Q1 2023 Bank of Marin Bancorp Earnings Call
Speaker 2: Anderson, Director of Marketing for Bank of Marin. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question and answer session. At that time, if you have questions, please press 1 followed by 4 on your telephone.
Speaker 2: If at any time during the conference call you need to reach an operator, please press star zero. This conference call is being recorded on April 24, 2023.
Speaker 2: Joining us on the call today are Tim Myers, President and CEO , and Tawny Gurdon, Executive Vice President and Chief Financial Officer.
Speaker 2: Our earnings press release, which we issued this morning, and a supplementary presentation can be found in the investor relations portion of our website at bankofmarin.com, where this call is also being webcast.
Speaker 2: Closed captioning is available during the live webcast as well as on the webcast replay.
Speaker 2: 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 press release for both GAAP and non-GAAP measures. Additionally, the discussion on this call is based on information we know as of Friday, April 21st.
Speaker 2: and may contain forward-looking statements that involve risks and uncertainties. All results may differ materially from those set forth in such statements.
Speaker 2: For discussion of these risks and uncertainties, please review the forthcoming statements disclosure in our earnings press release as well as our SEC filings.
Speaker 2: Following our prepared remarks, Tim, Tawney, and Chief Credit Officer Masako Stewart will be available to answer your questions. And now I'll turn the call over to Tim. Thank you, Andrea. Good morning, everyone, and welcome to our first quarter earnings call.
Speaker 3: I'd like to begin by addressing the regional bank failures and subsequent events that occurred late in the quarter and highlight how Bank and Rent's business model enabled us to effectively manage through these challenges.
Speaker 3: These failures, while idiosyncratic in nature and isolated the banks that operated much differently than Bank of Marin and most community banks,
Speaker 3: did create near-term uncertainty among depositors that resulted in outflows across the industry.
Speaker 3: While many depositors initially sought the perceived security and returns of money market funds outside of the banking system, according to the latest Federal Reserve data, those transfers have since stabilized.
Speaker 3: Overall, we have continued our efforts to maintain an industry-leading cost of deposits in light of pandemic-related surge balances exacerbated by our American River Bank acquisition and its lower loan-to-deposit ratio.
Speaker 3: It is not unusual for Bank and Ren to experience deposit decreases in the first quarter of the year due to the working capital needs of our customers. In fact, in four of the last eight years, we showed link quarter declines in Q1 deposits.
Speaker 3: This year, the 9% decrease of $323 million was due to a number of factors concurrent with, but largely unrelated to, the regional bank failures.
Speaker 3: Subsequent to these failures,
Speaker 3: The factors contributing to deposit outflows include, first, outflows due to what we consider singular transactions, such as disbursement of proceeds from the sale of businesses, real property acquisitions for cash, trust distributions, or estate settlements.
Speaker 3: Second, cash needs from our customers to fund ongoing business operations such as vendor payments, payroll and taxes.
Speaker 3: And third, deposit movements to outside brokerage firms and financial institutions for safety and or higher yields.
Speaker 3: Just over $200 million of the net outflows occurred after the bank failures and were concentrated among 100 larger relationships that overshadowed the impact of accumulated smaller transactions.
Speaker 3: Among those 100 relationship net outflows, 83% was considered normal activity, including vendor payments, taxes, payroll, and the singular events, as I mentioned earlier.
Speaker 3: 14% moved to brokerage firms or other financial institutions, and the remaining 3% were referrals to our Wealth Management and Trust Group.
Speaker 3: From March 22nd through April 18th, deposit levels have stabilized.
Speaker 3: In 2022, we maintained excess liquidity and expectation of pandemic surge outflows and managed our deposit costs in order to optimize deposit levels.
Speaker 3: In early 2023, we increased engagement with customers to discuss pricing and the appropriate deposit mix for their needs.
Speaker 3: After March 10, those discussions accelerated and expanded to include the safety and soundness of the bank, as well as information about our Reciprocal Deposit Network programs that offer depositors expanded FDIC insurance.
Speaker 3: The result was approximately $80 million of incremental funds placed into these programs, and we now have $220 million with Ruishan Tang and Entrify, and are continuing to see interest from our customers.
Speaker 3: I would also like to note that throughout the first quarter, we successfully opened over 1,000 accounts with $60 million in new deposits. At the same time, we did not see a notable number of account closures with funds leaving the bank.
Speaker 3: At quarter end, our deposit mix was steady, with non-interest bearing deposits accounting for just over 50% of total deposits.
Speaker 3: down only slightly from the prior quarter, and another indication of our strong deposit franchise.
