Q2 2024 Bank of Marin Bancorp Earnings Call

Operator: disclosure in our earnings press release, as well as our FEC filing.

As well as our SEC filings.

Following our prepared remarks, Tim, Tani, and our Chief Credit Officer, Misako Stewart will be available to answer your questions. And now, I'd like to turn the call over to Tim Myers.

Operator: Following our prepared remarks, Tim, Tani, and our Chief Credit Officer, Misako Stewart, will be available to answer your questions, and now I'd like to turn the call over to Tim Myers.

Timothy Myers: Thank you, Kressy.

Timothy D. Myers: Thank you, Chrissy. Good morning, everyone, and welcome to our second quarter earnings call. At a high level, during the second quarter, we benefited from the more robust loan origination engine that we have built, which resulted in an increase in our total loans, primarily in commercial loans, where we are adding full banking relationships that also bring core deposits to the bank. Continued moderation in the level of increase we are seeing in our cost of deposits, an increase in our net interest margin, ongoing disciplined expense control, and, on a broad basis, continued strong asset quality within our loan portfolio. With the talent we have added to our banking teams, along with those teams doing an outstanding job of developing attractive lending opportunities,

Timothy Myers: Good morning, everyone, and welcome to our second quarter earnings call. At a high level, during the second quarter, we benefited from the more robust loan origination engine that we have built, which resulted in an increase in our total loans, primarily in commercial loans, where we are adding full banking relationships that also bring core deposits to the bank, a continued moderation in the level of increase we are seeing in our cost of deposits, an increase in our net interest margin, ongoing disciplined expense control, and, on a broad basis, continued strong asset quality within our loan portfolio.

Timothy D. Myers: Thank you, Chrissy. Good morning, everyone, and welcome to our second quarter earnings call. At a high level, during the second quarter, we benefited from the more robust loan origination engine that we have built, which resulted in an increase in our total loans, primarily in commercial loans,

Timothy D. Myers: where we are adding full banking relationships that also bring core deposits to the bank.

Timothy D. Myers: a continued moderation in the level of increase we are seeing in our cost of deposits, an increase in our net interest margin, ongoing disciplined expense control, and on a broad basis, continued strong asset quality within our loan portfolio.

Timothy Myers: With the talent we have added to our banking teams, along with those teams doing an outstanding job of developing attractive lending opportunities, we are seeing a higher level of loan production, while still maintaining our disciplined underwriting criteria. During the quarter, we originated $94 million in loan commitments, with $64 million in outstanding balances, 69% of which closed in June, and will thus positively impact net interest income and margin next quarter. The new loans are coming on the books at higher rates in those paying off, which, along with our continued success and effectively managing our deposit, managing our deposit cost, is contributing to positive trends in our net interest margin, which in June was 21 basis points higher than it was in May.

Timothy D. Myers: With the talent we have added to our banking teams, along with those teams doing an outstanding job of developing attractive lending opportunities,

Timothy D. Myers: We are seeing a higher level of loan production while still maintaining our disciplined underwriting criteria. During the quarter, we originated $94 million in loan commitments, with $64 million in outstanding loans, 69% of which closed in June, and will thus positively impact net interest income and margin next quarter. The new loans are coming on the books at higher rates than those paying off, which, along with our continued success in effectively managing our deposit costs, is contributing to positive trends in our net interest, which in June was 21 basis points higher than it was in May.

Timothy D. Myers: We are seeing a higher level of loan production while still maintaining our discipline underwriting criteria.

Timothy D. Myers: During the quarter, we originated $94 million in loan commitments with $64 million in outstanding balances.

Timothy D. Myers: 69% of which closed in June and will thus positively impact net interest income and margin next quarter.

Timothy D. Myers: The new loans are coming on the books at higher rates than those paying off, which, along with our continued success in effectively managing our deposit costs, is contributing to positive trends in our net interest margin.

Timothy D. Myers: which in June was 21 basis points higher than it was in May.

Timothy Myers: During the quarter, we also made some staffing adjustments throughout the company to adjust our expense levels to the current operating environment, while investing in talent and technology that will support our future growth and improvement inefficiencies.

Timothy D. Myers: During the quarter, we also made some staffing adjustments throughout the company to adjust our expense levels to the current operating environment while investing in talent and technology that will support our future growth and improvement in efficiency. These staffing adjustments will result in $2.7 million of annualized cost savings going forward.

Timothy D. Myers: During the quarter, we also made some staffing adjustments throughout the company to adjust our expense levels to the current operating environment while investing in talent and technology that will support our future growth and improvement in efficiencies.

Timothy Myers: These staffing adjustments will result in 2.7 million of annualized cost savings going forward. As we announced in June, we also took advantage of our strong capital position to execute on a strategic balance repositioning to improve future earnings. As part of this balance repositioning, we sold 325 million in low-yielding investment securities, which resulted in the net loss reported in the second quarter. The 293 million in proceeds from the security sales are being reinvested into higher yielding earning assets that will be accreted to both our NIM and our net income. By the end of the second quarter, we had redeployed some of those proceeds to fund new loans, repay 58 million of interim borrowing, and purchase 19 million in new investment securities at a higher rate.

Timothy D. Myers: These staffing adjustments will result in 2.7 million of annualized cost savings going forward.

Timothy D. Myers: As we announced in June, we also took advantage of our strong capital position to execute on a strategic balance sheet repositioning to improve future earnings. As part of this balance sheet repositioning, we sold $325 million in low-yielding investment securities, which resulted in the net loss reported in the second quarter. The $293 million in proceeds from the security sales are being reinvested into higher-yielding earning assets that will be accretive to both our NIM and our net income.

Timothy D. Myers: As we announced in June , we also took advantage of our strong capital position to execute on a strategic balance sheet repositioning to improve future earnings.

Timothy D. Myers: As part of this balance sheet repositioning, we sold $325 million in low-yielding investment securities, which resulted in the net loss reported in the second quarter.

Timothy D. Myers: By the end of the second quarter, we had redeployed some of those proceeds to fund new loans, repay $58 million of interim borrowing, and purchase $19 million in new investment securities at a higher rate. July redeployment activity includes additional purchases of investment securities, new loan originations, and the purchase of a $36 million portfolio of high-quality, in-market residential mortgage loans with good credit metrics and an expected yield of approximately 6.3% based on our prepayment expectations. So far, the rates at which we are reinvesting confirm the estimated average yield of 5.75% assumed in calculating the capital earned back, accretion to the net interest margin, and accretion to earnings.

Timothy D. Myers: The $293 million in proceeds from the security sales are being reinvested into higher yielding earning assets that will be accretive to both our NIM and our net income.

Timothy D. Myers: By the end of the second quarter, we had redeployed some of those proceeds to fund new loans, repay $58 million of interim borrowing, and purchase $19 million in new investment securities at a higher rate.

Timothy Myers: July redeployment activity includes additional purchases of investment securities, new loan originations, and the purchase of a $36 million portfolio of high-quality, in-market residential mortgage loans with good credit metrics and an expected yield of approximately 6.3% based on our prepayment expectations. So far, the rates at which we are reinvesting confirm the estimated average yield of 5.75% assumed in calculating the capital earned back, accretion to net interest margin, and the accretion there. In terms of asset quality, as I mentioned earlier, we are seeing general stability in the portfolio, and we are not seeing the formation of material new problem loans.

Timothy D. Myers: July redeployment activity includes additional purchases of investment securities.

Timothy D. Myers: New Loan Originations, and the purchase of a $36 million portfolio of high-quality, in-market residential mortgage loans with good credit metrics and an expected yield of approximately 6.3% based on our prepayment expectations.

Speaker Change: So far, the rates at which we are reinvesting confirm the estimated average yield of 5.75% assumed in calculating the capital earned back, accretion to net interest margin, and the accretion to earnings.

Timothy D. Myers: In terms of asset quality, as I mentioned earlier, we are seeing general stability in the portfolio, and we are not seeing the formation of material new problem loans. During the second quarter, we moved a $16.7 million non-owner-occupied CRE classified loan to non-accrual status, which was the primary contributor to our provision. The underlying collateral property is a multi-story office building located in San Francisco that was materially impacted by the pandemic and subsequent remote work and vacancy issues.

Speaker Change: In terms of asset quality, as I mentioned earlier, we are seeing general stability in the portfolio and we are not seeing the formation of material new problem loans.

Timothy Myers: During the second quarter, we moved a $16.7 million non-owner occupied CRE classified loan to non-accrual status, which was the primary contributor to our provision. The underlying collateral property is a multi-story office building located in San Francisco that was materially impacted by the pandemic and subsequent remote work and vacancy issues. This isn't the first time we've discussed this credit on these calls as we downgraded the credit to substandard in the fourth quarter of 2021 and have continued to evaluate the occupancy, operating income, underlying valuation, and sponsorship support. The loan is guaranteed, and payments have always been current, with enough pledge cash held at the bank to cover payments to maturity in 2026.

Speaker Change: During the second quarter, we moved a $16.7 million non-owner-occupied CRE classified loan to non-accrual status, which was the primary contributor to our provision.

Speaker Change: The underlying collateral property is a multi-story office building located in San Francisco that was materially impacted by the pandemic and subsequent remote work and vacancy issues.

Timothy D. Myers: This isn't the first time we've discussed this credit on these calls, as we downgraded the credit to substandard in the fourth quarter of 2021 and have continued to evaluate the occupancy, operating income, underlying valuation, and sponsorship support. The loan is guaranteed, and payments have always been current, with enough pledged cash held at the bank to cover payments to maturity in 2026. Nonetheless, a recent appraisal indicated that the current value of the property would not support the par value of the loan.

Speaker Change: This isn't the first time we've discussed this credit on these calls as we downgraded the credit to substandard in the fourth quarter of 2021 and have continued to evaluate the occupancy, operating income, underlying valuation, and sponsorship support.

Speaker Change: The loan is guaranteed and payments have always been current, with enough pledged cash held at the bank to cover payments to maturity in 2026.

Timothy Myers: Nonetheless, a recent appraisal indicated that the current value of the property would not support the power value of the loan. If the loan were due today, a substantial reduction in the loan balance would be required to repay the loan based on current rents, occupancy, and sponsorship wherewithal. Based on this consideration, we chose the provision for that potential shortfall. The provision amount is based on information we have today and may be adjusted depending on future developments. Leasing activity for the property has seen improvement in recent months, and we continue to monitor closely. By placing the loan on non-accrual, the contractual payments we continue to receive from the borrower will go toward paying down the principal, reducing our loan balance at a faster rate.

Speaker Change: Nonetheless, a recent appraisal indicated that the current value of the property would not support the par value of the loan. If the loan were due today, a substantial reduction in the loan balance would be required to repay the loan based on current rents, occupancy, and sponsorship wherewithal.

Timothy D. Myers: If the loan were due today, a substantial reduction in the loan balance would be required to repay the loan based on current rents, occupancy, and sponsorship wherewithal. Based on this consideration, we chose the provision for that potential. The provision amount is based on information we have today and may be adjusted depending on future developments.

