Bank of Marin Bancorp (NASDAQ:BMRC) Q1 2023 Earnings Call Transcript

Bank of Marin Bancorp (NASDAQ:BMRC) Q1 2023 Earnings Call Transcript April 24, 2023

Bank of Marin Bancorp misses on earnings expectations. Reported EPS is $0.59 EPS, expectations were $0.66.

Operator: Good morning, and thank you for joining Bank of Marin Bancorp’s Earnings Call for the First Quarter Ended March 31, 2023. I’m Andrea Henderson, Director of Marketing for Bank of Marin. During the prestation, 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 April 24, 2023. Joining us on the call today are Tim Myers, President and CEO; and Tani Girton, Executive Vice President and Chief Financial Officer. Our earnings press release, which we issued this morning and a supplementary presentation can be found in the Investor Relations portion of our website at bankofmarin.com, where this call is also being webcast. 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. Additionally, the discussion on this call is based on information we know as of Friday, April 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, Tani, and Chief Credit Officer, Misako Stewart will be available to answer your questions.

And now, I’ll turn the call over to Tim.

Tim Myers: Thank you, Andrea. Good morning, everyone, and welcome to our first quarter earnings call. I’d like to begin by addressing the regional bank failures and subsequent events that occurred late in the quarter and highlight how Bank of Marin’s business model enabled us to effectively manage through these challenges. These failures, while idiosyncratic in nature and isolated the banks that operated much differently than Bank of Marin, and most community banks did create near-term uncertainty among depositors that resulted in outflows across the industry. While many depositors initially sought to perceive security and returns of money market funds outside of the banking system, according to the latest Federal Reserve data, those transfers have since stabilized.

Overall, we have continued our efforts to maintain an industry leading cost of deposits in light of pandemic related surge balances exacerbated by our American River Bank acquisition and its lower loan-to-deposit ratio. It is not unusual for Bank of Marin Bancorp to experience deposit decreases in the first quarter of the year due to the working capital needs of our customers. In fact, in four of the last eight years, we showed linked quarter declines in Q1 deposits. This year, the 9% decrease of $323 million was due to a number of factors concurrent with but largely unrelated to the regional bank failures. Subsequent to these failures, the factors contributing to deposit outflows include: first, outflows due to what we consider singular transactions, such as disbursement of proceeds from the sale of businesses, real property acquisitions for cash, trust distributions or estate settlements.

Second, cash needs from our customers to fund ongoing business operations such as vendor payments, payroll and taxes. And third, deposit movements to outside brokerage firms and financial institutions for safety and/or higher yields. Just over $200 million of the net outflows occurred after the bank failures and were concentrated among 100 larger relationships that overshadowed the impact of accumulated smaller transactions. Among those 100 relationship net outflows, 83% was considered normal activity, including vendor payments, taxes, payroll and the singular events, as I mentioned earlier. 14% moved to brokerage firms or other financial institutions and the remaining 3% were referrals to our Wealth Management and Trust Group. From March 22 through April 18, deposit levels have stabilized.

In 2022, we maintained excess liquidity and expectation of pandemic surge outflows and managed our deposit costs in order to optimize deposit levels. In early 2023, we increased engagement with customers to discuss pricing and the appropriate deposit mix for their needs. After March 10, those discussions accelerated and expanded to include the safety and soundness of the bank, as well as information about a reciprocal deposit network programs that offer depositors expanded FDIC insurance. The result was approximately $80 million of incremental funds placed into these programs and we now have $220 million with Reich & Tan and Intrafi and are continuing to see interest from our customers. I would also like to note that throughout the first quarter, we successfully opened over 1,000 accounts with $60 million in new deposits.

At the same time, we did not see a notable number of account closures with funds leaving the bank. At quarter end, our deposit mix was steady with non-interest-bearing deposits accounting for just over 50% of total deposits, down only slightly from the prior quarter and another indication of our strong deposit franchise. Many of these are commercial accounts that tend to carry larger balances that will fluctuate with our customers’ operating cash needs. Approximately 67% of our deposits are FDIC insured. At quarter end, our liquidity was roughly $1.9 billion and consisted of cash, unencumbered securities and borrowing availability from the FHLB and Federal Reserve Bank, an amount that covers all of our estimated uninsured deposits by approximately 181%.

