Q3 2023 Bank of Marin Bancorp Earnings Call
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Good morning, everyone welcome to the bank of Marin Bancorp Q3, 'twenty 'twenty earnings call. If you would like to ask a question during the Q&A period of this call.
Speaker 1: Good morning, everyone. Welcome to the Bank of Marin, Bancorp Q3 2020 earnings.
Speaker 1: If you would like to ask a question during the Q&A period of this call, please press star 5 to enter the queue. You may also press star 5 to remove yourself from the queue.
Please press star five to enter the queue.
You May also press star five to remove yourself from the queue is that any time during the conference call you need to reach an operator, Please press star zero.
Speaker 1: If at any time during the conference call you need to reach an operator, please press star zero.
Speaker 1: I will now turn the call over to Yahida Garcia-Perea.
I will now turn the call over to Jay Yeah, Hi, Jeff Garcia ARIA.
Good morning, and thank you for joining bank of Marin Bancorp's earnings call for the third quarter ended September 30th 2023, and you hate It Garcia press marketing and corporate communications manager for bank of Marin.
Speaker 2: Good morning and thank you for joining Bank of Marin Bancorp's earnings call for the third quarter ended September 30, 2023. I'm Yahidah Garcia-Perea, Marketing and Corporate Communications Manager 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. Joining us on the call today are Ken Meyers, President and CEO , and Tani, Girton Executive Vice President and Chief Financial Officer.
Speaker 2: During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question and answer session.
Speaker 2: Joining us on the call today are Tim Myers, President and CEO , and Tawny Gertin, Executive Vice President and Chief Financial Officer.
Our earnings press release and supplementary presentation.
Speaker 2: Our earnings press release and supplementary presentation, which we issued this morning, can be found in the investor relations portion of our website at bankofmarin.com, where this call is also being webcast.
Which we issued this morning can be found in the Investor Relations portion of our website at bank of Marin Dot Com, where this call is also being webcast close captioning is available during the live webcast as well as on the webcast replay.
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 on our earnings press release for both GAAP and non-GAAP measures. From this demonstration, one of the proposals has to be named height.
Before we get started I wanted to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table on our earnings press release for both GAAP and non-GAAP measures.
Speaker 2: Additionally, the discussion on this call is based on information we know as of Friday, October 20th, 2023.
Additionally, the discussion on this call is based on information, we know as of Friday October 20th 2023.
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 statement disclosures in our earnings press release as well as our S E SEC filings.
Speaker 2: 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 disclosures in our earnings press release as well as our SEC filings.
Speaker 3: Following our prepared remarks, Tim, Tawney, and our Chief Credit Officer, Masako Stewart, will be available to answer your questions. And now, I'd like to turn the call over to Tim Myers. Thank you, Yahada. Good morning, everyone, and welcome to our third quarter earnings call.
Following our prepared remarks, Tim Tani, and our Chief Credit Officer, Masako Stuart will be available to answer your question.
And now I'd like to turn the call over to Tim Myers.
Thank you Heather good morning, everyone and welcome to our third quarter earnings call.
Speaker 3: Our improved third quarter results reflect meaningful progress that we made to reposition our balance sheet out of borrowings and securities and into deposits and cash to expand our net interest margin, increase our liquidity diversification, and improve our interest rate risk position. We generated 16% sequential growth in net income while maintaining comparable loan balances, strong credit quality, and well-managed expenses.
Our improved third quarter results reflect meaningful progress that we've made to reposition our balance sheet out of borrowings and securities and into deposits and cash to expand our net interest margin increased our liquidity diversification and improve our interest rate risk position, we generated 16% sequential growth.
Net income, while maintaining comparable loan balances strong credit quality and well managed expenses.
We further strengthened our core deposit franchise during the quarter by engaging new customers and deepening ties with existing clients through exceptional service and our local market expertise.
Speaker 3: We further strengthened our core deposit franchise during the quarter by engaging new customers and deepening ties with existing clients through exceptional service and our local market expertise.
Speaker 3: These efforts led to strong deposit growth for the second consecutive quarter, including growth and non-interest-bearing deposits, which continue to represent 48% of our total deposits.
These efforts led to strong deposit growth for the second consecutive quarter, including growth in noninterest bearing deposits, which continue to represent 48% of our total deposits.
Speaker 3: Notably, during the quarter, we added more than 1,200 new accounts, 38% of which were with new clients.
Notably during the quarter, we added more than 200, new accounts, 38% of which were with new clients.
While deposit costs increased in the quarter the pace of increase slow dramatically from the second quarter as we continue to effectively manage our deposit costs and an ongoing competitive environment.
Speaker 3: While deposit costs increased in the quarter, the pace of increase slowed dramatically from the second quarter as we continue to effectively manage our deposit costs in an ongoing competitive environment.
Speaker 3: Interest-bearing deposit costs increased 31 basis points between June and September , compared to 77 basis points between March and June .
Interest bearing deposit cost increased 31 basis points between June and September compared to 77 basis points between March and June .
Speaker 3: Historically, our overall cost of funds has trended well below peer averages, reflecting our long-term approach to customer engagement, which emphasizes building connections with a full suite of products and services rather than competing on price alone.
Historically, our overall cost of funds has trended well below peer averages, reflecting our long term approach to customer engagement, which emphasizes building connections with a full suite of products and services rather than competing on price alone.
Speaker 3: We continue to work hard at improving our net interest margin by executing on our balance sheet initiatives, which not only include raising deposits and building our loan pipeline, but also reallocating part of our investment portfolio to cash and applying fair value hedges to other securities.
We continue to work hard at improving our net interest margin by executing on our balance sheet initiatives, which not only include raising deposits and building our loan pipeline, but also reallocating part of our investment portfolio to cash and applying fair value hedges to other securities.
Speaker 3: Those actions enabled us to expand net interest margin by three basis points from the second quarter.
These actions enabled us to expand net interest margin by three basis points from the second quarter.
We also substantially paid down our short term borrowings during the quarter with cash flows from our securities and loan portfolios as well as deposit growth as part of an ongoing strategy to reduce interest costs and support our net interest margin.
Speaker 3: We also substantially paid down our short-term borrowings during the quarter with cash flows from our securities and loan portfolios, as well as deposit growth as part of an ongoing strategy to reduce interest costs and support our net interest margin.
Speaker 3: While borrowing and cash fluctuate with day-to-day changes in deposits, the borrowing balance net of cash felt to zero earlier this month. We expect our funding cost increases to remain moderate in coming quarters, given expectations that fed rate hikes and customer migration of funds from operating accounts to interspersion accounts will continue to slow.
Yahaida Garcia: [inaudible] Good morning everyone, welcome to the Bank of Marin, fancores Q3 2020 earnings call, if you would like to ask a question during the Q&A period of this call, please press star 5 to enter the Q, you may also press star 5 to remove yourself from the Q, if at any time during the conference call, you need to reach an operator, please press star 0, I will now turn the call over to Yahaida, Garcia, Maria. Good morning and thank you for joining Bank of Marin, thank cords earnings call for the third quarter and it's September 30th, 2023.
While borrowings and cash fluctuate with day to day changes in deposits the borrowing balance net of cash balances zero earlier this month.
We expect our funding cost increases to remain moderate in coming quarters, given expectations of fed rate hikes and customer migration of funds from operating accounts to interest bearing accounts will continue to slow.
Speaker 3: Our loan portfolio and loan production was relatively stable in the third quarter as we remain disciplined in our underwriting.
Our loan portfolio and loan production was relatively stable in the third quarter as we remain disciplined in our underwriting.
Speaker 3: However, our loan pipelines have expanded meaningfully and fourth quarter loan production is shaping up to be strong, particularly in the area of commercial and industrial, where we are seeing a nice diversity of attractive opportunities.
However, our loan pipelines have expanded meaningfully in the fourth quarter loan production is shaping up to be strong, particularly in the area of commercial in the commercial and industrial where we are seeing a nice diversity of attractive opportunities.
Speaker 3: We generate a momentum in a third quarter that has continued into the fourth quarter. And since quarter N have funded or approved for funding, amounts exceeding Q3 total origination.
We generated momentum in the third quarter that has continued into the fourth quarter and since quarter end have funded or approved for funding amounts exceeding Q3 total originations.
In most cases, our new loans are coming onto our books at meaningfully higher rates than those being paid off and we expect this will provide further support for our NIM.
Speaker 3: In most cases, our new loans are coming onto our books that meaningfully hire rates that those being paid off, and we expect this will provide further support for our new.
Yahaida Garcia: I'm Yahaida Garcia, Korea, marketing and corporate communications manager for Bank of Marin. During the presentation, all participants will be in a listen-only mode, after the call, we will present an MCEO and Tony Burton executive vice president and chief financial officer, our earnings press release and supplementary presentation, which we issued this morning, can be found in investor relations portion of our website at BankofMorand.com, where does this call is also being webcast? Close captioning is available during the live webcast, as well as on the webcast replay.
David Bloom, who joined US as executive Vice President and head of commercial banking in July it is emblematic of our ongoing recruiting efforts and the results will follow.
Speaker 3: David Bloom, who joined us as Executive Vice President and head of commercial banking in July , is emblematic of our ongoing recruiting efforts and the results to follow.
Our commercial banking veteran with more than 25 years of experience David is responsible for the vision and growth of the bank's commercial banking division comprised of eight regional offices located throughout northern California, including our wind practice.
Speaker 3: A commercial banking veteran with more than 25 years of experience, David is responsible for the vision and growth of the bank's commercial banking division, comprised of eight regional offices located throughout Northern California, including our wine prep.
Speaker 3: We believe his growing team is well positioned to thrive further momentum late this year and moving into the new year. Importantly, with new commercial client relationships, comes the potential for fee-based opportunities and new deposits.
We believe is growing team is well positioned to FERC drive further momentum late this year and moving into the new year.
Importantly, with new commercial client relationships comes the potential for fee based opportunities and new deposits.
Yahaida Garcia: Before we get started, I want to note that we will be discussing some non-gap financial measures. Please refer to the reconciliation table on our earnings press release for both gats and non-gap measures. Additionally, the discussion on this call is based on information we know as a Friday, October 20, 2023. 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 as closures in our earnings press release, as well as our SEC filings.
Speaker 3: We believe that this will help the bank generate improved profitability, continue robust earnings generated capital, and strong returns on behalf of our shareholders.
We believe that this will help the bank generated improved profitability continued robust earnings generated capital and strong returns on behalf of our shareholders.
Critically as we pursue growth we remained focused on prudent risk management and strong credit quality that reflects our consistent underwriting standards and customer selection across cycles.
Speaker 3: Critically, as we pursue growth, we remain focused on plurian risk management and strong credit quality that reflects our consistent underwriting standards and customer selection across psychro.
We also continue to proactively manage our credit and support our borrowers building momentum with high quality credits, while carefully monitoring our loan portfolio and rating risk appropriately.
Speaker 3: We also continue to proactively manage our credit and support our borrowers, building momentum with high-quality credits while carefully monitoring our loan portfolio and rating risk appropriate.
Yahaida Garcia: Following our prepared remarks, Tim, Tony, and our chief credit officer, Miss Aquastur, will be available to answer your questions.
Non accrual loans totaled <unk>, 7% of the loan portfolio at September 30, compared to <unk>, 1% at June 30.
Speaker 3: 9-a-cruel loans totaled 0.27% of the loan portfolio at September 30, compared to 0.1% at June 30.
Tim Myers: And now I'd like to turn the call over to Tim Myers. Thank you, Yahaida.
