Bank of Marin Bancorp (BMRC) 2025 Q4 法說會逐字稿

Good morning and thank you for joining Bank of Marin Bancorp's earnings call for the fourth-quarter ended December 31, 2025. I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. (Event Instructions)

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 knew as of Friday, January 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, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. We are very excited that our execution in the fourth quarter across a number of key areas resulted in continued positive trends for core profitability metrics, loan and deposit growth, effective expense management and improved credit quality.

We completed a balance sheet restructuring during the quarter that did result in a net loss but meaningfully improved net interest margin and net interest income, while we maintain strong capital levels due to a targeted approach to security sales and a successful subordinated debt offering. Before Dave goes into more detail about the restructuring and its benefits, I'd like to discuss our fourth quarter highlights related to loan and deposit growth and asset quality improvements.

During the quarter, our total loan originations were $141 million, including $106 million funded with over 90% of that activity in commercial loans. This was one of our strongest quarters in the past decade. Our originations were a more diversified and granular mix across commercial banking categories, geographies, industries and property types, and we are seeing a healthy increase in commercial real estate loan demand that meets our disciplined underwriting standards.

Our overall loan growth, although quite robust, was offset moderately by $50 million in payoffs during the quarter, predominantly within nonowner-occupied commercial real estate and residential real estate. For the full year, we originated $374 million in new loans, including $274 million funded, which was 79% higher than the prior year.

Our banking team continues to develop attractive lending opportunities and bringing new deeply rooted relationships to the bank, including in key growth markets such as the Greater Sacramento area. While we continue to navigate a competitive market environment on pricing and structure, we have attracted a significant amount of new client relationships while maintaining our disciplined underwriting and pricing criteria.

Our total deposits increased during the fourth quarter due to a combination of increased balances from long-time clients as well as continued activity bringing in new relationships. The rate environment remains competitive and clients do remain rate sensitive. However, they continue to bank with us for our service levels, accessibility and commitment to our communities, allowing us to continue reducing our cost of deposits by 10 basis points while growing our deposit base.

Proactive credit management led to improved credit quality trends this quarter, driven by borrower upgrades, reflecting strong financial performance and successful targeted loan workout efforts. Classified loans declined 35% quarter-over-quarter, decreasing to 1.5% of total loans from 2.4% in the prior quarter. Nonaccrual loans also improved, declining 14% to 1.3% of total loans compared with 1.5% in the prior quarter. Past due loans decreased significantly as well in the quarter, reaching the lowest level since the fourth quarter of 2023.

With that, I'll turn the call over to Dave Bonaccorso to discuss our financial results in greater detail.

Thanks, Tim. Good morning, everyone. As Tim mentioned, the balance sheet repositioning we completed in the middle of the fourth quarter is performing as expected with contributions to profitability metrics already flowing through during the quarter. On a 12-month basis from the time of execution, we expect approximately $0.40 of earnings per share accretion and 25 basis points of net interest margin lift.

Regarding the structure of the repositioning, while we transferred the entire held-to-maturity portfolio to available for sale, we only sold 74% of the legacy held-to-maturity portfolio as we sought to optimize the level of incremental income on reinvestment relative to the realized loss on the securities sale, which impacted our capital ratio.

Through this optimization, we were able to replenish capital using only subordinated debt, which avoided the dilution to earnings per share that a common stock issuance would have created. As a result of the losses on security sales, we had a net loss of $39.5 million in the fourth quarter or $2.49 per share, which was attributable to the $69 million loss that we recorded related to the securities portfolio repositioning in the fourth quarter.

On a non-GAAP basis, excluding the loss on the securities portfolio repositioning, our net income was $9.4 million or $0.59 per share. Non-GAAP pretax pre-provision net income increased 31% over the quarter and 51% over the year. Our net interest income increased from the prior quarter to $31.2 million due to balance sheet growth as well as higher investment security yields and reduced deposit costs.

Loan yields also benefited from $667,000 of recovered interest from the payoff of a nonaccrual relationship. Based on current market expectations for 25 basis points to 50 basis points of easing in the Fed funds rate during 2026, we will remain prepared to make targeted deposit cost reductions, which we believe will continue to contribute to margin expansion. Moving to noninterest income. Setting aside the securities losses, most areas of fee income were relatively consistent with the prior quarter. Our noninterest expense increased by $100,000 from the prior quarter.

