Bank of Marin Bancorp Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2023

There are 10 speakers on the call.

Operator

Thank you for joining Bancomarin Bancorp's Earnings Call for the Q2 ended June 30, 2023. I am Andrea Henderson, Director of Marketing for Bank of Marin. During the presentation, all participants will be in a listen only mode. After the call, we will conduct a question and answer session. This conference call is being recorded on July 24, 2023.

Operator

Joining

Speaker 1

us on

Operator

the call today are Tim Myers, President and CEO and Tony Gerses, Executive Vice President and Chief Financial Officer. Our earnings press release and supplementary presentation, which we issued this morning, can be found in the Investor Relations portion of our website at bankofmorren.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay. Before we get started, I want to note that we will be discussing some non GAAP financial measures. Please refer to the reconciliation table in our earnings press release for both GAAP and non GAAP measures.

Operator

Additionally, the discussion on this call is based on information we know as of Friday, July 21, 2023, and may contain forward looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward looking statements disclosure in our earnings press release as well as our SEC filings. Following our prepared remarks, Tim, Tawny and Chief Credit Officer, Masako Stewart, will be available to answer your questions. And now, I'd like to turn the call over to Tim Myers.

Speaker 2

Thank you, Andrea. Good morning, everyone, and welcome to our Q2 earnings call. Our Q2 reflected the full impact of the late Q1 bank failures, resulting in meaningful net interest margin compression due largely to the higher cost of funds on FHLB borrowings and deposits compared with slower lending activity. We believe that this impact is temporary in nature and will not be an indicator of future performance as we have continued to make significant progress by focusing on our balance sheet. In fact, we substantially strengthened the balance sheet by attracting customers, raising deposits and improving liquidity to position the bank for efficient growth and stronger profitability.

Speaker 2

Here are a few key highlights of note. After regional bank failures triggered significant industry deposit outflows and price sensitivity, Our deposits quickly stabilized later in the Q1. During the Q2, we raised $152,000,000 in new balances at below capital market rates. Additionally, we opened over 1400 accounts for both new and existing customers. New balances, net of normal customer activity and some continued outflow largely to money market accounts, drove deposit growth of $75,000,000 in the 2nd quarter.

Speaker 2

Importantly, those new deposits and investment cash flows enabled us to reduce Our short term borrowings at the FHLB were $113,000,000 or 28% during the 2nd quarter. Deposit growth has continued post quarter end and included seasonal DDA growth we had anticipated. From quarter end to July 18, we added $116,000,000 to total deposits, which are now within $50,000,000 of pre bank failure levels in early March 2023. Our percentage of demand deposits has also increased to a level higher than the pre pandemic percentage at the end of 2019. At the same time, the rate of increase in the cost of deposits has slowed and FHLB borrowings have fallen another $126,000,000 Our deposit growth strategy was and continues to be driven by proactive customer outreach and relationship based pricing discussions.

Speaker 2

We have not offered CD specials or tapped into brokered CD markets. In the quarter, we saw a natural shift from non interest bearing to interest bearing deposits as customers sought higher yields on excess cash as well as increased FDIC insurance coverage to our reciprocal deposit network offerings. 2nd quarter deposit costs increased 49 basis points sequentially due to deliberate pricing adjustments that we made. We expect that funding cost increases will level off in the second half of twenty twenty three as Fed rate hikes and customer reallocation of funds between operating accounts and interest bearing accounts slow. Our deposit mix at June 30 consisted of 48% non interest bearing deposits, down from 50% last quarter.

Speaker 2

However, the percentage of non interest bearing deposits was back up to 50% by July 18. Going forward, we will continue to carefully manage deposit pricing on a customer specific basis and as we have throughout our history, we'll remain in close contact with our customers to understand opportunities and risks. In alignment with our stringent liquidity standards, We continue to maintain a high level of liquidity that covers all of our uninsured deposits by over 200%. Notably, our uninsured deposits declined to 29 percent from 33% of our total deposits at quarter end. In addition, our average balance per deposit account declined slightly by $2,000 to $62,000 from the prior quarter, with our largest depositor representing only 1 point 3% of total deposits.