Since 2013, we have had internal policies, controls and processes that set minimum liquidity requirements similar to the liquidity coverage ratio that larger banks are required to report. Later, Tani will explain some of the long-standing practices that uphold our robust liquidity risk management standards. Importantly, despite the decrease in deposits quarter-over-quarter, our average cost of deposits remained low by industry standards at 20 basis points, 40 basis points in the month of March, though this was up from 8 basis points the prior quarter. Our increase in deposit rates has lagged the general market, which benefited our net interest margin by approximately 10 basis points in the fourth quarter. We will continue to carefully manage deposit pricing on a customer-specific basis and diligently defend our industry-leading deposit franchise.

Now I’ll shift to a discussion about our loan portfolio and overall credit quality. We grew loans by $20 million or just under 1% during the quarter. While loan demand has eased from the peak levels of 2022, our teams continue to focus on building pipelines that will achieve risk-adjusted returns and maintain credit quality. Even as we grew loans in the first quarter, our team’s efforts to carefully manage asset quality resulted in continued strong credit metrics. We have consistently maintained our principled underwriting and our policies have remained unchanged. Total non-accrual loans declined during the quarter and amounted to just 10 basis points of total loans. We are confident in our allowance for credit loss, which represents 1.1% of total loans.

Our loan portfolio remains diversified across borrowers, loan and property types as well as geography and 93% of our loans are borrower guaranteed. Our largest concentration in the loan portfolio is in commercial real estate, which represents 73% of our total loan balances. 77% of our commercial real estate portfolio is non-owner occupied with 89% of these loans being borrower guaranteed. Additionally, since 2000 cumulative net charge-offs in the CRE non-owner-occupied portfolio have been minimal at $740,000, as there has been a good deal of press regarding office buildings, we are providing more granularity on our non-owner-occupied office building portfolio this quarter. Our $370 million of non-owner-occupied office portfolio consists of more than 140 loans with an average loan balance of $2.6 million, the largest loan being $17.2 million.

The average loan-to-value was 55% and the average debt service coverage ratio was 1.67 times based on the most recent information received in our annual review process. Of the non-owner-occupied office portfolio, 19% is located in the San Francisco market with the remainder spread across our Northern California footprint. Drilling down further into the San Francisco non-owner-occupied office portfolio, we have 11 loans totaling $72 million with an average loan size of $7 million and average loan-to-value of 60%. 10 of these buildings are considered low-rise office and eight of them report 100% occupancy. Vacancies averaged around 50% on the other three. $19 million or 26% of the $72 million portfolio is graded as a substandard as first reported in our Q4 2021 earnings and remains performing.

While we understand the heightened concerns that the investment community has regarding the office sector, we believe that given our conservative underwriting and the relatively small loan sizes, our office building exposure is manageable. We have a strong historical track record of minimal losses from this sector. During the first quarter, we also delivered on the final phase of our plans to gain efficiencies from our acquisition of American River Bank by consolidating four Northern Sonoma County branches into two that had overlapping customer coverage. In addition, we closed two other branches where we conserve customers effectively from nearby branches. This strategic decision enables us to optimize our physical footprint without sacrificing customer service and by extension, generate savings that we can reinvest in the talent and technology.

Finally, I’m excited to share that we welcomed our new Chief Information Officer, Sathis Arasadi. His extensive and unique experience as a software engineer and technology leader directing large scale digital and technology transformations will help us execute our bank’s strategic priorities. Throughout our 33-year history, we have not wavered from our guiding principles of relationship banking and disciplined fundamentals and continue to serve the banking needs of local, small to mid-sized businesses not-for-profit organizations and commercial real estate investors. Our business model has proven successful throughout various economic cycles, allowing us to navigate this or any challenging environment. Now I’ll turn the call over to Tani to discuss our financial results in greater detail.