While salaries and employee benefits declined in the fourth quarter due to incentive bonus and profit sharing accrual adjustments, in the first quarter, we expect this category to be elevated due to seasonal salary and benefit accrual resets, including payroll taxes, incentive compensation accruals and 401(k) matching.

Similar to last year, in the first quarter, we also expect to complete the majority of our annual charitable giving. Due to the improvement in asset quality in our loan portfolio and the substantial level of reserves we have already built, we had just a minor provision for credit losses in the fourth quarter, and our allowance for credit losses remained strong at 1.42% of total loans. Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on January 22, the 83rd consecutive quarterly dividend paid by the company.

With that, I'll turn it back over to you, Tim, to share some final comments.

Thank you, Dave. We continue to see relatively healthy economic conditions in our markets, and our credit quality continues to improve. Our loan pipeline remains strong amid healthy demand, and we expect to generate solid loan growth in 2026 while also continuing to grow deposits through the addition of new relationships and expansion of existing client relationships, although we do expect to see the seasonal outflows that we typically experience in the first half of the year.

In closing, we successfully executed on balance sheet restructuring and growth initiatives as anticipated, achieving the expected net interest margin and balance sheet expansion. Our expanded earnings stream enhances our ability to further invest in people and initiatives that we believe will help support the continued profitable growth of our franchise.

With that, I want to thank everyone on today's call for your interest and support, and we will now open the call to your questions.

(Operator Instructions)

Matthew Clark, Piper Sandler.

Hey, good morning, Tim and Dave. How you doing? First one for me, just on the loan side, really good production. Can you give us a sense for how much or what percent of that production came from recent hires and maybe how much they account for the current pipeline as well?

Yeah, thank you. I would say a significant part. I don't have the exact percentage for that particular group. I mean they're becoming less recent hires.

But I would say a lot of the production is predominantly oriented towards them. I think the pipeline is a little more diverse than that, but those teams that are contributed the most of that growth, those new people on those teams.

Okay. And on the deposit cost side, I see the average deposit cost of 2.08% in December, I think 2.09% in November, so only down a basis point. And given the December rate cut, do you happen to have the kind of the end of period, the 12/31 spot rate? Or I know there's some lag effect in your cutting the deposits, but I would have thought that number would have been a little lower in December.

So December spot rate for interest-bearing was 2.08% and for total -- the 12/31, I should say. And total was 1.17% and we're roughly in the same place as of last week.

Okay. But there's an expectation, I assume, given the kind of what you alluded to or mentioned in the deck about kind of a lag effect. I assume those will drop more meaningfully in January or first quarter?

Well, I think a big chunk has already occurred. We put through a lot of the rate reductions late in December. So there's some residual effect, but that should be captured mostly in the spot rates.

Okay. Okay. And then just the increase in special mention this quarter, any color there?

I would say the biggest contributor to that was the downgrade of a wine industry credit. That's -- yeah, I'm sorry.

And also upgrades from substandard.

Yeah. We -- well, I'm sorry, that's right. So we -- while we don't normally do this, we upgraded a couple from substandard to special mention from a conservative approach. For example, we have one commercial property that had been 100% vacant, an issue from the pandemic down in the Palo Alto area. That is now 100% leased.

The cash flow is sufficient to upgrade to pass. But those tenants have yet to take occupancy. So in the meantime, we upgrade to special mention. When they take occupancy, we'll go upgrade that to pass. And then we did have a downgrade of a wine industry credit from pass to special mention or from watch to special mention. So those were the two big contributors. So there's -- half of that is a positive or a good portion.

Okay, great. Thank you. You're welcome.

David Feaster, Raymond James.

Hey, good morning, everybody.

Morning David.

It sounds like just kind of going back to the loan growth side, I mean it's really encouraging what you guys have been able to do. And obviously, originations have improved pretty materially. It sounds like -- I mean, you alluded to some improvement in demand, but the new hires are really having a lot of success. I'm just curious, how do you think about new hires today? I mean, are you seeing opportunities across the footprint? And where are you looking to add talent?

We are seeing opportunities. I will say one thing back to Matthew's question, too. I mean, when these people come in and sort of set a new standard, you start to see the tide rise and all the other boats start to rise with it. So we are seeing improved behavior from other folks within the lending team. So I don't want to just give them all the credit. But we are going to continue to look to hire people that can come in and really move the needle on new loan originations.