Speaker 3: Many of these are commercial accounts that tend to carry larger balances that will fluctuate with our customers' operating cash needs.
Speaker 3: Approximately 67% of our deposits are FDIC insured.
Speaker 3: At quarter end, our liquidity was roughly $1.9 billion and consisted of cash, unencumbered securities, and borrowing availability from the FHLB and Federal Reserve Bank, an amount that covers all of our estimated uninsured deposits by approximately 181%.
Speaker 3: Since 2013, we have had internal policies, controls, and processes that set minimum liquidity requirements similar to the liquidity coverage ratio that larger banks are required to report.
Speaker 3: Later, Tani will explain some of the longstanding practices that uphold our robust liquidity risk management standards.
Speaker 3: Importantly, despite the decrease in deposits quarter over quarter, our average cost of deposits remain low by industry standards at 20 basis points.
Speaker 3: 40 basis points in the month of March. So this was up from eight basis points to prior quarter.
Speaker 3: Our increase in deposit rates has lagged the general market, which benefited our net interest margin by approximately 10 basis points in the fourth quarter.
Speaker 3: We will continue to carefully manage deposit pricing on a customer-specific basis and diligently defend our industry-leading deposit franchise.
Speaker 3: Now, I'll shift to a discussion about our loan portfolio and overall credit quality.
Speaker 3: We grew loans by $20 million, or just under 1%, during the quarter.
Speaker 3: While loan demand has eased from the peak levels of 2022, our teams continue to focus on building pipelines that will achieve risk-adjusted returns and maintain credit quality.
Speaker 3: Even as we grew loans in the first quarter, our team's efforts to carefully manage asset quality resulted in continued strong credit metrics.
Speaker 3: We have consistently maintained our principled underwriting and our policies have remained unchanged.
Speaker 3: Total non-accrual loans declined during the quarter and amounted to just 10 basis points of total loans. We are confident in our allowance for credit loss, which represents 1.1% of total loans.
Speaker 3: Our loan portfolio remains diversified across borrowers, loan, and property types, as well as geography.
Speaker 3: and 93% of our loans are borrower guaranteed.
Speaker 3: Our largest concentration in the loan portfolio is in commercial real estate, which represents 73% of our total loan balances.
Speaker 3: 77% of our commercial real estate portfolio is non-owner-occupied, with 89% of these loans being borrower-guaranteed. Another one to create sales at a single Tiger
Speaker 3: Additionally, since 2000, cumulative net charge-offs in the CRE non-owner-occupied portfolio have been minimal at $740,000.
Speaker 3: As there has been a good deal of press regarding office buildings, we are providing more granularity on our non-owner-occupied office building portfolio this quarter. Our $370 million non-owner-occupied office portfolio consists of more than 140 loans.
Speaker 3: with an average loan balance of $2.6 million, the largest loan being $17.2 million.
Speaker 3: The average loan-to-value was 55% and the average debt service coverage ratio was 1.67 times based on the most recent information received in our annual review process.
Speaker 3: Of the non-owner-occupied office portfolio, 19 percent is located in the San Francisco market, with the remainder spread across our Northern California footprint.
Speaker 3: Drilling down further into the San Francisco non-owner-occupied office portfolio, we have 11 loans totaling $72 million with an average loan size of $7 million and average loan to value of 60%.
Speaker 3: Ten of these buildings are considered low-rise office and eight of them report 100% occupancy.
Speaker 3: Vacancies averaged around 50% on the other three.
Speaker 3: 19 million, or 26%, of the $72 million portfolio is graded as substandard as first reported in our Q4 2021 earnings and remains performing.
Speaker 3: While we understand the heightened concerns that the investment community has regarding the office sector, we believe that, given our conservative underwriting and the relatively small loan sizes, our office building exposure is manageable.
Speaker 3: We have a strong historical track record of minimal losses from this sector.
Speaker 3: During the first quarter, we also delivered on the final phase of our plans to gain efficiencies from our acquisition of American River Bank by consolidating four northern Sonoma County branches into two that had overlapping customer coverage.
Speaker 3: In addition, we closed two other branches where we can serve customers effectively from nearby branches.
Speaker 3: This strategic decision enables us to optimize our physical footprint without sacrificing customer service and, by extension, generate savings that we can reinvest into talent and technology.
Speaker 3: Finally, I'm excited to share that we welcomed our new Chief Information Officer, Satish Murathati.
Speaker 3: His extensive and unique experience as a software engineer and technology leader directing large-scale digital and technology transformations will help us execute our bank's strategic priorities.