Tim Myers: Good morning, everyone, and welcome to our third quarter earnings call. Our improved third quarter results reflect meaningful progress that we made to reposition our balance sheet at a borrowing of insecurities and into deposits in cash to expand our net interest margin, increase our liquidity diversification and improve our interest rate risk position. We generated 16% sequential growth in net income while maintaining comparable loan balances, strong credit quality, and well-managed expenses. We further strengthened our core deposit franchise during the quarter by engaging new customers and deepening ties with existing clients through exceptional service and our local market expertise.
Speaker 3: We moved two loans to rolling $4 million to non-acrual status in the third quarter.
We moved two loans totaling $4 million to non accrual status in the third quarter.
Speaker 3: The increase was driven by a legacy acquired bank loan and we are working with that bar to ensure the best possible outcome.
The increase was driven by a legacy acquired bank loan and we are working with that bar to ensure the best possible outcome.
All of our non accrual loans are collateralized by real estate with no expected credit loss as of quarter end.
Speaker 3: All of our non-acrual loans are collateralized by real estate with no expected credit loss as a quarter-res.
Speaker 3: Classified loans comprise only 1.9% of total loans a quarter end. Propably slightly from the prior course.
Classified loans comprised only one 9% of total loans at quarter end.
Up only slightly from the prior quarter.
Speaker 3: Looking closer at our commercial real estate portfolio, which accounted for 74% of our total loan balances of September 30, 23% were owner occupied, which we believe carry a different risk profile than non-owner occupied loans in this environment.
Looking closer at our commercial real estate portfolio, which accounted for 74% of our total loan balances at September 30, 23% were owner occupied which we believe carry a different risk profile the non non owner occupied loans in this environment.
Tim Myers: These efforts led the strong deposit growth for the second consecutive quarter, including growth and non-interest bearing deposits, which continue to represent 48% of our total deposits. Notably, during the quarter, we added more than 1200 new accounts, 38% of which were with new clients. While deposit costs increased in the quarter, the pace of increase slowed dramatically from the second quarter as we continue to effectively manage our deposit costs in an ongoing competitive environment.
Speaker 3: Our $364 million non-owner occupied office portfolio is granular and consists of 142 loans with an average loan size of 2.6 million. The largest loan being 17.9.
Our $364 million non owner occupied office portfolio is granular and consists of 142 loans with an average loan size of $2 6 million the largest loan being $17 million.
Speaker 3: The weighted average loan to value was 56%, and the weighted average debt service coverage was 1.68 times based on our most recent data.
Weighted average loan to value of 36% and the weighted average debt service coverage was one six to eight times based on our most recent data.
Earlier this quarter, we conducted a review of the refinance risk in our non owner occupied commercial real estate portfolio, where it is.
Speaker 3: Earlier this quarter, we conducted a review of the refinance risk and our non-unoccupied commercial real estate portfolio, the results of which can be seen on slide 13 of the earnings present.
Tim Myers: Interest bearing deposit costs increased 31 basis points between June and September, compared to 77 basis points between March and June. Historically, our overall cost of funds has trended well below peer averages, reflecting our long-term approach to customer engagement, which emphasizes building connections with the full suite of products and services, rather than competing on price alone. We continue to work hard at improving our net interest margin by executing on our balance sheet initiatives, which not only include raising deposits and building our loan pipeline, but also reallocating part of our investment portfolio to cash and applying fair value hedges to other securities.
Also of which can be seen on slide 13 of the earnings presentation.
We evaluated 36 loans totaling $97 million with total commitments over $1 million, each the mature or reprice in 2023 or 2024.
Speaker 3: We evaluated 36 loans totaling $97 million with total commitments over $1 million each that mature or reprived in 2023 or 2024.
We have determined that the refinance risk on these loans is manageable with weighted average debt service coverage ratios ranging from $1 two eight to two one times across the four cohorts based on current rates.
Speaker 3: We determined that the refinance risk on these loans is manageable with weighted average debt service coverage ratios ranging from 1.28 to 2.01 times across the four cohorts based on current rates.
Speaker 3: In summary, we made important progress on both sides of our balance sheet in the third quarter and continue to make headway as we position the bank for improved profitability in the quarter's ahead.
In summary, we made important progress on both sides of our balance sheet in the third quarter and continue to make headway as we position the bank for improved profitability in the quarters ahead.
Tim Myers: Those actions enabled us to expand net interest margin by three basis points from the second quarter. We also substantially paid down our short-term borrowings during the quarter with cash flows from our securities and loan portfolios, as well as deposit growth as part of an ongoing strategy to reduce interest costs and support our net interest margin. While borrowings and cash fluctuate with day-to-day changes in deposits, the borrowing balance net of cash felt to zero earlier this month.
Finally, the bank is pleased to welcome Cheatham Ganser to its board of directors as announced in our recent 8-K Cheatham.
Speaker 3: Finally, the bankers please the welcome Cheatham Gensor to its Board of Directors as announced in our recent AK.
Speaker 3: Cheetah brings extensive leadership and financial services experience to the board, including the development and execution of transformative growth, expansion, and investment strategies for organization.
<unk> brings extensive leadership and financial services experience to the board, including the development and execution of transformative growth expansion and investment strategies for organizations.
Speaker 3: In 2021, she established an executive coaching and organizational consulting firm in which she also serves as an executive coach.
In 2021, she established an executive coaching and organizational consulting firm in which he also serves as an executive coach.
Tim Myers: We expect our funding cost increases to remain moderate in coming quarters given expectations that fed rate hikes and customer migration of funds from operating accounts to interest bearing accounts will continue to slow. Our loan portfolio and loan production was relatively stable in the third quarter as we remain disciplined in our underwriting. However, our loan pipelines have expanded meaningfully and fourth quarter loan production is shaping up to be strong, particularly in the area of commercial and industrial where we are seeing a nice diversity of attractive opportunities.
With that I'll turn the call over to Tony to discuss our financial results in more detail.
Speaker 4: With that, I'll turn the call over to Connie to discuss our financial results in more detail. Thanks, Tim. Good morning, everyone.
Thanks, Tim good.
Good morning, everyone.
First I'll start with some key highlights for the quarter.
Speaker 5: We generated net income of 5.3 million in the third quarter or 33 cents per diluted share up from 4.6 million or 28 cents in the second quarter.
We generated net income of $5 3 million in the third quarter or <unk> 33 per.
Per diluted share up from $4 6 million or <unk> 28 in the second quarter.
Speaker 5: As Tim noted, the increase was driven by a three basis point increase in our tax equivalent net interest margin to 2.48 percent from 2.45 percent in the prior quarter, due primarily to higher rates on interest bearing cash balances generated from security sales, and the addition of a $102 million fair value hedges in the form of interest rates.
As Tim noted the increase was driven by a three basis point increase in our tax equivalent net interest margin to 248% from 245% in the prior quarter due primarily to higher rates on interest bearing cash balances generated from security sales and the addition of 102.
Tim Myers: We generate a momentum in a third quarter that has continued into the fourth quarter and since quarter end, have funded or approved for funding amounts exceeding Q3 total originations. In most cases, our new loans are coming under our books that meaningfully higher rates than those being paid off, and we expect this will provide further support for our name.
Million dollar fair value hedges in the form of interest rate swaps.
Speaker 5: We recorded a $425,000 provision for credit losses on loans in the quarter compared to $500,000 in the prior quarter.
We recorded a $425000 provision for credit losses on loans in the quarter compared to 500000 in the prior quarter.
Tim Myers: David Bloom, who joined us as Executive Vice President and Head of Commercial Banking in July, is emblematic of our ongoing recruiting efforts and the results to follow. A commercial banking veteran with more than 25 years of experience, David is responsible for the vision and growth of the Bank's commercial banking division comprised of eight regional offices located throughout Northern California, including our wine practice. We believe his growing team is well positioned to drive further momentum late this year and moving into the new year. Importantly, with new commercial client relationships, comes the potential for fee-based opportunities and new deposits.
Speaker 5: The prohibition was due primarily to increases in qualitative factors related to trends in adversely graded non-owner occupied commercial real estate loans and the potential impact of higher interest rates and other external factors on both our non-owner occupied commercial real estate and construction portfolio.
Provision was due primarily to increases in qualitative factors related to trends in adversely graded non owner occupied commercial real estate loans and the potential impact of higher interest rates and other external factors on both our non owner occupied commercial real estate and construction portfolios.
Noninterest income totaled $2 6 million for the third quarter down $141000 from the second quarter.
Speaker 5: Non-interesting come total 2.6 million for the third quarter, down $141,000 from the second quarter.
Speaker 5: The modest decline was primarily due to a decrease in debit card interchange income.
Modest decline was primarily due to a decrease in debit card interchange income.
Speaker 5: The sale of 82.7 million investment securities generated a loss of 2.8 million, and that loss was offset by a gain on the sale of our remaining 10,439 visa B shares, which had a zero carrying value.
The sale of $82 $7 million investment securities generated a loss of $2 8 million.
Tim Myers: Awards. We believe that this will help the bank generate improved profitability, continued robust earnings generated capital, and strong returns on behalf of our shareholders. Critically, as we pursue growth, we remain focused on prudent risk management and strong credit quality that reflects our consistent underwriting standards and customer selection across cycles. We also continue to proactively manage our credit and support our borrowers, building momentum with high-quality credits while carefully monitoring our loan portfolio and rating risk appropriately.
Net loss was offset by a gain on the sale of our remaining 10439 visa b shares which had a zero carrying value.
Speaker 5: Non-interest expenses of 19.7 million in the quarter were down $918,000 from 20.7 million last quarter.
Noninterest expenses of $19 7 million in the quarter were down $918000 from $20 7 million last quarter.
Speaker 5: Contributing to the reduction was a $675,000 decrease in salaries and benefits related to decreases in accrued incentives and profit-sharing expenses and 401k contributions.
Contributing to the reduction was a $675000 decrease in salaries and benefits related to decreases in accrued incentives.
And profit sharing expenses and 401K contributions.
Additionally, our annual charitable contributions grant program normally occurs in the second quarter, resulting in another 618000 reduction quarter over quarter.
Speaker 5: Additionally, our annual charitable contributions grant program normally occurs in the second quarter, resulting in another 618,000 reduction quarter over quarter.
Tim Myers: Non-a-cruel loans total 0.27% of the loan portfolio at September 30, compared to 0.1% at June 30. We move two loans totaling $4 million to non-a-cruel status in the third quarter. The increase was driven by a legacy-acquired bank loan, and we are working with that bar to ensure the best possible outcome. All of our non-a-cruel loans are collateralized by real estate with no expected credit loss as a quarter-end. Classified loans comprised only 1.9% of total loans at quarter-end, but only slightly from the prior quarter.
Finally, FDIC insurance costs declined 197000, due to a second quarter catch up adjustment for the statutory rate increase to bolster the deposit insurance fund.
Speaker 5: Finally, FDIC insurance costs declined 197,000 due to a second-quarter catch-up adjustment for the statutory rate increase to bolster the deposit insurance fund.
These decreases were partially offset by a $533000 net increased other expense, primarily resulting from a 688000 increase in expenses and fees associated with our customers' participation and reciprocal deposit networks and boats bolster their FTE.
Speaker 5: These decreases were partially offset by a $533,000 net increase, other expense, primarily resulting from a $688,000 increase in expenses and fees associated with our customers' participation in reciprocal deposit networks to bolster their FDIC-insured balances.
Tim Myers: Looking closer at our commercial real estate portfolio, which accounted for 74% of our total loan balances at September 30, 23% were owner-occupied, which we believe carry a different risk profile than non-owner-occupied loans in this environment. Our $364 million non-owner-occupied office portfolio is granular and consists of 142 loans with an average loan size of 2.6 million, the largest loan being 17 million. The weighted average loan to value was 56%, and the weighted average debt service coverage was 1.68 times based on our most recent data.
Insured balances.
