Bank of Marin Bancorp Q2 FY2025 earnings call

• Positive trends in net interest margin, expense management, and asset quality.
• Securities repositioning expected to have 13 basis points of net interest margin lift and $0.20 of annual EPS lift, mostly starting in Q3.
• Banking team additions contributing to developing lending opportunities and new relationships.
• Total loan originations were $68.8 million of commitments, $50.2 million funded; deposits declined in Q2 but grew YTD with seasonal inflows expected in H2.
• Deposit costs reduced, aiding net interest margin expansion; additional targeted deposit rate cuts in early July.
• Strong capital ratios: total risk-based capital ratio 16.25%, TCE ratio 9.95%; repurchased $2.2 million of shares.
• Noninterest expense slightly up due to technology/branch upgrades, annual events, regulatory fees; expected to be similar to first half in remainder of year.

Pretax pre-provision net income increased 15% compared to the prior quarter and 85% compared to the prior year-to-date. Net interest income increased to $25.9 million, primarily due to a higher balance of average earning assets and a 7 basis point increase in net interest margin. Noninterest expense was slightly up from the prior quarter. Noninterest income was negative due to the loss on securities portfolio repositioning. Disciplined credit management continued with no provision for credit losses in Q2, and the allowance for credit losses remained at 1.44% of total loans. The net loss in Q2 was $8.5 million or $0.53 per share, but excluding the security sale loss, net income and EPS grew 18% QoQ.

• Expect positive trends in net interest margin and revenue in 2025.
• Anticipate loan growth in the second half of the year due to strong loan pipeline and recent closings.
• Continue to manage expenses tightly while adding banking talent and enhancing efficiency through technology.
• Well-positioned to increase market share, add client relationships, and drive profitable growth.

• Economic uncertainty could adversely impact clients and loan demand.
• Potential impact of short-term rate changes, prepayment changes, and nonaccrual statuses on margins and loan performance.

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

A: Yes, they're generally retail and/or mixed use, smaller loans in areas experiencing tenancy or cash flow issues. Downgraded but have good sponsorship; working on remargining with guarantors and not overly concerned.

Q: Now that you've cleaned up the AFS portfolio, what's your appetite to consider doing something similar in the HTM securities portfolio?

A: We continue to look at it, seeing examples in the market, but cautious of impact on capital and potential dilution to shareholders.

Q: Just on the buyback, kind of renewing or I think you guys renewed it or re-upped it. Just your appetite on the buyback, how aggressive you might get or continue to be in the market?

A: We re-upped the allocation with the Board; will continue to juggle with securities repositionings and evaluate, attractive to buy below tangible book but time was limited.

Q: 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 what the performance was like relative to -- I think your assumption was for a 5% reinvestment rate. Are you able to do better than that or in line? Or just how should we think about that?

A: Sales and purchases occurred throughout June; final yield on purchases was just a touch over 5%, 5.02% roughly, but 5% is a good number to work with.

Q: 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?

A: Targeted deposit rate cuts; about $185 million in early July with weighted average cut of about 15 basis points, worth 2 basis points to interest-bearing deposit cost and 1 basis point to total deposit cost; continue to look targeted and selectively.

Q: Maybe just to clarify, Tim, on the growth front. Loans is pretty flat year-to-date. We know there's a lot of churn. It sounds like you're optimistic. But on a net -- 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, your expectation.

A: Still targeting net growth; have pipeline and activity to justify plan, targeting acceleration of fundings and net growth for the year.

Q: 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. It sounds like the core, 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.

A: On loan side, have about 20-25 basis points of natural loan repricing yield over next 12 months; yield on funded loans up 72 basis points QoQ; security repositioning added 13 basis points mostly in Q3; continue to do targeted deposit rate cuts; still opportunity to remix assets and lower deposit rates.

Q: 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 are market leaders.

A: Have a new manager in San Francisco, hiring in Sacramento; 4 of top 5 producers are new to the bank; making a difference in activity, especially in Sacramento market.

Q: How does this kind of translate to kind of the expense outlook? Because 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?

A: Hiring either reflected in expenses or with replacement offsets; second half of year expected to look similar to first half expense-wise, with employee vacancy rate lower and new hires embedded.