Q2 2025 Bank of Marin Bancorp Earnings Call
Operator: Thank you for joining Bank of Marin Bancorp's earnings call for the second quarter and the June 30, 2025.
Krissy Meyer: I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. During the presentation, all participants will be in a listen-only mode.
Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the second quarter ended June 30, 2025. I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp.
Operator: After the call, we will conduct a question-and-answer session.
Krissy Meyer: Joining us on the call today are Bank of Marin President and CEO Tim Myers and Chief Financial Officer Dave Bonaccorso. Our earnings news release and supplementary presentation, which were issued this morning, can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay.
During the presentation, all participants will be in listen-only mode. After the call, we will conduct a question-and-answer session.
Joining us on the call today are Bank of Marin President and CEO Tim Myers and Chief Financial Officer Dave Bonaccorso.
Our earnings news release and supplementary presentation, which were issued this morning, can be found in the investor relations section of our website at bankofm.com, where this call is also being webcast.
Krissy Meyer: Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the Reconciliation Table in our Earnings News Release for both GAAP and non-GAAP measures.
Closed captioning is available during the live webcast, as well as on the webcast replay.
Before we get started, I want to note that we will be discussing some non-GAAP financial measures.
Krissy Meyer: Additionally, the discussion on the call is based on information we know as of Friday, July 25, 2025, and may contain forward-looking statements that involve risks and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion on these risks and uncertainties, please review the forward-looking statements disclosure in our earnings news release, as well as our SEC filings.
Please refer to the reconciliation table and our earnings news release for both GAAP and non-GAAP measures.
Additionally, the discussion on the call is based on information we know as of Friday, July 25, 2025, and may contain forward-looking statements that involve risks and uncertainties.
Actual results may differ materially from those set forth in such statements.
Krissy Meyer: Following our prepared remarks, Tim, Dave, and our Chief Credit Officer, Misako Stewart, will be available to answer your questions.
For a discussion on these risks and uncertainties, please review the forward-looking statements disclosure, our earnings news release, and our SEC filings.
Timothy Myers: And now, I'd like to turn the call over to Tim Myers.
Timothy Myers: Thank you, Krissy.
Timothy Myers: Good morning, everyone, and welcome to our quarterly earnings call.
Following our prepared remarks, Tim Myers, our Chief Executive Officer, and our Chief Credit Officer, Misako Stewart, will be available to answer your questions. Now, I would like to turn the call over to Tim Myers.
Timothy Myers: We executed well in the second quarter and saw positive trends in a number of key areas, including continued expansion in our net interest margin, effective expense management, and stable asset quality. Our pre-tax, pre-provision net income increased 15% compared to the prior quarter and 85% compared to the prior year-to-date.
Thank you, Christie. Good morning, everyone, and welcome to our quarterly earnings call.
We executed well in the second quarter and saw positive trends in a number of key areas, including continued expansion in our net interest margin, effective expense management, and stable asset quality.
Timothy Myers: Our improving financial performance and continued benefits from prudent balance sheet management resulted in increases in both book value and tangible book value per share growth in Q2.
Our pre-tax pre-provision net income increased 15% compared to the prior quarter and 85% compared to the prior year to date.
Timothy Myers: And as we announced in early July, our second quarter securities repositioning is expected to add 13 basis points of net interest margin lift and 20 cents of annual earnings per share lift with the vast majority of those benefits beginning in the third quarter.
Our improving financial performance and continued benefits from prudent balance sheet management resulted in increases in both book value and tangible book value per share. Growth in Q2.
Timothy Myers: Our banking team, reinforced with continued additions we are making and the positive impact of the hires we have made over the past couple of years, continues to do a more consistent job of developing attractive lending opportunities and generating new relationships to the bank.
And as we announced in early July our second quarter, Security's repositioning is expected to add 13 basis points of net interest margin lift and $0.20 of annual earnings per share lift, with the vast majority of those benefits beginning in the third quarter.
Timothy Myers: We are excited to add new leaders to our banking teams and are optimistic that they will contribute to our future growth and key markets. We are seeing a very competitive market environment, but we are maintaining our discipline, underwriting and pricing criteria. During the quarter, the total loan originations were $68.8 million of commitments, including $50.2 million in fundings, which was relatively consistent with the level we had in the prior quarter. Our originations were a nicely diversified and granular mix across commercial banking categories, industries, and property types. While we are more consistently funding new loans, we continue to see payoffs and paydowns due to asset sales and cash deleveraging, as well as elevated payoffs in our acquired residential mortgage portfolio.
Our banking team reinforced the continued additions we are making and the positive impact of the higher levels we have achieved over the past couple of years. This continues to do a more consistent job of developing attractive lending opportunities and generating new relationships for the bank.
We are excited to add new leaders to our banking teams, and we are optimistic that they will contribute to our future growth in SEA markets.
We are seeing a very competitive market environment where we are maintaining our discipline in underwriting and pricing criteria.
Which was relatively consistent with the level we had in the prior quarter.
Our originations were nicely diversified and granular, with a mix across commercial banking categories, industries, and property types.