Speaker 2

Our available contingent liquidity was approximately $2,000,000,000 and consisted of cash, unencumbered securities and borrowing availability from the FHLB and Federal Reserve Bank. Post quarter end, we have taken additional steps to bolster on balance sheet liquidity by selling AFS securities and Visa B class shares at a net breakeven and retaining proceeds in cash. In addition, we entered into fixed pay interest rate swaps to protect our other available for sale securities from changes in market value. We also continue to actively engage with and support our borrowers and we are optimistic about identifying compelling While lending activity has slowed, the new loans that we are bringing onto our books are high quality credits coming on at notably higher yields than those being paid off. This is providing a boost to our interest income And moving forward, we believe should help us protect our NIM as we continue to fund our pipeline.

Speaker 2

Additionally, approximately 29% of our loan portfolio will reprice in the next 12 months. If those repricings occurred at today's rates, We estimate it will provide an incremental lift of roughly 30 basis points for the loan portfolio. While loan demand has eased, Our teams continue to focus on achieving attractive risk adjusted returns while maintaining solid credit quality. We are sticking to the prudent lending policies and standards that we have always had, carefully monitoring our loan portfolio and proactively adjusting risk rating. While there has been some risk rate migration, largely in special mention loans, there were no meaningful surprises in the quarter.

Speaker 2

During the Q2, non accrual loans held steady at just 10 basis points of total loans. Classified loans comprised only 1.81 percent of total loans at quarter end. Classified loans did increase during the quarter centered primarily around the non office CRE loan, the C and I term loan and increased usage on a previously downgraded line of credit. I'll take a moment to provide added color to our commercial real estate portfolio as it is the largest concentration in our loan book, representing 73% of our total loan balances at the end of the second quarter. Of our total CRE loans, 22% are owner occupied, which we believe carry a different risk profile than non owner occupied loans in this environment.

Speaker 2

Our $366,000,000 of non owner occupied office portfolio consists of 142 loans with an average loan size of $2,600,000 the largest loan being $17,000,000 The average LTV was 55% and the average debt service coverage was 1.67x based on our most recent annual review process. Lastly, we are actively recruiting proven talent as recent industry disruption has made available a considerable number of seasoned bankers. We have taken advantage of the recent market changes and expect to announce a meaningful recruiting new SIM that we believe will help boost lending activity and deposit growth and deliver greater value to our customers and our shareholders. Now I'll pass it over to Tani to discuss our financial results in greater detail.

Speaker 1

Thanks, Tim. Good morning, everyone. Now that Tim has provided a picture of how our balance sheet is evolving, I will walk through earnings. Banco Marin generated net income of $4,600,000 or $0.28 per diluted share in the 2nd quarter. As Tim said, the decline from the Q1 was largely due to a higher interest expense, both on the rising cost of deposits and higher average borrowing balances.

Speaker 1

Our 2nd quarter tax equivalent net interest margin of 2.45 percent was down 59 basis points from the prior quarter as rapid deposit pricing adjustments and higher borrowing balances far outweigh gradually increasing loan yields. While lagging deposit rate increases delayed NIM compression and contributed to 2022 earnings, it also resulted in more change concentrated in the Q2 of 2023. We expect pressure on our net interest margin to continue in the second half of twenty twenty three, but to abate somewhat as deposit rates have caught up with market rate changes and loan yields are expected to continue improving. Additionally, we have taken steps early in the Q3 to mitigate the impact of further rate hikes by paying down another $126,000,000 in borrowings, selling $83,000,000 in securities to retain proceeds in cash and entering into 102 $1,000,000 fixed pay interest rate swaps. We made a $500,000 provision for credit occupied commercial real estate office portfolios impacted by trends in criticized and classified loans and collateral values.

Speaker 1

Subsequent to quarter end, we sold our only real estate other real estate owned property at a slight gain. Non interest income of $2,700,000 was down modestly from the Q1, primarily related to the recognition of policy payments on bank owned life insurance in the Q1, somewhat offset by higher debit card interchange fees and wealth management and trust services income in the 2nd quarter. Non interest expenses remain well controlled at $20,700,000 for the quarter, up from $19,800,000 in the first quarter. The increase included $589,000 in annual giving program charitable contributions, $486,000 in salaries and related benefits, which included annual merit increases $393,000 in deposit network expenses and a $377,000 FDIC assessment base rate adjustment. These increases were partially offset by reductions of $482,000 in depreciation and amortization expense and $434,000 in occupancy and equipment expense related to Q1 branch closures.