Tani Girton: Thank you, Tim, and good morning. First, I’ll start with some key highlights. We generated net income of $9.4 million in the first quarter or $0.59 per diluted share. Net income was down from the fourth quarter as we began raising interest rates on deposits and borrowing balances increased. Our low cost of deposits was a significant benefit last year, and Bank of Marin achieved record earnings in both the fourth quarter and full year of 2022. Our first quarter tax equivalent net interest margin of 3.04% was down 22 basis points from the fourth quarter, 37 basis points of which was related to higher deposit and borrowing cost, partially offset by a 17 basis point improvement from higher loan yields. We expect continued pressure on the margin as recent (ph) increases in deposit costs are in place for a full quarter.

So far this cycle, increases in rates on non-maturity interest-bearing deposits reflect a beta of 15%, while our interest rate risk models assume a beta of 45%. Non-interest expenses were well controlled at just under $20 million for the quarter. Our first quarter earnings translated into a return on assets of 92 basis points and a return on equity of 9.12% down from 1.21% and 12.77% in the previous quarter. Our Board of Directors declared a cash dividend of $0.25 per share payable on May 12, 2023. This represents the 72 consecutive quarterly dividend paid by Bank of Marin Bancorp. I’d like to add a little more detail on our results, beginning with the $350,000 provision for credit losses on loans in the first quarter compared to no provision in the prior quarter.

This was due to qualitative risk factor adjustments to account for continued uncertainty about inflation, recession, concentration and heightened portfolio management risk in the current environment that were not fully captured in the quantitative portion of the allowance calculation. Additionally, there was a 174,000 credit loss provision reversal due to a $37.4 million reduction in unfunded commitments. As Tim mentioned, credit quality remains strong. Classified loans of $31 million increased $2.9 million, primarily due to higher usage of a revolving line of credit that was previously downgraded. Other changes include $1.7 million in payoffs and paydowns, $314,000 in upgrades to pass risk rating, partially offset by $1.4 million in downgrades.

All of the downgrades in the first quarter were for loans that are secured by real estate collateral. Accruing loans past due 30 to 89 days totaled $1.2 million at March 31, 2023 and compared to $664,000 at December 31, 2022. First quarter non-interest income was up 13% from the fourth quarter at $2.9 million, due in large part to higher earnings on bank-owned life insurance, while other line items showed modest increases and decreases. Non-interest expense of $19.8 million in the first quarter was up from $18.3 million in the fourth quarter, and the efficiency ratio increased to 60.24% from 50.92% in the prior quarter due to both higher interest and non-interest expenses. The first quarter typically has elevated non-interest expense related to 401(k) matching and lower utilization of vacation accruals.

Additionally, the first quarter of 2023 included adjustments related to estimated incentive and retirement plan accruals as well as accelerated amortization and lease expenses associated with branch closures. On the flip side, technology expenses fell as a result of our recent core processor contract renegotiation and we expect branch closures to generate net savings of $470,000 in 2023 and $1.4 million per year thereafter. All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 16.2% at the end of the first quarter compared to 15.9% at December 31. And the bank’s total risk-based capital ratio was 15.6% at March 31 compared to 15.7% at the close of 2022. Quarter end tangible common equity of 8.7% for Bancorp and 8.3% for Bank of Marin were up from 8.2% and 8.

1%, respectively, in the previous quarter. Increases were due to earnings and a $16.2 million improvement in AOCI as the value of our available-for-sale securities portfolio increased with falling interest rates. After adjusting for $76.4 million after-tax unrealized losses in our held-to-maturity securities portfolio, our tangible common equity ratio would be 6.9% for Bancorp. Our strong capital position and high quality investment portfolio provides strength and liquidity for the ongoing operations and investments in the future of Bank of Marin. We evaluate the bank’s interest rate, liquidity, economic value and market price risks under various scenarios regularly, and we stress test underlying assumptions. We conduct capital planning on a regular basis and evaluate various scenarios, stress tests and potential capital actions.

We monitor markets daily for systemic and idiosyncratic risk and maintain contingency plans that support rapid and comprehensive responses if warranted. We also make it a priority to learn from developing situations, and we are incorporating enhancements to current scenarios, assumptions and stress factors to reflect the heightened potential for deposit volatility in a world of social media and digital banking. We have pledged securities to the Federal Reserve’s Bank term funding program and ran a small overnight test to ensure access, if ever needed. The FHLB and Federal Reserve borrowing facilities were established in large part to ensure that banks would not be forced to sell securities at a loss. The FHLB facility proved extremely effective during the global financial crisis and the BTFP will undoubtedly do the same with its favorable rates and availability tied to the par value of securities.