Speaker Change: Based on this consideration, we chose the provision for that potential shortfall.

Speaker Change: The provision amount is based on information we have today and may be adjusted depending on future developments.

Timothy D. Myers: Leasing activity for the property has seen improvement in recent months, and we continue to monitor closely. By placing the loan on nonaccrual, the contractual payments we continue to receive from the borrower will go toward paying down the principal, reducing our loan balance at a faster rate. We also had one commercial banking relationship with a consumer goods company that we moved into the non-performing status due to idiosyncratic issues with the borrower. The borrower is actively pursuing refinancing and asset sale options and is currently in the due diligence process of a sale, which will substantially reduce our borrowing.

Speaker Change: Leasing activity for the property has seen improvement in recent months and we continue to monitor closely.

Speaker Change: By placing the loan on non-accrual, the contractual payments we continue to receive from the borrower will go toward paying down the principal, reducing our loan balance at a faster rate.

Timothy Myers: We also had one commercial banking relationship to a consumer goods company that we moved into the non-performing status due to idiosyncratic issues with the borrower. The borrower is actively pursuing refinancing and asset sale options and is currently in the due diligence process of a sale, which will substantially reduce our borrowings.

Speaker Change: We also had one commercial banking relationship to a consumer goods company that we moved into the non-performing status due to idiosyncratic issues with the borrower.

Speaker Change: The borrower is actively pursuing refinancing and asset sale options and is currently in the due diligence process of a sale which will substantially reduce our borrowings.

Timothy Myers: Now turning to deposits. In the second quarter, we had a decline in total deposits, which was partially attributable to seasonality and deposit flows related to tax payments and bonus distributions. Some outflows related to real estate investments, some funds that were transferred by clients to our wealth management business, as well as the intentional runoff of some higher-cost deposits. Shortly after quarter end, balances began to climb again. This is consistent with the usual seasonality we see in the third quarter of the deposit inflow. Importantly, at June 30th, our non-interest bearing deposits remained at 44% of our total deposits as we continue to benefit from our relationship banking model with high-touch service that results in clients choosing Bank of Marin for reasons not solely dependent on the rates we pay on deposits.

Tani Girton: Now turning to deposits. In the second quarter, we had a decline in total deposits, which was partially attributable to seasonality and deposit flows related to tax payments and bonus distribution. Some outflows related to real estate investments, some funds that were transferred by clients to our wealth management business, as well as the intentional runoff of some higher-cost deposits. However, shortly after quarter end, balances began to climb again. This is consistent with the usual seasonality we see in the third quarter of the year.

Speaker Change: Now turning to deposits.

Speaker Change: In the second quarter, we had a decline in total deposits, which was partially attributable to seasonality and deposit flows related to tax payments and bonus distributions.

Speaker Change: Some outflows related to real estate investments, some funds that were transferred by clients to our wealth management business, as well as the intentional runoff of some higher cost deposits.

Speaker Change: Shortly after quarter end, balances began to climb again. This is consistent with the usual seasonality we see in the third quarter of deposit inflows.

Tani Girton: Importantly, at June 30th, our non-interest bearing deposits remained at 44% of our total deposits as we continue to benefit from our relationship banking model with high-touch service that results in clients choosing Bank of Marin for reasons not solely dependent on the rates we pay on deposits. Even with the loss recognized on the security sales, our capital ratios remain very strong, with a total risk-based capital ratio of 16.5% and a TCE ratio of 9.92%, which increased from the prior quarter due to a decrease in our tangible assets.

Speaker Change: Importantly, on June 30th, our non-interest bearing deposits remained at 44% of our total deposits.

Speaker Change: as we continue to benefit from our relationship banking model with high touch service that results in clients choosing Bank of Marin for reasons not solely dependent on the rates we pay on deposits.

Timothy Myers: Even with the loss recognized on the security sales, our capital ratios remained very strong, with a total risk-based capital ratio of 16.5% and a TCE ratio of 9.92%, which increased from the prior quarter due to a decrease in our tangible assets.

Speaker Change: even with the loss recognized on the security sales.

Speaker Change: Our capital ratio has remained very strong, with a total risk-based capital ratio of 16.5%,

Speaker Change: and a TCE ratio of 9.92%, which increased from the prior quarter due to a decrease in our tangible assets.

Timothy Myers: In summary, we made substantial progress through our balance-y repositioning, and our growing momentum and business development further strengthening our foundation for profitability improvements and long-term growth.

Tani Girton: In summary, we made substantial progress on our balance sheet repositioning and our growing momentum in business development, further strengthening our foundation for profitability improvements and long-term growth. With that, I'll turn the call over to Tani to discuss our financial results and more.

Speaker Change: In summary, we made substantial progress for our balance sheet repositioning and our growing momentum in business development, further strengthening our foundation for profitability improvements and long-term growth.

Tani Girton: With that, I'll turn the call over to Tommy to discuss our financial results and more detail. Thank you, Tim. Good morning, everyone. Thank you very much for joining us as part of our balance-y repositioning strategy. Excluding the loss on security sales, on a pro forma basis, we had net income of $1 million or $6 cents per diluted share compared to $2.9 million or $18 cents per share in the first quarter. The remaining $1.9 million decline in earnings was primarily due to the $5.2 million second quarter provision for credit losses related to the loans Tim discussed earlier, somewhat offset by a reversal of the tax provision recorded in the first quarter.

Speaker Change: With that, I'll turn the call over to Tani to discuss our financial results in more detail.

Tani Girton: Bank of Marin continues to focus on further strengthening its core deposit franchise and maintaining robust liquidity and capital levels while delivering exceptional service to existing and new customers as we position for earnings improvement in 2024 and beyond. On a reported basis, we incurred a net loss of $21.9 million for the second quarter, or $1.36 per share, which was due to the $32.5 million pre-tax loss we recorded on the sale of investment securities as part of our balance sheet repositioning strategy.

Tani: Thank you, Kim.

Tani: Good morning, everyone.

Tani: Bank of Marin continues to focus on further strengthening our core deposit franchise and maintaining robust liquidity and capital levels while delivering exceptional service to existing and new customers as we position for earnings improvement in 2024 and beyond.

Tani: On a reported basis, we incurred a net loss of $21.9 million for the second quarter, or $1.36 per share, which was due to the $32.5 million pre-tax loss we recorded on the sale of investment securities as part of our balance sheet repositioning strategy.

Tani Girton: Excluding the loss on security sales, on a pro forma basis, we had net income of $1 million or $0.06 per diluted share compared to $2.9 million or $0.18 per share in the first quarter. The remaining $1.9 million decline in earnings was primarily due to the $5.2 million second quarter provision for credit losses related to the loans Tim discussed earlier, although somewhat offset by a reversal of the tax provision recorded in the first quarter.

Speaker Change: Excluding the loss on security sales, on a pro forma basis, we had net income of $1,000,000 or $0.06 per diluted share compared to $2,900,000 or $0.18 per share in the first quarter.

Speaker Change: The remaining $1.9 million decline in earnings was primarily due to the $5.2 million second quarter provision for credit losses related to the loans Tim discussed earlier, somewhat offset by a reversal of the tax provision recorded in the first quarter.

Tani Girton: Other than the security sales and provision, operating earnings were stable quarter over quarter. While net interest income was slightly lower than the prior quarter, we had a two basis point increase in our net interest margin, primarily due to new loans coming on the books at higher rates, a moderation in the pace of deposit cost increases, and the initial benefits of our balance sheet's restructuring. Our non-interest expense increases quarter, mostly due to our annual charitable contributions typically made during the second quarter. Salary and benefits increased $280,000, reflecting both annual merit increases and the cost associated with the staffing adjustments Tim discussed.

Tani Girton: Other than the security, sales, and provision, operating earnings were stable quarter over quarter. While net interest income was slightly lower than the prior quarter, we had a two-basis point increase in our net interest margin, primarily due to new loans coming on the books at higher rates, a moderation in the pace of deposit cost increases, and the initial benefits of our balance sheet's restructuring. Our non-interest expense increased this quarter, mostly due to our annual charitable contributions, which are typically made during the second quarter.

Timothy D. Myers: Other than the security, sales, and provision, operating earnings were stable quarter over quarter.

Speaker Change: While net interest income was slightly lower than the prior quarter, we had a two basis point increase in our net interest margin, primarily due to new loans coming on the books at higher rates, a moderation in the pace of deposit cost increases, and the initial benefits of our balance sheets restructuring.

Speaker Change: Our non-interest expense increased this quarter mostly due to our annual charitable contributions typically made during the second quarter.

Tani Girton: Salary and benefits increased $280,000, reflecting both annual merit increases and the costs associated with the staffing adjustments Tim discussed. Aside from those items, most areas of non-interest expense were relatively consistent with the prior quarter. Moving to non-interest income,

Timothy D. Myers: Salary and benefits increased $280,000, reflecting both annual merit increases and the costs associated with the staffing adjustments Tim discussed.

Tani Girton: Aside from those items, most areas of non-interest expense were relatively consistent with the prior quarter. Moving to non-interest income, excluding the loss on security sales, all other areas of non-interest income were also relatively consistent with the prior quarter. Our total deposits were $3.2 billion at June 30, which was down $70 million from March 31st related to the activity Tim mentioned earlier. Due to the strength of our deposit base, we have not needed to tap the brokerage CD market or run CD campaigns, and non-interest sharing deposits continue to account for 44% of our total deposits. And as Tim noted, we have seen total deposits increase so far in July, consistent with our typical historical pattern.

Timothy D. Myers: Aside from those items, most areas of non-interest expense were relatively consistent with the prior quarter.

Tani Girton: Excluding the loss on security sales, all other areas of non-interest income were also relatively consistent with the prior quarter. Our total deposits were $3.2 billion at June 30th, which was down $70 million from March 31st, related to the activity Tim mentioned earlier. Due to the strength of our deposit base, we have not needed to tap the brokered CD market or run CD campaigns, and non-interest bearing deposits continue to account for 44% of our total deposits.

Timothy D. Myers: Moving to non-interest income, excluding the loss on security sales, all other areas of non-interest income were also relatively consistent with the prior quarter.

Timothy D. Myers: Our total deposits were $3.2 billion at June 30th, which was down $70 million from March 31st, related to the activity Tim mentioned earlier.

Speaker Change: Due to the strength of our deposit base, we have not needed to tap the brokered CD market or run CD campaigns, and non-interest bearing deposits continue to account for 44% of our total deposits.

Tani Girton: And, as Tim noted, we have seen total deposits increase so far in July, consistent with our typical historical pattern. However, our average cost of deposits increased just seven basis points in the second quarter compared to a 23 basis point increase in the prior quarter, and monthly trends continue to show a moderation in the pace of deposit price increases. Disciplined credit management remains a Bank of Marin core value as well. We continue to prudently add to our level of reserves, and the $5.2 million provision for credit losses we recorded in the second quarter increased our allowance for credit losses to 1.47% of total loans. Importantly, actual charge-offs remain low.