I would say we're less geographically sensitive to where that is. For example, if you look at the teams that did the best, the North Bay still is far and away the biggest producer or the biggest producer, a lot of those assets and borrowers are in other parts of the Bay Area. And so as we make hires that were with bigger banks that might not be so geographically constrained within the regional commercial banking offices, we're not seeing a direct correlation between where they're domiciled and where the deals they are. And that's giving us a better approach to the market overall.

So we'll continue to look for those hires, continued hiring in Sacramento, the East Bay and/or San Francisco, depending on where they're at and what markets they cover. We want to continue to -- our production was much better dispersed across regions by teams this quarter than we've seen in a long time, and we want to continue to take advantage of that. So I'm not trying to be an evasive question. It is all over the place, but we are seeing better activity in virtually every market.

That's great. And then maybe just switching gears to deposits. I mean your deposit trends have been really impressive. I mean the amount of NIB growth that you're able to put on and continuing to grow deposits while reducing deposit costs is no easy feat. I'm just kind of curious, could you just touch on, I guess, first of all, the receptivity of your clients to reducing deposit rates at this point?

And if you've seen any attrition, if at all? And then just kind of how do you think about deposit growth and where are you having the most success today?

So I'll start with the latter on the deposit growth. So we opened almost another 1,000 accounts, about 45% of those are new to the bank. And that's been a relatively consistent trend over the last four or six quarters. But that has a higher percentage of interest-bearing as we bring in new customers to the bank, opening consumer accounts. They're going to have a different mix. But our continued success on the commercial banking side are bringing deposits.

That being said, the quarterly fluctuations in our deposits are generally driven by movements within our large deposit, in some cases, deposit-only customers, and that continues to be the case. We did have some money that came in during the third or fourth quarter last year that we knew was going to flow out. It was an outcome of a real estate transaction.

So we already moved that off balance sheet. But it is hard to predict how those large account fluctuations, whether they be public fiduciary type or contractor funds, many with government contracts, those can have some volatility to them, and that is where we tend to see the fluctuations. Remind me of the very first part, David, sorry.

Yeah, just the -- how they -- have your clients been receptive to deposit cost reductions at this point and any attrition?

Yeah. We've tried to be very targeted in how we've approached that over the last few quarters. We've sort of segmented where we can target next in terms of having those conversations, and we've tried to have those decreases be moderate.

And you can never -- I wouldn't pretend to argue that people enjoy that, but I think we do a really good job of understanding where the market is at and do our best to drive value and have the conversations in a way that eases that. And so the only real transition or runoff we've had or expect to have are people that were more rate shoppers that will then go chase a 4.25% rate at a CD somewhere, and we're just not going to grow our deposit base via that mechanism.

So we'll probably see some outflows that won't necessarily move the needle, but we will continue to balance that rational approaching model versus potential runoff. But every quarter, we'll see a rate shopper respond in that way, and that's a prerogative, but we want to maintain the exact profile that you described.

Okay. And then maybe last one for me, just kind of switching gears to the margin side. I mean, obviously, there's been a lot of moving parts with the balance sheet restructuring maybe brought forward a little bit of the margin expansion. Looking at the slides, you screen as modestly asset sensitive. But I mean, obviously, there's still huge back book repricing potential.

And kind of, Dave, here in your commentary about being able to reduce deposit costs is still drive margin expansion over the course of the year even with a couple of cuts. Is that the right way to think about it? Could you just help us think through maybe the pace of margin expansion? And any thoughts on the trajectory?

Sure. So I think a variety of angles here as usual. So one angle is just looking at the monthly NIMs that we've had. And when you take out the loan -- the nonaccrual loan interest recovery in October, the adjusted NIM for that month was 3.12% and the actual NIM for December was 3.42%. So you have 30 basis points of expansion during the quarter that sort of validates what we did with the repositioning, also includes the benefits of some targeted deposit cuts along the way.

So one thing to think about as a launch point from December is a good chunk of our loan growth in Q4 was skewed to the last -- certainly the last month, if not the last 2 weeks, if not the last three or four days of December. So you have a lot of momentum coming out in terms of the loan growth that we had there.

