Bank of Marin Bancorp 2026 Q3 Earnings Call

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the third quarter ended September 30, 2026. 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 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. Now I'd like to turn the call over to Tim Myers.

Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. Our third quarter results reflected another period of improved financial performance. We increased EPS 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 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. We believe this healthy production, continued relationship development, and disciplined underwriting will continue to translate into sustainable improvement in asset yields and earnings over time. Though organic loan fundings 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 borrower is paying as agreed, and we do not expect any loss given the strong collateralization.

Special mention loans also benefited from $18 million in upgrades and payoffs. 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-bearing 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 new 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-bearing 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 Bonaccorso 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 $9.2 million or $0.58 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 income 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-interest-bearing 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 a special dividend on FHLB 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. We expect to see these continued benefits in our results going forward. Our non-interest expense improved by approximately $1 million, primarily related to an incentive bonus accrual adjustment, prior quarter annual 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 disciplined 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 commitments drove 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 to 15.59%, and our Tier 1 leverage ratio increasing to 9.04%. 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 at 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.