Overall, Bank of Marin’s strong balance sheet, liquidity and capital continue to generate profitability as has been the case across many interest rate and economic cycles. With that, I’ll turn it back to Tim to share some final comments.

Tim Myers: Thank you, Tani. In closing, we are opportunistically looking for ways to manage our balance sheet in order to drive margins while maintaining excellent credit quality and operating efficiency. We believe this will lead to consistent earnings and improve profitability and in turn, translate into enhanced shareholder value. 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.

Q&A Session

Operator: Thank you. Our first question comes from the line of Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark: Hey. Good morning. Good morning, Tani.

Tim Myers: Good morning, Matthew.

Tani Girton: Good morning.

Matthew Clark: Maybe just around the margin, can you give us the average margin in the month of March and what your updated outlook is for your cumulative beta through the cycle. I think we were — I think we talked previously about 10% to 15% for — I think the total deposit beta, if memory serves me correct, but any updated thoughts on that as well.

Tani Girton: Yes. So I’ll need to pull the margin for the month of March for you, which I can do in a second. On the betas — so right now, we’re looking at 15% thus far. We have 45 built into our malls, which is still above the historical norm, but we are doing some catch-up right now as you know. So the — in the 15 — of the 15 basis point in the non-maturity interest-bearing deposit beta, that’s not fully reflected in the third quarter margin or even in the March cost of deposits because it was ongoing through the month of March. So we got some catch-up going there. But I would say that if you — if we look at our modeling for net interest margin, assuming the standard 45% beta, there is a slight increasing trend in the margin. So our assets continue to reprice upward. At the same time, we’re undergoing to catch up. And I will pull the margin for March, but that will take me a second.

Matthew Clark: Okay. Sounds good. And then just your outlook for deposits and borrowings. Deposits sounds like they have stabilized. But how do you think about the borrowing balances that you have? Is there a plan to try to reduce those throughout the year or do you feel like they’ll be relatively stable as well?

Tani Girton: So we will — we’re very focused on that. We will opportunistically reduce those where we can. We get cash flows off of both the loan portfolio and the investment portfolio. So to the extent that we can deploy those to reduce the borrowings, we will. The borrowings have been pretty stable for the last couple of months. So I think we’re good there. And as I said, when we have opportunities that makes sense for us that either have low earn back periods or interest rates go down, giving us an opportunity to — so a larger portion of the securities portfolio at a gain, we will do that.

Tim Myers: And Matthew, we do tend to have within our borrowing or I’m sorry, our depositor base, some seasonal increases as you get later in the year, that should assist with that, too. Certainly, this quarter, the seasonal declines, but we tend with some of those depositors, large depositors to see increases throughout the year as well. So we’ll continue to look at all those options and work those down as soon as possible.

Matthew Clark: Okay. And then a couple more here. How much was the BOLI (ph) benefit this quarter? And then any guidance around your non-interest expense run rate going forward with the savings from the branch closures that you mentioned?

Tani Girton: The BOLI benefit was $313,000 and I didn’t hear the second half of the question.

Matthew Clark: Just around your — any guidance around the non-interest expense run rate with the cost savings coming through from the branch closures?

Tani Girton: Yeah. So what I would do on the run rate is look at — so we have several adjustments that you — that are actually noted in the earnings release that would — should be excluded from the run rate. And then on the branches, that’s in the highlight bullet. We should going forward, get about 470,000 net of those initial write-offs for the year for 2023 and then for future years, $1.4 million savings.

Matthew Clark: Okay. Thank you.

Operator: Our next question is from the line of Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis: Thanks. Good morning. Tani, just on that last point, the 470,000 net, could you unpack the — I assume there’s upfront cost with that, of which I think maybe you’ve incurred some in the first quarter and then, I guess, the savings for the rest of the year. And I guess, also if there were savings in the first quarter that you called out. Just to try to break that piece out the $470,000 out a little bit.

Tani Girton: Yeah. So the accelerated amortization for the two branches closing — for two of the branches closing was $274,000, the other’s didn’t have that — any of that. And then there was $158,000 of accelerated lease expense and that was associated with one of the branch closures.