Timothy Myers: Our total deposits declined in the second quarter, which was primarily due to normal client activity, including business expenses, payroll and distributions, asset purchases, and seasonal outflows for taxpayers. However, with our continued success in adding new deposit relationships, total deposits have grown year-to-date, and we expect to see the typical seasonal inflows of deposits during the second half of the year. Thus far in July, we've recouped more than 70% of the deposit outflows that occurred in the second quarter. The rate environment remains competitive and clients remain rate sensitive, however, we are seeing limited attrition of deposits due to rates.
While we are more consistently funding new loans, we continue to see payoffs and pay downs due to asset sales and cash flow leveraging, as well as elevated payoffs in our acquired Residential Mortgage portfolio.
Our total deposits declined in the second quarter, primarily due to normal client activity, including business expenses, payroll distributions, asset purchases, and seasonal outflows for tax payments. However, with our continued success and the addition of new deposit relationships, total deposits have grown year-to-date, and we expect to see the typical seasonal inflows of deposits during the second half of the year.
Thus far in July, we recouped more than 70% of the deposit outflows that occurred in the second quarter.
Timothy Myers: Our customers continue to bank with us for our service levels, accessibility, and commitment to our communities, and not entirely based on price. As a result, we continue to be able to reduce our deposit costs, which help drive further expansion in our net interest margin in the second quarter, and similar to actions taken early in the second quarter, last week we completed additional targeted deposit rate cuts.
The rate environment remains competitive, and clients remain rate sensitive. However, we are seeing limited attrition of deposits due to rate.
Our customers continue to bank with us for our service levels, accessibility, and commitment to our communities, and not entirely based on pricing.
Timothy Myers: Given our solid financial performance and prudent balance sheet management, our capital ratios remain very strong, with a total risk-based capital ratio of 16.25% and a TCE ratio of 9.95%. Given our high level of capital, during the quarter we repurchased $2.2 million of shares within the limited window we had for repurchases.
As a result, we continue to be able to reduce our deposit costs, which helped drive further expansion in our net interest margin in the second quarter. Similar to the actions taken early in the second quarter, last week we completed additional targeted deposit rate cuts.
Given our solid financial performance and prudent balance sheet management, our capital ratios remain very strong, with a total risk-based capital ratio of 16.25% and a TCE ratio of 9.95%.
Dave Bonaccorso: With that, I'll turn the call over to Dave Bonaccorso to discuss our financial results in more detail. Thanks, Tim.
Give our high level of capital during the quarter. We repurchased $2.2 million of shares within the limited window we had for repurchases.
Dave Bonaccorso: Good morning, everyone. Our results this quarter were impacted by the additional securities repositioning that we executed at the end of the quarter and the resulting loss that we incurred on the sale of the securities. We had a net loss of $6.5 million in the second quarter, or $0.53 per share. However, excluding the loss in the security sales and the related tax impact based on our Q2 effective tax rate, our net income and EPS each grew by 18% compared to the prior quarter. Our net interest income increased from the prior quarter to $25.9 million, primarily due to a higher balance of average earning assets and a seven basis point increase in our net interest margin.
With that, I'll turn the call over to Dave Bonaccorso of Corsa to discuss our financial results in more detail.
Thanks, Tim. Good morning, everyone.
Our results this quarter were impacted by the additional securities repositioning that we executed at the end of the quarter and the resulting loss that we incurred on the sales of the securities. We had a net loss of $6.5 million in the second quarter or 53 cents per share.
However, excluding the loss in the security sales and the related tax impact based on our Q2 effective tax rate, our net income and EPS each grew by 18% compared to the prior quarter.
Dave Bonaccorso: The expansion in our net interest margin was attributable to a one-basis point decrease in our cost of deposits, while our average yield on interest-earning assets increased six basis points from the prior quarter. Our average yield on loans increased seven basis points from the prior quarter as the average rate on new loan production was higher than the average rate of the loans that paid off during the quarter. We also continue to see an increase in the average yield on a securities portfolio, which was bolstered by the securities repositioning that occurred in June. Our non-interest expense was slightly up from the prior quarter due to expected costs of technology and branch upgrades, annual events, and regulatory agency fees.
Our net interest income increased from the prior quarter to $25.9 million, primarily due to a higher balance of average earning assets and a 7 basis point increase in our net interest margin.
The expansion in our net interest margin was attributable to a 1 basis point decrease in our cost of deposits. While our average yield on interest-earning assets increased 6 basis points from the prior quarter.
Our average yield on loans increased 7 basis points from the prior quarter, as the average rate on new loan production was higher than the average rate of a loan that paid off during a quarter.
We also continue to see an increase in the average yield on our security portfolio, which was bolstered by the securities repositioning that occurred in June.
Dave Bonaccorso: Over the remainder of the year, we expect that our non-interest expense will be similar to the first half of 2025. Moving to non-interest income, it was negative this quarter due to the loss we incurred on the securities portfolio repositioning. aside from this one-time non-recurring item. Most other areas of non-interest income were relatively consistent with the prior quarter.
Our non-interest expense was slightly up from the prior quarter due to expected costs of technology and branch upgrades, annual events, and regulatory agency fees.
Over the remainder of the year, we expect that our non-interest expense will be similar to the first half of 2025.
Moving to non-interest income, it was negative this quarter due to the loss we incurred on the securities portfolio repositioning.
Aside from this one-time non-recurring items.