Speaker 3: Throughout our 33-year history, we have not wayward from our guiding principles of relationship banking and discipline fundamentals, and continue to serve the banking needs of local, small to mid-sized businesses, not-for-profit organizations, and commercial real estate investors.
Speaker 3: Our business model has proven successful throughout various economic cycles, allowing us to navigate this or any challenging environment.
Speaker 3: Now, I'll turn the call over to Tani to discuss our financial results in greater detail.
Speaker 4: Thank you, Kim and good morning.
Speaker 4: First, I'll start with some key highlights. We generated net income of $9.4 million in the first quarter, or 59 cents per diluted share. Net income was down from the fourth quarter as we began raising interest rates on deposits and borrowing balances increased.
Speaker 4: Our low cost of deposits was a significant benefit last year, and Bank of Marin achieved record earnings in both the fourth quarter and full year of 2022.
Speaker 4: Our first quarter tax equivalent net interest margin of 3.04% was down 22 basis points from the fourth quarter, 37 basis points of which was related to higher deposit and borrowing costs partially offset by a 17 basis point improvement from higher loan yields.
Speaker 4: We expect continued pressure on the margin as recent increases in deposit costs are in place for a full quarter.
Speaker 4: So far, this cycle increases in rates on non-maturity interest bearing deposits reflect a beta of 15%, while our interest rate risk models assume a beta of 45%. Non-interest expenses were well controlled at just under $20 million for the quarter.
Speaker 4: Our first quarter earnings translated into a return on assets of 92 basis points and a return on equity of 9.12%, down from 1.21% and 12.77% in the previous quarter.
Speaker 4: Our Board of Directors declared a TASH dividend of 25 cents per share payable on May 12, 2023.
Speaker 4: This represents the 72nd consecutive quarterly dividend paid by Bank of Marin Bancorp.
Speaker 4: I'd like to add a little more detail on our results, beginning with the $350,000 provision for credit losses on loans in the first quarter, compared to no provision in the prior quarter.
Speaker 4: This was due to qualitative risk factor adjustments to account for continued uncertainty about inflation, recession, concentration, and heightened portfolio management risk in the current environment that were not fully captured in the quantitative portion of the allowance calculation.
Speaker 4: Additionally, there was a $174,000 credit loss provision reversal due to a $37.4 million reduction in unfunded commitments.
Speaker 4: As Tim mentioned, credit quality remains strong. Classified loans of $31 million increased $2.9 million, primarily due to higher usage of a revolving line of credit that was previously downgraded.
Speaker 4: Other changes include $1.7 million in payoffs and paydowns, $314,000 in upgrades to past risk rating,
Speaker 4: partially offset by 1.4 million in downgrades.
Speaker 4: All of the downgrades in the first quarter were for loans that are secured by Real Estate Collateral. Accruing loans past due 30 to 89 days totaled $1.2 million at March 31, 2023, compared to $664,000 at December 31, 2022.
Speaker 4: First quarter non-interest income was up 13% from the fourth quarter at $2.9 million, due in large part to higher earnings on bank-owned life insurance, while other line items showed modest increases and decreases.
Speaker 4: Non-interest expense of $19.8 million in the first quarter was up from $18.3 million in the fourth quarter, and the efficiency ratio increased to 60.24% from 50.92% in the prior quarter due to both higher interest and non-interest expenses.
Speaker 4: The first quarter typically has elevated non-interest expense related to 401k matching and lower utilization of vacation accruals.
Speaker 4: Additionally, the first quarter of 2023 included adjustments related to estimated incentive and retirement plan accruals, as well as accelerated amortization and lease expenses associated with branch closures.
Speaker 4: On the flip side, technology expenses fell as a result of our recent core processor contract renegotiation, and we expect branch closures to generate net savings of $470,000 in 2023 and $1.4 million per year thereafter.
Speaker 4: All capital ratios were above well-capitalized regulatory requirements.
Speaker 4: The total risk-based capital ratio for Bancorp was 16.2% at the end of the first quarter, compared to 15.9% at December 31. And the bank's total risk-based capital ratio was 15.6% at March 31, compared to 15.7% at the close of 2022.
Speaker 4: Quarter-end tangible common equity of 8.7% for Bancorp and 8.3% for Bank of Marin were up from 8.2% and 8.1% respectively in the previous quarter.
Speaker 4: Increases were due to earnings and a 16.2 million improvement in AOCI as the value of our available for sale securities portfolio increased with falling interest rates.
Speaker 4: After adjusting for 76.4 million after-tax unrealized losses in our held to maturity securities portfolio, our tangible common equity ratio would be 6.9% for Bancorp.