Our third quarter earnings translated into a return on assets.
Speaker 5: Our third quarter earnings translated into a return on assets of 0.52% and return on equity of 4.94% up from 0.44% and 4.25% in the prior quarter.
0.52% and return on equity of 494% up from 0.44% and $4 two 5% in the prior quarter.
The efficiency ratio improved to $72, 96% from $76, 91% in the prior quarter due to both higher net interest income and lower noninterest expenses.
Speaker 5: The efficiency ratio improved to 72.96% from 76.91% in the prior quarter due to both higher net interesting come and lower non-interest expenses.
Speaker 5: We continue to maintain a high level of capital and liquidity, as well as an allowance for credit losses equal to 1.16% of total loans.
We continue to maintain a high level of capital and liquidity as well as an allowance for credit losses equal to 116% of total loans.
Tim Myers: Earlier this quarter, we conducted a review of the refinance risk and our non-owner-occupied commercial real estate portfolio, the results of which can be seen on slide 13 of the earnings presentation. We evaluated 36 loans, totaling $97 million with total commitments over $1 million each, the mature or reprived in 2023 or 2024. We determined that the refinance risk on these loans is manageable, with weighted average debt service coverage ratios ranging from 1.28 to 2.01 times across the four cohorts based on current rates.
Speaker 5: All capital levels remain strong and meaningfully above well capitalized regulatory requirements.
Our capital levels remained strong and meaningfully above well capitalized regulatory requirements.
Speaker 5: Our total risk-based capital improved to 16.6% and 16.1% for bank core and the bank respectively during the quarter. Our TCE ratio was comparable with prior quarter despite pressure from AOCI resulting from resulting rising interest rates in the quarter.
Our total risk based capital improved to 16, 6% and 16, 1% for Bancorp and the bank respectively during the quarter our.
Our TCE ratio was comparable with prior quarter, despite pressure from OCI, resulting from resulting rising interest rates in the quarter.
Speaker 5: Bank Corps's quarter and tangible common equity was down one basis point to 8.63%. The 7.2 million decline in AOCI resulting from after-tax marks on our AFS portfolio, net affair value hedges was mostly offset by earnings and a reduction in tangible assets.
Same course quarter end tangible common equity was down one basis point to 863% to $7 $2 million decline in OCI, resulting from an after tax marks on our <unk> portfolio net of fair value hedges was mostly offset by earnings and a reduction intangible.
Tim Myers: In summary, we made important progress on both sides of our balance sheet in the third quarter and continue to make headway as we position the bank for improved profitability in the quarters ahead.
Assets.
After adjusting for $107 million and after tax unrealized losses in our HTM securities portfolio, our TCE ratio would be six 1% for bancorp.
Speaker 5: After adjusting for 107 million and after tax unrealized losses in our HTM security portfolio, our TCE ratio would be 6.1% for bank force.
Tim Myers: Finally, the bank has pleased to welcome Sheedham Gensor to its board of directors as announced in our recent AK. Sheedham brings extensive leadership and financial services experience to the board, including the development and execution of transformative growth, expansion, and investment strategies for organizations.
Importantly, our liquidity covers all of our uninsured deposits by over 200%.
Speaker 5: Importantly, our liquidity covers all of our uninsured deposits by over 200%.
Speaker 5: liquidity and contingent liquidity of approximately 2.1 billion at quarter end consisted of cash, unencumbered securities and total borrowing capacity and does not include our ability to tap the broker deposit market.
Liquidity and contingent liquidity of approximately $2 1 billion at quarter end consisted of cash unencumbered securities and total borrowing capacity and does not include our ability to tap the broker deposit market.
Tim Myers: In 2021, she established an executive coaching and organizational consulting firm in which she also serves as an executive coach, with that.
Tani Girton: I'll turn the call over to Tani to discuss our financial results in more detail. Thanks, Tim.
Uninsured deposits remained at 29% of our total deposits as of September 30, our largest depositor represented just 0.8% of total deposits and our combined four largest depositors represented 3% of total deposits.
Speaker 5: Uninsured deposits remained at 29% of our total deposits as of September 30th. Our largest depositor represented just 0.8% of total deposits and are combined for largest depositors represented 3% of total deposits.
Tani Girton: Good morning, everyone. First, I'll start with some key highlights for the quarter. We generated net income of 5.3 million in the third quarter or 33 cents per diluted share up from 4.6 million or 28 cents in the second quarter. As Tim noted, the increase was driven by a three basis point increase in our tax equivalent net interest margin to 2.48 percent from 2.45 percent in the prior quarter due primarily to higher rates on interest bearing cash balances generated from security sales and the addition of 102 million dollar fair value hedges in the form of interest rate swaps.
Speaker 5: Our Board of Directors declared a cash dividend of 25 cents per share on October 20, 2023, which represents the 74th consecutive quarterly dividend paid by bank courts.
Our board of directors declared a cash dividend of <unk> 25 per share on October 20th 2023, which represents the 74th consecutive quarterly dividend paid by Bank Corp.
Speaker 5: As we noted on last quarter's call, the Board of Directors renewed the Share Repurchase Program for 25 million, effective through July 2025. There have been no repurchases in 2023, as we have focused on continuing to build upon our already strong capital position.
As we noted on last quarter's call. The board of directors renewed the share repurchase program for $25 million effective through July 2025.
There have been no repurchases in 2023 as we are focused on continuing to build upon our already strong capital position.
Tani Girton: We recorded a 425,000 dollar provision for credit losses on loans in the quarter compared to 500,000 in the prior quarter. The provision was due primarily to increases in qualitative factors related to trends in adversely graded non owner occupied commercial real estate loans and the potential impact of higher interest rates and other external factors on both our non owner occupied commercial real estate and construction portfolio. Non interest income total 2.6 million for the third quarter down $141,000 from the second quarter.
Speaker 5: We continue to believe that our emphasis on the fundamentals of relationship banking and risk management combined with our strong liquidity and capital will continue to serve our customers and shareholders well across all interest rate and economic cycle.
We continue to believe that our emphasis on the fundamentals of relationship banking and risk management combined with our strong liquidity and capital we will continue to serve our customers and shareholders well across all interest rate and economic cycles.
Speaker 5: At Bank of Marin, we are committed to fostering a culture of excellence, effort and engagement as our teams work together on the execution of our strategies to increase operational efficiencies and improve long-term profitability. With that, I'll turn it back to Tim to share.
And bank of Marin, we're committed to fostering a culture of excellence effort and engagement as our teams work together on the execution of our strategies to increase operational efficiencies and improve long term profitability.
With that I will turn it back to Tim to share some final comments.
Speaker 3: Thank you, Tony. In conclusion, we continue to build upon our valuable core deposit franchise and the third quarter.
Thank you Tani.
In conclusion, we continued to build upon our valuable core deposit franchise in the third quarter <unk>.
Tani Girton: The modest decline was primarily due to a decrease in debit card interchange income. The sale of 82.7 million investment securities generated a loss of 2.8 million and that loss was offset by a gain on the sale of our remaining 10,439 visa B shares which had a zero carrying value. Non interest expenses of 19.7 million in the quarter were down 918,000 dollars from 20.7 million last quarter. Contributing to the reduction was a $675,000 decrease in salaries and benefits related to decreases in accrued incentives and profit sharing expenses and 401k contributions.
Emphasizing our relationship based banking model to increase deposits, while maintaining an attractive deposit mix and healthy liquidity levels.
Speaker 3: Emphasizing our relationship-based banking model to increase deposits while maintaining an attractive deposit and healthy liquidity level.
Speaker 3: We also proactively managed our balance sheet, enabling us to expand our net interest margin in the quarter.
We also proactively managed our balance sheet, enabling us to expand our net interest margin in the quarter.
We bolstered our commercial banking team and are attracting new clients are seeking financing to pursue new opportunities and expansion plans.
Speaker 3: We bolster our commercial banking team and are attracting new clients that are seeking financing to pursue new opportunities and expansion plans. And we are deepening our relationship.
And we are deepening our relationships with existing clients.
Speaker 3: This is enabling our lending teams to build a strong pipeline that we believe will lead to low growth, increased interest income, and ongoing margin and earnings improvements.
This is enabling our lending teams to build a strong pipeline that we believe will lead to loan growth increased interest income and ongoing margin and earnings improvement.
Speaker 3: Finally, I want to thank everyone on today's call for your interest and your support. You will now open the call to your question.
Finally, I want to thank everyone on today's call for your interest and your support we will now open the call to your questions.
Tani Girton: Additionally, our annual charitable contributions grant program normally occurs in the second quarter resulting in another 618,000 reduction quarter over quarter. Finally, FDIC insurance costs declined 197,000 due to a second quarter catch-up adjustment for the statutory rate increase to bolster the deposit insurance fund. These decreases were partially offset by a $533,000 net increase, other expense, primarily resulting from a 688,000 increase in expenses and fees associated with our customers participation. In reciprocal deposit networks, the bolster their FDIC insured balances.
Okay.
To join the queue to ask a question. Please press star on your.
Speaker 1: join with you to ask a question please press start five on your telephone.
Your telephone keypad again that stockpile on your telephone keypad to ask a question.
Speaker 1: Again, at star five on your telephone key, you can ask a question.
Our first question comes from Jeffrey <unk> from D. A Davidson.
Speaker 1: Our first question comes from Jeffrey Rulis from VA Davidson. Your line is now open. Please go ahead.
Your line is now open. Please go ahead.
Good morning.
Good morning, Jeff Good morning Jess.
Speaker 6: I hope to get an update on, I think you've identified a couple of months ago, the percent of loans that we're pricing in the next 12 months, I think it was around 30%. Has that meaningfully changed as of today?
Hoping to get an update on that.
<unk> identified a couple of months ago.
Percent of loans that are repricing in the next 12 months I think it was around 30%.
Meaningfully changed.
Tani Girton: Our third quarter earnings translated into a return on assets of 0.52% and return on equity of 4.94% up from 0.44% and 4.25% in the prior quarter. The efficiency ratio improved to 72.96% from 76.91% in the prior quarter due to both higher net interest income and lower non-interest expenses. We continue to maintain a high level of capital and liquidity as well as an allowance for credit losses equal to 1.16% of total loans.
Good day.
Speaker 3: No, there's a slide in the deck on page 17 for in the investor presentation on the total, but.
So there is a slide in the deck on page 17 on for.
An investor presentation on the total.
But that's that's.
Speaker 5: All economy going from the details on that. Yeah, so Jeff, the 29% in, when we discuss that in the context of our interest rate risk and where our net interest margin is headed, that includes prepayment projections, whereas what you can see on page 17 in the deck or the presentation, if you add up the first two columns in the loan repricing schedule, that's 17%. There are no prepayment rates applied to that.
Our economy on some of the details on that yes, so geoff that 29%.
When we discussed that in the context of our interest rate risk and where our net interest margin is headed that includes prepayment projections, whereas what you can see on page 17 in the deck.
The presentation, if you add up the first two columns in the loan repricing schedule that 17% there are no prepayment rates applied to that.
Tani Girton: All capital levels remain strong and meaningfully above well capitalized regulatory requirements. Our total risk-based capital improved to 16.6% and 16.1% for bank core and the bank respectively during the quarter. Our TCE ratio was comparable with prior quarter despite pressure from AOCI resulting from rising interest rates in the quarter. Bank core's quarter and tangible common equity was down one basis point to 8.63%. The 7.2 million decline in AOCI resulting from after-tax marks on our AFS portfolio, net affair value hedges, was mostly offset by earnings and a reduction in tangible assets.
Got it okay.
Speaker 6: Okay. And, you know, as you both kind of talked about the puts and takes of, of, you know,
And as you approach kind of.
Talked about the puts and takes.