Dave Bonaccorso: Disciplined credit management remains a hallmark of Bank of Marin as well. Due to the stability in our loan portfolio and the high level of reserves we have already built, we do not require any provision for credit losses in the second quarter. Overall trends in our level of problem assets reflect our proactive and conservative approach to credit management, where we are aggressive to downgrade and cautious to upgrade. The allowance for credit losses remained at 1.44% of total loans.
Most of the areas in non-interest income were relatively consistent with the prior quarter.
Discipline in credit management remains a hallmark of Bank of Marin, as well.
Due to the stability in our loan portfolio and the high level of reserves we have already built, we did not require any provision for credit losses in the second quarter.
Overall trends in our level of problem assets reflect our proactive and conservative approach to credit management, where we are aggressive to downgrade and cautious to upgrade.
Dave Bonaccorso: So far in July, we are seeing indications that there will be additional loan upgrades during the third quarter.
The allowance for credit losses remained at 1.44% of total loans.
Dave Bonaccorso: Given the continued strength of our capital ratios, our board of directors declared a cash dividend of 25 cents per share on July 24th, the 81st consecutive quarterly dividend paid by the company.
So far in July, we are seeing indications that there will be additional loan upgrades during the third quarter.
Timothy Myers: With that, I'll turn it back over to you, Tim, to share some final comments.
Given the continued strength of our capital ratios, our board of directors declared a cash dividend of $0.25 per share on July 24th. This marks the 81st consecutive quarterly dividend paid by the company.
Timothy Myers: Thank you, Dave. In closing, we believe we are very well positioned to continue generating solid financial performance in 2025, as we expect to continue to see positive trends in our net interest margin and revenue. Given the strength of our balance sheet and the high levels of capital that we have, we were able to execute on another securities portfolio repositioning at the end of the second quarter that will be accreted to earnings and result in further expansion of our net interest margin. While broadly there is economic uncertainty, we are not seeing this adversely impact our clients and loan demand remains healthy.
With that, I'll turn it back over to you. Tim to share some final comments.
Thank you, Dave.
In closing, we believe we are very well positioned to continue generating solid financial performance in 2025, as we expect to see continued positive trends in our net interest margin and revenue.
Timothy Myers: Our loan pipeline remains strong and we are continuing to see solid loan production thus far in July. As such, we expect to see loan growth during the second half of the year.
That will lead to creative earnings and result in further expansion of our net interest margin.
While broadly there is economic uncertainty, we are not seeing this adversely impact our clients, and loan demand remains healthy.
A loan pipeline remains strong, and we are continuing to see solid loan production thus far in July.
Timothy Myers: While we always tightly manage expenses, we will also continue to take advantage of opportunities to add banking talent and enhance efficiency through technology that we believe will help support the continued profitable growth of our franchise. Given the positive trends we expect to see in loan growth, net interest margin, and expense management, we expect to generate improved financial performance over the remainder of the year. With the strength of our balance sheet, we believe we are very well positioned to increase our market share, add attractive new client relationships, generate profitable growth, and further enhance the value of our franchise in 2025 and the coming years.
As such, we expect to see loan growth during the second half of the year.
While we always tightly manage expenses, we will also continue to take advantage of opportunities to add banking talent and enhance efficiency through technology that we believe will help support the continued profitable growth of our franchise.
Given the positive Trends. We expect to see in loan growth, net interest margin and expense management. We expected generate improved financial performance over the remainder of the year.
Timothy Myers: With that, I want to thank everyone on today's call for your interest and your support.
With the strength of our balance sheet, we believe we are very well positioned to increase our market share, attract new client relationships, and generate profitable growth. Furthermore, we aim to enhance the value of our franchise in 2025 and in the coming years.
Operator: We will now open the call to questions. If you would like to ask a question, please click on the raise hand button at the bottom of your screen. Once prompted, please unmute your line and ask your question.
With that, I want to thank everyone on today's call for your interest and support. We will now open the call to questions.
If you would like to ask a question, please click on the raise hand button at the bottom of your screen.
Operator: We will now pause a moment to assemble the Our first question will come from Matthew Clark with Piper Sanders.
Once prompted, please unmute your line and ask your question.
We will now pause a moment to assemble the queue.
Matthew Clark: You may now unmute your audio and ask your question. Hey, good morning. Morning, Matthew.
Our first question will come from Matthew Clark with Piper Sandler.
You may now unmute your audio and ask your question.
Hey, good morning.
Timothy Myers: um This one for me on the two CRE loans that migrated this quarter. Could you just give us some color on the types of CRE loans? Um, and, you know, witcher of that migration. and any plans for resolution there.
morning, Matthew
um,
First 1 for me on the 2 Siri loans that migrated this quarter. Could you just give us some color on the the types of Siri loans
um,
and you know what year of that migration
um, and and
Timothy Myers: Yeah, they're generally retail and or mixed use. They're obviously smaller loans.
any plans for resolution there.
Timothy Myers: They're in, they're not in San Francisco, they're in areas, they were experiencing tenancy or cash flow issues. So we downgraded them, but there is good sponsorship there. And so we, you know, they'll continue to tend it up and we'll There's a number of loans we're working on re-margining because of the support of our guarantors and they're not loans that we're particularly concerned about. Got it.
