateral you know so there can be movements in the average life depending on prepayment speeds But that's what we assumed, which we thought was pretty, you know, mortgage rates have moved up since then. So I don't think we're going to get the wave of very fast prepayments like we did on the prior pool. Yep. Okay. And then any recoveries or interest reversals in the loan yield this quarter? I didn't think so, but wasn't sure. nothing material nothing meaningful we have the one large non-accrual we've talked about that you know could resolve through the judicial reference process but that has a sort of a indeterminate indeterminable period so when that happens that's an eight million dollar loan and non-acquire but nothing just last quarter but that will be a tailwind when that finally results okay and then just back on the expense run rate um how should we think about a normalized run rate going forward here at least in the near term so the um you know i i i would say q4 is probably going to look pretty similar to q3 and um and my thinking behind that is um you Know we we had some uh lower salaries and benefits expense this quarter. That could persist into the prior quarter. I think there's some acceleration that probably happens in occupancy as we're rehabbing a few locations and some IT projects catching up. But I think we met all that together. Q4 is probably pretty close to where we were in Q3. But where I would remind folks is there's quite a bit of seasonality on our expense base. And the way to think about the quarters beyond that is probably to look at the year ago prior quarter. So I wouldn't launch your Q1 numbers off of our Q4 numbers. I would look at Q1 2026 and then apply some sort of growth rate to that for looking at Q1 1027 and then throughout the year. So Q1, we have a lot of resets on personnel related items. Q2 tends to be where our expenses peak due to merit increases and a few special items in Q2, and then they start to drift down from there. And that's the pattern I would recommend thinking about going beyond Q4 this year. Yep. Okay, great. And then just on capital, you didn't buy back any shares this quarter, just some color there. And then on slide six, not that it's a new slide, but you mentioned acquisitions as part of your strategy. Any update on conversations you might be having, targets you might consider of late? Yeah, sure. I'll start a bigger picture on the capital buyback. So we've talked pretty ad nauseum about, you know, working with our regulators, particularly the DFPI, on our health and maturity trade, and that we were going to earn our way back into a more peer-level capital ratio before going back and going through the process of getting the necessary approvals tied to the overall dividend to the bank. so but you know we're getting closer to a period where we'll feel more comfortable having those conversations m&a certainly with our return of profitability or the trajectory we're on the impact that's had on our valuation that's helping but I wouldn't say there's any conversations that are more progressed at this point than there have been but I continue to do my job and be talking to folks and we would love to be opportunistic and that's one of the key reasons why i keep driving the evaluation improvement got it thank you thank you our next question comes from david feaster of raymond james please unmute your line and ask your question hi good morning everybody david um i wanted to first start on um you know the the demand side I'm curious how demand has trended across your footprint as rates have begun rising and then just kind of how pipelines are. And then as it plays into that, just hiring I know has been a big focus for you all and kind of increased production in some newer markets like Sacramento and some of the parts of the Bay Area. I'm just kindof curious how productivity from those bankers is and your thoughts on hiring broadly. Okay. Okay. Well, thank you, David. There's a lot in there. So I think if you look at demand and the rate environment, what we've seen more is on the payoff side. So like on the retail side, HELOCs paying off with rates where they are. But we continue to have or have seen much better demand on the consumer side. Again, like construction, with the bulk of our direct consumer lending activity being tenant and common loans, that really died in the city for a while. And I think We're at triple right now, year to date, or almost triple where we were the prior year, despite where rates are because of the boom in San Francisco residential lending. The commercial pipeline, while overall we're achieving a much more consistent and higher consistent level of production, we did have some deals pushed. So we feel good about the volume. Our pipeline looks similar now for Q4 than it did last year for Q3, and that ended up being a great quarter. you know it's always tough to say how that will all play out but right now we saw some residential lending on the floating home side which we haven't really seen in a while again despite where rates are so you don't know how you know borrower behavior will be when rates drop after you've done all that but we're really not seeing it limit uh the amount of things going in the funnel um and i'm sorry if i missed something in there uh but that's that's where we've seen hiring most and on the hiring side no we continue to look you know sometimes the hiring is more on the support underwriting function to support the new sales people we've actually had a pretty active hiring quarter uh or going into q4 not all of the producers but we continue to look to fill those positions and be opportunistic um and we're pretty excited you know nothing nothing dramatic to report at this time but i think the teams are building out nicely to again get that more consistently higher level of activity you know i feel i feel good about the trajectory that's great um maybe just on the other side of the balance sheet just touching on funding i mean that's probably one of the more impressive things about the quarter in my mind i mean the non-interest bearing deposit growth was phenomenal i know we're entering into a seasonally weaker quarter in the fourth quarter but curious some of the drivers behind the growth you saw this quarter um and how customers are responding as as rates are rising have you seen more exception pricing requests um do you see more funding cost leverage on the horizon and just any thoughts on on the deposit side well i think for us every request is an exception pricing request and that's you know that makes the context that's partly how we manage that right and so So I do not, I have not seen the wave of requests for activity that we would have thought, but that's because of the ongoing day-to-day relationship management. The fluctuations are largely driven by balances within our larger customers. And so our goal is really to maintain that and not have them move those funds out elsewhere, but those are operating balances. We have had over the last couple of quarters some money leave where it's a quasi or public entity. They have investment policies and that money is going to sit in some other type of investment vehicle generating a higher yield than we're willing to pay. But we're not. I think it was more last quarter than this quarter, to be honest. So pretty blocking, impacting quarter on the deposit side in terms of the trends. Our goal is to just continue to get better at new business client acquisition. of course we want to continue to acquire consumer loans to get those business operating accounts and you know we continue to have strategies around how we continue to evolve or get better at that again to have a more consistent growth and get more granularity from there so that's we continue to focus on that and not just sort of you know leave it to fate in terms of deposit balances okay and then that's great and then uh just last one just you know you've done a great job finding opportunities to maybe charge for products and services that you haven't historically or maybe where you were under charging you talked about you know a million dollar kind of annualized run rate that you've been you've seen so far where are we at in that process it sounds like you know from your commentary it sounds there might be some more on the horizon but curious kind of where where are in that in that as you think about opportunities to just maybe generate some revenues where you maybe should have been already? Yeah, so I'll break that into two parts. We continue to have things coming online that we're working on that will overall drive greater non-interest income, particularly related to the business service fees. Those are just things where we were undercharging or, you know, when you look at a bank that grew in large part by acquisition of smaller banks, very common for banks to waver or have generous fee schedules, etc. And it was taking the time to sit back and quantify and qualify that. And what does this need to look like? What does it need to work like relative to our peers? What's fair? Tier that properly. And so that is implemented. So that run rate is based on this new fee schedule for our business commercial treasury management customers that utilize those services. We'll continue to look to add things that will be added into that. Sorry for the redundancy there. but we do have other things in the works overall to drive the income unrelated to deposit service charges. Terrific. Thanks everybody. Thank you. Thank You. As a reminder if you would like to ask a question please click on the raise hand button at the bottom of your screen. We'll pause a moment to allow the queue to form. We have no further questions at this time. I'll hand it back to Tim Myers for closing remarks. Thank you very much. Thank everyone for joining. As always, please feel free to reach out to us. We're happy to provide more color. We look forward to talking to you next quarter.