The bigger picture on margin.
Thousands.
Speaker 6: move more positive than not. At high level margin conversation.
More positive than not.
High level margin conversation.
The outlook here.
You described you're out.
Speaker 6: I'm a expansioner, I see it as the deposit cost kind of held it.
Some expansion there.
How do you see it as those deposit costs hi, Albert Thanks.
Yeah exactly so we had talked about that on the last call and I think for some of the factors are what we expected was what actually transpired and but again that was absent any loan growth and also any change in deposits. Obviously, we had more we had.
Speaker 5: Yeah, exactly. So we had talked about that on the last call. And I think for some of the factors, what we expected was what actually transpired. But again, that was...
Tani Girton: After adjusting for 107 million and after-tax unrealized losses in our HTM security portfolio, our TCE ratio would be 6.1% for bank core. Importantly, our liquidity covers all of our uninsured deposits by over 200%. Liquidity and contingent liquidity of approximately 2.1 billion at quarter end consisted of cash, unencumbered securities and total borrowing capacity and does not include our ability to tap the broker deposit market. Uninsured deposits remained at 29% of our total deposits as of September 30th. Our largest depositor represented just 0.8% of total deposits and are combined four largest depositors represented 3% of total deposits.
Speaker 5: absent any loan growth and also any change in deposits. Obviously we had more growth in deposits and also the rates on the deposits went up. So that's where you would have gotten the differential. So as we look forward from today with a static balance sheet, so similar expectations, obviously not quite as much lift if we...
Our growth in deposits and also the rates on the deposits went up so that's where you would have gotten in the differential so as we look forward from today with the static.
The balance sheet.
So similar expectations, obviously not quite as much lift if we do.
Speaker 5: don't make any changes associated. You know, last time we worked in, the changes associated with the security sales. I'm just kidding.
Don't make any changes associated.
Last time, we worked in the changes associated with the security sales.
Excuse me and the interest rate swaps and this time, we have not done any of those as of yet this quarter.
Speaker 5: and the interest rates to what? This time we have not done any of those as of yet this quarter. So if you just look at a straight...
So if you just look at straight.
Speaker 5: static balance sheet uh... with no changes in market rates no changes in deposit rates you know that ranges from
<unk> balance sheet.
With no changes in market rates no changes in deposit rates.
Tani Girton: Our Board of Directors declared a cash dividend of 25 cents per share on October 20th, 2023, which represents the 74th consecutive quarterly dividend paid by bank core. As we noted on last quarter's call, the Board of Directors renewed the share repurchase program for 25 million effective through July 2025. There have been no repurchases in 2023 as we have focused on continuing to build upon our already strong capital position. We continue to believe that our emphasis on the fundamentals of relationship banking and risk management, combined with our strong liquidity and capital, will continue to serve our customers and shareholders well across all interest rate and economic cycles.
That ranges from two to five basis points in lift on average margin in the quarter.
Speaker 5: two to five basis points in lift on average margin in a quarter. Yeah, I would say Jeff from
I would say Jeff from.
Speaker 3: left sterile standpoint analytically and and honey's right is you know we are seeing that pace of the positive cost you celebrate uh... you know we look at the deposit campaign we did this last quarter versus a prior quarter the weighted average
Russ sterile standpoint, analytically and timing is right as you know we are seeing that pace of deposit costs decelerate.
If you look at the deposit campaign, we did this last quarter versus the prior quarter. The weighted average cost on that was very very similar almost identical and.
Speaker 3: Cost on that was very, very similar, almost identical. And the yield on new loans coming on was 7.69 in the quarter. So I think we mentioned in the script there that
The yield on new loans coming on was 769 in the quarter. So I think we mentioned in the script. There that we have had an acceleration of loan closings.
Speaker 3: We have had an acceleration of loan closings. We had expected some last quarter, but those are materializing now.
Tim Myers: At Bank of Marin, we are committed to fostering the culture of excellence, effort and engagement as our teams work together on the execution of our strategies to increase operational efficiencies and improve long term profitability. With that, I'll turn it back to Tim to share some final comments. Thank you, Tony. In conclusion, we continue to build upon our valuable core deposit franchise in the third quarter. Emphasizing our relationship-based banking model to increase deposits while maintaining an attractive deposit mix and healthy liquidity level.
Unexpected some last quarter, but those are materializing now.
Speaker 3: And so if we get that lone growth on top of what Tony mentioned, we're optimistic we can continue to show that expansion barring any unperseemed circumstances there.
And so if we get that loan growth on top of autonomy mentioned, we're optimistic we can continue to show that expansion barring any unforeseen circumstances there.
Great.
Speaker 6: I appreciate the color. If I could ask about the deposit side.
Good color.
Can I ask about the deposit side.
And you talked about I think you said 1200, new accounts added in a large portion of those were new clients.
Speaker 6: 1200 new accounts added and a large portion of those were new clients what what
What.
If you could kind of range bound what.
Speaker 6: I could kind of range bound what the newer clients, where are they coming from? Is it from some of the struggles or failed banks in your region? Was it community banks? Is it larger banks? Do you get a sense for where those clients are coming from?
Newer clients where are they coming from is it from some of the struggles are.
Tim Myers: We also proactively managed our balance sheet, enabling us to expand our net interest margin in the quarter. We bolster our commercial banking team and are attracting new clients that are seeking financing to pursue new opportunities and expansion plans, and we are deepening our relationships with existing clients. This is enabling our lending teams to build a strong pipeline that we believe will lead to long growth, increased interest income, and ongoing margin and earnings improvement.
Failed banks in your region or is it community banks is it larger banks you get a sense for what.
Where those clients are coming from.
Speaker 3: Yes, it's all be above. We are continuing to benefit from what happened with some of the banks that were taken over, but we're also getting accounts from just other large.
Yes, it's all of the above.
We are continuing to benefit from what happened with some of the banks that were taken over but we're also getting accounts from this other large banks.
Speaker 3: Banks, I think the price on the market drove people that direction, but fundamentally they're still a strong desire and love of the community banking model or appreciation of that. And so we continue to benefit from that. The bulk of it that we brought in, meaning not current account fluctuations, you know, is about.
Thanks, I think the.
PRASM in the market drove people that direction, but fundamentally there is still a strong desire and.
Our love of the community banking model or appreciation of that and so we continue to benefit from that.
Tim Myers: Finally, I want to thank everyone on today's call for your interest and your support. You will now open the call to your questions. To join with you to ask a question, please press start five on your telephone keypad. Again, that's start five on your telephone keypad to ask a question.
Look a bit that we brought in not current account fluctuations.
Isabelle.
Oh 80 million or $81 million of that was interest bearing but again that weighted average cost was $3 63. This for interest bearing so we continue to get DDA.
Speaker 3: 80 million or 81 million of that was interest bearing, but again that weighted average cost was $363 just for interest bearing. So we continue to get DDA. None of that was broker deposit activity and very little CD activity. So it's just blocking and tackling deposit gathering, but it is across the board in terms of source.
Jeffrey Rulis: Our first question comes from Jeffrey Rulis from B.A. Davidson. Your line is now open. Please go ahead. Good morning, Jeff. Good evening, Jeff. I'm hoping to get an update on I think you've identified a couple of months ago that the percent of loans that were repricing in the next 12 months, I think it was around 30 percent. Is that meaningfully changed as of today? No, there's a slide in the deck on page 17.
None of that was brokered deposit activity.
And very little CD activity. So, it's just blocking and tackling deposit gathering, but it is across the board in terms of sources.
And I would say you can see you can see in the deck on page 16.
Speaker 7: And I'd say you can see in the deck on page 16, what the cost of deposits was in September versus June , but in general, the deceleration and the increase in cost of deposits is significant. It was about half this quarter versus what it was last quarter.
What the cost of deposits was in September versus June but in general.
Deceleration in the in the increase in cost of deposits is significant it was about half this quarter versus what it was last quarter.
Jeffrey Rulis: That's a presentation on the total, but that's all economy on some of the details on that. Yes, so Jeff, the 29 percent, when we discussed that in the context of our interest rate risk, and where our net interest margin is headed, that includes prepayment projections, whereas what you can see on page 17 in the deck, or the presentation, if you add up the first two columns in the loan repricing schedule, that's 17 percent.
That's great. Thank you.
Thank you Jeff.
Our next question comes from the line of David Feaster from Raymond James.
Speaker 1: next question comes from the line of David Beaster from Raymond J.
Speaker 8: David, your line is open. Please go ahead. All right, good morning, everybody. Good morning. Maybe just following up on...
David Your line is open. Please go ahead, hey, good morning, everybody.
Morning.
Maybe just following up on the margin discussion.
Speaker 8: you know you guys that's assuming a static balance if i heard you correctly and you guys have been you've got a great job managing the balance you i'm just curious how you think about it going forward you know we've built cash balance in this quarter uh... are there any expectation to continue putting security book pay down borrowing you know that would only be added to the discussion i would think but i'm just curious you know how you think about
You guys, that's assuming a static balance sheet. If I heard you correctly you guys have been you have done a great job managing the balance sheet I'm just curious how you think about it going forward.
Jeffrey Rulis: There are no prepayment rates applied to that. I got it. Okay. And as you both kind of talked about the puts and fakes of the bigger picture on margin, it sounds more positive than not. High level margin conversation, the outlook here is to continue to scratch out some expansion or how do you see it as those deposit costs kind of held at bay? Yeah, exactly. So we had talked about that on the last call, and I think for some of the factors, what we expected was what actually transpired.
We built cash balances this quarter are there any expectations continued pruning the securities book pay down borrowings.
That would only be additive to the discussion I would think but I'm just curious.
How do you think about managing the balance sheet going forward.
Speaker 3: al-Takai level not time to jump in but we continue to look at that all the time we can sell securities particularly fun in the loan growth uh... you know obviously a bit more definable earned back period that way or more clarity into that we've been successful and paying down those barring factors
I'll talk high level about Tommy jump in but we continue to look at that all the time, if we can sell securities.
Particularly funding the loan growth.
Obviously, you have a more definable earn back period that way or there is more.
More clarity into that.
We've been successful in paying down those borrowings in fact for them.
Jeffrey Rulis: But again, that was absent any loan growth and also any change in deposits. Obviously, we had more growth in deposits and also the rates on the deposits went up, so that's where you would have gotten the differential. So as we look forward from today with a static balance sheet, so similar expectations, obviously, not quite as much lift if we don't make any changes associated. You know, last time we worked in the changes associated with the security sales, excuse me, and the interest rates were up.
Speaker 3: You know, a number of days during the quarter we were, if you met from the cash, the $83 million from the prior security failed, if you met that.
Number of days during the quarter, we were if you net from the cash the $83 million from the prior security sales. If you net that from borrowings we were negative $10 million for a while we were sitting at zero. So we've seen the ability to work that down but your question is a great. One and we will continue to look at that were being sent.
Speaker 3: from borrowing, we were negative 10 million for a while. We were sitting at zero. So we've seen the ability to work that down, but your question's a great one, and we will continue to look at that. We're being sensitive to managing all the stakeholders here, shareholders, regulators.
And the managing all the stakeholders here shareholders regulators.
Speaker 3: and want to maintain liquidity on the balance sheet, but we definitely want to look at what we can do to fund long growth and continue to refosition that in them. Yeah, I would just ask.
And want to maintain liquidity on the balance sheet, but we definitely want to look at what we can do to fund loan growth and continue to reposition that NIM.
Yes, I would just add.
Jeffrey Rulis: This time we have not done any of those as of yet this quarter. So if you just look at a straight static balance sheet with no changes in market rates, no changes in deposit rates, you know, that ranges from two to five basis points and lift on average margin in a quarter. I would say Jeff, from, you know, let's sterile standpoint analytically and Tani's right is, you know, we are seeing that pace of deposit cost decelerate.