Yeah, they're generally retail and or mixed use, they're they're obviously smaller loans, they're in, they're not in San Francisco. They're in areas. They were experiencing 10 Tenney or cash flow issues so we downgraded them. But there is good sponsorship there and and so we uh you know they'll continue to ten it up and we'll we'll
there's a number of loans where we're working on REM margining uh because of the support of our guarantors and I they're not loans that were particularly concerned about
Timothy Myers: And then now that you've cleaned up the AFS portfolio, what's your appetite to consider doing something similar in the HTM securities portfolio? Yeah, sure. We've talked about that obviously quite a bit with you all, and it's something we continue to look at. I think we're seeing some more examples in the market, albeit not all apples to apples, but the capital markets seem to be willing to support, and that would be the next mountain to climb there. So it's something we continue to look at, just cautious of the impact on capital and potential dilution to shareholders.
got it.
Um, and then now that you've cleaned up the AFS portfolio. What's your appetite to consider doing something similar in the HTM Securities portfolio.
Sure, we've talked about that obviously quite a bit, uh, with you all, and it's something we continue to look at. I think we're seeing some more examples in the market, uh, albeit, not all Apples to Apples, but uh, the capital markets seem to be willing to support and
Timothy Myers: So we continue to juggle all that with the prospect of unleashing those earnings off the balance. Great.
That would be the next, uh, mountain to climb there. So, it's something we continue to look at just cautious of the impact on uh, capital and potential dilution to shareholders. So we continue to juggle all that uh, with the prospect of unleashing those earnings off the balance sheet.
Timothy Myers: And then last one for me, just on the buyback, kind of renewing or I think you guys renewed it or re-upped it. I just can't recall off the top of my head. I might be confusing you with someone else. But just your appetite on the buyback, how aggressive you might get or continue to be in the market.
Great. And then last 1 for me just on the buyback. Um,
Kind of renewing.
Um, or
or I think you guys are new to it or we update I just can't recall at the time. I might be confusing you with someone else. Um but just your appetite on the buyback. How how aggressive you might
Timothy Myers: Yeah, so you're right. We did just re-up that allocation with the board. The reason, frankly, we had said we would love to buy back shares, we'll attend, we'll book. By the time we went through the exam process and then got approval for the capital plan, the dividend, et cetera, from the regulatory body, that limited our time. given the blackout that we could execute that within.
Uh, get or or continue to be in the market. Yeah, so, you're right, we did just re-up that, uh, allocation, uh, with the board. The, the reason frankly we had said, we would love to buy back shares a little tangible book. Uh, by the time we went through the exam process and then got approval uh for the capital plan, the dividend Etc, from the regulatory body uh that limited our time.
Timothy Myers: Obviously, that's competing use of capital, and so we'll continue to juggle that concept with, as you said, some more securities repositionings and continue to evaluate, but it was very attractive for us to do that below a tangible book. We just ran out of time. Understood. Thanks for the questions.
Given the blackout that we could execute that within, obviously, that's competing use of capital. And so, we'll continue to juggle that concept with, uh, as you as you said, some more Securities repositioning, uh, and continue to evaluate but, uh, it was very attractive for us to do that below tangible book. Uh, we just ran out of time there.
Understood, thanks for the questions.
Operator: Our next question comes from Andrew Terrell with Stevens. Please go ahead. Hey, good morning, morning.
Thank you.
Our next question comes from Andrew Terrell with Stevens.
Please go ahead.
Hey, good morning.
Good morning.
Dave Bonaccorso: Um, maybe just to start, um, probably for Dave, just on the securities restructuring, uh, the AFS book in the, in the second quarter, it looks like the majority of that was kind of already traded and kind of repurchased. Just curious, you know, what the performance was like relative to, I think your assumption was for a 5% reinvestment rate. Um, were you able to do better than that or in line or just how should we, how should we think about that? And I'm assuming the timing was like right at the end of the quarter, but any clarity there would be helpful.
Second quarter. It looks like the the majority of that was kind of already traded and and kind of repurchased just curious you know what the performance was like relative to I think your assumption was for a 5% reinvestment rate.
Dave Bonaccorso: The sales and purchases occurred throughout June, and I believe the final yield on purchases was just a touch over 5%, I believe 502, somewhere around there, but 5 is a pretty good number to work with. Got it. Okay.
Um, were you able to do better than that? Or, or in line or just how should we, how should we think about that? And I was assuming the timing was like right at the end of the quarter but any Clarity there would be helpful.
Sure. That, that, excuse me, the sales and purchases occurred throughout June and, um, the I believe, the final yield on purchases, was just a touch over 5%. I believe, 502, somewhere around there, but 5 is a, is a pretty good number to work with.
Dave Bonaccorso: I think in the prepared remarks, you guys mentioned that I was going to say, that's for the repossession. Sorry, go ahead. They buy other bonds during the quarter, you know, so before that, so. And if you're asking specifically for the repositioning or if you're asking for what we did for the entire quarter, what we did for the entire quarter was a little bit low. on an average basis. The repositioning-related trades, the purchases were just above. Overall, we've understood. Okay, thank you for clarifying.
Got it. Okay, um, I think in the prepared remarks, you guys mentioned that um, but
I was going to say that that's for the 3 did buy other bonds during the quarter, you know? So before that
so,
If you're asking specifically for the for the repositioning, or if you're asking for what we did for the entire quarter, what we did for the entire quarter was a little low on a, on an average basis, the the repositioning related trades, the purchases were just above 5%.