Timothy D. Myers: And as Tim noted, we have seen total deposits increase so far in July consistent with our typical historical pattern.

Tani Girton: Our average cost of deposits increased just 7 basis points in the second quarter compared to a 23 basis point increase in the prior quarter, and monthly trends continue to show a moderation in the pace of deposit price increase.

Timothy D. Myers: Our average cost of deposits increased just seven basis points in the second quarter compared to a 23 basis point increase in the prior quarter and monthly trends continue to show a moderation in the pace of deposit price increases.

Tani Girton: Research. Discipline credit management remains a bank of marine core value as well. We continue to prudently add to our level of reserves, and the 5.2 million provision for credit losses we've recorded in the second quarter increased our allowance for credit losses to 1.47 percent of total loans. Importantly, actual charge-offs remain low. Lone balances of 2.1 billion at the end of the second quarter were up 28 million from the prior quarter, with a notable percentage increase in our CNI portfolio. Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of 25 cents per share on July 25th, the 77th consecutive quarterly dividend paid by the company.

Speaker Change: Disciplined credit management remains a Bank of Marin core value as well.

Speaker Change: We continue to prudently add to our level of reserves, and the $5.2 million provision for credit losses we recorded in the second quarter increased our allowance for credit losses to 1.47% of total loans.

Speaker Change: Importantly, actual charge-offs remain low.

Tani Girton: Loan balances of $2.1 billion at the end of the second quarter were up $28 million from the prior quarter, with a notable percentage increase in our C&I portfolio. Given the continued strength of our capital ratios, our board of directors declared a cash dividend of 25 cents per share on July 25th, the 77th consecutive quarterly dividend paid by the company. With that, I'll turn it back to Tim to share some final comments. Thank you, Tani. In closing, we are starting the second half of

Speaker Change: Loan balances of $2.1 billion at the end of the second quarter were up $28 million from the prior quarter with a notable percentage increase in our C&I portfolio.

Speaker Change: Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on July 25th, the 77th consecutive quarterly dividend paid by the company.

Timothy Myers: With that, I'll turn it back to Tim to share some final comments. Thank you, Tani. In closing, we are starting the second half of 2024 with positive trends in loan growth, new account gathering, deposit cost trends, and expense management while seeing generally stable asset quality trends in our loan portfolio. We are also seeing the initial benefits from our balance repositioning to our net interest margin, and we expect to realize more expansion in our margin as we continue re-investing those proceeds from the security sales. We believe all of these trends should result in a higher level of profitability in the second half of the year and position us well to generate profitable growth in the years ahead.

Speaker Change: With that, I'll turn it back to Tim to share some final comments.

Timothy D. Myers: In closing, we are starting the second half of 2024 with positive trends in loan growth, new account gathering, deposit cost trends, and expense management while seeing generally stable asset quality trends in our loan portfolio. We are also seeing the initial benefits from our balance sheet repositioning to our net interest margin, and we expect to realize more expansion in our margin as we continue reinvesting those proceeds from the security system. We believe all of these trends should result in a higher level of profitability in the second half of the year and position us well to generate profitable growth in the years ahead.

Timothy D. Myers: Thank you, Tani. In closing, we are starting the second half of 2024 with positive trends in loan growth, new account gathering, deposit cost trends, and expense management, while seeing generally stable asset quality trends in our loan portfolio.

Timothy D. Myers: We are also seeing the initial benefits from our balance sheet repositioning to our net interest margin, and we expect to realize more expansion in our margin as we continue reinvesting those proceeds from the security sales.

Timothy D. Myers: We believe all of these trends should result in a higher level of profitability in the second half of the year and position us well to generate profitable growth in the years ahead.

Timothy Myers: We also continue to have a very strong balance sheet with high levels of capital, liquidity, and reserves. Given the strength of our balance sheet and the progress we are making on our strategic initiatives, we may resume repurchasing shares should we decide that's the best use of capital at that particular time. As always, we will make the decisions that we believe are in the best long-term interest of our shareholders, and that we believe will further enhance the value of our franchise.

Timothy D. Myers: We also continue to have a very strong balance sheet with high levels of capital, liquidity, and reserves. Given the strength of our balance sheet and the progress we are making on our strategic initiatives, we may resume repurchasing shares should we decide that it's the best use of capital at that particular time. As always, we will make the decisions that we believe are in the best long-term interest of our shareholders and that we believe will further enhance the value of our franchise. With that, I want to thank everyone on today's call for their interest and their support. We will now open the call to your questions.

Timothy D. Myers: We also continue to have a very strong balance sheet with high levels of capital, liquidity, and reserves.

Timothy D. Myers: Given the strength of our balance sheet and the progress we are making on our strategic initiatives, we may resume repurchasing shares should we decide that's the best use of capital at that particular time.

Timothy D. Myers: As always, we will make the decisions that we believe are in the best long-term interest of our shareholders and that we believe will further enhance the value of our franchise.

Timothy Myers: With that, I want to thank everyone on today's call for your interest and your support.

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

Operator: We will now open the call to your questions. Thank you. At this time, if you would like to ask a question, please click the raise hand button, which can be found at the black bar on the bottom of your screen. When it is your turn, you will receive a message on your screen from the host, allowing you to talk, and then you will hear your name call. Please accept, unmute your audio, and ask your question. As a reminder, we are allowing analysts one question and one related follow-up today. We will wait one moment to allow the queue to four.

Operator: Thank you. At this time, if you would like to ask a question, please click the raise hand button, which can be found in the black bar on the bottom of your screen. When it is your turn, you will receive a message on your screen from the host allowing you to talk, and then you will hear your name called. Please accept, unmute your audio, and ask your question. As a reminder, we are allowing analysts one question and one related follow-up today. We will wait one moment to allow the queue to form. Our first question will be from Matthew Clark from Piper Jeffrey. Matthew, please unmute yourself, and you can ask your question.

Speaker Change: Thank you. At this time, if you would like to ask a question, please click on the raise hand button, which can be found at the black bar on the bottom of your screen.

Speaker Change: When it is your turn, you will receive a message on your screen from the host, allowing you to talk, and then you will hear your name called.

Speaker Change: Please accept, unmute your audio, and ask your question. As a reminder, we are allowing analysts one question and one related follow-up today. We will wait one moment to allow the queue to form.

Matthew Clark: Our first question will be for Matthew Clark at Piper Jaffray. Matthew, please unmute yourself, and you can ask your question.

Speaker Change: That's my journal.

Speaker Change: Our first question will be from Matthew Clark at Piper Jeffrey. Matthew, please unmute yourself and you can ask your question.

Operator: Can you hear me? Hi, Matthew. Hey, Matthew, let me clarify for the group. We don't have a limit on questions.

Matthew Timothy Clark: And I'm going to be talking about the the the the the the the the the the the the the the

Timothy D. Myers: Hi Matthew. Hey Matthew, let me clarify for the group. We don't have a limit on questions. Sorry to argue with the facilitator here, but you guys can ask us as many questions as you like. But go ahead, Matthew. I appreciate that.

Matthew Timothy Clark: Can you hear me?

Speaker Change: Hi Matthew. Hey Matthew, let me let me clarify for the group. We don't have a limit on questions. Sorry to argue with the facilitator here, but you guys can ask us as many questions as you like. But go ahead Matthew.

Matthew Clark: Sorry to argue with the facilitator here, but you guys can ask us as many questions as you like. I appreciate that.

Timothy D. Myers: I appreciate that. How much in interest income reversal did you have this quarter versus last on the

Matthew Clark: How much in interesting come reversals did you have this quarter versus last on new none accruals? That's okay. Matthew Tani was answering a question that came in online.

Matthew Timothy Clark: I appreciate that. How much in interest income reversals did you have this quarter versus last on new non-accruals?

Matthew Timothy Clark: That's okay. Matthew, Tani was answering a question that came in online. Can you repeat that again? I apologize. Yeah, I'm just looking in a corner.

Speaker Change: That's okay. Matthew, Tani was answering a question that came in online. Can you repeat that again? I apologize.

Tani Girton: Can you repeat that again? I apologize. Yeah, I'm just looking to quantify how much in interesting come reversals you had that negatively impacted the margin in 2Q versus the first quarter from the new none accruals? You know what?

Matthew Timothy Clark: Yeah, I'm just looking to quantify how much interest income reversals you had that negatively impacted the margin in 2Q versus the first quarter from last year.

Matthew Timothy Clark: Yeah, I'm just looking to quantify how much interest income reversals you had that negatively impacted the margin in 2Q versus the first quarter from the new non-accruals.

Tani Girton: You know what? I'm going to have to pull that number and get back to you on that one, Matthew. Sorry, I don't know where I'm going. No worries. And the weighted average rate on the $664 million of new loan funding? What was that rate?

Tani Girton: I'm going to have to pull that number and get back to you on that one now, too. Sorry, I don't know where.

Speaker Change: You know what, I'm going to have to pull that number and get back to you on that one, Matthew. Sorry, I don't know.

Matthew Clark: No worries.

Tani Girton: The weighted average rate on the new loans was $7.50.

Tani Girton: And the weighted average rate on the 64 million of new loan funding. What was that rate? The weighted average rate on the new loans was 715.

Speaker Change: No worries. And the weighted average rate on the $664 million of new loan funding, what was that rate?

Speaker Change: The weighted average rate on the new loans was $7.15.

Tani Girton: Okay.

Tani Girton: And I think you gave the June average deposit cost, so I was hoping to get the end of the month spot rate on deposit, either interest bearing or total. We have for the month we don't have a spot rate for June 30. Okay. It was 146. Okay. Yeah. Okay.

Tani Girton: And I think you gave the June average deposit cost; I was hoping to get the end of the month spot rate on deposits, either interest-bearing or total.

Speaker Change: Okay.

Matthew Timothy Clark: And I think you gave the June average deposit cost, but I was hoping to get the end of the month spot rate on deposits, either interest bearing or total.

Tani Girton: The only we have for the month; we don't have a spot rate for June 30. OK.

Speaker Change: The only, we have for the month, we don't have a spot rate for June 30.

Tani Girton: It was 146, I think, for June. It was up at the base point for June.

Speaker Change: Okay. It was 1.46, I think, for June . Yeah, it was up at the basis point for June , yeah.

Tani Girton: Okay, and then the margin. In the month of June, I know you said it was up from May, I think twenty-one or two basis points. What was the margin then in June? What was the margin?

Tani Girton: And then the margin in the month of June, I know you said it was up from May, I think 21 or 280 points. What was that? What was the margin then in June? What was the margin? It's the average in June. 264. Okay. And that didn't include any interesting come reversals, I assume? No.

Speaker Change: Okay, and then the the margin in the month of June , I know you said it was up from May, I think 21 or two basis points, but just...