Speaker 1

In addition, professional services decreased by $326,000 related to the timing of audit work performed. Our 2nd quarter earnings translated into a return on assets of 0.44 percent and return on equity of 4.25%, down from 0.92% and 9.12% in the prior quarter. The efficiency ratio increased to 76.91 percent from 60.24 percent in the prior quarter due to both higher interest and non interest expenses. All capital ratios were above well capitalized regulatory requirements at June 30. The total risk based capital ratios for Bancorp Core and the bank increased to 16.4%

Operator

and 16%, respectively.

Speaker 1

Quarter end tangible common equity was 8.6 percent for Bancorp and 8.4% for Bank of Marin as compared to 8.7% and 8.3% in the previous quarter, respectively. After adjusting for $85,000,000 after tax unrealized losses in our HTM securities portfolio, our TCE ratio would be 6 0.7% for Bancorp. Our Board of Directors declared a quarterly cash dividend of $0.25 per share payable on August 11, 2023. This represents the 73rd consecutive quarterly dividend paid by Bank of Marin Bancorp. The Board also approved a new share repurchase program for $25,000,000 effective through July 2025.

Speaker 1

Our ample capital position and high quality investment portfolio provide strength and liquidity for the ongoing operations and investments in the future of Vancomoran. We evaluate the bank's interest rate, liquidity, economic value and market price risk under various scenarios, particularly and we stress test underlying assumptions. We believe that our unwavering emphasis on the fundamentals of relationship banking and credit, Liquidity and Capital Management will continue to position Bank of Marin to navigate challenging cycles profitably. Now I'll turn it back to Tim to share some final comments.

Speaker 2

Thank you, Tony. In conclusion, While the current rate environment and the effects of the recent bank failures caused a significant impact on our net interest margin and earnings in the second quarter, We continue to believe those effects to be temporary. Due to our intense focus on the balance sheet, we considerably enhanced our prospects for NIM and EPS improvement going forward, while doing nothing outside our normal business model, and we have seen material improvement post quarter end. With that, I want to thank everyone on today's call for your interest and support. We will now open the call to your questions.

Speaker 3

Thank You will hear a 3 tone prompt to acknowledge your request. Also, questions can also be submitted via the webcast page by clicking the Ask Our first question Is from the line of David Feaster with Raymond James. Please go ahead.

Speaker 4

Hey, good morning, everybody.

Speaker 5

Good morning, David. How are you?

Speaker 4

Maybe just starting out on the deposit side and the flows, Look, it's great to hear the commentary that you had about what you guys been very active this far in the Q3 already. But I'm just curious, If you could characterize some of the NIB flows, it sounds like it's a lot of it's seasonality. I'm curious how much is continued account growth and then just how you think about continued deposit growth going Forward and your efforts there, your strategy to continue to drive growth and then is the kind of the plan to continue to Have deposit growth outpaced loans and pay down the borrowings hopefully by the end of the year?

Speaker 2

So good question. So the movement in demand deposit accounts in the quarter and after quarter end were reflective of our normal seasonality. You had payroll and taxes in there on the outflow side and we had some seasonal increases that we mentioned on the call last quarter Well, they started to go up. Maybe $10,000,000 or so of that deposit raising effort was in checking accounts. Most of that was in interest bearing as you can imagine because we're going out and soliciting funds.

Speaker 2

So the bulk of the money we mentioned we raised through Our deposit initiative was interest bearing, but what was nice is the weighted average rate on that was 3.20 for the whole pool. So still well below our cost of borrowing. So the goal is to continue to raise deposits. Our goal is not to shrink loans. Our goal is to grow loans.

Speaker 2

We continue to fill the pipeline. We did have some closings we expected to happen get pushed in the next quarter. When you talk about issues with office real estate, Tenancy issues or vacancy, we're seeing that affect us kind of more in the pipeline than we are in Our portfolio has maintained very steady, but we have had to do in our pipeline activity is lead out where there's a lot of lease turnover risk, etcetera, Valuation risk. So we continue to build the pipeline. We're looking to make some hires in the near future to help drive that So the goal is to continue to build deposits, pay down the borrowings and continue to drive a pipeline that will result in loan growth.