<unk>.
Speaker 5: It's an exciting time if you see what the originations were at the beginning of Q4. That's a time where we can really take some more action and do some redeployment on the balance sheet. So I think there's possibly some opportunities coming up for us here.
It's an exciting time, if you see what the originations were at.
At the beginning of Q4.
That's the time, where we can really take some more action and do some redeployment on the balance sheet. So.
I think I think there's possibly some opportunities coming up for us here.
That's terrific and maybe just following up on that point.
Speaker 8: That's terrific. And maybe he's throwing up on that point. I was, because you talk about some of the things.
Could you talk about some of the dynamics that youre seeing on the loan side of the equation.
Speaker 8: on the loans that are the equation. You know, maybe just first of all, I guess I'm posting your mark and how the man...
Jeffrey Rulis: You know, we look at the deposit campaign we did this last quarter versus a prior quarter, the weighted average cost on that was very, very similar, almost identical. And the yield on new loans coming on was 7.69 in the quarter. So I think we mentioned in the script there that we have had an acceleration of loan closings. We had expected from last quarter, but those are materializing now. And so if we get that loan growth on top of what Tani mentioned where we're optimistic, we can continue to show that expansion barring any unforeseen circumstances there.
Maybe first of all I guess, we're closer to your markets.
Mandy <unk>.
Speaker 8: But just giving some of the the higher you talk about in the commentary on
But just given some of the hires which we've talked about in the commentary on.
Speaker 8: you know, originations are already exceeding the third quarter level. I mean, it's curious, you know, where you're having success, where you're seeing opportunity to gain clients.
Origination is already exceeding third quarter levels I'm just curious.
Where youre, having success, where you see an opportunity to gain clients and.
New lending opportunities and how good risks, where a good risk adjusted returns at this point.
Speaker 8: new lending opportunities and how good risk, you know, where are good risks?
Sure. So we are seeing a mix.
Speaker 3: Sure, so we are seeing a mix with a higher weighting towards C&I right now. Certainly that comes with new hiring and focus.
With a higher weighting towards C&I right now certainly that comes with new hiring and focus of.
Speaker 3: But we're also starting to see opportunities within CRE, meaning as prices have come down and rationalized and panic as abated.
We're also starting to see opportunities within CRE, meaning as prices have come down and rationalized and panic has abated.
Tim Myers: I appreciate the color. If I could ask about the deposit side and you talked about, I think you said 1200 new accounts added in a large portion of those were new clients. What, what, if you could kind of range bound what the newer clients, where are they coming from is it from some of the struggles that are, you know, failed banks in your region was it community banks is at larger banks, do you get a sense for where those clients are coming from.
Speaker 3: buyers, customers, prospects, looking to make purchases at those lower values with those number all pencil out. We're seeing a mix of all of that and it's also a good mix between new and existing customers And you always want to see that kind of mix across all those things type, bar or type, etc
Buyers customers prospects looking to make purchases at those lower values, where those number all pencil out we're seeing a mix of all of that.
And it's also a good mix between new and existing customers and you always want to see that kind of mix across all of those things type borrower type et cetera. So.
Speaker 3: It's been very encouraging. Some of it is stuff that was stuck in the pipeline for some time as...
It's been very encouraging some of it is stuff that was stuck in the pipeline for some time as you know.
Tim Myers: Yes, it's all the above. We are continuing to benefit from what happened with some of the banks that were taken over, but we're also getting accounts from just other large banks. You know, I think the price on the market drove people that direction, but fundamentally there's still a strong desire and love of the community banking model or appreciation of that. And so we continue to benefit from that. The bulk of it that we brought in, meaning not current account fluctuations, you know, it was about 80 million or 81 million of that was interest bearing, but again that weighted average costs was 363 just for interest bearing.
Speaker 3: you know, these things work their way through the system. We are being very cautious. There are other factors out there that slow that process down. A lot of it's just brand new customer referrals from some of the hiring we've done. So I'm encouraged by the diversity of...
These things work their way through the system, we are being very cautious there other factors out there that slowed that process down a lot of issues.
Brand new customer referrals from some of the hiring we've done so.
I'm encouraged by the diversity of that.
That's terrific.
Speaker 8: And the last one for me, you guys have done a great job.
And the last one for me you guys have done a great job managing expenses in a challenging revenue environment still investing for growth I'm. Just curious how do you think about the expense trajectory going forward. Some of the puts and takes there and an all new hires are you seeing more opportunity.
Speaker 8: challenging revenue environment. Still investing for growth. I'm just curious, how do you think about the expense trajectory going forward? Some of the puts in take there and how new hires are you seeing more opportunity to invest and add new hires at this point where they come in from and just again maybe some higher level commentary on the expense.
To invest and add new hires.
Tim Myers: So we continue to get DDA, none of that was broker deposit activity and very little CD activity. So it's just blocking and tackling deposit gathering, but it is across the board in terms of sources. And I'd say you can see you can see in the deck on page 16 what the cost of deposits was in September versus June, but in general, you know, the acceleration in the increase in cost of deposits is significant. It was about half this quarter versus what it was last quarter. That's great. Thank you.
At this point, where are they coming from and just again, maybe some high level commentary on the expense trajectory more broadly.
Speaker 3: I'll start on the hiring and then what time I talk about the expense run. We are seeing opportunities work in the process of trying to fill from open positions on the production lending side. We've benefited across the bank and the different divisions from some of the disruption in the market and been able to hire some really good people. But we continue to be reluctant to throw a lot of
Tim Myers: Thank you, Jeff.
I'll start on the hiring and then a lot of time talking about the expense front, we are seeing opportunities. We're in the process of trying to fill some open positions on the production lending side.
We benefited across the bank and the different divisions from some of the disruption in the market and been able to hire some really good people, but we continue to be reluctant to throw a lot of <unk>.
Speaker 3: money at people that we can't really map out or or road to return on that meaning you know big team hires etc but we are trying to be very selective and the people we have hired are making a difference so we'll continue to look at that but it will be in a pragmatic incremental look.
<unk> people that we can't really map out a road to return on that meaning big team hires et cetera, but we are trying to be very selective in the people. We have hired are making a difference. So we'll continue to look at that but it will be in a pragmatic incremental approach.
And on the general expense side, I'd say that this quarter continues to be indicative.
Speaker 5: And on the general expense side, I'd say that this quarter continues to be indicative. Fourth quarter is typically when all the true ups happen, but the team has been really
David Feaster: Our next question comes from the line of David beaster from Raymond James. David, your line is open. Please go ahead. All right. Good morning, everybody. Maybe just phone up on on the margin discussion. You know, you guys, that's assuming a static balance. If I heard you correctly, and you guys have been, you've done a great job managing the balance. I'm just curious. How do you think about it going forward? You know, we built cash balances this quarter.
Fourth quarter is typically when all the true ups happen, but the team has been really.
Speaker 5: persistent about trying to make sure that we're doing our true ups as we go throughout the year. So you saw a few happen in the third quarter. The one thing that could bounce around a little bit, the reciprocal deposit costs.
Persistent about trying to make sure that we're doing are true ups as we go throughout the year. So you saw a few happened in the third quarter.
The one thing that could bounce around a little bit the reciprocal deposit.
Did go up as the balances went up those balances went up at quarter end, they came down a little bit after quarter end. So those deposit fees could fluctuate somewhat but those have become a larger.
Speaker 5: They'd go up as the balances went up. Those balances went up at quarter end. They came down a little bit after quarter end. So those deposit fees could fluctuate somewhat, but those have become a larger component of our other expense category.
David Feaster: Are there any expectations to continue putting the security book and get down borrowing? You know, that would only be additive to the discussion. I would think, but I'm just curious, is, you know, kind of how you think about managing the balance you're going forward.
Component of our other expense category.
Okay.
It's helpful. Thanks, everybody.
Tim Myers: I'll talk high level about Tani Girton, but we continue to look at that all the time. We can sell securities, particularly fund in the loan growth, you know, obviously have a more definable, earned back period that way or the more clarity into that. We've been successful and paying down those bonds in fact for, you know, a number of days during the quarter we were, if you net from the cash, the $83 million from the prior security failed, if you net that from borrowing, we were negative 10 million for a while.
Thank you.
Speaker 1: The next question comes from the line of Woody Lay from KVW. Your line is now open. Please go ahead.
The next question comes from the line of Woody lay from K VW.
Your line is now open. Please go ahead.
Hey, good morning, guys.
Good morning, how are you.
Speaker 9: good. Wanted to start on the deposit side. I mean, it was another good
Good I wanted to start on the deposit side.
It was another good quarter of deposit growth.
Excluding the normal seasonality do you think that these trends can continue sort of in the near to medium term or would you say most of the heavy lifting has been done at this point.
Speaker 9: excluding the normal seasonality. Do you think that
Speaker 9: and you sort of in the near to medium term, or would you say most of heavy lifting has been...
Tim Myers: We were sitting at zero, so we've seen the ability to work that down, but your question is a great one, and we will continue to look at that. We're being censored and managing all the stakeholders here, shareholders, regulators, and want to maintain liquidity on the balance sheet, but we definitely want to look at what we can do to fund loan growth and continue to reposition that in them. Yeah, I would just add, you know, I think it's an exciting time if you see what the originations were at the beginning of Q4, you know, that's a time where we can really take some more action and do some redeployment on the balance sheet. So, you know, I think there's possibly some opportunities coming up for us here. That's terrific.
No I think it can can I'm, sorry can continue or should continue I think like a lot of these trends will decelerate. So if you looked at our new deposit gathering activity that was $152 million call. It in the prior quarter $90 million this quarter.
Speaker 3: No, I think it can continue or should continue. I think a lot of these trends will decelerate. So if you looked at our new deposit gathering activity, that was 152 million, call it in the prior quarter, 90 million this quarter. But we intend to continue that effort and we want to continue the deposit mix.
But we intend to continue that effort and we want to we want to continue the deposit mix.
But it's really the seasonality I think that's going to that we see in the large depositor operating account fluctuations, while we might see upward or downward trends affecting the results but.
Speaker 3: But it's really the seasonality I think that's going to, that we see in the large deposit or operating account fluctuations, where we might see upward or downward trends affecting the results.
Speaker 3: Oh, I think, you know, the behavioral attributes that have a lot of to be successful should continue. And that ultimately leads to treasury management, the income growth. And as the lending opportunities, it's behavior we want to continue. I just think it will continue to accelerate. I just don't know what pays.
I think.
The behavioral attributes that have allowed us to be successful should continue and that ultimately leads to treasury management fee income growth that adds to lending opportunities. Its behavior. We want to continue I just think it will continue to decelerate I just don't know at what pace.
Tim Myers: And maybe just following up on that point, I was, could you talk about some of the dynamics that you're seeing on the loans out of the equation? You know, maybe this is, first of all, I guess the pulse of your markets and how demand is trending, but just giving some of the hires that you talked about in the commentary on, you know, originations already in feeding the third quarter levels, I'm curious, you know, where you're having success, where you see an opportunity to gain clients and new lending opportunities and how good risk, you know, where are good risk adjusted returns at this point?
Speaker 5: And I would just add that those large depositor fluctuations, that's, that's
And I would just add that those large depositor fluctuations that's.
That's.
Speaker 5: part and parcel of our business model and has been forever. But also the third quarter what we did observe was, you know, sort of during the months of late July and August , we saw the activity go down a bit because of vacations, not not only people here, but customers being on vacation. And we did see that activity start to pick up again towards the end of the customer.
Part and parcel of our business model and has been forever.
But also the third quarter, what we did observe was seen a sort of during the months of late July and August we saw the activity go down.