Speaker 4: Our strong capital position and high-quality investment portfolio provide strength and liquidity for the ongoing operations and investments in the future of Bank of Marin.
Speaker 4: We evaluate the bank's interest rate, liquidity, economic value, and market price risks under various scenarios regularly, and we stress test underlying assumptions.
Speaker 4: We conduct capital planning on a regular basis and evaluate various scenarios, stress tests, and potential capital actions.
Speaker 4: We monitor markets daily for systemic and idiosyncratic risks and maintain contingency plans that support rapid and comprehensive responses if warranted. We also make it a priority to learn from developing situations and we are incorporating enhancements to current scenarios, assumptions and stress-based outcomes.
Speaker 5: Thank you for tuning in.
Speaker 4: The FHOB and Federal Reserve borrowing facilities were established in large part to ensure that banks would not be forced to sell securities at a loss.
Speaker 4: The FHLB facility proved extremely effective during the global financial crisis, and the BTFP will undoubtedly do the same with its favorable rates and availability tied to the par value of securities.
Speaker 4: Overall, Bank of Marin's strong balance sheet, liquidity, and capital continue to generate profitability, as has been the case across many interest rate and economic cycles.
Speaker 4: With that, I'll turn it back to Tim to share some final comments.
Speaker 3: Thank you, Tawny. In closing, we are opportunistically looking for ways to manage our balance sheet in order to drive margins while maintaining excellent credit quality and operating efficiency.
Speaker 3: We believe this will lead to consistent earnings and improve profitability and in turn translate into enhanced shareholder value.
Speaker 3: 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.
Speaker 3: Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt technology request. If your question has been answered and you would like to withdraw your registration, please press 1-3. If you would like to receive a question, please press 1-3.
Speaker 6: Questions can also be submitted via the webcast page by clicking the ask questions tab and typing your question in the box that appears below the tab. One moment please for the first question.
Speaker 6: Our first question comes from the line of Matthew Clark with Piper Sandler. Please go ahead.
Speaker 7: Hey, good morning. Morning. Um.
Speaker 7: Just around the margin.
Speaker 7: Can you give us the average margin in the month of March and what your updated outlook is for?
Speaker 7: your cumulative beta through this cycle. I think we were we talked previously about 10 to 15 percent.
Speaker 7: I think the total deposit beta, if memory serves me correct, but any updated thoughts on that as well.
Speaker 4: Yes, so I'll need to pull the margin for the month of March for you, which I can do in a 2nd on the betas. So right now we're looking at 15% thus far. We have 45 built into our models, which is still above the historical norm, but we are doing some catch up right now.
Speaker 4: cost of deposits because it was ongoing through the month of March. So we've got some catch up going there, but I would say that if we look at our modeling for net interest margin, assuming the standard 45% beta, there is a slight difference in
Speaker 4: increasing trend in the margins. So our assets continue to reprice upward at the same time we're undergoing to touch up. And I will pull the margin for March, but that'll take me a second.
Speaker 4: So our assets continue to reprice upward at the same time we're undergoing touch-up. And I will pull the margin for March, but that'll take me a second.
Speaker 7: Okay, okay, sounds good. And then just your outlook for deposits and borrowings. Deposits, it sounds like they've stabilized, but how do you think about the borrowing balances that you have? Is there a plan to try to reduce those throughout the year or do you feel like they'll be relatively stable as well?
Speaker 4: So we're very focused on that. We will opportunistically reduce those where we can. We get cash flows off of both the loan portfolio and the investment portfolio. So to the extent that we can deploy those to reduce the borrowings, we will.
Speaker 4: The borrowings have been pretty stable for the last couple of months. So I think we're good there. And as I said, when we have opportunities. That makes sense for us that either have low earned back periods or, you know.
Speaker 4: interest rates go down giving us an opportunity to sell a larger portion of the securities portfolio at a gain, we will do that.
Speaker 3: And Matthew, we do tend to have within our borrowing, or I'm sorry, our depositor base, some seasonal increases as you get later in the year that should assist with that too. Certainly this quarter you know, the seasonal declines, but we tend with some of those depositors, large depositors to see increases throughout the year as well. So we'll continue to look at all those options and work those down as soon as possible.
Speaker 7: Okay, and then a couple more here. How much was the bully benefit this quarter? And then
Speaker 7: Okay, and then a couple more here. How much was the bully benefit this quarter? And then any.
Speaker 7: guidance around your non-interest expense run rate going forward with the savings from the branch closures that you mentioned. The BOLI benefit was $313,000.