Overall we bought understood. Okay? Thank you for clarifying.
Order.
Dave Bonaccorso: If I could also just ask on the, I think you mentioned in the prepared remarks, maybe some additional deposit rate cuts.
Dave Bonaccorso: More recently, can you elaborate on that a little bit more? I think we're seeing, in most examples, just kind of a falling out of ability to lower deposit rates. Just would love to hear a little bit more about what you guys are doing. Yeah, I don't, I wouldn't qualify that as ability. It's just targeted. So whether you're taking reciprocal class deposits or other buckets, we look at buckets where we can do that and have a manageable impact. And so I think it was about 250-300 million that we did recently, too, in April. So we'll continue to look targeted and selectively where we can do that without too much adverse impact.
Um, if I could also just asked on the, I think you, you mentioned the prepared remarks, maybe some additional deposit rate Cuts. Uh,
More recently. Can you just, you know, elaborate on that a little bit more? I think we're we're seeing um in most examples just kind of a stalling out of ability to to lower deposit rates. Just would love to hear a little bit more about what you guys are doing there.
Yeah, I don't, I wouldn't qualify that as ability. It's just targeted. So whether you're taking, uh, reciprocal type deposits or other buckets, we look at buckets where we can do that and have a manageable impact. And so, I think it was about
Dave Bonaccorso: The most recent piece, I mean, I think, so we did some in early April and some in early July. The early July piece was around 185 million or so. And the weighted average cut of those was about 15 basis points. So that's worth two basis points roughly to interest bearing deposit cost and one basis point to total deposit cost. Small benefits to them, and then along the way, we've been cutting time deposits. As you probably saw, we cut time deposits 31 basis points. But yeah, there's definitely more more ability with Fed moves that were being targeted and how we make smaller modifications away from FedCup.
250 300 million that we did recently too in the in April. So we'll continue to look targeted and selectively where we can do that without too much adverse impact the most recent piece. I mean, I think so we did some some some in early April and some in early July, the early July piece wasn't around 185 million or so, and the way that average cut of those was about 15 basis points, so that's worth 2 basis points, roughly to interest bearing deposit, cost and 1 basis points, total deposit costs, small benefits to them and then through along the way, we've been cutting time deposits as you probably saw. We cut time deposits, 31 basis points in the quarter.
But yeah, there's definitely more more ability. Yep.
with fed moves, but we're being
targeted and how we make smaller modifications away from fed cuts.
Dave Bonaccorso: So some of the reason is never larger overall impact, because we, as we noted in the presentation, continue to bring in a lot of new customers, the preponderance of that, the majority that was interest bearing, that's a slightly higher rate, but we are continue to gather new households, new relationships, and build a more granular portfolio. So it's toggling to have the ability to attract new customers while managing the cost of existing deposits.
Operator: For more information visit www.FEMA.gov Yeah, okay.
So some of the um I appreciate it. That was add the reason we didn't have a larger overall impact is because we as we noted in the the presentation continue to bring in a lot of new customers. Uh the preponderance of that, the majority of that was interest bearing that's where the slightly higher rate, but we are, uh, continue to gather new households new relationships and build a more granular portfolio. So, it's toggling to have the ability to attract new customers while managing the cost of existing deposits.
Dave Bonaccorso: And if I could speak one more and just I mean, it sounds like you're optimistic about, you know, loan growth stepping up a little bit in the second half of the year, it sounded like originations were pretty flat sequentially. But, you know, I'm curious, you know, how you expect to drive positive loan growth in the back half? Is it more from accelerating origination levels? Do you feel like payoffs should subside a bit from here? Just any more color on kind of a net loan growth outlook in the back half? Yeah, so the payoffs for the quarter at or below where we expected them, you know, where we have had the higher degree of payoffs than forecast was on the acquired mortgage portfolio has been considerably higher, but the commercial was less than we forecast.
Yep. Okay. Um, and if I could speak 1 more in, just, I mean, it sounds like you're optimistic about, you know, loan growth stepping up a little bit in the second half of the year. It sounded like originations were
Pretty flat sequentially. But, um, you know, I'm, I'm curious. You know, how you expect to to drive positive loan growth in the back half, is it more from accelerating? Uh, origination levels? Do you feel like payoffs should subside a bit from here? Just any more color on? Kind of the the kind of net loan growth Outlook in the back half.
Dave Bonaccorso: We do have a couple of key hires coming in, some new market leaders, and that have joined the bank. And so, yes, the pipeline, despite the loans are closed, is slightly higher than it was the prior quarter, and we've actually had some deals push out in the July and have had a good amount of closings going into August. So, you know, timing is everything with that stuff in a commercial relationship, so I can't guarantee the amount, you know, the volume within a quarter, but all those things continue to move in the right direction.
Yeah. So the payoffs for the quarter at or below where we uh expected them, you know, where we have had the higher degree of payoffs and then forecast was on the acquired mortgage portfolio that's been considerably higher, uh but the commercial was less than we forecast. Uh, we do have a couple key hires coming in New Market leaders and that have joined the bank. And so yes, the pipeline despite the loans are closed uh is slightly higher than it was the prior quarter. And uh, we've actually had some deals push out in the July and have had a good amount of closings going into August. So, you know, timing is everything with that stuff and the commercial relationship. So I can't guarantee the amount, you know, the volume within a quarter. But all those things continue to move in the right direction.