Tim Myers: Sure. So, we are seeing a mix with a higher weighting towards C&I right now. Certainly, that comes with new hiring and focus, but we're also starting to see opportunities within CRE, meaning as prices have come down and rationalized and panic as abated, buyers, customers, prospects, looking to make purchases at those lower values, with those number all pencil out, we're seeing a mix of all of that. And it's also a good mix between new and existing customers.
A bit because of vacations, not not only people here, but customers being on vacation and we did see that activity start to pick up again towards the end of the.
Speaker 9: towards the end of the quarter. So, you know, as long as we stay engaged, I think we stand to continue the trend. But as him said, maybe not quite as heavy as in the second quarter. Got it. That's a great color. I wanted to...
Towards the end of the quarter. So as long as we stay engaged I think we stand to continue the trend, but as Tim said, maybe not quite as heavy as in the second quarter.
Yeah.
Got it.
Great color.
I wanted to ask.
Over to credit.
When I look at your office.
Tim Myers: And you always want to see that kind of mix across all those things, type, borrower type, etc. So, it's been very encouraging. Some of it is stuff that was stuck in the pipeline for some time as, you know, these things worked their way through the system. We are being very cautious. There's other factors out there that slow that process down. A lot of it's just brand new customer referrals from some of the hiring we've done, so I'm encouraged by the diversity of that. That's terrific.
The average occupancy rate ticked up for the same the same Fran office portfolio.
Speaker 9: picked up for the Sam Fran office portfolio.
Speaker 9: think that sort of represents a positive trend or is that just sort of a quarter of fluctuation?
Do you think that sort of represents a positive trend or is that just sort of a quarter over quarter fluctuations.
That's not really representative of much.
Speaker 3: I wouldn't read too much into that. We're actually seeing some, there is weakness in the market. What we are starting to see, the interesting is,
I wouldn't read too much into that we're actually seeing some there is weakness in the market. What we are starting to see.
Interesting is.
Speaker 3: Activity per borrowers landlord is increasing in terms of Tenant investigation of taking down space
Activity per borrowers landlord is increasing in terms of tenant investigation of taking down space, but right now what youre seeing is a rationalization of the market, meaning our landlords are willing to accept what tenants can pay per market rents today, and so we're seeing that ongoing negotiation.
Tim Myers: And the last one for me, you guys have done a great job managing expenses in a challenging revenue environment, still investing for growth. I'm just curious, how do you think about the expense trajectory going forward? Some of the push and take there and how new hires are you seeing more opportunity to invest and add new hires at this point where they're coming from and just again maybe some higher level on the expense trajectory more broadly.
Speaker 3: But right now what you're seeing is a rationalization of the market, meaning our landlords are willing to accept.
Speaker 3: what tenants can pay for market rents today. And so we're seeing that ongoing negotiation. And so I really am low to predict a run rate would he based on that trend?
And so I really am lowered the predict our run rate would be based on that trend because we are seeing a softening people not renewing leases and as the landlords look for new tenants again can they live with <unk>.
Speaker 3: because we are seeing a softening, you know, people not renewing leases.
Speaker 3: And as the landlords look for new tenants, again, can they live with, you know, five, 10 year or seven, 10 year leases at today's current market rate? And there's...
Tim Myers: I'll start on the hiring and then let Tani talk about the expense run. We are seeing opportunities work in the process of trying to fill some open positions on the production lending side. We've benefited across the bank and the different divisions from some of the disruption in the market and been able to hire some really good people, but we continue to be reluctant to throw a lot of money at people that we can't really map out a road to return on that.
Five to 10 year or 710 year leases at today's current market rate and theirs.
Speaker 3: a bit of a standoff there and you know that'll play itself out but you know all those you have that good sponsorship.
Bit of a standoff, there and that will play itself out, but all of those deals got good sponsorship.
Speaker 3: and decent loan the values in some cases that's not loan the values which gives us flexibility for time but it San Francisco is still a weak market right now for leasing up newer empty space.
And decent loan to values in some cases excellent loan to values, which gives us flexibility for time.
San Francisco is still a weak market right now for leasing up newer empty space.
Tim Myers: Not meaning big team hires, et cetera, but we are trying to be very selective and the people we have hired are making a difference. So we'll continue to look at that, but it will be in a pragmatic incremental approach. And on the general expense side, I'd say that this quarter continues to be indicative. Fourth quarter is typically when all the true ups happen, but the team has been really persistent about trying to make sure that we're doing our true ups as we go throughout the year.
Right Thanks for that.
And then lastly, I just wanted to follow up on the special mention one bucket or were there any trends there in the third quarter any color there would be helpful.
Speaker 9: And then last, I just wanted to follow up on the special mention, loan bucket art, were there any trends there in the third quarter?
Speaker 3: We exactly what I was just saying. So that's two of the properties we moved into there. Well, properties in San Francisco, where tenants that chose not to renew, were pretty aggressive when we downgrade. So watch credits, for example, are a very transitory bucket for us.
Exactly what I was just saying so.
Two of the property as we moved into there were properties in San Francisco, where tenants have chosen not to renew we're pretty aggressive when we downgrade. So watch credits for example is a very transitory bucket for us.
Speaker 3: So we're pretty aggressive in downgrading the special mention if we think there's a threat to the primary source of repayment. But those in properties where one in particular where the lease isn't up yet, and it said they're leaving, my amores looking for a new tenant. And again, you get back to that rationalization.
So we're pretty aggressive in downgrading the special mention if we think there is a threat to the primary source of repayment, but those are properties, where one in particular, where the lease has an up yet tenant has said, they're leaving landlords looking for a new tenant in.
Tim Myers: So you saw a few happen in the third quarter. The one thing that could bounce around a little bit, the reciprocal deposit costs did go up as the balances went up. Those balances went up at quarter end. They came down a little bit after quarter end. So those deposit fees could fluctuate somewhat, but those have become a larger component of our other expense category. Okay, that's helpful. Thanks, everybody. Thank you.
And again, you get back to that rationalization of.
Speaker 3: of accepting longer term leases at current market rates.
Of accepting longer term leases at current market rates. So.
Speaker 3: The increase in special mention or classified as similar, I'm sorry, criticized is very similar to the amount that moved in the prior quarter. We just have a lot of transitory activity there. So we'll aggressively downgrade when we see a threat for that primary source, but oftentimes we can work out. But that goes back to this often as San Francisco.
The increase in special mention or classified as similar I'm sorry criticized.
Is very similar to the amount that moved in the prior quarter. We just have a lot of transitory activity. There. So we'll aggressively downgrade when we see a threat to that primary source, but oftentimes we can work out but that goes back to the softness in San Francisco.
Woody Lay: The next question comes from the line of Woody Lay from KVW. Your line is now open. Please go ahead. Hey, good morning guys. Good morning, Woody. How are you? Good.
Alright, thanks for taking my questions.
The next question comes from the line of Andrew <unk>.
Speaker 1: The next question comes from the line of Andrew.
Tim Myers: I wanted to start on the deposit side. I mean, it was another good quarter deposit growth. You know, excluding the normal seasonality, do you think that these trends can continue sort of in the near to medium term, or would you say most of heavy lifting has been done at this point? No, I think it can continue or should continue. I think like a lot of these trends will decelerate. So if you looked at our new deposit gathering activity, that was 152 million in the prior quarter, 90 million in this quarter, but we intend to continue that effort.
Speaker 1: Tarot from Stevens. Your line is now open. Please go ahead.
Zero from Stephens. Your line is now open. Please go ahead.
Hey, good morning.
Good morning, Andrew.
Speaker 10: uh... if i could just follow up on on credit for a moment that the three point eight million loan you called out that went not a cruel this quarter uh... looks like it was acquired you have just what the specific reserve of the mark is against that credit and was just a was this one you had marked a pcd uh... in the transaction originally originally identified as being a potential problem
If I could just follow up on credit for a moment and the $3 $8 million that you called out that went non accrual this quarter. It looks like it was acquired do you have just what the specific reserve for the Mark is against that credit and was this fall. There was this one that you had marked as BCD.
And the transaction originally our originally identified as being a potential problem loan.
Speaker 11: I'm going to write a misoccus through it if you've read off the answers questions. So, good. Yes, there is no specific reserve for that particular loan because we do still have adequate or sufficient loan to value coverage on that.
I'm going to wrap Masako Stewart, our Chief Credit Officer answer. This question, so, but yes. There is no specific reserve for that particular long because we do still have adequate or sufficient loan to loan to value coverage on that and allowing did go into non accrual, but since quarter and they didn't bring a payment current so actually as of this date the loan.
Tim Myers: And we want to continue the deposit mix. But it's really the seasonality, I think, that's going to that we see in the large depositor operating account fluctuations where we might see upward or downward trends affecting the results. But no, I think, you know, the behavioral attributes that have a lot of to be successful should continue. And that ultimately leads to Treasury management, the income growth that adds to lending opportunities, it's behavior we want to continue.
Speaker 11: And the loan did go into non-accrual, but since quarter end, they did bring the payment current. So actually, as of the state, the loan is current on payments. And we're continuing to work with the borrower. The deal happens to be in an industry that we normally are not in. So it's kind of an isolated situation and we're continuing to work with the borrower.
<unk> is current on payments and we're continuing to work with the borrower.
The deal happens to be in an industry that we normally are not in so it's kind of an isolated situation and we're continuing to work with the borrower.
Okay, Great I appreciate the color.
Speaker 10: Okay, great, I appreciate the color. And then a lot of banks have been giving some color this quarter or around a reserve against their office portfolio. Is that something you guys have all pan that you could share?
And then a lot of banks have been giving.
Some color this quarter around the reserve against our office portfolio is that something you guys have all Pam if you could share.
Tim Myers: I just think it will continue to decelerate. I just don't know what pays. And I would just add that those large depositor fluctuations, that's that's part and parcel of our business model and has been forever. But also, the third quarter, what we did observe was, you know, sort of during the months of late July and August, we saw the activity go down a bit because of vacations, not not only people here, but customers being on vacation.
Speaker 11: A specific reserve, is that what you're asking? Yeah, specific reserve against the office portfolio. Yeah, we don't have a specific reserve. However, we did make some adjustments in our Q-factors and our qualitative factors under Cecil to kind of increase the risk factor for our non-uniroccupied real estate, which would include office. So that's kind of where the reserves would be coming from. But no individual.
A specific reserve is that what youre asking yes specific reserve against the office portfolio. We can we don't have a specific reserve. However, we did make some adjustments in our Q factors in our qualitative factors under Cecil.
Tim Myers: And we did see that activity start to pick up again towards the end of the quarter. So, you know, as long as we stay engaged, I think we stand to continue the trend. But as him said, maybe not quite as heavy as in the second quarter.
Kind of increased the risk factor for our non owner occupied real estate, which would include office. So that's kind of where the reserves would be coming from but no individual reserve.
Speaker 10: Okay, understood. And then just, I wanted to make sure I understood that the page 13 of the presentation, the refinance applied correctly. And I appreciate the data, it's very helpful. For the four loans that are 11.6 million out, maturing in the fourth quarter, I just wanna make sure that the 128 debt service coverage is based on a 3.80 weighted average current rate. Correct?
Okay understood.
And then just I wanted to make sure I understood. The page 13 of the presentation, the refinance slide correctly and I appreciate the data its very helpful.
The four loans that are $11 6 million out maturing in the fourth quarter I just want to make sure that the 128 debt service coverage is based on a 380 weighted average current rate correct.
Tim Myers: Claudia. Got it. That's great color.