Tani Girton: What was the margin? The actual margin was... 264. OK.

Speaker Change: What was the margin then in June ?

Speaker Change: What was the margin? The actual margin was...

Speaker Change: And

Speaker Change: 264

Tani Girton: And that didn't include any interest income reversals, I assume? No.

Speaker Change: Okay.

Speaker Change: And that didn't include any interest income reversals, I assume.

Tani Girton: Okay. And then last one for me, just on deposit costs in general, as it relates to the outlook. It sounds like the rate of change continues to slow here, but what's your view on when the Fed starts to cut rates? Do we have some lag effect there where deposit costs maybe stabilize, or do you think you can start to reduce them in the fourth quarter? Well, I think they'll stabilize, and hopefully we can start to reduce them. So if you would get some of the runoff we had, about 17 million of the deposit outflow were monies where we stopped bidding on ratio, what seemed like ratio upper money.

Timothy D. Myers: And then last one for me just on deposit costs, in general, as it relates to the outlook. Sounds like the rate of change continues to slow here. But what's your view on when the Fed starts to cut rates? Do we have some lag effect there, or deposit costs may be stabilized? Or do you think you can start to reduce them in the fourth quarter? Well, I think so.

Speaker Change: No.

Speaker Change: And then last one for me, just on deposit costs.

Speaker Change: in general, as it relates to the outlook.

Speaker Change: Sounds like the rate of change continues to slow here, but what's your view on, you know, when the Fed starts to cut rates? Do we have some lag effect there where deposit costs may be stabilized, or do you think you can start to reduce them in the fourth quarter?

Timothy D. Myers: Well, I think they'll stabilize, and hopefully, we can start to reduce them. So if you look at some of the runoff we had, about $17 million of the deposit outflow was monies where we stopped bidding on what seemed like rate shopper money. So we will cautiously look to allow deposits to run off that are overpriced. There's always going to be some lag, but we have been strategizing for a quarter and a half now about how to manage our customers because of the exception pricing and do that, and David Feaster, Wood Lay, Timothy Myers, Robert Terrell, Misako Stewart, Tani Girton, Yahaira Garcia, Bank of Marin Bancorp Does Yes, thanks. You're welcome.

Speaker Change: Well, I think they'll stabilize and hopefully we can start to reduce them. So if you look at some of the runoff we had about 17 million of the deposit outflow were monies where we stopped bidding on ratio what seemed like rate shopper money. So we will

Tani Girton: So we will cautiously look to allow deposits to run off that are overpriced.

Speaker Change: cautiously look to allow deposits to run off that are overpriced. You know, there's always going to be some lag, but we have been strategizing for quarter and a half now about how to manage our customers because of the exception pricing and do that.

Tani Girton: There's always going to be some lagged, but we have been strategizing for quarter and a half now about how to manage our customers because of the exception pricing and do that, effectuate all those changes as quickly as possible. But like I said, we are allowing some of that to start to run off. That's really going to exacerbate the overall deposit. to pass.

Speaker Change: effectuate all those changes as quickly as possible so but like I said we are allowing some of that to start to run off if it's really going to exacerbate the overall deposit cost.

Matthew Clark: And to answer your question, Matthew.

Speaker Change: Does that answer your question, Matthew?

Matthew Clark: Yes, thanks. You're welcome.

Matthew Timothy Clark: Yes, thanks. You're welcome.

Andrew Terrell: Our next question will be from Andrew Terrell with Peters. Hey, good morning. Can you hear me?

Operator: Our next question will be from Andrew Turon.

Matthew Timothy Clark: Our next question will be from Andrew Terrell.

Matthew Timothy Clark: with Stevens.

Andrew Terrell: Hi, Andrew. Hey, morning.

Andrew Turon: Hey morning. Going back to the margin. Just quickly, Tani, if you wouldn't mind, if you guys do have the interest reversal figure, just send it around to all of us, please. Thank you.

Matthew Timothy Clark: Hey, good morning. Can you hear me? Hi, Andrew.

Andrew Terrell: Going back to the margin. I'll just clearly sound if you in mind. If you guys do have the intros reversal figure just sitting in around to all of us, please. Thank you.

Speaker Change: Going back to the margin...

Speaker Change: Just quickly, Tani, if you wouldn't mind, if you guys do have the interest reversal figure, just sending it around to all of us, please. Yes, I will do that.

Tani Girton: How should we think about? Could you maybe provide some expectations on the margin to 3Q? There's obviously a lot of moving pieces. We've got the June that's up. It sounds like some reinvestments still occur so far in July. Any sense of where kind of the margin has in the third quarter or in the back half of the year? So we've got probably at least another 10 basis points coming in from the securities repositioning. I haven't calculated exactly how much I think might come in from the new loans that were originated in June that were not on the books for the entire quarter, but that's a plus.

Tani Girton: How should we think about it because you maybe provide some expectations on the margin for 3Q. There's obviously a lot of moving pieces. We've got June, that's up. It sounds like some reinvestment still occurs so far in July. Um, any sense of where kind of the margin heads in the third quarter and the back half of the year?

Speaker Change: Thank you.

Speaker Change: How should we think about...could you maybe provide some expectations on the margin to 3Q? There's obviously a lot of moving pieces. We've got the June ...

Speaker Change: that's up. It sounds like some reinvestment still occurs so far in July . Any sense of where kind of the margin heads in the third quarter or in the back half of the year?

Tani Girton: So we've got probably at least another 10 basis points coming in from the securities repositioning. I haven't calculated exactly how much I think might come in from the new loans that were originated in June that were not on the books for the entire quarter, but that's a plus.

Speaker Change: So we've got probably, you know, at least another 10 basis points coming in from the securities repositioning. I haven't calculated exactly how much I...

Speaker Change: I think might come in from the new loans that were originated in June that were not on the books for the entire quarter, but that's a plus. We have 37 basis points.

Tani Girton: We have 37 basis points baked into the balance sheet on loan repricing over the next 12 months. So, you know, roughly three basis points a month there. And then, you know, we deposit costs are the wild card, not quite as wild as they have been lately because we do see a pretty consistent trend of those slowing down.

Tani Girton: We have 37 basis points baked into the balance sheet on loan reprising over the next 12 months. So roughly three basis points a month there. And then the deposit costs are the wild card, not quite as wild as they have been lately because we do see a pretty consistent trend of those flowing down. Yeah. Okay.

Speaker Change: baked into the balance sheet on loan repricing over the next 12 months, so, you know, roughly three basis points a month.

Speaker Change: And then, you know, we, you know, the deposit costs are the wild card, not quite as wild as they have been lately, because we do see a pretty consistent trend of those slowing down.

Tani Girton: Yeah, okay. Those are all helpful. On the cash position, can you just remind us your expectations of where you'd like to run cash as a percentage of either total assets or earning assets?

Tani Girton: Those are all helpful on the cash position.

Tani Girton: Can you just remind us your expectations of where you'd like to run cash as a percentage of either total assets or earning assets? We're running right now at around 200 million. So we're pretty comfortable with that. You know, if that gets absorbed by growth over and above in loans over and above what we had anticipated, that's why we're maintaining that cushion. We still have lots of cash flow coming off as the portfolio is so. I think 200 million kind of at the high, and then our hope is that we'll be using that up over time.

Speaker Change: On the cash position, can you just remind us your expectations of where you'd like to run cash as a percentage of either total assets or earning assets?

Tani Girton: We're running right now at around $200 million, so we're, you know, pretty comfortable with that. You know, if that gets absorbed by growth over and above in loans, over and above what we had anticipated, that's why we're maintaining that cushion. We still have lots of cash flow coming off of the portfolios, so I think, you know. $200 million, kind of at the high end. And then our hope is that we'll be using that up over time.

Speaker Change: We're running right now at around 200 million, so we're, you know, we're pretty comfortable with that, you know, if that gets

Speaker Change: absorbed by growth over and above in loans over and above what we had anticipated. That's why we're maintaining that cushion.

Speaker Change: We still have lots of cash flow coming off of the portfolios, so I think, you know...

Speaker Change: 200 million kind of at the high end and then our hope is that we'll be using that up over time.

Tani Girton: Yeah. Okay.

Tani Girton: And then, Tani, just quickly on the expense space, if I take out the cost savings from the FTE reduction and the preparator marks you guys mentioned, and then normalize that charitable contribution line, it looks like the run rate should shake out somewhere around kind of 20.5 million. Does that feel like a kind of fair run rate to you? Or how should we think about the cadence of expenses into the back half of the year?

Tani Girton: And then, Tony, just quickly on the expense base, if I take out the cost savings from the FTE reduction, you guys mentioned in the prepared remarks and normalize that charitable contribution line lower. It looks like the run rate should shake out somewhere around kind of 20.5 million. Does that feel like a kind of fair run rate to you, or how should we think about the gains of expenses in the back half of the year? Yeah, I think the back half of the year is going to look a lot like the front half of the year.

Speaker Change: Yeah, okay.

Tani: And then, Tani, just quickly on the expense base, if I take out the cost savings from the FTE reduction, you guys mentioned the preparator marks and the normalized, that charitable contribution line.

Speaker Change: Lower. It looks like the run rate should shake out somewhere around 20.5 million. Does that feel like a kind of fair run rate to you or how should we think about the cadence of expenses into the back half of the year?

Tani Girton: Yeah, I think the back half of the year is going to look a lot like the front half of the year, so they're just things that come in and go out, you know, in each quarter that are sort of, you know, the same year over year, but it looks like the first half is pretty indicative of what the second half is going to be.

Tani: Yeah, I think the back half of the year is going to look a lot like the front half of the year, so they're just things that come in and go out, you know, in each in each quarter that are sort of

Tani Girton: So they're just things that come in and go out, you know, in each, in each quarter that are sort of, you know, the same year over a year, but it looks like the first half is pretty indicative of what the second half is going to be. Yeah, and you're by and large, if you look at the cost of the higherings, we may be opportunistic kinds to help with the long growth. That's largely going to offset the this year's impact from the staff reduction. So it'll probably look pretty close. Okay, understood.

Tani: the same year over year, but it looks like the first half is pretty indicative of what the second half's gonna be. Yeah, Andrew, by and large, if you look at the cost of the hirings, we made the opportunistic hirings to help with the loan growth.

Timothy D. Myers: Yeah, Andrew, by and large, if you look at the cost of the hirings we made the opportunity, opportunistic hirings to help with the loan growth, that's largely going to offset this year's impact from the staff reduction. So it'll probably look pretty close.

Robert Andrew Terrell: That's largely going to offset this year's impact from the staff reduction, so it'll probably look pretty close.

David Feaster: And then just question around credit, maybe I realize the office book is very granular called 2.5 million average loan size of this 17 or 16.7 million is certainly going to stand out.