Speaker 7: And I didn't hear the 2nd, half of the question just around your. Any guidance around the non interest expense run rate with the cost savings coming through from the branch closures.
Speaker 4: Yeah, so what I would do on the run rate is look at, so we have several adjustments that are actually noted in the earnings release that would, should be excluded from the run rate. And the branches, that's in the highlight bullet.
Speaker 1: Okay, thank you.
Speaker 6: Our next question from the line of Jeff Rulius with DA Davidson. Please go ahead.
Speaker 8: Thanks good morning that Tony just on that last point the 470,000 met.
Speaker 8: Could you unpack the. I assume there's there's. Upfront cost with that, that's of which I think maybe you. Encourage some in the 1st quarter and then and then I guess the savings. For the rest of the year, and I guess also if there was savings in the 1st quarter that you call out just to try to.
Speaker 4: break that piece of the 470 out a little bit. Yeah, so the accelerated amortization for the two branches closing was 274,000. The others didn't have that.
Speaker 4: Any of that, and then there was 158,000 of accelerated lease expense. And that was associated with 1 of the branch closures. And no savings in the first quarter just yet.
Speaker 4: I have to run that number for the 1st quarter. So, to break down that for 7,470 net for the year over the 4 quarter period, I can, I can. Uh, send out an email after the call on that, if you like.
Speaker 8: Okay, I guess you got us on the run rate annually, so I could kind of back into that. That's fair enough on the cost. Thanks. I wanted to go back, Tim, to that.
Speaker 8: Appreciate the breakout of the outflow, but focusing in on that 14%, you know, that sort of left the bank just trying to get us just circling back. I think it gave some reasons that some were seeking safety somewhere seeking yield. 1, could you confirm those reasons for departure and 2,
Speaker 8: How has that conversation changed kind of mid-April versus the early stages of
Speaker 8: conversation changed kind of mid-April versus the early stages of the news events in March.
Speaker 3: Sure, no, it's a good question. So as we've talked about before going into the first quarter, we're slow to increase our deposit rates, kind of see what Mark was going to do and how our customer base bonded. We actually had started talking to clients and doing more broad-based deposit rate increases throughout the quarter. But depending, we didn't.
Speaker 3: in our market with news around some of the large regional banks under duress. And so, you know, it's really hard to parse out completely how much of a concern that was about viability versus just a rate conversation, but certainly the higher rates at a large brokerage firm, you know, were.
Speaker 3: enough to help drive some of that. So we got much more aggressive, you know, for us later in that quarter, made a lot of adjustments. We actually started a number of tier increases two days before, or three days before the failure of Silicon Valley Bank. So we thought we were getting, you know, I guess we didn't know we were getting ahead of something, but we thought we were
Speaker 3: going to play catch up at that point and then certainly the need for that was a pastor
Speaker 3: As you thought, the number has made some pretty healthy increases for us. We still think we're very But Not the left thing or back up to produce positive here and so maintain the best job for the first lady ships
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Speaker 8: The audio was starting to get a little choppy there. I don't know if that's on my line, but I got the gist of it. I appreciate it. 1 other question on just the.
Speaker 8: You mentioned the three seven
Speaker 9: Please spell out part of your name.
Speaker 6: This is the operator. We hear a toppiness from the line right now coming from that main line.
Speaker 3: Jeff, are you there? I am. You sound quite a bit clearer, Tim. Yeah, as do you, but I couldn't hear you either, so would you mind repeating what you said? I apologize. The question is how ago he felt.
Speaker 8: Sure, sure. We wanted to ask about thanks for the detail on the office CRE. I think I mentioned $370 million in the non-owner occupied. What's the balance of the owner occupied office CRE?
Speaker 1: That is in here, hang on.
Speaker 3: That's 17% of the $2.1 billion total.
Speaker 3: of the $2.1 billion total.
Speaker 8: So on page 9 of the present so all of. Well, so in the office specifically of owner occupied.
Speaker 8: That accounts for that entire amount. Oh, I'm sorry. Office owner occupied.
Speaker 3: We'll get you that number, Jeff. I don't have that in front of me.
Speaker 8: Sure. Just a last check in. The loan pipeline, you scratched out some growth in the first quarter.
Speaker 8: Just a last check in the loan pipeline. You know, you scratched out some some growth in the 1st quarter. It looks like paydowns were down.
Speaker 8: You came in with kind of a lower pipeline, but ended up in net growth. How does that pipeline look today, or at least the start of the quarter versus?