Tim Myers: I wanted to get over to credit. And when I look at your office slide, it looks like the average occupancy rate picked up for the Sam Fran office portfolio. Do you think that sort of represents a positive trend? Or is that just sort of a quarter fluctuation? That's not really representative of much. I wouldn't read too much into that. We're actually seeing some, there is weakness in the market. What we are starting to see interesting is activity per borrowers landlord is increasing in terms of tenant investigation of taking down space.
Speaker 11: No, it's not. It's actually stressed the current market market.
No it's not it's actually stress to current market market rate.
Okay understood Okay.
Speaker 3: Okay, understood. Okay. I think we need not have good for everyone's benefit. We may not have done a good job selling that out, but those are the current rates we took.
We ran out of Europe for everyone's benefit we may not have done a good job spelling that out but those are the current rates.
Sure.
Current.
Speaker 3: Leafs rates, current rent rules, current tendency, and said, could these loans ascensitize those to repriving a current market rate?
Lease rates current rent rolls current tenancy and said could these loans sensitize us of repricing at current market rates to see what our exposure was on that and so we did it in two buckets loans coming due by way of maturity or loans that reprice, because those are somewhat different risk buckets, but similar underlying.
Speaker 3: see what our exposure was on that. And so we did it in two buckets. Loans coming due by the way of maturity or loans at reprise because those are somewhat different risk buckets. The similar underlying risk factors is commuting cash flow when you reprise them at market rates. We wanted to demonstrate for ourselves you have analysis and demonstrate that they have adequate deck out there.
Lying risk factors as <unk> cash flow when you reprice them at market rates, we wanted to demonstrate for ourselves do that analysis and demonstrate that they have adequate debt coverage.
Tim Myers: But right now what you're seeing is a rationalization of the market, meaning our landlords are willing to accept what tenants can pay per market runs today. And so we're seeing that ongoing negotiation. And so I really am low to predict a run rate woody based on that trend, because we are seeing a softening, people not renewing leases. And as the landlords look for new tenants, again, can they live with 5, 10 year or 7, 10 year leases at today's current market rate.
So that right Dan.
Speaker 11: So that rate is indicative of how far those would have to move between there and the stress rates to get to those debt service coverages. Right, right, right. It means that based on the current rate that they're paying on, the debt coverage would be much higher than what's indicated here because the weighted average debt service ratio that you see on this page is
Is is indicative of how far.
And those would have to move between there and the stressed rates to get to those.
Debt service coverages right right right. It means that based on the current rate that they're that they are paying on the debt coverage will be much higher than what's what's indicated here because the weighted average debt service ratio that you see on this page is stressed.
Tim Myers: And there's a bit of a standoff there, and that'll play itself out. But all those deals have good sponsorship. And decent loan to values. In some cases, that's not loan to values, which gives us flexibility for time. But San Francisco is still a weak market right now for leasing up newer empty space.
Understood Okay.
Speaker 10: understood okay uh... yet definitely still still really strong especially and understanding that you've already stressed that that service right there okay very good
Definitely it's still really strong, especially understanding that you've already stressed that that service right. There okay very good.
Speaker 10: And then just one last one for me, I wanted to get maybe updated thoughts. You've obviously got a really strong capital position. Maybe update thoughts on the buy back, I think about 25 million outstanding, just how you're thinking about that, given what the stock is trading at right now.
And then just one last one for me I wanted to get maybe updated thoughts you've obviously got a really strong capital position.
Tim Myers: Right, thanks for that.
Tim Myers: And then last, I just wanted to follow up on the special mention loan bucket. Were there any trends there in the third quarter, any color there would be helpful? We exactly what I was just saying. So that's two of the properties removed into their properties in San Francisco, where tenants that chose not to renew. We're pretty aggressive when we downgrade. So watch credits, for example, is a very transitory bucket for us.
Maybe updated thoughts on the buyback I think about $25 million outstanding just how youre thinking about that given where the stock is trading at right now.
While we continue to believe we love to do that based on the valuation we think it's a great deal obviously.
Speaker 3: Well, we continue to believe we love to do that based on the evaluation. We think it's a great deal, obviously. Similar to my answer to I think David on security sales and having ongoing conversation with different stakeholders including the regulators about their appetite, given fears around potential credit losses, what that might mean, but it's something we remain keenly interested in as probably a matter of timing.
Tim Myers: So we're pretty aggressive in downgrading the special mention, if we think there's a threat to the primary source of repayment, but those in properties where one in particular were the leases and up yet. Tenon has said they're leaving. I know it's looking for a new tenant. And again, you get back to that rationalization of accepting longer term leases at current market rate. So the increase in special mention or classified as similar, I'm so criticized, is very similar to the amount that moved in the prior quarter.
Similar to my answer that I think David on security sales.
Having ongoing conversations with different stakeholders, including our regulators about their appetite given fears around potential credit losses.
What that might mean, but it is something we remain keenly interested in it's probably a matter of timing.
Okay. Thank you for taking all the questions.
Thank you Andrew.
Speaker 7: The next question comes from the line of Matthew Clark from Piper Samler. Your line is open. Please go ahead. Thanks.
The next question comes from the line of Matthew Clark from Piper Sandler. Your line is open. Please go ahead.
Thanks, and good morning.
Tim Myers: We just have a lot of transitory activity there. So we'll aggressively downgrade when we see a threat to that primary source, but oftentimes we can work out. But that goes back to the softness in San Francisco.
Morning, guys.
<unk>.
Just a.
Few more all around the margin.
Speaker 7: you more around the margin just trying to find two in the forecast here. Lone yields.
Trying to fine tune the forecast here.
Hmm.
Tim Myers: All right, thanks for taking my question.
Loan yields were.
Speaker 7: flat. This quarter was anything unusual there and you know we see they were pricing
<unk> flat this quarter was there anything unusual there.
Andrew Tara: The next question comes from the line of Andrew. Tara from Stevens. Your line is now open. Please go ahead. Hey, good morning. Good morning, Andrew. If I could just follow up on credit for a moment, the 3.8 million loan that you called out that went not a cruel this quarter, it looks like it was acquired. Do you have just what the specific reserve or the mark is against that credit? And was this the one that you had marked as PCD in the transaction originally or originally identified as being a potential problem loan?
There.
We see the repricing.
Speaker 7: slide and we know about new loan production coming on a lot higher but maybe just any commentary around this latest quarter and then kind of the lift you you might expect.
Slide and we know about new loan production coming down a lot higher but.
Maybe just any commentary around this latest quarter and then.
Kind of a lithium you might expect going forward.
I think some of the yields of loans paying off for a little bit higher depending on the loan category. So the average yield of loans paying off a six two.
Speaker 3: Thanks some of the yields of loans paying off for a little bit higher, depending on the loan category. So the average yield of loans paying off was 6.2.
Speaker 3: That's a little bit high. And so there wasn't a huge differential yet, overall loan compression, I'll be marginal. And I think that all affected an average yield.
A little bit high and so there wasn't a huge differential yet overall loan compression, albeit marginal and I think that all affected our average yield but.
Misako Stewart: I'm going to let Misako Stewart issue credit officer answers questions. So good. Yes, there is no specific reserve for that particular loan because we do still have adequate or sufficient loan to value coverage on that. And the loan did go into nonoccurable but since quarter end they did bring the payment current so actually as of the state you know the loan is current on payments and we're you know we're continuing to work with the borrower. The deal happens to be in an industry that we normally are not in so it's kind of an isolated situation and we're continuing to work with the borrower.
Speaker 3: Uh, about average yield of loans coming on at 7.69. You know, if we can continue that trend again, that 620 is high for loans coming off. That should, that should expand or be more differentiated.
The average yield of loans coming on at 769.
Can you continue that trend again that 620 is high for loans coming off that should that should expand or be more differentiated yeah, and if you look at the yield.
Speaker 12: Yeah, and if you look at the yield on the quarter before loan fees, we had lift of five basis points there. And I think what happened in the loan fees and cost standardization is that if memory is serving correctly, we had some pay off last quarter. So we had some fees that were associated with those that lifted the yield to back.
On the quarter both for loan fees we.
We had list of five basis points there.
And I think what happened in the in the loan fees and cost amortization is that.
Misako Stewart: Okay great I appreciate the color. And then a lot of banks have been giving some color this quarter or we're on a reserve against their office portfolio. Is that something you guys have all pan that you could share? A specific reserve? Is that what you're asking? Yeah specific reserve against the office portfolio? Yeah we don't have a specific reserve however we did make some adjustments in our queue factors and our qualitative factors under Cecil to kind of increase the risk factors for our non-unaroccupied real estate which would include office. So that's kind of where the reserves would be coming from but no individual reserve.
If memory serves correctly, we had some payoffs last quarter and.
So we had some fees that were associated with those that lifted the yield a bit.
Got it okay.
And then.
The trend in interest bearing deposits you show on Slide 16, you know call. It 10.
Speaker 7: The trend in intersparing departures you show on 6th slide 16, you know, call it 10.
10, and 11 basis points per month in terms of the rate of increase and it sounds like you expect things to moderate.
Speaker 7: 10-11 basis points per month in terms of the rate of increase. And it sounds like you expect things to moderate. Do you happen to have, well, I guess your UK, yeah, if you happen to have the spot rate at the end of September , I'm just trying to get a sense for, is that 10-base point increase could come.
Happen to have.
Sure.
Do you happen to have the spot rate at the end of September I'm, just trying to get a sense for does that.
Misako Stewart: Okay understood and then just I wanted to make sure I understood that the page 13 of the presentation the reef and ants slide correctly and I appreciate the data it's very helpful for the four loans that are 11.6 million out maturing in the fourth quarter. I just want to make sure that the 128 debt service coverage is based on a 3.80 weighted average current rate correct. No it's not it's actually stressed the current market market rate.
10 basis point increase get cut in half going forward or not.
Speaker 12: Yeah, so we don't have the spot rate for September 30, but what we gave you was the month for the rate for the month of September , which was 100 basis points on the total cost, versus 82 in the month of June . So 28 basis point left over the three months.
Yes, so we don't have the spot rate for September 30, but what we gave you was the month for the rate for the month of September which was a 100 basis points on the total cost versus 82 in the month of June So 28 basis point lift over the three months.
Misako Stewart: Okay understood okay. We need not have good for everyone's benefit we may not done a good job selling that out but those are the current rates. We took current lease rates current rent rules current tendency and said could these loans ascensitize those to repricing a current market rate to see what our exposure was on that and so we did it in two buckets loans coming due by the way of maturity or loans that repriced because those are somewhat different risk buckets but similar underlying risk factors is commuting cash when you repriced some of that market rate.
Yeah.
Okay great.
Then.
Just any additional commentary around expenses for next year.
Speaker 7: Does any additional commentary around expenses for next year? You know, how should we be thinking about growth? Is it, are we shooting for expenses to be flat on an operating basis? Or do you think they're my—
You know how should we be thinking about growth.
We are we shooting for for expenses to be flat on an operating basis or do you think there might be some modest growth.
Well, we have some investments we want to continue to make around efficiencies and digitalization that being said that that investment has been slower this year.
Speaker 3: Well, we have some investments we want to continue to make around efficiencies and digitalization. That being said, that investment has been slower this year. The branch closures we announced, the savings this year because of accelerating TI costs.
The branch closures, we announced the savings this year because of accelerating ti costs.
Misako Stewart: We wanted to demonstrate for ourselves you have analysis and demonstrate that they have adequate that coverage. So that rate there is indicative of how far those would have to move between there and the stress rates to get to those debt service coverages. Right right right it means that based on the current rate that they're paying on the debt coverage would be much higher than what's what's indicated here because the weighted average debt service ratio that you see on this page is stressed. Understood okay yeah definitely still really strong especially understanding that you've already stressed that that service right there.