Jeff Rulis: And no savings in the first quarter just yet?

Tani Girton: I have to run that number for the first quarter, so to break down that $470 million net for the year over the four quarter period. I can send out an e-mail after the call on that, if you like.

Jeff Rulis: Okay. Just I guess you got us on the run rate annually. So I could kind of back into that. Just that’s fair enough on the cost. Thanks. I wanted to go back, Tim, to the that. I appreciate the breakout of the outflow, but focusing on that, that sort of left the bank, just trying to get a — just circling back, I think you gave some reasons that some were seeking safety, some were seeking yield. One, could you confirm those reasons for departure? And two, how has that conversation changed kind of mid-April versus the early stages of the news of end March?

Tim Myers: Sure. No, it’s a good question. So as we’ve talked about before, going into the first quarter, we’re slow to increase our deposit rates kind of see what Mark was going to do and how our betas respond (ph). We actually have started talking to clients and doing more broad-based deposit rate increases towards the end of February and early March, prior to the failure of Silicon Valley Bank and the other bank issues at hand. And so then we became more aggressive in doing that. But I think you had at that point, an intersection of concern, certainly about the health of regional and community banks. That was exacerbated in our market with news around some of the large regional banks under the rest. And so it’s really hard to parse out completely how much of a concern that was about viability versus just a rate conversation, but certainly the higher rates at a large brokerage firm were enough to help drive some of that.

So we got much more aggressive for us later in that quarter, made a lot of adjustments. We actually started a number of tier increases days before, the three days before the failure of Silicon Valley Bank. So we thought we were getting — I guess we didn’t know we were getting ahead of something, but we thought we were going to play catch up at that point. And then certainly, the need for that was a made them pretty healthy increases for us. We still think we’re very

Jeff Rulis: Yeah. It was — audio was starting to get a little choppy there. I don’t know if that’s on my line, but I got to gist of it. I appreciate it. One other question on just the — you mentioned that

Andrea Henderson: Operator, we hear choppiness from the line right now coming from that main line.

Tim Myers: Jeff, are you there?

Jeff Rulis: You sound quite a bit clear, Tim.

Tim Myers: Yeah. As you see you, but I couldn’t hear you either. So would you mind repeating what you said? I apologize.

Jeff Rulis: Sure. Wanted to ask about, thanks for the detail on the office CRE. I think you mentioned $370 million in the non-owner-occupied. What’s the balance of the owner-occupied office CRE?

Tim Myers: At 17% of the $2.1 billion total. From Page 9 of the presentation.

Jeff Rulis: Well, so in the office specifically of owner-occupied CRE that accounts for that entire amount.

Tim Myers: I’m sorry, office owner occupied. We’ll get you that number, Jeff. I don’t have that in front.

Jeff Rulis: Sure. Just a last check in. The loan pipeline, you scratched out some growth in the first quarter. It looks like paydowns were down. You came in with kind of a lower pipeline but ended up a net growth. How does that pipeline look today or at least the start of the quarter versus as you entered the year?

Tim Myers: It continues to build. Demand is reasonably muted out there with the rates where they are, but we are seeing the pipeline build. It gets lumpy and you close loans and then you have to build that pipeline back up. But I think we’re pretty pleased given the environment of how that’s shaping up.

Jeff Rulis: Okay. I’ll step back. Thank you.

Tim Myers: Thank you.

Tani Girton: This is Tani, interjecting and answer to your question, Matthew, the tax equivalent net interest margin for March was 2.74%.

Operator: All right. Our next question from the line of David Feaster with Raymond James. Please go ahead.

David Feaster: Hey. Just — thanks for taking questions. One quick one of that — one quick one off the that, it’s just talk — could you remind us of the cash flows off the securities book. I think we had talked about $25 million a quarter. It’s been running ahead of that. I guess what do you think about the pace of the securities cash flows?

Tani Girton: Yeah. We do usually think of it as around 100 a year. Of course, that fluctuates from quarter-to-quarter. And if we have any calls on securities, it would accelerate that. But yeah, it was higher than — a little higher than normal this quarter.