Speaker 3: as you entered the year? It continues to build. Demand is reasonably muted out there with the rates where they are. But we are seeing the pipeline build. It gets lumpy and you close loans and then you have to build that pipeline.
Speaker 4: the tax equivalent net interest margin for March was 2.74%.
Speaker 6: All right, our next question from the line of David Feaster with Raymond James. Please go ahead.?
Speaker 7: Hey, just thanks for taking the question. Quick one off the bat.
Speaker 10: One quick one off the bat, could you remind us of the cash flows off the securities book? I think we had talked about $25 million a quarter. It's been running ahead of that. I guess, what do you think about the pace of securities cash flows?
Speaker 4: Yeah, we usually we do usually think of it as around 100 a year. Of course, that fluctuates from quarter to quarter. And if anybody if we have any calls on securities, it would accelerate that. But, yeah, it was higher than than a little higher than normal this quarter.
Speaker 10: Just wanted to make sure that we're thinking about kind of the expense run rate the right way.
Speaker 3: You're talking about the branch saves cost saves? Correct. Yeah. So, eventually we do want to use the cost saves there to invest in the cost saves.
Speaker 3: Things like technology that are tied to our 5 year plan, our strategic initiatives, but that'll take some time, you know, hiring of the opportunistic. So we don't have. You know, that money earmarked currently for things. So I think for. Some, you know, undetermined period of time those will drop to the bottom line, but eventually with our new CIO on board potentially taking advantage of some of the disruption in the market, we certainly would like to hire.
Speaker 3: So there's nothing on the immediate horizon for that, for either of those things. So we expect that to be true cost saves until we can reinvest in growth. Okay, that's helpful. I just want to make sure we're thinking about that. Maybe touching on the growth side of the equation, I was hoping you could maybe give us a pulse of the region, what you're hearing from your clients, how demand is trending.
Speaker 10: how new loan yields are and maybe just your appetite for growth here, just given the backdrop, what segments you're still seeing good risk adjusted returns. I mean, obviously, CNI was good. Just curious how you think about growth and where you're seeing new opportunities. The opportunities in terms of pipeline building is pretty even across our flow...
Speaker 3: by way of loan yields in our market the way maybe we would have liked. And so we will continue to look for loans that make sense, like you said, on a risk adjusted basis. The opportunities are there, but it is a muted demand environment. In the North Bay, some of the trends around commercial real estate are still pretty positive. San Francisco
Speaker 3: Clearly has its issues, but our portfolio is held up well there. And we're seeing growth out of some of our other regions like Walnut Creek. So. You know, with our, with our different regions now that can be, you know, disparate in terms of when 1 does well versus the others, but. We're seeing a good pipeline build up in the Sacramento market and.
Speaker 4: It's really hard to predict at this point, but by and large, we think there will be opportunities, but it's not going to be at a first half 2022 pace. And if I could just add to that, on a looking backwards basis, over the last few months, the rates on loans coming in new to the portfolio versus the portfolio rate, they are significantly higher on average, so almost a couple hundred.
Speaker 3: put out offers at 20-year fixed rate.
Speaker 3: So, we will have choices to make on those right assets to put on our books based on the credit quality and the relationship opportunities.
Speaker 10: Okay, okay, that's helpful. And just following back up on the margin, if I hear your comments earlier about you're seeing a slight increasing trend in the margin, do you think we've dropped here kind of from that 374 or 274 that you just mentioned?
Speaker 10: And kind of just how do you think about the margin looking forward? I know it's a tough question to ask, but...
Speaker 4: Yeah, that's a real tough question because as I said, I don't want to predict where the margin is going exactly because in that 274 for March, for example, we're still seeing assets repricing upward. But we are still playing catch up on the deposit side, on the deposit beta.
Speaker 4: And so if you look at them in isolation, each one of those two factors weighing against each other, they are offsetting each other somewhat. But I think, you know,
Speaker 4: the incorporating the full price increase on deposits that we have that we you know put into place during the month of March that's going to put some pressure on the margin.
Speaker 9: Okay. All right. That's helpful. Thank you. Thank you, David. Jeff, back to your question on owner occupied theory office. That total is 65M.
Speaker 11: brand gets a lot of the headlines, but can you talk about the trends you're seeing in the other 81% of the portfolio?