Speaker 2

So Long winded answer. We're trying to do both, but we did have a very concerted effort on the fundamentals in the quarter of raising deposits at the lowest rates we could Because those will retain as customers when all this goes away and those rates will eventually subside and we are trying to maintain that mix of non interest bearing and interest bearing as close to that level as we are today as we can.

Speaker 4

Okay. That's helpful. And I want to touch on the growth side in just a second, but before we get there, there's a lot of moving parts for all the things that we've talked about As it relates to the margin and just hearing Tani kind of your commentary, it sounds like expect a bit more Pressure in the back half of the year, but it sounds like we're getting close to the trough. I was hoping just given all the moving parts in there between the borrowing pay downs, The deposit growth you've seen into quarter, if you could just help us think about the timing of a trough and kind of the NIN trajectory as we look forward?

Speaker 1

Yes, I can help you with that. So short answer, I believe We have hit the trough, but if not soon and a lot of that is just dependent As we continue to go out and try to bring in more deposits, which we would like to do to pay down some more of those Federal Home Loan Bank borrowings, at what rate those end up coming in at. But if you think about it, we sold about 80 $3,000,000 in securities that gave us proceeds of about $80,000,000 We're going to keep that on the balance sheet and we'll get a NIM pickup on that piece of about or interest rate pickup of about 150 basis points. Then when we did the $102,000,000 in swaps, In the base case, no rate change scenario and assuming a Fed funds Rate increase just 1 in next this week. We probably we'll probably pick up 70 basis Point there and also the 150 basis points that I gave you on the securities that also assumes a 25 basis point increase in the Fed this week.

Speaker 1

So let's see. The other thing is on deposits. If you look at where we were July 18, we got another 20 basis points in cost. So cost of deposits was up to $89,000,000 That's the wildcard where that one's going. But then you've got borrowings coming down by $175,000,000 and those had yielded about $518,000,000 during the quarter, But offsetting that, you have $200,000,000 remaining in Federal Home Loan Bank borrowings and that's because we're retaining the $80,000,000 on the balance sheet, that portion would go up 25 basis points.

Speaker 1

So you put it all together, I think, Assuming no growth to the balance sheet and again, not Taking into account where deposits are going to go beyond where they went as of July 18, I'd say we'd be looking at roughly 10 basis points to pick up in margin. Okay.

Speaker 4

And so when you say You think the margin has troughed. Is that relative to the full second quarter or maybe the June figure?

Speaker 1

I was thinking about the Q2.

Speaker 4

Okay. So you think margin starts expanding here in the Q3? Yes.

Speaker 6

That's what I'm thinking.

Speaker 7

Okay. With all those

Speaker 1

assumptions and caveats I gave you.

Speaker 4

Yes, of course, of course. And then Tim, back to your point on the growth Sai, I mean it's encouraging to hear about the opportunities, understand some delays. I'm just curious things getting pushed back. I'm just curious maybe If you could talk about what you're hearing from your clients, what's the pulse of your market, how much this slowdown is truly like demand versus Your appetite for growth, it sounds like you still have a pretty big appetite for growth. Where are you still seeing good risk adjusted Returns and then just kind of where these new hires are coming from?

Speaker 4

Is it infill? Is it market expansion? Just any color on all that? I know it's a broad category, but just curious what you're seeing?

Speaker 2

Sure. So there's no question that with rates where they are and a lot of our client base being real estate investors The demand is muted. We actively are pushing on a C and I calling program to try to benefit that or grow that Portion of the business and continued diversification and get more benefit from variable rate lending, but certainly that is There is no question demand is muted. For the opportunities that are coming where people have to refi, that's what we're parsing through. Is there a rollover risk?

Speaker 2

We're sacrificing some of our credit standards, meaning if there's a third of that tenant list that's going to roll over the next year or 2 and they want a 5 or 7 year Those conversations are a little more protracted because we're just not going to stretch right now. And so we are I think it's pretty even throughout our footprint about the opportunities we're seeing. A lot of that is in some form of commercial real estate And within that, we are being cautious. On the hiring side, we have had opportunities ranging from credit administration to infill The opportunistic hires and there are people that fit our model. So when you think about the different banks that have failed, We're looking to bring in people that already understand how we do things that can benefit growth within our model, but also bring us new things but on the edges, meaning not changing dramatically our lending appetite for our strategic push around that.

Speaker 2

Does that answer your question, David?

Speaker 4

Yes. No, that's terrific. Thanks for all the color.

