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 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 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 one ratio increasing to 12.96%, our total capital ratio increasing to 15.59%, and our tier one 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.
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 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 your question.
Hey, good morning, guys.
Good morning, Woody.
Wanted to start on the net interest margin. It was great to see the QoQ improvement. 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.
The September NIM was 3.54% tax equivalent, 3.52% reported. That includes about $145 million of one-way sell. That definitely has a positive impact there. If you were to completely eliminate one-way sell, you are probably in the 3.46% area. I think we have the capacity to continue those. Quarter- to- date, we are about $115 million or so, which gives you sort of a 3.51% level if we kept that level of one-way sell going.
A roundabout way to give it to you, but there is some nuance to it.
Yeah. I guess on the one-way strategy, you all were at, call it $131 million this past quarter, but on an average basis, you think that can go to $300 million next quarter?
No, I think slightly higher would be the way to go. $300 million would be out of the range. But could we be $150 million, $160 million? Yes. Could we be $120 million or $100 million? Yes. So those are the magnitudes I have in mind. The income from one-way sell 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, if you basically assume that the deposits we have, if they weren't in one-way sell were on the balance sheet, our net interest income would've been about $489,000 higher. So another way of thinking about that.
You asked a question about margin trajectory and, if you think of it, the higher rate environment we're in now, if you think about our greatest challenge and our greatest strength, our greatest challenge is loan yields. So the higher environment gives us more time to reprice loans. It allows variable rate loans to reset higher and then new originations at higher yields than previously thought. Then our biggest strength is our deposit franchise. 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 non-interest-bearing deposits, we've tended to outperform. If you look at peers in the last cycle, our total deposit beta was 29% compared to 43% for peers.
I think on a relative basis, we're positioned very well for the rising rate environment, both managing deposit costs and also continued loan repricing. 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're looking at a pipeline right now for Q4 pretty similar to where we were last year. Obviously, that ended up being a blowout quarter, but a lot of the NIM lift here in the quarter was due to new loan originations. As Dave mentioned, the repricing over the next 3- 12 months, variable plus fixed rate repricings. We continue to think we have good tailwinds there. Also we talked about in the loan section, we have some nice tailwinds from construction lending given the type of stuff we do and the geographies we do it in. That was really a headwind for a number of years, primarily in San Francisco. A lot of unused commitments going to borrow up on construction loans.
Those are our highest priced commercial real estate loans. No real silver bullet there for everything, but a lot of things that are going to add up to, I think, continued growth.
Yeah, and a statistic we've given out over the years is a monthly loan yield 12 months from now. Based on our ALM forecasting with a 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. That just shows a little bit more benefit in rising rates. Again, flat balance sheet there. If we have loan growth that we expect, there's some upside to that.
Yeah. That is 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 is the right way to think about it to the extent we get additional rate hikes from here?
Yeah, I do not see why it would differ. The last cycle had the complication of the regional bank failures in our market impacting things. So, relative to our nationwide peer group, you could argue we were disproportionately affected by that, and we were still at 29% relative to the 43%. So, I do not see why it would differ from that. And we have had a long history of high non-interest-bearing balances, which really gets you off on the right foot from that perspective in a rising rate environment.
Yep. All right. Well, that is all from me. Thanks for taking my questions.
Thank you, Woody.
Thank you. Our next question comes from Jeff Rulis with D.A. 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 linked quarter? And then similar question, if you had payoffs both in the current and past quarter?
Yeah. 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 million. And there is a table in our earnings release that has all this information if you didn't catch all that.
Yeah, and we're excluding the $31 million in mortgage purchases are excluded from the numbers he just gave-
Correct
-a nice trend in the payoffs. Certainly a big chunk of our year-to-date payoffs have been working on some of those historical problem loans on the real estate and wine side. We feel much better about the trend of that as well.
Okay. That was sort of the payoff visibility's historically pretty tough. Based on what you see, are you encouraged by maybe the payoff wall that you've seen that maybe is lower going forward? 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. There were two big headwinds there over the last year to date period. We had about $28 million of the problematic loans, our big pandemic special CRE loan in the city, and our large wine industry loan that we had talked about for, both of which we had talked about for some time. That was $28 million of the payoffs. We also had a lot of construction projects that we're completing. The flip side of that is it brought our balances down to almost zero, like $16 million. But now we have added a bunch of new loans. Those will fund up over the next 18- 24 months. Those are two of the larger headwinds for payoffs. 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. Yeah.
This is the first quarter in a year where we've sort of our last couple year average. We've averaged about $40 or so million, between $38 million and $42 million, let's say, depending on your time frame over the last couple of years in payoffs. So we've had a lot of headwinds the last few quarters. This is the first quarter we've had a little bit of relief from a payoff perspective.
Okay. Jumping off that, I guess the further appetite for loan purchases, was this a one-off? Would you have more? The kind of a related question is 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. 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 HTM 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 a geography we're comfortable with 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 that. 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 prepay 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, Jeff.
Thank you. Our next question comes from Matthew Clark with Piper Sandler. Please unmute your line and ask your question.