Timothy D. Myers: Okay, understood. And then just a question around credit, maybe I realize the office book is very granular, call it two and a half million average loan size. So this 17 or 16.7 million is certainly kind of stand out. Can you just talk about the bell curve of the office kind of loan size in the portfolio, maybe just a bit more, just to give us context on how maybe outsize this one credit might be, what's kind of the second, third largest office loans behind that. And then why should we feel kind of comfortable with the collateral and the potential?

Robert Andrew Terrell: Okay, understood.

Robert Andrew Terrell: And then just a question around credit maybe, I realize the office book is very granular, call it two and a half million average loan size, so this 17 or 16.7 million is...

David Feaster: But can you just talk about the bell curve of the office kind of loan size in the portfolio, maybe just a bit more. Just seeing this context on how maybe outsize this one credit might be, what's kind of the second third largest office loans behind that. And why should we feel kind of comfortable with the collateral on the initial outcome. Well, I think that's fair.

Speaker Change: Certainly kind of stand out. Can you just talk about the bell curve of the office kind of loan size in the portfolio, maybe just a bit more, just thinking of context on how maybe outsize this one credit might be, what's kind of the second, third, largest office loans behind that?

Speaker Change: and then why we should feel kind of comfortable with the collateral and the potential outcome.

Misako Stewart: I think that's fair. I'll look at the high level while Misako looks for some of the specifics.

Timothy Myers: I'll at high level. I'll talk a look for some of the specifics, but you know, we've been talking about that one 16.7 million dollar loan since fourth quarter 2021, as you know, the one most pandemic impacted, most impacted by remote work. You know, you name it. It was the poster child here. We haven't been shy about discussing it. If you net out the specific reserve for that in San Francisco, our average loan to value is 58% or a weighted average loan to value on the rest of the properties. Even if you throw that property in but include that net net that specific reserve, it's 72%.

Speaker Change: I think that's fair. I'll look high level while Misako looks for some of the specifics, but...

Speaker Change: We've been talking about that one $16.7 million loan since the fourth quarter of 2021, as you know.

Speaker Change: The one most pandemic impacted, most impacted by remote work. You name it, it was the poster child here. We haven't been shy about discussing it.

Speaker Change: If you net out the specific reserve for that in San Francisco, our average loan-to-value is 58 percent, our weighted average loan-to-value on the rest of the properties. Even if you throw that property in but include that specific reserve, it's 72 percent.

Misako Stewart: Seven of the 11 properties we have in San Francisco are 100% occupied. So this one really was unique even outside of the size differentials. This one was unique in terms of the occupancy or vacancy. The pace with which in the incremental increase in rents, you would have to get in order to refinance that loan in full at maturity two years out. And therefore the one most impact impacted by a current valuation. So we're constantly looking at these values, whether it's an appraisal because of the timing or our own valuation. And this one does stand out as you meet, irrespective of the size.

Speaker Change: Seven of the 11 properties we have in San Francisco are 100% occupied.

Speaker Change: the pace with which an incremental increase in rents

Timothy D. Myers: But, you know, we've been talking about that $16.7 million loan since the fourth quarter of 2021, as you know, the one most affected by the pandemic, most impacted by remote work. You name it, it was the poster child here. We haven't been shy about discussing it. If you net out the specific reserve for that, in San Francisco, our average loan to value is 58%. Our weighted average loan to value on the rest of the properties is

Speaker Change: he would have to get in order to refinance that loan in full at maturity two years out.

Speaker Change: and therefore the one most impacted by a current valuation. So we're constantly looking at these values, whether it's an appraisal because of the timing or our own valuation. And this one does stand out as unique, irrespective of the size.

Timothy D. Myers: Even if you throw that property in, but include that net, that specific reserve, it's 72%. Seven of the 11 properties we have in San Francisco are 100% occupied. So, this one really was unique, even outside of the size differentials; this one was unique in terms of the occupancy or vacancy, the pace with which an incremental increase in rents he would have to get in order to refinance that loan in full at maturity two years out, and therefore the one most impacted by a current valuation. So we're constantly looking at these values, whether it's an appraisal because of the timing or our own valuation. And this one does stand out as unique, irrespective of the size.

Misako Stewart: So I'll give it up. Yeah, that particular loan that Tim was talking about is by far the largest office property that we are office loan that we have in the portfolio. And you know, understandably, I know that San Francisco remains a concern, but you know, the San Francisco office portfolio does make up only 3% of our total. And the properties are 11 in total, and they're pretty diversified in terms of geographic locations as well. We don't have any in the Financial District. And as Tim said, if you exclude that one particular loan out, I mean our loan to value and our weighted average debt service coverage is at 120 and 58% respectively.

Misako Stewart: Yeah, that particular loan that Tim was talking about is by far the largest office loan that we have in the portfolio. And understandably, I know that San Francisco remains a concern, but the San Francisco office portfolio does make up only 3% of our total. And the properties are, there are 11 in total, and they're pretty diversified in terms of geographic locations as well. We don't have any in the financial district. And as Tim said, if you exclude that one particular loan out, our loan-to-value and our weighted average debt service coverage are at 120 and 58%, respectively.

Speaker Change: Misako, do you have anything you want to add? Yeah, that particular loan that Tim was talking about is by far the largest office loan that we have in the portfolio.

Speaker Change: And, you know, understandably, I know that San Francisco remains a concern, but, you know, the San Francisco office portfolio does make up only 3% of our total.

Speaker Change: And the properties are, there's 11 in total, and they're pretty diversified in terms of geographic locations as well. We don't have any in the financial district. And as Tim said, if you exclude that one particular loan out, I mean, our loan-to-value and our weighted average debt service coverage is at 120 and 58% respectively.

Misako Stewart: and we do have good occupancy and majority of those properties and good sponsorship as well. So we really do feel like that one particular loan had some, I don't want to call it anomaly by, you know, just not profile like the rest of the ones that we have in our portfolio. Yeah, it does.

Misako Stewart: And we do have good occupancy in the majority of those properties and good sponsorship as well. So we really do feel like that one particular loan had some, I don't want to call it an anomaly, but it does not profile like the rest of the loans that we have in our portfolio.

Timothy D. Myers: And we do have good occupancy in the majority of those properties and good sponsorship as well. So we really do feel like that one particular loan had some, I don't want to call it an anomaly, but you know, did not profile like the rest of the loans that we have in our portfolio, if that makes sense.

Andrew Turon: Yep, it does. Okay, thank you for the color and I appreciate the questions.

David Feaster: Okay, thank you for the color and appreciate the questions. Thank you.

Speaker Change: Yep, it does. Okay, thank you for the color and I appreciate the questions.

Operator: Thank you. Our next question will be from Woody Lay with KBW.

Woody Lay: Our next question will be from Woody Lay. Okay, with KBW.

Speaker Change: Thank you. Our next question will be from Woody Lay with KBW.

Woody Lay: Hey, good morning, guys. Morning, what morning.

Timothy Myers: Wanted to start on longer. It was great to see the pickup just how the pipeline looking for the back after the year. Well, you know, pipelines always have a way of contracting when you close loans, but I think we're actually pleased with where it sits today, and it continues to build about half that production. The quarter was related to our new hires, and they continue to be out there finding relationships. So we're still targeting the same degree of growth, but the net, you know, in terms of gross production, you know, net's hard to predict. Construction always has some loans that get paid off or do something different, and I'm just load the predict net in this environment, but we feel good that we can continue on an origination track to stay ahead of that curve.

Wood Neblett Lay: I wanted to start on Lungra, and it was great to see the pickup. Just how's the pipeline looking for the back half of the year?

Speaker Change: Hey, good morning, guys. Morning, Woody. Morning.

Wood Neblett Lay: Wanted to start on one growth. It was great to see the pickup. Just how's the pipeline looking for the back half of the year?

Timothy D. Myers: Well, you know, pipelines always have a way of contracting when you close loans, but I think we're actually pleased with where it sits today, and it continues to build. About half that production in the quarter was related to our new hires, and they continue to be out there finding relationships, so we're still targeting the same degree of growth, but the net, you know, in terms of gross production, it's hard to predict.

Speaker Change: Well, you know pipelines always have a way of contracting when you close loans But I think we're actually pleased with where it sits today and it continues to build about half that production in the quarter was

Speaker Change: related to our new hires and they continue to be out there finding relationships. So we're still targeting the same degree of growth, but the net, you know, in terms of gross production, you know, net's hard to predict.

Timothy D. Myers: Construction always has some loans that get paid off or do something different, and I'm just too low to predict net in this environment, but we feel good that we can continue on an origination track to stay ahead of that curve.

Speaker Change: Construction always has some loans that get paid off or do something different and I'm just low to predict net in this environment but we feel good that we can continue on an origination track to to stay ahead of that curve.

Timothy Myers: Yeah, and it seems like the new hires are sort of gaming theme. How do you think about the forward hiring strategy from here? Are you looking to be opportunistic? We are, I mean, we want to be very cautious, right? We just went through a staff reduction because we want to be able to for the people that will really move the needle for us, and those ones we bet on did. So we continue to have those conversations. It just has to be right place, right time for the right reason. So I don't want to say we won't, but we're not actively trying to add at this point unless it looks really opportunistic, just like we've done.

Timothy D. Myers: Yeah, and it seems like the new hires are sort of gaining steam. How do you think about the forward hiring strategy from here? Are you looking to be opportunistic? We are.

Speaker Change: Yeah, and it seems like the new hires are sort of gaining steam. How do you think about the forward hiring strategy from here? Are you looking to be opportunistic?

Timothy D. Myers: We are. I mean, we want to be very cautious, right? We just went through a staff reduction because we want to be able to afford the people that will really move the needle for us. And those ones we bet on did. So we continue to have those conversations. It just has to be the right place, the right time, for the right reason. So I don't want to say we won't, but we're not actively trying to add at this point unless it looks really opportunistic, just like we did. So we were able to hire the ones we wanted. We'll look for those that can come in and really make a difference, but we're going to be cautious on the cost-benefit of those.

Speaker Change: We are. I mean, we want to be very cautious, right? We just went through a staff reduction because we want to be able to afford the people that will really...

Speaker Change: moved the needle for us, and those ones we bet on did.

Speaker Change: So, we continue to have those conversations.

Speaker Change: It just has to be right place, right time, for the right reason. So, I don't want to say we won't, but we're not actively trying to add at this point unless it looks really opportunistic, just like we've done. So, we were able to hire the ones we wanted.

Timothy Myers: So we were able to hide the ones we wanted. We'll look for those that can come in and really make a difference, but we're going to be cautious on the cost-benefit of that.

Speaker Change: We'll look for those that can come in and really make a difference, but we're going to be cautious on the cost-benefit of that.

Woody Lay: Great image; just one last follow-up on the larger office credit.

Wood Neblett Lay: Great. And then just one last follow-up on the larger office credit. Do you have the specific reserve that's tied to that credit?

Speaker Change: Great. And then just one last follow-up on the larger office credit. Do you have the specific reserve that's tied to that credit?