Speaker 3: was more minimal, but next year that's a 1.4 million annualized savings. So we're doing our best to cover investments or any further increases in expenses with offsetting that with savings like that. We'll continue to do that. So we don't have any large expense things plan that would deviate too far from that. But we also caveat that we wanna be opportunistic with hiring other things. And I say that with nothing in mind, but I think that's the general.
It was more minimal but next year, that's a $1 4 million annualized savings. So we're doing our best to.
Misako Stewart: Okay very good.
Cover investments or any further increases in expenses with offsetting that with savings like that and we'll continue to do that so we don't have any large expense things planned that would deviate too far from that but we also.
<unk>, we want to be opportunistic with hiring and other things I would say that would nothing in mind, but.
But I think that's the general picture.
Speaker 12: And we normally will plan for merit increases. And so that's going to give you an upward trend just in general. Yep. OK.
And we normally will plan for merit increases and so that's that's going to.
Giving you an upward trend just in general.
Yes, Okay got it thank you.
Andrew Tara: And then just one last one for me. I wanted to get maybe updated thoughts. You've obviously got a really strong capital position maybe update thoughts on the buyback I think about 25 million outstanding just how you're thinking about that given over the stocks trading average. Well, we continue to believe we love to do that based on the evaluation. We think it's a great deal obviously. Similar to my answer to I think David on security sales and you know having ongoing conversation with different stakeholders, including the regulators about their appetite, given fears around potential credit losses. What that might mean, but it's something we remain keenly interested in as probably a matter of timing.
Thank you.
Andrew Tara: Okay, thank you for taking all the questions.
Matthew Clark: Thank you, Andrew.
The next question comes from the line of Tim Coffey. Your line is now open. Please go ahead.
Speaker 1: The next question comes from the line of Tim Coffee. Your line is now open. Please go ahead. Great. Thank you, morning, everybody.
Great. Thank you morning, everybody.
We're running them.
Speaker 13: Hey, Carlos, we can circle back to the service Cisco office book. How much of that is criticized or classified at this point?
So if we can circle back to the.
The San Francisco Office book.
How much of that is criticized or classified at this point.
Let's see here.
Yes.
So about.
Of the $71 million, there's about 25% that's in the classified bucket.
And then.
Yes.
And that continues and has been skewed by that large sub standard that we got downgraded two decembers ago. So we've had the movement in there or are we just mentioned into <unk>.
Speaker 3: And that continues and has been skewed to and by that large substandard that we downgraded two December's ago. So we've had the movement in there. We just mentioned into...
Matthew Clark: The next question comes from the line of Matthew Clark from Piper Sandler. Your line is open. Please go ahead. Thanks and good morning. I'm just a few more around the margin of trying to fine tune the forecast here. Low yields were basically flat. This quarter was anything unusual there. And you know, we see they were pricing slide and we know about new loan production coming on a lot higher, but maybe just any commentary around this latest quarter and then kind of the lift you might expect going forward.
Criticized but that one large $17 million loan really contributes the bulk of that I have for some time, it's one borrower.
We're not seeing any deterioration not not any notable improvement, but no deterioration others. Good sponsorship behind it so loan payments are being made as agreed in and we're continuing to work with the borrower.
Speaker 11: others good sponsorship behind it so wrong payments are being made to agree and and we're continuing to work with the borrower.
Speaker 3: Okay, okay, that's great. And then as you talk to some of the commercial real estate investors, and...
Okay. Okay, that's great.
And then as you talk to some of the.
Commercial real estate investors.
At your bank.
What's their temperature life right now or are they still waiting for things to get worse, you pick up better deals or do you see them getting more interested in being back in the market.
Speaker 3: What's their temperature like right now? Are they still waiting for things to be worse and pick up better deals? Are do you see them getting more interested in...
Matthew Clark: I think some of the yields of loans paying off for a little bit higher, depending on the loan category. So the average yield of loans paying off was 6.2. That's a little bit high. And so there wasn't a huge rate differential yet overall loan compression. I'll be marginal. And I think that all affected an average yield, but that average yield of loans coming on at 7.69. We can continue that trend. Again, that 6.20 is higher for loans coming off.
Speaker 3: We're seeing interest pick up. I don't want to, you know.
We're seeing interest pick up I don't want to.
Speaker 3: We don't have a large enough portfolio to be statistically relevant there with my opinion, but we are seeing activity pick up, whether it's the North Bay Sacramento, but we are seeing people interested at.
We don't have a large enough portfolio to be statistically relevant there is my opinion, but we are seeing activity pick up whether it's in north Bay and Sacramento, but we are seeing people interested at acquiring properties at what looked like depressed.
Speaker 3: acquiring properties at what look like the praster degraded prices and that's creating opportunities so you know in that right size is the credit risk right as we're doing those at higher returns we're also funding loans that are rationalized to praise the value of this environment so yeah I don't want to I don't know if that's a trend yet but it's it's becoming more visible.
The grade prices and thats, creating opportunities so.
And that right size of the credit risk right as we're doing those at higher returns. We're also funding loans that have rationalized appraise value in this environment. So I don't want to I don't know, if that's a trend yet, but it's becoming more visible.
Matthew Clark: That should expand or be more differentiated. Yeah. And if you look at the yield on the quarter before loan fees, we had lift of five basis points there. And I think what happened in the loan fees and cost standardization is that if memory is serving correctly, we had some pay off last quarter. So we had some fees that were associated with those that lifted the yield a bit. Got it. Okay. And then the trend in intersparing deposits, you show on 6.16, you know, call it 10, 10, 11 basis points per month in terms of the rate of increase.
Okay.
Speaker 14: Okay, that's positive relative where we were earlier this year. And then if you kind of move forward with your deposit of gathering strategies, do you have a target lower deposit ratio? You'd like to get...
It is relative to where we were earlier this year.
And then as you kind of refer with your deposit.
Gathering strategies do you have a target loan to deposit ratio you'd like to get to.
Well I mean, we'd love it to be higher than it is right. So we want to lend into this with the higher yields and so we'd love to continue to raise deposits at manageable costs at a relationship deposits.
Speaker 3: Well, I mean, we'd love it to be higher than it is, right? So we want to lend into this with the higher yields. And so, you know, we'd love to continue to raise deposits at manageable costs or relationship deposits.
Speaker 3: uh... that will come down in cost overtime and pay off the borrowing that said or but we really want to grow the loans and so we can get back to a historical trendline for us on that you know that's really what we'd like to be but no one set number target we have a lot ahead room
That will come down in cost overtime and pay off the borrowings et cetera, but we really want to grow the loans and so if we can get back to historical trend line for us on that that's really what we'd like to be but no. One set number target yeah, we have a lot of headroom.
Matthew Clark: And it sounds like you expect things to moderate. Do you happen to have, well, I guess your UK, yeah, do you happen to have the spot rate at the end of September? I'm just trying to get a sense for is that, you know, 10 base point increase could cut in half going forward or not. Yeah. So we don't have the spot rate for September 30, but what we gave you was the month for the rate for the month of September, which was a hundred basis points on the total cost.
Speaker 5: I had to go where I mean we used to talk about you know what would what would the cap be on that and you know Unlike a lot of the larger banks we
To go where I mean, we used to talk about.
What would what would the cap beyond that end.
Unlike a lot of the larger banks, we we don't really have an appetite or haven't historically for getting loan to deposit ratios over even not only 100, but even 90% to 95 so.
Speaker 15: We don't really have an appetite or haven't historically for getting loaned deposit ratios over even not only 100, but even 90 to 95. So. Right. OK. Well, thank you.
Right, Okay, well. Thank you very much for your time guys my questions. Okay.
Thank you very much.
Okay.
There are no further questions in the queue I will now pass the call over to Tim Myers for closing remarks.
Speaker 1: There are no further questions in the queue. I will now pass the call over to Tim Myers for closing remarks.
Matthew Clark: Versus 82 in the month of June. So 28 basis point left over the three months. Okay, great. And then just any additional commentary around expenses for next year. How should we be thinking about growth? Are we shooting for expenses to be flat on an operating basis? Or do you think there might be some modest growth? Well, we have some investments we want to continue to make around efficiencies and digitalization. That being said, that investment has been slower this year.
Thank you again, everyone for your interest in joining us in the outstanding questions and we look forward to talking to you again next quarter.
Speaker 3: Thank you again everyone for your interest in joining us in the outstanding questions and we look forward to talking again next week.
Okay.
Yeah.
Okay.
Okay.
[music].
Matthew Clark: The branch closures we announced, the savings this year because of accelerating TI costs was more minimal, but next year that's a 1.4 million annualized savings. So we're doing our best to, you know, to cover investments or any further increases in expenses with, you know, offsetting that with savings like that. We'll continue to do that. So we don't have any large expense. Expense things plan that would deviate too far from that, but we also, you know, caveat that we want to be opportunistic with hiring other things.
Yeah.
[music].
Okay.
Matthew Clark: I say that with nothing in mind, but, but I think that's, that's the general picture. And we normally will plan for, you know, merit increases. And so that's, that's going to, you know, give you an upward trend to stand general. Yep. Okay. Got it. Thank you.
Matthew Clark: The next question comes from the line of Tim coffee. Your line is now open. Please go ahead. Great. Thank you. Morning, everybody. Morning. Okay.
Misako Stewart: So if we can circle back to the service fiscal office book, how much of that is criticized or classified at this point? Let's see here. Let me do the math. So about of the 71 million, there's about 25% that's in the classified bucket. And then, yeah. And that continues and has been skewed to my about large substandard that we get downgraded to December's ago. So, you know, we've had the movement in there.
Misako Stewart: We just mentioned into criticize, but that one large 17 million dollar loan really contributes the bulk of that. It's one borrower. You know, we're not seeing any deterioration. Not, not any notable improvement, but no deterioration. There's good sponsorship behind it. So loan payments are being made to the greed and, and we're, we're continuing to work with the borrower. Okay.
Tim Myers: That's great. And then as you talk to some of the commercial real estate investors in your bank, what's their temperature like right now? Are they still waiting for things to be worse and pick up better deals? Or do you see them getting more interested in being back in the market? We're seeing interest pick up. I don't want to, you know, we don't have a large enough portfolio to be statistically relevant there with my opinion.
Tim Myers: But we are seeing activity pick up, whether it's the North Bay Sacramento, but we are seeing people interested at acquiring properties at what look like depressed or degraded prices. And that's creating opportunities. So, you know, and that right size is the credit risk, right? As we're doing those at higher returns, we're also funding loans that are rationalized to praise the value of this environment. So, yeah, I don't want to, I don't know if that's a trend yet, but it's becoming more visible. Okay, that's positive, relative where we were earlier this year.
Tim Myers: And then if you kind of refer with your deposit gathering strategies, do you have a target loaner deposit ratio you'd like to get to? Well, I mean, we'd love it to be higher than it is, right? So we want to lend into this, yeah, with the higher yields. And so, you know, we'd love to continue to raise deposits at manageable costs at a relationship deposits that will come down and cost over time and pay off the borrowings, et cetera.
Tim Myers: But we really want to grow the loans. And so if we can get back to a historical trendline for us on that, you know, that's really what we'd like to be, but no one set number target. Yeah, we have a lot of headroom to go where I mean, we used to talk about, you know, what would, what would the cap be on that? And, you know, unlike a lot of the larger banks, we, we don't really have an appetite or haven't historically for getting loaned to deposit ratios over even not only 100, but even 90 to 95. So Right. Okay.
Tim Myers: Well, thank you very much for your time. Those are my questions. Yeah, thank you very much.
Operator: There are no further questions in the queue.
Tim Myers: I will now pass the call over to Tim Myers for closing remarks. Thank you again, everyone, for your interest in joining us and the outstanding questions.
Tim Myers: And we look forward to talking you again next.