Speaker 3: Yes, I will comment briefly on the North Bay market. Sales trends are down, but things like cap rates and price per square foot are holding and vacancy is a lot lower. For example, in the North Bay, vacancy for offices is around 11-12%. So, what's going on?
nowhere near the pressure that you're seeing in San Francisco proper. With that though, I would ask Masako Stewart, our Chief Credit Officer, to weigh in as they have a very robust annual review process that gives us a lot of insight into the markets as we go throughout the year. Sure, good morning. Like Tim said, you know, San Francisco is probably the most impacted and maybe next would be Sacramento in terms of office, but as noted...
typically look for some solid sponsorship as well in all of our deals. So you know I think we may we continue to monitor the portfolio closely but I think it's we're in a very manageable
And I'll just reiterate something that Sako said because this came in on the line about San Francisco office exposure and how recently those are refreshed in terms of loan to value, best service coverage, occupancy. That information in the deck, that is all based on 12-31-22 results in San Francisco.
based on operating statements and rent rolls, and then internal valuations when we don't have a more recent appraisal adjusted for current cap rate trends. We really do try to stay on top of those and do an annual review process for a very large percentage of our portfolio throughout the entire bank.
Yeah, we do reviews for about a billion of our 1.2 billion non-owner occupied real estate portfolios.
That's helpful color. And then I know that office class can be a largely subjective measure, but any color you could give just on the breakdown of class A, B, or C exposure in the portfolio.
That's a tough one to answer since as you point out it is subjective. I would say in our San Francisco office portfolio these are not high rise skyscraper type buildings. They are relatively smaller in size and as noted as Tim's presentation, they are not
story range. There's the one outlier that happens to be our substandard credit that we've referenced in multiple calls in the past that we reference in the deck, but that is higher, but the vast majority of our properties are, you know, two, three stories. Right?
Okay, and then lastly- And then the ABC is subjective, as you said. Right, yeah. All right, well, last I just wanted to hit on deposits, and I appreciate the color that balances have held in relatively stable since March 22nd, but in any color you could just give on the mix shift over that time.
Bye.
Page 4, I'm getting hand signals. Hang on.
Yeah, it's on page 4 of the deck there, and the mix is almost identical. Non-inter-spring DDA is 50.3 versus 51.5. Money market went from 27.7 to 28. So from a mix standpoint, it's remained very stable.
A lot of the big outflows that we did have in the quarter, both before and after the failure of Silicon Valley Bank, I don't mean to keep picking on them, that's just the trigger point.
was really large outflows tied to specific events that are very easy to point to. Like I said, commercial real estate acquired with cash. We had two companies that sold and those funds were dispersed and unrelated to the owners. That was $40 million. It was $20 million on the CRE purchase post.
SBB collapse, a lot of estate and trust disbursement. So it really was unfortunate timing, but in terms of the behavioral attributes, we really have seen things settle since the 22nd, and that mix really hasn't changed a lot. We have seen things settle since the 22nd, and that mix really hasn't changed a lot. So it really has been interesting timing, and that mix really hasn't changed a lot.
All right, that's all for me. Thanks for taking my questions. Thank you. So while we're on the topic and waiting for other questions on the phone, we did have an investor ask again about the deposit data for the quarter.
Versus what we indicated for the cycle. So they're both they're both the same because 15%. For the cycle, I'm quoting through March 31st.
So, there will likely be more, but that is the cycle and March 31st for the same as of right now. And then the same person asked if we decided to sell the HTM.
what would be the time frame if we arrested at current market and perhaps shorter maturity. So, first of all, we wouldn't sell held to maturity securities. We would sell available for sale securities. And if we were going to do any sort of transaction, if we sold at a gain or at a break even, there wouldn't be an earn back time frame. And we would sell at a gain or at a break even, there wouldn't be an earn back time frame.
Next one question from the line of Andrew Turrell with Stevens. Please go ahead.
Hey, good morning. Morning, Andrew. Maybe just to go back and start on the margin here, I just want to clarify on page 15 of the slide deck, the 83 basis point interest bearing deposits for March, I just want to clarify that is the average throughout the month of March and not the spot.
in the bottom right graph. Ah, OK. I'm going to start in j graph.
That's average throughout the month, correct?
That's average throughout the month, correct? Yes.
Okay, and just, I mean, given the velocity there, the 23 to 83 basis points is a pretty big step up. Do you have what the spot interest-bearing deposit cost was at the end of the period?
No, we don't we, we don't have that right now.
Okay. I mean, it sounds like you guys got a little more aggressive kind of February , March timeframe in ratcheting deposit costs, but I guess I'm just trying to get a sense of, like, how that's progressed so far in the month of April , like, whether or not it feels like the cost increases in maybe early March timeframe were enough. You've had to move.
adjustments were made in March, Andrew. And yes, we've certainly got more aggressive. We had started that process, like I said, two or three days before.
the collapse of Silicon Valley Bank and accelerated that shortly thereafter. But most of those adjustments that I've seen so far were done through the end of the month.