Misako Stewart: Do you have this specific reserve that is tied to that credit? Yeah, give us a second. I do. 6.7 is the specific reserve.

Misako Stewart: Yeah, give us a second.

Misako Stewart: Thank you. 6.7 is the specific research.

Speaker Change: Yeah, give us a second.

Speaker Change: Thank you.

Speaker Change: 6.7

Tani Girton: And how much of the provision record in the second quarter was related to that credit? I think the major contributor for the 5.2. The reasons primarily they don't match what he is because we have been provisioning using cue factors within Cecil to compensate for the enhanced writ or heightened risk we were having in CRE, particular that portfolio.

Timothy D. Myers: And how much of the provision recorded in the second quarter was related to that credit?

Speaker Change: Is this specifically shared?

Speaker Change: And how much of the provision recorded in the second quarter was related to that credit?

Timothy D. Myers: I'd say it's a major contribution to the 5.2. The reasons why they don't match, primarily, Woody, are that we had been provisioning using Q-factors within CECL to compensate for the enhanced or heightened risk we were having in CRE, particularly that portfolio. So when we took the full specific reserve of the 6-plus, we made some adjustments back on some of those other CECL-related Q-factors that were really being tweaked to compensate for not doing that. Next.

Speaker Change: I'd say it's a major contributor.

Speaker Change: for the five-point

Speaker Change: The reasons, primarily, they don't match, Woody, is because we have been provisioning using Q-factors within CECL.

Speaker Change: to compensate for the enhanced risk or heightened risk we were having in CRE, particularly that portfolio. So when we took the full specific reserve of the six plus, we made some adjustments back on some of those other

Tani Girton: So when we took the false specific reserve of the 6 plus, we made some adjustments back on some of those other Cecil related cue factors that were that were really being tweaked to compensate for not doing that. Makes sense. Yes, that's great.

Speaker Change: Cecil related Q factors that were that were really being tweaked to compensate for not doing that. Make sense?

Timothy D. Myers: Yeah, all right, that's great. Thanks for taking my question. I wanted to go back to Tuesday. I was just going to mention that, you know, the unemployment forecast still looks pretty optimistic, and so that also contributed to offsetting that amount. Got it. It makes sense.

Tani Girton: Thanks for taking my question. I wanted to take a fact or two. Sorry, I was just going to mention that you know the unemployment board has to look for your optimistic, and so that also contributed to offsetting that amount. Got it, makes sense.

Speaker Change: Yeah, all right, that's great. Thanks for taking my question. I wanted to take it back to Tuesday. I was just going to mention that, you know, the unemployment forecast still looks pretty optimistic, and so that also contributed to offsetting that amount.

David Feaster: Thank you. Our next question will be from David Feaster with Raymond James. Hey, good morning, everybody. Morning, David. We just kind of staying on the the credit side, you know, you touched on a lot of these credits.

Speaker Change: Got it. Makes sense.

Operator: Thank you. Our next question will be from David Feaster with Raymond James.

Speaker Change: Thank you. Our next question will be from David Feaster with Raymond James.

David Pipkin Feaster: Hey, good morning everybody. Good morning, David.

David Pipkin Feaster: Hey, good morning, everybody. Morning, David. Morning. Just kind of staying on the credit side, you know, you touched on a lot of these credit issues. I guess first, do you have a timeline for a resolution and kind of how you're thinking about that?

David Feaster: I guess first you, do you have a timeline for resolution and kind of how you're thinking about that and then just, you know, of the migration that we saw, I guess, you know, how do you think about managing those and working through them, you know, and just overall, thoughts on on CRE more broadly, what are you seeing across your footprint? Sure, so I'll start in socket and jump in. But you thought your first part of your question was resolution of that particular large credit. Yeah, so I think as we mentioned in the script, you know, we have the amount of payments through maturity in 2026, you know, pleasure, the bank.

Speaker Change: You know, of the migration that we saw, I guess, you know, how do you think about managing those and working through them, you know, and just overall thoughts on CRE more broadly? What are you seeing across your footprint?

David Pipkin Feaster: Just kind of staying on the credit side, you know, you touched on a lot of these credit issues. First, do you have a timeline for a resolution and kind of how you're thinking about that? And then just, you know, the migration that we saw, I guess, you know, how do you think about managing those and working through them, you know, and just overall thoughts on CRE more broadly? What are you seeing across your footprint? Sure.

Speaker Change: Sure, so I'll start and Saka can jump in, but you thought your first part of your question was resolution of that particular large credit? Yeah.

Timothy D. Myers: Sure, so I'll start and Misako can jump in, but the first part of your question was about the resolution of that particular large credit. Yeah.

Timothy D. Myers: So I think, as we mentioned in the script, we have the amount of payments through maturity in 2026, you know, the Pledge of the Bank. So there's never been an issue with payment. We're gonna get paid through. What we're gonna watch then is the next two years, and he is seeing leasing activity pick up. I mean, we're hopeful, but we can't say for certain that this valuation looks like a bottom because he is seeing leasing activity pick up, and we continue to track it very closely. So there are two years for this thing to improve by way of tenancy. These are small footprint floors, three to 4,000 square feet of floors.

Saka: So, I think as we mentioned in the script,

Saka: You know, we have the amount of payments through maturity in 2026, you know, pledged to the bank.

Timothy Myers: So we've, there's never been an issue with payment. We're going to get paid through. Well, we're going to watch then is over the next two years. And he is seeing leasing activity pick up. I mean, we're hopeful we can say for certain that this valuation looks like a bottom up because he is seeing leasing activity pick up, and we continue to track it very closely. So there are two years for this thing to improve by way of tenancy. These are small footprint floors, three to 4,000 square feet of floor. So you don't need to bring in a lot of tenants to materially change the NLI, and that's the valuation on this property, right.

Saka: We've there's never been an issue with payment. We're going to get paid through Well, we're going to watch then is over the next two years and and he is seeing leasing activity pick up I mean, we're hopeful we can't say for certain that that this valuation looks like a bottom Because he is seeing leasing activity pick up and we continue to track it very closely. So there is two years for this thing to

Speaker Change: to improve by way of tenancy. These are small footprint floors.

Timothy D. Myers: So you don't need to bring in a lot of tenants to materially change the NOI, and that's the valuation on this property, right? So there is a lot of reason to believe whether, you know, the trend of AI driving leasing activity in San Francisco is the right overall solution or not. And he is looking to benefit from that. It certainly appears that he will or might.

Speaker Change: 3,000 to 4,000 square feet of floor, so.

Speaker Change: You don't need to bring in a lot of tenants to materially change the NOI, and that's the valuation on this property, right? So, there's a lot of reason to believe...

Timothy Myers: So there's a lot of reason to believe whether, you know, the trend of AI driving leasing activity. So the right overall solution or not, he is looking to benefit from that. It certainly appears that he will or might. And so a lot of that valuation differential could resolve itself towards maturity. Again, we'll get paid, but that's what we're tracking for, and we reserved as today's as is value. So we have we have cushion there to continue tracking it.

Speaker Change: whether you know the trend of AI driving leasing activity in San Francisco is the right overall solution or not, he is looking to benefit from that. It certainly appears that he will or might and so

Timothy D. Myers: And so a lot of that valuation differential could resolve itself towards maturity. Again, we'll get paid, but that's what we're tracking for. And we reserved as today's as-is value. So we have a cushion there to continue tracking it.

Speaker Change: A lot of that valuation differential could resolve itself towards maturity. Again, we'll get paid, but that's what we're tracking for, and we reserve today's as-is value. So we have cushion there to continue tracking it.

Timothy Myers: On this office theory overall, yes, values are down, but that one, as we've said for several years, is the one most impacted. You know, I know we say 12; we have 13 loans in the city. Those are really 11 properties because there's some craylocks there. Ten or low rises, as Misaka said, seven are 100% occupied, and the weighted average LTV, if you remove the big one, 58%. So there's a lot of flex that we know with a 120 plus DCR, even at today's market. So we have a lot of flexibility, and by and large, when I shouldn't say by and large, almost entirely.

Timothy D. Myers: On the office CRA overall, yes, values are down, but that one, as we've said for several years, is the one most impacted. I know we say 12, but we have 13 loans in the city. Those are really 11 properties because there are some Craylocks there. 10 are low rises, as Misako said. Seven are 100% occupied.

Speaker Change: On the office CRA overall, yes, values are down, but that one, as we've said for several years, is the one most impacted. You know, I know we say 12, we have 13 loans in the city. Those are really 11 properties because there's some Craylocks there.

Misaka: 10 are low rises, as Misako said, 7 are 100% occupied, and the weighted average LTV, if you remove the big ones, 58%. So there's a lot of flex that we, you know, with a 120 plus DCR.

Timothy D. Myers: And the weighted average LTV, if you remove the big ones, 58%. So there's a lot of flex with the 120 plus DCR, even in today's market. So we have a lot of flexibility. And by and large, when I shouldn't say by and large, almost entirely, we have a combination of property cash flow, collateral value, or sponsorship to re-margin where necessary. And the rest of the portfolio; we have not felt compelled or even the need to do something like this.

Misaka: even at today's market. So we have a lot of flexibility.

Timothy Myers: We have a combination of property cash flow, collateral value, and/or sponsorship to remarge or necessary in the rest of the portfolio. We have not felt compelled or even a need to do something.

Speaker Change: and by and large, well I shouldn't say by and large, almost entirely

Speaker Change: We have a combination of property cash flow.

Speaker Change: collateral value and or sponsorship to re-margin where necessary in the rest of the portfolio we have not felt compelled or even the need to do something like this.

Misako Stewart: Yeah, no, I agree. And that relationship that Tim was talking about is the only non-unoccupied office that we have classified in some standard category. We monitor the portfolio very closely on a quarterly basis. And as Tim mentioned, you know, any issues that we might be having with that, any of our other office properties, we have sponsorship that has the ability to support any shortfalls or fix a problem. And those are the things that we can continue to work with our borrowers and doing so. In fact, we had a couple of upgrades to pass last quarter because you're able to come to a resolution by way of, you know, additional pledge cash collateral or, you know, additional collateral real estate unencumbered real estate that's got cash flow to support it.

Misako Stewart: Yeah, no, I agree, and that relationship that Tim was talking about is the only non-owner-occupied office that we have classes for that... in the substandard category. We monitor the portfolio very closely on a quarterly basis, and as Tim mentioned, any issues that we might be having with any of our other office properties, we have sponsorship that, you know, that has the ability to support any shortfalls or fix a problem, and those are the things that we continue to work with our borrowers in doing so.

Speaker Change: Yeah, no, I agree, and that relationship that Tim was talking about is the only non-owner-occupied office that we have that's classified.

Speaker Change: in the substandard category.

Speaker Change: We monitor the portfolio very closely on a quarterly basis, and as Tim mentioned,

Speaker Change: Any issues that we might be having with any of our other office properties, we have sponsorship that has the ability to support any shortfalls or fix a problem, and those are the things that we continue to work with our borrowers in doing so. In fact, we had a couple of upgrades to pass last quarter because we were able to come to a resolution by way of...