Speaker 1

Hey, Dave, can I go back to, I think I left out loans on my last That 10 basis points also includes an assumption of an increase of roughly 7 basis points On the loan portfolio with the embedded repricing and also assuming a 25 basis point increase at the Fed?

Speaker 8

Okay. That's helpful. Thank you.

Speaker 3

Our next question is from Andrew Terrell with Stephens. Please go ahead.

Speaker 8

Good morning, Tim. Good morning, Tani.

Speaker 7

Good morning, Andrew.

Speaker 8

Tani, just to go back to that last point on the 10 basis Think about the margin. Can you just talk about the underlying assumptions that might be in that commentary in terms of incremental deposit cost pressure?

Speaker 1

So what that includes is the lift to 89 basis points that we disclosed in earnings in the release and the presentation as of July 18. It doesn't include anything else because like I said, that's the big wildcard. It's really tough to assess right now because while we think that the repricing on the deposit portfolio is going to Because we had so much catch up to do during the quarter. There's still we're still having those conversations And we're still pricing kind of at levels where we've been pricing. There hasn't been a lot of pressure to take it up Higher than that, but then you get another 25 basis points.

Speaker 1

My initial thought is the next 25 basis points won't be as impactful as all of that catch up. And since we've caught up to where Fed funds are today, It might not come in as strong, but it's really, really hard to gauge.

Speaker 8

Yes, understood. No, I appreciate that. If I could drill down on the deposit front specifically, I appreciate the disclosure for the 89 basis points quarter to date in the Q3. I guess, can you give us a sense on how that compares to where total deposit costs ended the quarter or what the June deposit cost was on average. Just trying to get a sense Of really whether or not that the cost pressure is leveling off throughout the Q3 or not?

Speaker 1

Yes. So the Q2 total cost of deposits was 69 basis points. If we just look at the month of June, That was 82 basis points. And if we look at July 1 through July 2018, that was 89 basis points.

Speaker 8

Understood. Okay. So only a 7 basis point lift so far throughout the Month of July versus the spot at the end of June?

Speaker 2

Yes. We do think the pace of requests has moderated. It hasn't stopped, but as a number Of you and your peers noted on our last call, Andrew, we had a lot of catch up to do. We talked about the Q4 where given the loan to deposit ratio Not being full not full transparency into where rates were going to go, we're slower to adjust our rates than the events of early March happened. We already started that process, but there was a lot of catch up to do in the quarter.

Speaker 2

So the quarter had a lot of that impact of that rapid catch up. There are certainly more requests coming in, but the process has moderated in terms of people's requests.

Speaker 8

Yes, Totally understood. Really appreciate the color there. And if I could ask a question on just the presentation, The interest rate risk modeling assumption using a 35% interest bearing beta. I think if I recall correctly from The last quarter call, we've discussed kind of a 45% beta on interest bearing for the prior kind of Rate risk modeling assumption, but expectations to outperform that. I get a lot of moving pieces Just right now, but what drove the moderation to 35% in this presentation from, I think, the previous discussion of 45%.

Speaker 8

Is that kind of where you'd I guess now that we've seen a lot of the catch up, is that kind of firmly where you think you're going to shake out from a beta perspective?

Speaker 1

So that's a little bit of apples and oranges. The 45% beta was on money market deposits Only and the 35 is on all interest bearing deposits.

Speaker 8

I see.

Speaker 1

So we have not we're not Changing our betas, we're definitely not taking the betas down. In fact, what we're doing is we're eliminating the lag in our modeling.

Speaker 8

Okay. Understood. And then it sounds like maybe getting close on some team hires. I'm just hoping to maybe get a sense on the non interest expense kind of run rate moving forward And how much you can share about the team hires or individual hires you might expect and how that influences the expense run rate, but just any help there, Any potential levers or give back on expenses we should be thinking about going forward?

Speaker 2

Well, I don't want to jinx it or overpromise On the timing of the hires, but we are looking at ways to moderate those costs and the cost impact of that. I'll just leave that one there just because I don't want to for disclosure reasons.

Speaker 8

Yes, understood. Okay. Thank you for the questions.

Speaker 2

Yes, there was David Giester. I did fail to answer, I think, part of your question around the growth in the loan yields. So if you look at the Quarter, the loans that came on had a yield a weighted average yield of about 6.6, which was Considerably higher than the average of those paying off. Unfortunately, the ones that paid off were still high compared to our overall portfolio yield at around 5.95 But that gives you a sense of the pickup as originations as we hope will improve.