Operator: Awesome.
Operator: Okay.
Operator: Thank you for taking the questions.
Awesome. Um okay. Thank you for taking the questions. Thank you.
Jeff Rulis: Our next question comes from Jeff Rulis with D.A. Davidson & Co. Please go ahead. Great. Thanks. Good morning.
Da Davidson and Co please go ahead.
Timothy Myers: Maybe just to clarify, Tim, on the growth front, your loan's pretty flat year to date. And we know there's a lot of churn.
Great. Uh, thanks. Good morning. Um,
Timothy Myers: It sounds like you're optimistic, but on a net, are you saying you anticipate net growth in the second half or is it, hey, we feel good about originations, payoffs could. negate that and we're we're flat through the end of the year. I just want to kind of gauge where you are on a net based. by your end, what were your expectations? Yeah, we are still targeting net growth, Jeff. And we feel like we have the pipeline and the activity to justify that plan.
Timothy Myers: It is hard to, I don't mean to sound like I'm hedging, it is hard to answer that question of how the net, we had told everybody about mid-single-digit growth for the year. Can I double that for the second half of the year and target that mid-single-digit? That's our goal, but obviously that becomes harder as you get later in the year. But we are targeting an acceleration of fundings and have net growth for the year.
Maybe just to clarify, uh, Tim on the, on the growth front. Um, you know, loans pretty flat year to date, and we know there's a lot of Churn. It sounds like you're optimistic, but on a net. Are you saying you anticipate net growth in the second half? Where is it? Hey, we we feel good about. Originations payoffs could negate that. And we're, we're flat through the end of the year. Just wanted to kind of gauge where you are on a net basis, uh, by year end but we were expectation. Yeah, we are still targeting that growth Jeff. Um, and we feel like we have the pipeline and the, the activity to justify that uh, that plan
It is hard to, I don't mean to sound like I'm hedging. It is hard to answer that question of how the net we had told everybody about mid single digit growth for the year. You know, can I double that for the second half of the year and the Target Target that mid single digit?
That's our that's our goal but obviously that becomes harder as you get later in the year but we are targeting and acceleration of fundings uh and have net growth for the year.
Dave Bonaccorso: Okay, thank you. And Dave, on the margin, look at a nice pickup of this restructuring kind of pulls you up. I guess we just point the point we're closer to 305 margin. He had seven basis points of lift this last quarter with targeted rate cuts. Sounds like the core, you know, absent the restructure. is on the way up.
Okay. Thank you. Um, and Dave on the margin. Um, look at a nice pickup of this restructuring, kind of pulled you up. Uh, I guess if we just point the point we're closer to 305 margin.
You had 7 basis points of, of, of lift. This last quarter with targeted rate, cut sounds like the core, you know, absent, the restructure.
Dave Bonaccorso: If you could kind of... maybe bake in the restructuring benefit and talk about maybe the second half of what you think total reported margin. Sounds like an upward trend above the restructuring benefit. Uh, correct.
is is is on the way up, if you could kind of, maybe bake in the restructuring benefit and and
Kind of talk about maybe the second half of what you think, total, reported margin. Um, sounds like an upward Trend above the um,
Restructuring benefit.
Dave Bonaccorso: So, um, maybe I can cover some of the drivers. You know, so on the loan side, you know, the usual statistic we share is that point-to-point monthly loan yield benefit over the course of a year. We think we have about 20 to 25 basis points of natural loan repricing yield over the next 12 months, uh, getting out to June 26. We had about six or seven basis points of loan yield increases most recently. So, you know, that tracks well with the estimate I just gave. Obviously, you have upside if you had loan growth and, um, and higher intermediate term rates, let's say, for variable rate loans.
Dave Bonaccorso: You know, headwinds could potentially be lower short-term rates. Things like prepayment changes and non-accrual positives or negatives are wild cards there. But, you know, overall, still a very good trend on the loan side. And, you know, the yield on funded loans this quarter was 72 basis points higher than prior quarter. So, again, good trends there.
Correct. So um maybe I can I can cover some of the drivers you know? So on the loan side, you know, the usual statistic. We we share is that point-to-point monthly loan. Yield benefit over the course of a year. We think we have about 20 to 25 basis points of natural loan re-pricing. Yield over the next 12 months. Uh, getting out to June 26th, we had about 6 or 7 basis, points of loan, yield increases most recently. So, you know, that that tracks well with the estimate, I just gave obviously, you have upside, if you had long growth and um, and and higher intermediate term rates, let's say for variable rate loans, you know, headwinds could potentially be lower short-term rates.
Dave Bonaccorso: I think we've mostly covered what's available on the security side with the repositioning, adding the 13 basis points. primarily beginning. I think there's just a touch of impact in June, just given when we did those trades. But the bulk of those benefits really occur in Q3.