Misako Stewart: In fact, we had a couple of upgrades to pass last quarter because we were able to come to a resolution by way of, you know, additional pledged cash collateral or, you know, additional collateral real estate, unencumbered real estate that's got cash flow to support it. So, those are all the discussions that we're having, and I think we've had some good success in finding resolution with our borrowers.

Speaker Change: You know, additional pledged cash collateral or, you know, additional collateral. Real estate, unencumbered real estate that's got cash flow to support it. So, those are all the discussions that we're having and I think we've had some good success in finding resolution with our borrowers. Yep. I think that's very fair. And in terms of your question about migration, we really didn't see, we didn't have any increase for changing classifies.

Misako Stewart: So those are all the discussions that we're having. And I think we've had some good success in finding resolution with our borrowers. Yeah, I think that's very fair.

Timothy D. Myers: Yeah, I think that's very fair. And in terms of your question about migration, we really didn't see, we didn't have any increase in changing classifications. We did have the two big relationships moved to non-accrual. Obviously, we just talked about the property in San Francisco.

Timothy Myers: And in terms of your question about migration, we really didn't see; we didn't have any increase for changing classifies. We did have the two big relationships moved and on a cruel. You know, obviously, we just talked about the property in San Francisco. The other one is a consumer goods program with brands; they can sell, but just had some idiosyncratic issues. And as we mentioned in the script, you know, they do have an L.O.Y. to sell some of those brands. And so it's not pie in the sky. For us to say, well, the company has to do something dramatic to do that.

Speaker Change: We did have the two big relationships moved to non-accrual.

Speaker Change: Obviously, we just talked about the property in San Francisco.

Timothy D. Myers: The other one is a consumer goods program with brands they can sell that just have some idiosyncratic issues. And, as we mentioned in the script, they do have an LOI to sell some of those brands. And so it's not pie in the sky for us to say, well, the company has to do something dramatic to do that. This is something they've done in the past. So we have every reason to believe that this company can sell some brands and materially reduce the debt to a point where it's refinanceable, or generate cash flows.

Speaker Change: The other one is a consumer goods program with brands they can sell that just have some idiosyncratic issues, and as we mentioned in the script,

Speaker Change: You know, they do have an LOI to sell some of those brands and so it's not pie in the sky for us to say, well, the company has to do something dramatic to do that. This is something they've done in the past.

Timothy Myers: This is something they've done in the past. So, we have every reason to believe that, you know, this, this company can sell some brands, materially reduce the debt to a point where it's refinanceable or cash flows, but because of the timing and everything that happened, we felt it prudent to move it to non-accrual. But I think we also feel optimistic about the resolution. And there's that is not indicative of anything else in the portfolio in that regard.

Speaker Change: We have every reason to believe that this company can sell some brands, materially reduce the debt.

Speaker Change: to a point where it's refinanceable or cash flows. But because of the timing and everything that happened, we felt it prudent to move it to non-accrual. But I think we also feel optimistic about the resolution.

Timothy D. Myers: But because of the timing and everything that happened, we felt it prudent to move it to non-accrual. But I think we also feel optimistic about the resolution. And that is not indicative of anything else in the portfolio in that regard. [inaudible] And can I just add to that: we will distribute the number of interest reversal, but it is pretty immaterial because that borrower has been current all along.

Speaker Change: and that is not indicative of anything else in the portfolio in that regard.

Tani Girton: Okay, thank you. And just that we will, we will distribute the number on interest reserve reversal, but it is pretty immaterial because that borrower has been current all along. Yeah, okay, that's great color.

Speaker Change: And can I just add to that, we will distribute the number on interest reversal, but it is pretty immaterial because that borrower has been current all along.

David Pipkin Feaster: Okay, that's a great caller. And it's encouraging to hear the new deposit account growth as well as the trends on balances early in the third quarter. I'm curious if you could touch on where you're having success and what the pricing is on new deposit accounts and how that's trending and just overall thoughts on deposit growth as we look forward. I mean, just given loan growth seems to be accelerating, do you expect deposits to be a governor of loan growth or think that loans outpace deposits?

David Feaster: And it's encouraging to hear the new deposit account growth as well as the trends on balances early in the third quarter. I'm curious; you could touch on where you're having success and what the pricing is on new deposit accounts and how that's trending. You just overall thoughts on deposit growth as we look forward. I mean, just given long growth seems to be accelerating, you expect deposits to be a governor of loan growth or think that loans outpace deposits.

Speaker Change: Okay, that's a great caller, and it's encouraging to hear the new deposit account growth as well as the the trends on balances early in the third quarter. I'm curious...

Speaker Change: You could touch on where you're having success and what the pricing is on new deposit accounts and how that's trending.

Speaker Change: Overall thoughts on deposit growth as we look forward, I mean, just given loan growth seems to be accelerating. Do you expect deposits to be a governor of loan growth or think that loans outpace deposits?

Timothy D. Myers: That's a really good question. Yeah, our deposits that are coming in on interest bearing, I think the weighted average was 318, and I think maybe as high as 3.5, but nowhere near, you know, the billboard rates you see. So it's very incremental. It is helping the granularity.

David Feaster: That's a really good question. Yeah, our deposit center coming in on interest bearing. I think the weighted average was 318, and I think maybe as high as 3.5, but nowhere near, you know, the billboard rates you see. So it's very incremental. It is helping the granularity; you know, having that percent of new accounts every quarter is great. You know, it doesn't really offset the big fluctuations in our big operating accounts, but again, and I know I've said this, that deposit decline, we had, we didn't lose any relationships. In fact, we were as hot; we've been up since quarter end is highest 67 million, and I think we ended Friday 43 up.

Speaker Change: That's a really good question. Yeah, our deposits that are coming in on interest bearing, I think the weighted average was 318 and I think maybe as high as 3.5, but nowhere near, you know, the billboard rates you see. So it's very incremental. It is helping the granularity.

Speaker Change: You know, having that percent of new accounts every quarter is great.

Timothy D. Myers: You know, having that percent of new accounts every quarter is great. It doesn't really offset the big fluctuations in our big operating accounts, but again, and I know I've said this, that deposit decline we had, we didn't lose any relationships. In fact, we were as high, we've been up since quarter end as high as 67 million, and I think we ended Friday 43 up.

Speaker Change: You know, it doesn't really offset the big fluctuations in our big operating accounts, but again, and I know I've said this, that deposit decline we had, we didn't lose any relationships. In fact,

Speaker Change: We've been up since quarter end as high as $67 million, and I think we ended Friday $43 million up. So, in terms of looking at the quarter end and it being $70 million down, we can see fluctuations within a week that bring that back. Those are just the big DDA balance fluctuations.

Timothy D. Myers: So, you know, in terms of looking at the quarter end into being 70 down, we can see fluctuations within a week that bring that back. Those are just the big DDA balance fluctuations. But to your question or your point at the beginning, I think that was both within our branches and our commercial group, more so in our commercial group than before, we have an intense focus on low-cost DDA accounts and on the C&I side of DDAs.

Timothy Myers: So, you know, in terms of looking, looking at the quarter end into being 70 down, you know, we can see fluctuations within a week that bring that back. Those are just the big DDA balance fluctuations, but to your question or your point at the beginning, I think of that was both within our branches and our commercial group, more so on our commercial group than before. We have an intense focus on low cost, DDA accounts and on the C and I side DDA. So we brought in some relationships, relationships this quarter where those deposit accounts really haven't fully funded, and we expect to get a material benefit from that strategy, like around professional services going forward to where we'll see a nice build in those.

Speaker Change: But to your question or your point at the beginning, I think, of that was

Speaker Change: both within our branches and our commercial group, more so in our commercial group than before. We have an intense focus on low-cost DD accounts.

Timothy D. Myers: So we brought in some relationships this quarter where those deposit accounts really weren't fully funded, and we expect to get a material benefit from that strategy, like around professional services, going forward where we'll see a nice build in those. And obviously, there's some seasonality with professional service firms and DDA balances, but that could materially help offset or be counter-cyclical to the fluctuations we have today. So the focus is on all of the above, but where we are paying a rate, paying a below-market rate, and managing and improving granularity to offset some of that seasonality or cyclicality we see with the big DDA accounts.

Speaker Change: and on the CNI side, DDA. So we brought in some relationships this quarter where those deposit accounts really haven't fully funded and we expect to get a material benefit from that strategy like around professional services going forward to where we'll see a nice build in those. And obviously there's some seasonality with professional service firms and DDA balances but that could materially help.

Timothy Myers: And obviously there's some seasonality with professional service firms and DDA balances, but that could materially help offset or be counter-cyclical to the fluctuations we have today. So the focus is on all the above, but where we are paying a rate, paying a below market rate, and managing an improved granularity to offset some of that seasonality or cyclicality we see with the big DDA. that's helpful.

Speaker Change: offset or be counter cyclical to the fluctuations we have today. So the focus is on all of the above, but where we are paying a rate, paying a below market rate.

Speaker Change: and managing and improved granularity to offset some of that seasonality or cyclicality we see with the big DDA accounts.

Timothy D. Myers: That's helpful. And then just last one for me, you know, it feels like you've got a lot of financial flexibility, just given the liquidity you're sitting on, as well as the fact that even after the securities and everything that you guys have done, you still have a ton of capital. I'm curious, kind of, how do you think about deploying liquidity and capital going forward? I'm just curious; what are your priorities? Just kind of. What do you think about it?

Timothy Myers: And then just last one for me, you know, it feels like you've got a lot of financial flexibility just given the liquidity you're sitting on, as well as the, even after the securities and everything that you guys have done, still have a ton of capital. I'm curious kind of how do you think about deploying liquidity and capital going forward? I'm just curious what are your priorities? I'm just kind of how do you how do you think about it? Our priority one continues to be the dividend, obviously, and being able to invest in the long growth.

Speaker Change: Okay.

Speaker Change: That's helpful. And then just last one for me, you know, it feels like you've got a lot of.

Speaker Change: financial flexibility just given the liquidity you're sitting on as well as the even after the the securities and everything that you guys have done still have a ton of capital.

Speaker Change: I'm curious, kind of, how do you think about deploying liquidity and capital going forward? I'm just curious, what are your priorities, and just kind of how do you think about it?

Timothy D. Myers: Priority one continues to be the dividend, obviously, and being able to invest in loan growth. That's how we're going to build long-term franchise value. We continue, and we mention it here, to be highly intrigued by the opportunity of share repurchases. You know, the securities repositions put us in a blackout for a while there, but we'll be out of that eventually. And that's one area we're considering. I think, particularly when it's trading below or at a tangible book value, that continues to be a really attractive valuation and potentially the best use of capital for the benefit of the shareholders. But that's ultimately going to be our guiding principle: among the menu of options, what is the best for our shareholders? But we will continue to look at all those things.