And then you think about the instruments beyond that, I mean, starting with loans, though, we continue to think there's the back book repricing you talked about. A year ago, that might have been 30 basis points of yield pickup on a monthly basis over a 12-month period. It's probably closer to 20 now. But there's still opportunity there, no doubt. Certainly, as you alluded to, on the securities side, we pulled forward some of the benefits there.

There are about $25 million, let's say, of non-repositioned bond cash flows that occur each for each of the next two years with yields in the low 3s. So there's still some opportunity from that perspective.

And then on the deposit side, as we've done in the last couple of years, it's been, let's say, bigger cuts aligned with Fed funds rate cuts and more targeted cuts away from that. And so there's that opportunity this year with markets looking for 1 to 2 25 basis point rate cuts. We have all the tools in place to make cuts appropriately there while also balancing retention and deposit growth.

Okay just, yeah, go ahead.

Yeah, David, I just wanted to add one point to your question, I think this and the prior one and maybe Matthew's. As we're bringing in this new granularity and deposit base, if you look at page nine of the investor presentation, the average weighted cost for those interest-bearing accounts for that proportion was 1.9%.

So there is some impact of improving granularity, but we continue to think whether it's from the standpoint of uninsured deposits or just the concept of strategically being more granular, that's important. So that's always going to have some offset to our work on our large interest and noninterest-bearing customer balances.

And I'll add a couple of things, too. I assume you're referring to Page 5 of the presentation that has the traditional rate shock parallel cuts. And I think we screen probably a little bit more asset sensitive there than we have in recent quarters. But on a ramp basis, I would say rates down, we still continue to see some benefits. It kind of depends on the time horizon you're talking about, but more on a ramp basis for about 6 quarters, we benefit from rates down. And then as more of the back book reprices we benefit more from rates up.

So our sensitivity is a little bit nuanced. It's probably oversimplifying just looking at the disclosure on that page. The other way of thinking about it is we have a little over 3x the amount of floating rate assets relative to floating rate liabilities. So as long as we continue to reprice our non-maturity interest-bearing deposits at a 33% or better beta, we win in the near term. And cycle to date, we've been 36%. So just a variety of ways to think about it.

Just staying on the margin, pre-pandemic, you guys were at a 4%-plus margin. Just given the strength of your deposit base, is that -- I mean, obviously, you're not going to get there this year, but is that still a reasonable target over time?

Yeah. When you think about the incremental new pieces of business we're putting on, I don't see any reason why that wouldn't be. It certainly would take time as the back book, particularly in loans now reprices. But yes, that I don't see any structural impediments to that over the medium to -- like you said, not a 2026 then.

Yeah, okay, thanks everybody.

Thank you.

Jeff Rulis, DA Davidson.

Thanks. Good morning. Tim, on the -- I just wanted to kind of get into the loan growth and I appreciate kind of some of the seasonal outflow headwinds to start the year. But I mean, originations at decade highs here. I want to try to get a sense for -- and I know you're not going to guide to it, but I'm trying to think about a net loan growth figure for the year. you've been working at new team hires and getting that up. But it seems like a brighter year than you've had in the years past.

Any kind of expectations of kind of a mid-single-digit or better net growth for the year? Where do you guys see that sort of settling in?

Well, I think you just -- you did a great job answering your own question, Jeff. I think we are continuing to target a much more consistent mid-single-digit production. That being said, we have the opportunity depending on how payoffs behave to hit a number higher than that. We continue to be faced with a number of payoff reasons that are largely out of our control. I've said this before, but that as the rate environment continues to get more prolonged, that gets a little bit harder.

A lot of the loans that were higher rates before later in their maturity life have paid off. But our biggest components to the payoffs were still asset sales and cash deleveraging.

We have purposely continued to exit some credits that I would call structural imbalances there relative to the pandemic. And so about $10 million of the payoffs in the quarter were from us working those out. They weren't horrible credits. One of the largest one there was paid off by a bank, but it is deals that were always going to kind of languish in an area that caused us a lot of time. And so it's a cost-benefit analysis.

So the goal is to continue to focus on the things we can control, keep those originations higher. The pipeline is about 30% higher right now than it was last year at this time despite all the closings. So usually, with the end of fourth quarter, particularly very end of fourth quarter, production like that, you tend to see a really big drop-off in the pipeline, and it's bigger.