Things like prepayment changes and non-accrual positives or negatives are wild cards there. But you know oh overall still a a very good trend on the loan side. And um you know the the yield on funded loans. This quarter was 72 basis points higher than than prior quarter. So, uh, again, good Trends there, I think we've mostly covered what's, what's available on the security side? With the the repositioning adding the the 13 basis points.
primarily beginning, I think there's, there's a just a touch uh, uh,
Dave Bonaccorso: And then on deposits, you know, We continue to do targeted things. We continue to reprice time deposits down. And then the question is, what do we get from the Fed that would allow us to do bigger things on deposits? But overall, there's there's still plenty of opportunity to remix assets and, again, have the demonstrated ability to lower deposit. Got it. I mean, that sounds like pretty good visibility on the loan side. I mean, we'll wait to see what the U curve gives us. But I mean, a margin closer to three and a half well in the next year.
Of of impact in June just given when we did those trades, but uh, the bulk of those benefits really occur in Q3. And then on, on deposits, you know,
We continue to do targeted, things we continue to to re-priced time deposits down. And then the question is, what do we what do we get from the FED that would allow us to do bigger things on the deposit side. But overall, there's there's still plenty of opportunity to remix assets and um again have the demonstrated ability to to to lower deposit rates.
Got it. I mean, that sounds like pretty good visibility on the loan side. I mean, we we'll wait to see what the U curve uh, gives us. But I mean a a, a margin
Dave Bonaccorso: Is that you know as you guys talk in-house is that a realistic goal or just trying to gauge This sounds like a long runway of benefit, absent any other further restructuring. Yeah, so I think loan growth would be a question there, you know, what do we get there that would would help us? And I'd say three and a half is probably more a back half of 26 number than a front half of 2020. Fair enough. Got it.
Kind of closer to 3 and a half. Uh, well, in the next year, um, is that, you know, as you guys talk in house is that a
Realistic, uh, goal or uh, just trying to gauge.
It sounds like a a a long Runway of of benefit um absent any other further restructuring efforts.
Yeah, so I think loan growth would be a, a, a question there. You know, what do we get there? That would would help us. Uh, and I'd say, 3 and a half is probably more of back. Half of 26, number than a, you know, front half of 26 number,
Dave Bonaccorso: And one last one for you, Dave. You did mention the credit upgrades anticipated or into the third quarter. Any kind of segment detail on where you're seeing some of those upgrades? It's really all over the place. There's some, you know, substandard or nonaccrual C&I real estate where we're getting re-margining. Yeah, I don't want to jinx it and or, you know, give away too much information, but refinancing some of these problematic credits out. So we've made a lot of progress. I wish the timing had worked so we could share that with you. But we feel optimistic that a considerable portion of substandard, some nonaccrual and special mentions will get upgraded in the near future.
Fair enough. Got it, then 1 last 1 for you. Dave, you did mention the credit upgrades, um, um, anticipated or, or, uh, in in the third quarter is, uh, any kind of segment detail on on where you're seeing some, some of those upgrades
Timothy Myers: Tim, are those sizable? Any, I mean, I hate to, you don't want to spill all of it, but any of the larger credits that you're seeing, or are these sort of on the edges, granular stuff? No, there's some meaningful amounts in there. If you're talking specifically about our largest loan that we've talked so much about, that's still a work in progress. We are seeing progress on the market. You know, we just did a new appraisal, and over the last year, the value of that went up 23%. Now it went down a lot, so we have more room to make up.
Information, but uh, refinancing uh, some of these problematic credits out. So we've made a lot of progress. I wish the timing had worked so we could share that with you. But we feel optimistic that a considerable portion of substandard. Uh some non-accrual and special mentions will get upgraded in the near future.
Kim are those sizable? Uh, any I mean I hate to you. Um, don't want to spill all of it, but any of the larger credits that you're seeing, or these sort of on the on the edges granular stuff.
Timothy Myers: The office space in that building is now, in San Francisco, almost 100% leased, but the retail portion of that is problematic, and I think that's reflective of what we're seeing in San Francisco overall. We are seeing leasing activity pick up, but at certainly lower rates, and that's where you go to our guarantors, our sponsorship, and re-margining at the right amount. So, no, some of the loans that we're talking about are some of the bigger ones we've had conversations with you all about, so we're optimistic. You know, it's not over till that all happens, but we've made a lot of progress.
There's some there's some meaningful amounts in there. Uh, if you're talking specifically about our largest, uh, loan that we've talked so much about, uh, you know, that's still a work in progress. We are seeing seeing progress in the market. You know, we just did a new appraisal and uh, over the last year, the value of that went up 23%. Now, it went down a lot. So we have more room to to make up the office. Uh, space in that building is now uh, in San Francisco, Almost 100% least, but the retail portion of that is problematic and I think that's reflective of what we're seeing in San Francisco. Overall. We are seeing leasing activity, pick up, uh, but at certainly lower rates and that's where you go back to our guarantors, our sponsorship and remarketing at the right amount. So know some of the loans that we're talking about are some of the bigger ones. We've, we've had conversations with you all about, so we're, we're optimistic.
Uh, you know, it's not over till that all happens, but we've made a lot of progress.
Operator: Appreciate the detail.
Operator: Thanks.
Appreciate the detail. Thanks, you're welcome.
Operator: As a reminder, if you would like to ask a question, please click on the raise hand button at the bottom of your screen. Once prompted, please unmute your line and ask your question.
Timothy Coffey: Our next question comes from Tim Coffey at Johnny Montgomery.
Have a reminder if you would like to ask a question, please. Click on the raise hand button at the bottom of your screen. Once prompted, please unmute your line and ask your question.