Hey, good morning, Tim and Dave.
Good morning.
Just to round out that conversation on the single-family resi pool, what was the expected duration on that purchase?
We ran at a 25 CPR, which gets you to about a 3.3 year average life. It is 30-year collateral, so there can be movements in the average life depending on prepay speeds. That is what we assumed, which we thought was pretty and mortgage rates have moved up since then. I do not think we are going to get the wave of very fast prepayments like we did on the prior pool.
Yep. Okay. 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 had the one large nonaccrual we talked about that could resolve through the judicial reference process, but that has a sort of an indeterminable period. When that happens, that's an $8 million loan and nonaccrual, but nothing this last quarter. That will be a tailwind when that finally resolves.
Okay. Just back on the expense run rate, how should we think about a normalized run rate going forward here, at least in the near term?
I would say Q4 is probably going to look pretty similar to Q3. My thinking behind that is we had some lower salaries and benefits expense this quarter. That could persist into the prior quarter. I think there is some acceleration that probably happens in occupancy as we are rehabbing a few locations and some IT projects catching up. But I think you net all that together, Q4 is probably pretty close to where we were in Q3. But where I would remind folks is there is quite a bit of seasonality on our expense base. The way to think about the quarters beyond that is probably to look at the year ago prior quarter. I would not 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 2027 and then throughout the year. 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. That is the pattern I would recommend thinking about going beyond Q4 this year.
Yep. Okay. Great. Then just on capital, you did not buy back any shares this quarter, just some color there. Then on slide six, you not that it is a new slide, but mentioned acquisitions as part of your strategy. Any update on conversations you might be having, targets you might consider of late?
Yeah, sure. I will start bigger picture on the capital buyback. So we have talked pretty ad nauseam about working with our regulators, particularly the DFPI, on our HTM trade, and that we were going to earn our way back into a more peer-level capital ratios before going back and going through the process of getting the necessary approvals tied to the overall dividend to the bank. But we are getting closer to the period where we will feel more comfortable having those conversations. M&A, certainly with our return of profitability or the trajectory we are on, the impact that has had on our valuation, that is helping. But I would not say there is any conversations that are more progressed at this point than there have been.
I continue to do my job and be out talking to folks, and we would love to be opportunistic, and that is one of the key reasons we want to keep driving the valuation 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.
Morning, David.
I wanted to first start on 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. As it plays into that, hiring I know has been a big focus for y'all and kind of increased production from newer markets like Sacramento and some of the parts of the Bay Area. Just kind of curious how productivity from those bankers is and your thoughts on hiring broadly.
Okay. Well, thank you, David. There's a lot in there. I think if you look at demand and the rate environment, where we've seen it more is on the payoff side. 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 tenants in 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 push. We feel good about the volume.
Our pipeline looks similar now for Q4 than it did last year for Q4, and that ended up being a great quarter. 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. We don't know how borrower behavior will be when rates drop after you've done all that, but we're really not seeing it limit the amount of things going in the funnel. I'm sorry if I missed something in there. But that's where we've seen-
Just hiring.
-most. On the hiring side, no, we continue to look. Sometimes the hiring is more on the support underwriting function to support the new salespeople. We've actually had a pretty active hiring quarter or going into Q4. Not all of it producers, but we continue to look to fill those positions and be opportunistic. We're pretty excited. 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. I feel good about the trajectory.
That's great. Maybe just on the other side of the balance sheet, just touching on funding. That's probably one of the more impressive things about the quarter in my mind. The non-interest-bearing deposit growth was phenomenal. I know we're entering into a seasonally weaker quarter, the fourth quarter. But curious some of the drivers behind the growth you saw this quarter, and how customers are responding as rates are rising. Have you seen more exception pricing requests? Do you see more funding cost leverage on the horizon? Just any thoughts on the deposit side.
Well, I think for us, every request is an exception pricing request, and that makes it a context. That's partly how we manage that, right? So 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. 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 that was more last quarter than this quarter, to be honest.
Pretty blocking and tackling 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, but get those business operating accounts and 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. We continue to focus on that and not just sort of leave it to fate in terms of deposit balances.
Okay. That's great. Then just last one, 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 undercharging. You talked about a $1 million kind of annualized run rate that you've seen so far. Where are we at in that process? From your commentary, it sounds like there might be some more on the horizon, but curious kind of where are we in that process as you think about opportunities to just maybe generate some revenues where you maybe should have been already?
Yeah. 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 when you look at a bank that grew in large part by acquisition of smaller banks, very common for banks to waive or have generous fee schedules, et cetera. It was taking the time to sit back and quantify and qualify that. What does this need to look like? What does it need to look like relative to our peers? What's fair? Tier that properly. That is implemented. 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 additive to that.
Sorry for the redundancy there. But we do have other things in the works overall to drive fee 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 will pause a moment to allow the queue to form. We have no further questions at this time. I will hand it back to Tim Myers for closing remarks.
Thank you very much. Thank you, everyone, for joining. As always, please feel free to reach out to us. We are happy to provide more color. We look forward to talking to you next quarter.