Speaker 3

Our next question is from Woody Lee with KBW. Please go ahead.

Speaker 9

Hey, good morning guys.

Speaker 5

Good morning, Lee.

Speaker 9

Just had a follow-up on that expense question. I know hiring can sort of Move it around, but excluding any additional hires, I know there was some a little bit of noise in the 2Q With the charitable contributions, but if you adjust for that, I mean, does the 2Q seem like a reasonable run rate going forward?

Speaker 1

Excluding the prior year. Sorry, what was the last thing you said there?

Speaker 9

Sorry, I just said excluding any potential hires.

Speaker 1

Okay. So depreciation, amortization, occupancy and equipment, those Two lines, those reflect the branch closures now and are indicative of the go forward levels. So most of the acceleration was in the Q1. So you'll see that continue. The FDIC base rate went up from 3 to 5 basis points.

Speaker 1

So that's about a 67% lift versus where it was. So what I would say is look at the Q1 FDIC And adjust for the change in deposits and then raise that by 67% because the second quarter included an adjustment for the Q1 because We incorporated that late later than we should have. We should have accrued for it in the Q1 and then it also included a higher accrual for the go forward. So that's going to It's going to be lower than Q2, but higher than Q1. You are absolutely right on charitable contributions.

Speaker 1

Those mostly go out in Q2, the rest of them seem pretty indicative other expenses higher because we do have more reciprocal deposits. So that's also indicative.

Speaker 8

Yes, that's

Speaker 9

helpful. Maybe shifting over to the new client disclosure. I mean, it looks like it was a really successful quarter on that front. How sticky do you view these clients and how optimistic are you that you can sort of get the full suite of business over time with these clients?

Speaker 2

That's a good question. I do tend to think it's sticky. A lot of that was going back and getting money that had left. So You look at the number of accounts that were opened, just over half was new accounts for existing customers are reallocating the Architecture of their account structure, putting some money that was in a DDA into an interest bearing account or reciprocal account, But over 500 of those were new clients. And so we are already talking to them.

Speaker 2

There's been some pushes around Municipalities and then what other things can we do for them. So we're starting here, yes, but we always look to See how we can grow that relationship in their totality.

Speaker 9

Got it. And then last for me, I saw the renewed buyback announcement. Just with the volatility in the market You mean that settled down a little bit. Are there any updated thoughts on how you are thinking about the buyback?

Speaker 2

They're very similar to how we have described it in the past. We think our stock has tremendous value. We think the impact that we've had on earnings as a result of What happened in Q1 remains temporary and we want to have the ability to take advantage of that value Depression and purchase of stock. All that being said, we are being very cautious about capital preservation. So we're not rushing out to do that, But we want to retain the ability to do so.

Speaker 9

Got it. Thanks, guys.

Speaker 1

And I think I'll just add, our top priority in the capital management is to maintain the dividend and reinvest In the company, if we've got the strategic initiatives and our plates are full on both of those But maintaining that dividend is really important to us.

Speaker 9

All right. Thanks, guys.

Speaker 2

Thank you.

Speaker 3

Our next question is from Jeff Rulis with D. A. Davidson. Please go ahead.

Speaker 5

Thanks. Good morning. Good morning, Jeff. Toni, appreciate all the color on the deposit And trends in cost, did you have a month of June net interest margin average?

Speaker 1

Yes. Let me pull that. I should already have that at my fingertips because You guys ask me that every time. I'll pull it just a second.

Speaker 5

Okay. And maybe Jim, during that, I wanted to hop to the classified loan increase, the loans that I think you've outlined in the Loan segments, C and I, CRE, line of credit, but do you have within industries and geography of Those additions on classifieds?

Speaker 2

Yes. I'm going to ask Ms. Saka Stewart, our could answer to talk about the classifieds.

Speaker 6

Yes. There's not really a concentration in geography, if that's the question. And it's kind of across the board in terms of both the migration that we saw from watch to the criticize and criticize To classify, it kind of covers all different collateral categories, multifamily, retail, C and I, we only had one small office loan that was downgraded from watch to special mention. But

Speaker 1

On the substandard of the classified,

Speaker 6

again, as Tim noted, it was an increased usage on an already existing classified

Speaker 5

loan and then 2 loans that downgraded, 1, a

Speaker 6

C and I term loan. Loan and then 2 loans that downgraded 1, a C and I term loan and the other CRE secured term loan as well.