Timothy Myers: That's how we're going to build the long-term franchise value. We continue, and we mentioned it in here to be highly intrigued by the opportunity to share your purchases. You know, the securities repositions put us in a blackout for a while there, but we'll be out of that eventually, and that's one area we're considering. We think particularly when it's trading below or at a tangible book that continues to be a really attractive valuation and potentially a best use of capital for the benefit of the shareholders. But that's ultimately going to be our guiding principle is, you know, among the menu of options, what is the best for our shareholders. But we will continue to look at all those things.

Speaker Change: Priority one continues to be the dividend, obviously, and being able to invest in the loan growth. That's how we're going to build the long-term franchise value. We continue, and we mention it in here, to be

Speaker Change: Highly intrigued by the opportunity of Sherry purchases

Speaker Change: You know the securities repositions put us in a blackout for a while there, but

Speaker Change: We'll be out of that eventually, and that's one area we're considering. We think, particularly when it's trading below or at a tangible book, that continues to be a really attractive valuation and potentially a best use of capital for the benefit of the shareholders. But that's ultimately going to be our guiding principle.

Speaker Change: Among the menu of options, what is the best for our shareholders? But we will continue to look at all those things.

Operator: Thanks, everybody. You're welcome.

David Pipkin Feaster: Terrific. Thanks, everybody. You're welcome. Thank you.

Operator: Thank you.

Speaker Change: Terrific. Thanks everybody. You're welcome. Thank you.

Timothy Coffey: Next, we have a question from Tim Coffee with Jenny.

Operator: Next, we have a question from Tim Coffey with Jannie.

Speaker Change: Next we have a question from Tim Coffey with Jannie.

Timothy Coffey: All right. Morning, Tim. Good morning, Jim. How are you? I'm good. Thanks.

Timothy Norton Coffey: All right. Morning.

Tani Girton: and Tani Girton.

Timothy Norton Coffey: Good morning, Tim. How are you? I'm good.

Timothy Norton Coffey: Morning, Tim. Good morning, Tim. How are you? I'm good, thanks. Can you give us an idea of kind of the change in value of this property in San Francisco? Would you be able to share what the LTV was at origination and what it is now?

Timothy Coffey: Can you give us an idea of the kind of change in value of this property in San Francisco? Would you be able to share what the LCD was that origination and what is it now? The I don't remember way back at origination, but the appraise value was 33 and a half million back when we probably funded the last increase to that a number of years ago, so you can do that math 33 down to 10. What was the last one? The last appraisal. The last appraisal, yeah, was about 33 and a half million, and that was no, the newest one.

Timothy Norton Coffey: Thanks. Can you give us an idea of the kind of change in value of this property in San Francisco? Would you be able to share what the LTD was at origination and what it is now? I don't remember how much it was at origination, but the appraised value was 33 and a half million back when we probably funded the last increase to that a number of years ago. So you can do the math, 33.

Speaker Change: I don't remember way back at origination, but the appraised value was $33.5 million back when we probably funded the last increase to that a number of years ago. So you can do that math, $33 down to...

Misako Stewart: The last appraisal was about $33.5 million, and that was the newest one; it's about $9.2 million. So it's a substantial decline.

Speaker Change: 10? What was the last one, Misako?

Misako Stewart: The last appraisal. The last appraisal, yeah, was about $33.5 million, and that was... No, the newest one. The newest one? Oh, yeah, it's a little... it's about $9 million, $9.2.

Timothy Myers: The newest one. Oh, yeah, it's it's a little bit. It's about 9 million, 9.2. So not exactly the trajectory and investor wants, but that is. Yeah, it got hit harder. Again, because of, for us, it's idiosyncratic nature being a tall office building in the financial district. Right. I'm sure.

Timothy Norton Coffey: Not exactly the trajectory an investor wants, but that is a... Yeah, it got hit harder again because, for us, its idiosyncratic nature being a tall office building in the financial district.

Speaker Change: So, not exactly the trajectory an investor wants, but that is a...

Speaker Change: Yeah, it got hit harder again because of, for us, its idiosyncratic nature being a tall office building in the financial district.

Timothy D. Myers: Right, I understand. And given that you have the cash collateral to see this loan to maturity, do you anticipate doing additional appraisals? And if so, what would need to happen for an additional appraisal to happen?

Timothy Myers: And given that you have the cash collateral to see this loan to maturity, do you anticipate doing additional appraisals? And if so, you know, what would need to happen for an additional appraisal that happened? And our practice is to do one every year on our substandard classified loans, and that frequency may increase depending on what's happening in the market. But yeah, the plan is to continue to do one annually. Okay. And even when we don't, we do get the data points from our portfolio stress test around cap rates, and, you know, we stress the entire investor portfolio that way.

Speaker Change: Right, I understand. And given that you have the cash collateral to see this loan to maturity, do you anticipate doing additional appraisals? And if so, what would need to happen for additional appraisal to happen?

Misako Stewart: Our practice is to do one every year on our substandard classified loans, and that frequency may increase depending on what's happening in the market, but yeah, the plan is to continue to do one annually.

Speaker Change: Our practice is to do one every year on our substandard classified loans, and that frequency may increase depending on what's happening in the market, but yeah, the plan is to continue to do one annually.

Timothy D. Myers: And even when we don't, we do get the data points from our portfolio stress test around cap rates. And, you know, we stress the entire investor portfolio that way. So, you know, we're constantly getting, and so we knew there was going to be someone on a downward trend. And this one, as you and I talked about, but the extent sort of surprised us. But at the same time, we felt it was better to just say, I mean, this could improve a lot. Right? This is an example of today's appraisal with the leasing activity. He's seeing some of the trends for those kinds of spaces in San Francisco.

Speaker Change: Okay.

Speaker Change: And even when we don't, we do get the data points from our portfolio stress test around cap rates and, you know, we stress the entire investor portfolio that way. So, you know, we're constantly getting

Timothy Myers: So, you know, we're constantly getting. And so we knew there was going to be someone downward trend in this one, as you and I talked about, but the extent sort of surprised us. But at the same time, we felt it better to just, I mean, this could improve a lot, right? This is an as is today's appraisal with the leasing activity. He's seeing some of the trends for those kind of spaces in San Francisco. This could actually improve quite a bit, so we are ripping the bandaid off and provisioning today for what might happen two years out, but we thought it was prudent to do.

Speaker Change: And so we knew there was going to be some downward trend in this one, as you and I talked about, but the extent sort of surprised us.

Speaker Change: But at the same time,

Speaker Change #100: We felt it better to just, I mean, this could improve a lot, right? This is an as is today's appraisal with the leasing activity he's seeing, some of the trends for those kind of spaces in San Francisco. Thank you. Thank you.

Timothy D. Myers: This could actually improve quite a bit. So we are ripping the bandaid off and provisioning today for what might happen two years out. But we thought it was prudent to do so.

Speaker Change #100: This could actually improve quite a bit, so we are ripping the Band-Aid off and provisioning today for what might happen two years out, but we thought it was prudent to do so.

Timothy Coffey: So, as you know, I spoke about this. This is the outlier in the portfolio for sure. Okay, those are my questions. Thank you very much.

Timothy Norton Coffey: Yeah, as you and I have spoken about, this is an outlier in the portfolio, for sure.

Speaker Change #101: Yeah, as you and I have spoken about, this is the outlier in the portfolio, for sure.

Timothy Norton Coffey: Okay, those are my questions. Thank you very much. Yeah, thanks, Tim.

Timothy Coffey: Yeah, thanks, Tim. Thank you.

Speaker Change #101: Okay, those are my questions. Thank you very much. Yeah, thanks, Tim.

Operator: Thank you. That was our final raised hand here. I will now pass it back to Tim Myers. Okay.

Timothy Myers: That was our final raise hand here. I will now pass it back to Ken Myers.

Speaker Change #105: Thank you. That was our final raised hand here. I will now pass it back to Tim Myers.

Timothy D. Myers: Okay, we had one question online. What is the coupon yield on the residential mortgage portfolio purchase? And what was the purchase at a premium to par? So we paid just over par, a very small premium, two cents a penny. The mortgage coupon was $7.16, and our yield was $6.91, about. I hope that answers the question about who is a member. And we have one more question.

Operator: Okay. We had one question online. What is the coupon yield on the residential mortgage portfolio purchase? What was the purchase at a premium to par? So we paid just over par. There are very small premium two cents over two-cent premium. The mortgage coupon was $7.16 and our yield is $6.91 about those are. Yeah.

Speaker Change #103: Okay, we had one question online. What is the coupon yield on the residential mortgage portfolio purchased?

Speaker Change #102: and what was the purchase at a premium to par? So we paid just over par, a very small premium, two cents over premium, two cent premium. The mortgage coupon was 7.16.

Speaker Change #102: And our yield is $6.91, about, those are, yeah.

Operator: I hope that answers the question to who member asked.

Speaker Change #101: Yep.

Operator: And we have one more question. Someone was asking for an update on the cumulative deposit and loan data percentages. So, this cycle, our deposit data cumulatively has been 26% on total deposits. We have added a lag on our deposit data in falling interest rate environments in our models for conservatism. And the loan status are slower, but they usually catch up in the longer term. So, if you look at our net interest income or interest rate risk, reliability sensitive in the short term, but that kind of evens out as you get into the out years, and the average life on that portfolio is about four years.

Speaker Change #101: I hope that answers the question to whomever asked.

Timothy D. Myers: Someone was asking for an update on the cumulative deposit and loan beta percentages. So this cycle, our deposit beta cumulatively has been 26 percent for total deposits. We have added a lag on our deposit beta in falling interest rate environments in our models for conservatism, and the loan betas are slower, but they usually catch up in the longer term. So if you look at our net interest income or interest rate risk, we're liability sensitive in the short term, but that kind of evens out as you get into the later years. And the average life of that portfolio is about four years.

Speaker Change #101: And we have one more question.

Speaker Change #104: Someone was asking for an update on the cumulative deposit and loan data percentages.

Speaker Change #104: So, this cycle, our deposit data cumulatively has been 26% on total deposits. We have added a lag.

Speaker Change #104: on our deposit data in falling interest rate environments in our models for conservatism.

Speaker Change #104: And the loan betas are slower, but they usually catch up in the longer term. So if you look at our net interest income or interest rate risk,

Speaker Change #104: We're liability sensitive in the short term but that kind of evens out as you get into the out years and the average life on that portfolio is about four years.

Operator: We have no further questions online. So, with that, thank you everyone for your interest. Thanks for the great questions, and we will see you next quarter. Thank you.

Timothy D. Myers: We have no further questions online. So, with that, thank you everyone for your interest. Thanks for the great questions. And we will see you next quarter.

Speaker Change #106: We have no further questions online. So with that, thank you everyone for your interest. Thanks for the great questions and we will see you next quarter. Thank you.

Operator: Thank you. Thank you.