Okay, I appreciate it. And then the one other question I had, you guys have, I think it's close to a $35 million buyback in place and capital ratios look very, very healthy.
With the stock trading kind of around this tangible book value level, can you talk about your appetite for utilization of the buyback here? I didn't see any in the quarter, but we'd love to hear your thoughts. Yeah, we would love to buy shares back at this price. I think we're, you know.
waiting and seeing a little bit.
with the concerns around credit risk, making decisions around whether watching the market and the ability to sell available for sale securities, reposition our NIM based on reducing FHLB borrowings. And so we're looking at all those options and how that would impact capital, again in light of potential credit issues coming.
I would love to do that, but I want to be cautious and prudent in the approach.
Well, the rest of mine were asked and answered already, so I appreciate you taking the questions. Yeah, thank you. Once again, please press 1-4 if you have any phone questions. We have a question from the line of Tim Coffey with Johnny Montgomery Scott. Please go ahead. Thank you. Good morning, everybody. Good morning, everybody.
Hi, Tim. Hello. Hey, I appreciate, I really appreciate all the detail that you provide in the investor deck and on the call today. I just have some kind of follow-up questions on some of those items. The construction book in San Francisco, can you provide some color on that?
Yes, I am going to ask Masako to weigh in on this. She's much better versed in the interest of these other. Sure, the construction portfolio mostly is a multi-family or single-family residences.
When you ask about color, is there anything specific you want me to address? I mean, they are all performed.
Yeah, exactly. Well, the moment property type and location. I mean, specifically in and around the central business district. They are mostly in San Francisco, they're multi family, and so they do cover a number of different neighborhoods in San Francisco.
If there's anything, we have some softening in terms of just condo sales, but they are all performing currently.
Okay. And then with all, with the total CRE loans in San Francisco, are you seeing any, are you seeing any signs that they're behaving differently than say the office portfolio?
In San Francisco.
in San Francisco? Yes, yeah.
You know, I would say that the general trend that that we're seeing, which, you know, which I'm sure many others are seeing as well is just with vacancies, you know, as Lisa's come come due and maturity. You know, many are not not renewing or if they are, they're renewing at lower rate. And so.
We are, you know, continue to keep a close eye and monitor our entire portfolio for that matter for the non-owner-occupied real estate but mostly for the office property. But it is a general trend that we are seeing. In San Francisco, I think majority of it is concentrated in office in San Francisco. I think we have...
deposit accounts be open in a typical quarter? Give me one second.
Give me one second.
Yeah, I'm just trying to get an idea of kind of you put the 1000 that you open in this last quarter. Probably in the five to 600 range.
Yeah, I'm just trying to get an idea of kind of you put the thousand that you open in this last quarter Yeah, probably in the five to six hundred range Okay
All right, those are my questions. I appreciate the time. Thank you. You're very welcome. Thank you.
All right, those are my questions. I appreciate the time. Thank you. You're very welcome. And we have no further questions on the phone line.
Okay, we have a couple of questions from the webcast. The first one is another one on the net interest margin, inflecting back up as assets reprice. In terms of timing, how should we think about that? I would say it's a...
On the asset side, it's a gradual increase and in like the first. You know, the next couple of months with the beta catch up on the deposit. That's definitely going to offset it more than in future months, but hopefully that's of some help. We also have a question about the.
March 31 reserve for unfunded commitments and I'm working on getting that right now. Well, she's getting that we did have a question What are the opportunities to hire out of the recent dislocation in the wine lending market? We were fairly excited about that opportunity early on again not to take any more time.
specific focuses within commercial banking from some of the other dislocations. So I do think there will be hiring opportunities, you know, the right, the question for us is going to be is it the right fit? Will that help drive us forward in areas we want to continue to grow in? Is that someone can add value? But I would expect us to have more opportunities within that.
broader commercial banking for sure, and then hopefully we'll unwind as we see this continue to play out. Going back to the reserve for unfunded commitments, as of March 31st, it was $1.3 million. Looks like we have another question from the line.
that.
So I will say this, I'll read the question that came in, what does the back book of loan repricing look like through 2023, 2024? We have about 18% of our book that reprices over every 12 month cycle. We can go back and do some more research, but it's generally been in that 18 to 20% range. If you would like more specificity around that, please reach out to me or I'll be happy to answer any questions you may have.
With that, I want to thank everyone for their time, attention, and questions. Please feel free to reach out to any of us if you want further information, but we appreciate your involvement. Thank you....