Speaker 5

Got it. So, yes, not so much geographic concentration, just kind of where they were.

Speaker 2

So it

Speaker 5

sounds like it was spread throughout the footprint?

Speaker 2

Yes. Both geographically and asset class diversified. If you look at the largest migration we Which was in the special mention was then criticized. It's all over the place. There's nothing alike there.

Speaker 2

There was C and I on the wine industry side, a motel, a retail commercial real estate space and a multifamily None in the same geography, none in the same asset class. So we have not seen meaningful deterioration in any one particular class. The problems we have on the substandard side remain the same ones we've been talking about for multiple quarters. And again, the increase And Matt, as Moussaker noted, it was outstanding usage on a C and I revolving credit that we're negotiating full real estate collateral for. So We've been able to focus on those properties.

Speaker 2

Right.

Speaker 1

And that line has since paid down. And I also wanted

Speaker 6

to note too the migration from watch A special mention isn't necessarily indicative of deterioration. We just haven't seen any meaningful improvement and we

Speaker 1

kind of treat the watch category as

Speaker 6

it's transitory. So we don't see any meaningful improvement or deterioration for that matter. We do move the deals into special management. In this case, it was a matter of not seeing any improvement.

Speaker 5

Okay. And maybe, Tim, to go back to the Capital and I appreciate the buyback, a prudent cautious approach. Just A philosophy kind of question, I guess, on the TCE, I think you got, I think, at 8.6% current and I think 6, 7 with AOCI baked in. What do you value more? I mean, do you is that a guiding Kind of thought, I mean, the regulatory capital is very robust.

Speaker 5

I don't know if you look at that, is that part of the cautiousness of With AOCI, do you value that metric or do you look at 8.6%. I guess I'm trying to get What's the capital target that you value most that we should look at?

Speaker 2

It's a good question, Jeff, and I'm not sure I have a solid answer, meaning we look at all those factors all the time and those are the conversations we have amongst ourselves and with the Board. Meaning, yes, we have high regulatory capital, but right now TEC ratio is important. It's important to the investment community. It's important to us. And we do have to look at that adjusted for AOCI or the impact of unrealized losses in the HTM book.

Speaker 2

And so and certainly we'll look at that within the context of our deposit trends and our asset growth and our earnings generation. So it's We look at all of that and yes, we want to take advantage of the stock value and we'd love to buy back more shares. We just look at all Factors and say, okay, what's the right thing to do at this time? So there is no one clear answer for you and I'm not saying that to be evasive. But if we continue along the balance sheet cleanup path that we're on, our earnings start to improve and we don't feel like we're going to have any other marginal I'm sorry, meaningful impact to capital, then we'll certainly take a lot closer look at that.

Speaker 5

Appreciate it. Thank you.

Speaker 1

Hey, Jeff, back to your month of June net interest margin question, that was 2.4%. And just to give a little bit of color to that, our Fed funds borrower sorry, our funds purchased Our borrow balance peaked at the end of April, a little over 400,000,000 And for the month of June, that had come down to a little over $300,000,000 And now If you net out the excess cash that we're holding because we are keeping the $83,000,000 or this The proceeds from the $83,000,000 sold on the balance sheet, the borrowing level is now closer to $125,000,000 So that's that's going to have a significant impact on the margin improvement.

Speaker 5

And Tani, that's the $240,000,000 is Relative to the fully tax equivalent $2.45?

Speaker 1

That is correct.

Speaker 5

Okay. I appreciate it. Thank you.

Speaker 3

Our next question is from Matthew Clark with Piper Sandler. Please go ahead.

Speaker 7

Hey, good morning, Santani. Just on the restructuring within the securities portfolio, it looks like you're taking advantage of the Visa gain here. What's your appetite for restructuring more of that portfolio in the back half here?

Speaker 1

So that's a tough question. I mean, we impacted $180,000,000 if you include the swaps In terms of our interest rate risk position. So in terms of selling securities, I think we want to remain opportunistic. It's really a matter of once you start taking losses, what's the earn back period And we'd be looking at a very short earned back period and that's frankly hard to achieve right now. But as If rates go down and we do have that opportunity, then we will take it.