So it will be, again, continuing to control the payoff side where we can, but also -- and I would say a significant amount of our payoffs last year were also came from the residential mortgage portfolio that we purchased the prior year to help with the yield on the reinvestment of the AFS sale proceeds, and those had a much higher prepay rate than -- much lumpier than we anticipated. And again, that was not something we control.

So we continue to believe if we control the things we can, but a lot of the headwinds on the payoff side will continue to moderate, and it will be much easier to hit that consistent mid-single digit.

Appreciate it. And then one other question or topic would just be on the credit side. I can -- you could view that special mention move as somewhat of a silver lining in that and then other upgrades and payoffs in the classified bucket, what would you sort of assign is there some rate relief going on, the macro is better. But just overriding thought on the credit trends that you're seeing. It certainly seems more positive by the quarter.

Yeah. No, I would say none of that I mentioned has anything to do with rate relief. Some of this has just been an ongoing recovery of the real estate market in the Bay Area. So the one I mentioned where special mention went up because we upgraded from classified was that was 100% vacant property in an area where that had probably never happened, and it took some time, but that property is now fully leased with multiple tenants at above market rates, and we're just waiting for all those tenants to occupy the property before we upgrade the pass.

So we continue to see positively upward trends in some of the other areas impacted. Office real estate continues to improve. The overall economic environment in San Francisco continues to improve, sorry. So we continually see improvement in some of the key areas that were causing the downgrades in the first place. And certainly, the wine industry downgrade, that industry is going through its own struggles right now.

We continue to maintain an active and proactive approach working with our clients, but you can read almost anywhere about the decline in whether it's wine sales, visitation to tasting rooms, et cetera. We have a fairly limited exposure to that overall industry, but we are going to continue to be proactive in our risk rating based on trends.

Thanks, Tim.

Woody Lay, KBW.

Hey, good morning, guys.

Morning, Woody.

I wanted to start on expenses. A couple of moving pieces in the fourth quarter and then I know we get some seasonality impact in the first quarter. But I was just hoping you could give some clarity on how you're thinking about the run rate going forward.

Sure. So yes, setting aside the seasonality components, and I can beat them quickly. I mean some benefits in Q4 for personnel-related items and then some reversion of that in Q1. And then also in Q1, the contribution cycle, we get a big chunk of what we do there on an annual basis. So that's the near term. I'd say, as we talked about the repositioning, we, of course, communicated the benefits to net interest income.

We also talked about some additional investments in the company, and I think that's what we'll probably end up seeing more of this year is additional investments in people, initiatives, systems, et cetera, to further generate growth both in interest income and noninterest income. We think there's some opportunities to improve fee income.

So there is a cost of that. And so I would say we had 4.5% expense growth in 2025. I think a reasonable assumption would be there plus the additional investments we're looking to make to further generate revenue and growth.

And we expect those investments will have a commensurate income to help offset.

Got it. That's helpful. And then last for me on capital. It looks like capital levels came slightly better than what you were projecting. But it's obviously lower than historical levels, but it's a testament you were able to reconfigure the balance sheet without having to raise any additional capital. So how do you think about current capital levels and thoughts on potential excess capital deployment?

Well, I would start with saying we just execute on the balance sheet restructure. And so we want to -- obviously wanted to see how that played out before making any longer-term decisions on capital. While the capital ratios, as you noted, Woody, are lower than historical levels, we think they're more than adequate relative to the risk profile of our balance sheet. We talked already about a lot of the cleanup we've done on problematic credits. We expect further continued improvement in that category.

And so we certainly feel good from that standpoint. We do have a Board authorization for a share repurchase that we'll continue to look at. Obviously, a continued improving valuation, our stock price makes the idea of M&A a little bit more feasible as we get a better currency. So we want to continue to keep our options open now. And so no current plans, but similar to all of my other answers around this topic, we continue to maintain all those options.

All right, I appreciate the color. Thanks for taking my questions.

Thank you. (Operator Instructions)

Andrew Terrell, Stephens.

(Operator Instructions) Andrew, you may now unmute and ask your question.

Okay, well, we have no further questions at this time, so I'll hand back to Tim Myers for closing remarks.

I appreciate all the questions. Thank you all for being a part of this. If you have any additional ones, obviously, please let Dave or I know. Thank you for your interest and attention.