Timothy Coffey: Please unmute your line and ask your Great. Thank you. Morning, gentlemen. Morning, Ted.
Our next question comes from, Tim coffee at Johnny. Montgomery, Scott, please unmute your line, and ask your question.
Timothy Myers: Hey, can you talk a little bit more about the hires that you made? I think you mentioned that one of them or a couple of them were market leaders. Yes. We've got.
Great. Thank you. Good morning, gentlemen, morning 7.
Yes. Hey, can you talk a little bit more about the hires that you made? I think you mentioned that 1 of them or a couple of them were Market leaders.
Yes. Um,
Timothy Myers: I'd rather speak more about it next time because some of this is still, you know, in the process of being announced in various places, but we have a new manager in San Francisco. We continue to hire in the Sacramento market. That's making a meaningful difference in the activity out there. If you look at where the bulk of activity is coming, actually, Sacramento is a market, probably our most active market. Some of those loans are done in other commercial banking groups where they have those relationships, but with those hires, again, just like the activity we've seen year to date, you know, for our top five producers are new, brand new or reasonably new to the bank, we're seeing that play out in the Sacramento market as well.
We've got.
Timothy Myers: And so, they're splattered throughout kind of the footprint, but they are making a difference when you look at our staff.
I'd rather speak more about it next time because some of this is still eating on the process of being announced various places. But we have a new manager in San Francisco, we continue to hire in the Sacramento Market, that's making a meaningful difference in the activity out there. Uh, if you look at where the bulk of activities coming, I actually Sacramento is a market, probably our most active Market. You some of those loans were done in other, uh, Commercial Banking groups, where they have those relationships. Uh, but with those hires again, just like the activity we've seen here today, you know, for our top 5, producers our, our new brand new or reasonably new to the bank. We're seeing that play out in the Sacramento Market as well. And so,
Timothy Myers: Okay, that's great color. Appreciate that.
Uh, there there's splattered throughout uh kind of the footprint, but they are making a difference when you look at our staff rankings.
Timothy Myers: And how does this, you know, kind of translate to kind of the expense outlook? Because I think if I look at last year core expenses first half of the year, about where they are now, before trailing off in the second half of the year, it doesn't seem like that's going to happen this time. Am I reading that correctly?
Dave Bonaccorso: You know, I'll let Dave talk about the expenses. But in terms of the hiring, that's either already reflected in here or there's some replacement offsets. And so, you know, there might be some modest you know net difference there but I'll let Dave talk about that that run rate overall.
That's a great color, appreciate that. Um, and how does this, you know, that kind of information kind of translate to kind of the expense Outlook? Because I think if I look at last year, core expenses, first, half of the Year about where they are now, before trailing off, in the second half of the year, it doesn't seem like that's going to happen. This time. Am I am I reading that correctly?
you know, I'll let Dave talked about the expenses that in terms of the higher end, that's either already reflected in here, or there's some replacement offsets and so, you know, there might be some modest uh,
Dave Bonaccorso: Sure, so last quarter we talked about a four percent compound annual growth rate of expenses historically for us since 2021 being a good place to start the forecasting. We also talked about the moves in our charitable contributions from Q2 to Q1, excuse me, that played out as as expected. Same with the IT projects we we talked about and and that expense. So the other categories of growth included occupancy. We had some branch upgrades and relocations where the expense was higher in Q2 but there's some cost savings I think coming ahead for that. We also have some one-time or annual events I should say in Q2 that make Q2 higher than Q1 in in that category.
Dave Bonaccorso: So So that's embedded in that thought that the second half is close to the first half.
You know, net difference there, but I'll let Dave talked about that that run rate overall, sure. So last quarter, we talked about a 4% compound, annual growth rate of expenses, historically for us. Since 2021 being a good place to start the forecasting. We also talked about the moves in our charitable contributions from Q2 to q1, uh, excuse me that played out as as expected, uh, same with the IT projects, we we talked about and, uh, and, and that expense. So, uh, the other categories of expense growth included occupancy. We had some Branch upgrades and relocations where, uh, the expense was higher in Q2, but there's some costs, I think it's coming ahead for that. We also had some 1-time annual events I should say in Q2 that, uh, make Q2 higher than q1 in in that category. Uh, so
our, our Outlook really is that, um, they'll be movements within the buckets, but the second half of the year is going to look probably quite a bit like the first half of the Year and that includes some, um, giving some thought to the fact that our, um, our employee vacancy rate is actually lower than usual including uh, and also including some of these new folks that were uh, bringing on or potentially bringing on
thought that the second half is close to the first half the extension was
Timothy Coffey: Okay, that's all great color. I really appreciate the candor.
Operator: I'll step back. Thank you. Yeah, thank you. Thank you.
Okay, that's all great color, I really appreciate. Um, the kandare, I'll step back, thank you. Yeah, thank you. Tim
Operator: We have no further questions at this time.
Timothy Myers: I will hand it back to Tim Myers for closing remarks. Again, thank you everyone for your interest, the excellent questions, and we look forward to talking to you next quarter.
Thank you. We have no further questions at this time. I will hand it back to Tim Meyers for closing remarks.
Again, thank you everyone for your interest, the excellent questions and we look forward to talking to you next quarter.