Speaker 7

Okay, great. And then in terms of the swap, what are the specific terms there in terms of what you're receiving tied

Speaker 1

to what index and And what you're paying? Okay. So we did $50,000,000 in 2.5 year and we did dollars 60,000,000 in 3 year and the underlying on those is the AFS security portfolio. Those are floating at SOFR and the fixed rates are on average in the 4.5% range, 4.5%. And that Yes.

Speaker 7

Okay. Didn't mean to cut you off. And then on your Interest bearing deposit beta assumption of 35% for the cycle and in light of the spot rate On July 18, and assuming another 25 basis points this week by the Fed would imply your deposit costs meaningfully in terms of the rate of increase meaningfully slow Beginning in the Q4 and into 1Q. And I'm assuming I'm not missing anything, but just didn't want to speak out of turn. That's a fair assumption.

Speaker 1

Matthew, you're talking about Q4 of 2022 and Q1 of 2023?

Speaker 7

No, Q4 of this year. No, I'm just saying it looks like given the spot rate you provided, You have a nice you have another step up here in the upcoming quarter, but then after that to get to that to back into their 35% deposit beta, It would suggest that your deposit costs, the rate of change meaningfully slows beginning in the Q4 of this year and into next year?

Speaker 1

Yes. That is in the numbers I gave earlier, that is the Embedded in assumption with a lot of caveats, but I only assumed A 25 basis point increase in Fed funds rate. But in our modeling, of course, It's different. In the base case, you're assuming 0 interest rate changes. And then In the up scenarios, we apply the betas with no lag.

Speaker 1

And so those actually would go up Faster than what was assumed in previous modeling attempts. We're running our we will run our next model on as of July 31 and that will take into account all of the Actions balance sheet actions that have occurred in July. What will be published in the second quarter earnings will be the or in the Q2, 2Q sorry, 10Q will be the interest rate risk Results from April 30 as of April 30. And as I said, we were at peak fed funds there. So we will be showing Much more liability sensitivity there, but when we run as of July 31, It will probably start looking a little bit more like what was in the Q1 10Q.

Speaker 7

Okay, got it. And then just shifting gears to the office CRE portfolio, What do you have in terms of what do you have in that is going to be maturing or repricing Through the end of this year, maybe even through next year. And whether or not you've kind of

Speaker 2

gone We've been to invest

Speaker 7

And whether or not you've

Speaker 2

Just to the investor office, we have about 10 loans maturing the rest of this year and a little bit more than that in the next Here, so not a tremendous number. That's just within the investor office space.

Speaker 7

Okay. Got it. Thank you. And then housekeeping item, Tani, on the tax rate going forward? I know it's a little low this quarter.

Speaker 1

Yes. So it's particularly low this quarter because With the earnings for the quarter, what that does is it reduces the rate for the full year. So there's some adjusting going on there. So that had a big impact. That was the biggest driver.

Speaker 7

And the rate going forward, would you 26.5% to

Speaker 1

it? Yes. So that rate because we adjust it to reflect future What the future expectation is for the full year provision, I think that that's Let me just take one quick look. I think that that's I don't think it's going to be 26 it was 26.70 last quarter. I don't think it's going to be that high going forward.

Speaker 1

Because it was down to 22.5 This quarter due to the all those shifts. So I think it will balance out somewhere between those. Okay. Thank you.

Speaker 3

And speakers, there are no further questions at this time. Please continue with your presentation or closing remarks.

Speaker 1

So we had one more question From the participants online, can you talk about the duration on the swaps? Should we assume they are immediately accretive to the net Margin. So I gave the detail on the swaps. Yes, they are immediately accretive to the net interest margin as of Where they're priced right now not include and including a 25 basis point increase in the Fed, it's roughly somewhere between $500,000 to $700,000 pickup in net interest margin for the year on an annual basis, I should say.

Speaker 2

With that, I want to thank everybody for your questions, your interest and support. And I look forward to talking to you all next quarter.

Speaker 3

Thank you. And that does conclude the conference call for today. We thank you all for your participation. I kindly ask that you please disconnect your lines. Have a great day, everyone.

Powered by Quartr
Earnings Conference Call
Bank of Marin Bancorp Q2 2023
00:00 / 00:00