David Feaster: Okay. And then just on the expenses, just wanted to clarify whether you would expect those to all flow to the bottom line? Because in the prepared remarks, Tim, it kind of sounded like you were planning on reinvesting those. Just want to make sure that we’re thinking about kind of the expense run rate the right way.

Tim Myers: You’re talking about the branch saves – cost saves.

David Feaster: Correct. Yeah.

Tim Myers: Yeah. So eventually, we do want to use the cost saves there to invest in things like technology that are tied to our five-year plan, our strategic initiatives, but that will take some time hiring of the opportunistic. So we don’t have that money earmarked currently for things. So I think for some undetermined period of time, those will drop to the bottom line. But eventually, with our new CIO on board potentially taking advantage of some of the disruption in the market, we certainly would like to hire but there’s nothing on the immediate horizon for that for either of those things. So we expect that to be true cost saves until we can reinvest in growth.

David Feaster: Okay. That’s helpful. I just want to make sure we’re thinking about that. Maybe on the growth side of the equation. I was hoping you could maybe give us a pulse of the region what you’re hearing from your clients, how demand is trending how new loan yields are? And maybe just your appetite for growth here, just given the backdrop, what segments you’re still seeing good risk-adjusted returns. I mean, obviously, C&I was good. Just curious how you think about growth and where you’re seeing new opportunities.

Tim Myers: The opportunities in terms of pipeline building is pretty even across our footprint. I will say that the pricing we’re seeing out there, whether it’s for the duration of fixed rate loans or yields remains very competitive. So I don’t want to throw any competitors under the bus, but the market has not responded by way of loan yields in our market the way maybe we would have liked. And so we will continue to look for loans that make sense, like you said, on a rig adjusted basis. The opportunities are there but it is a muted demand environment. In the North Bay, some of the trends around commercial real estate are still pretty positive. San Francisco clearly has its issues, but our portfolio has held up well there, and we’re seeing growth out of some of our other regions like Walnut Creek.

So with our different regions now that can be disparate in terms of when one does well versus the others, but we’re seeing a good pipeline buildup in the Sacramento market, and it’s really hard to predict at this point, but by and large, which we think there will be opportunities, but it’s not going to be at a first half 2022 pace.

Tani Girton: And if I could just add to that, on a looking backwards basis, so over the last few months, the rate fund loans coming in new to the portfolio versus the portfolio rate, they are significantly higher on average. So almost a couple of hundred basis points. So we do continue to see upward momentum on the yields for the asset side.

Tim Myers: But maybe back to your question a little bit, David. I mean we’ll continue to look for those areas where we can lend on a good risk-adjusted return basis. But in some of our niche lending areas like tax exempt, I mean we’re still seeing large regional competitors put out and even some money center banks put out offers that 20-year fixed rate so we will have spaces to make are those the right assets to put on our books based on the credit quality and the relationship opportunities.

David Feaster: Okay. That’s helpful. And just following back up on the margin. If I hear your comments earlier about you’re seeing a slight increasing trend in the margin. Do you think we’ve troughed here kind of from that $374 — $274 million that you just mentioned? And kind of just how do you think about the margin looking forward? I know it’s a tough question to ask, but.

Tani Girton: Yeah. That’s a real tough question because as I said, I don’t want to predict where the margin is going exactly because in that $274 for March, for example, we’re still seeing assets repricing upward, but we are still playing catch up on the deposit side, on the deposit beta. And so if you look at them in isolation, each one of those two factors weighing against each other, they are offsetting each other somewhat. But I think the incorporating the full price increase on deposits that we have — that we put into place during the month of March, that’s going to put some pressure on the margin.

David Feaster: Okay. All right. That’s helpful. Thank you.

Tim Myers: Thank you, David. Jeff, back to your question on owner-occupied CRE office, that total is $65 million.

Operator: Next question from the line of Woody Lay, KBW. Please go ahead.

Woody Lay: Hey. Good morning, guys.

Tani Girton: Good morning.

Woody Lay: I wanted to start off with the office portfolio. I mean, I know Sacramento (ph) gets a lot of the headlines. But can you talk about the trends you’re seeing in the other 81% of the portfolio?

Tim Myers: Yes. I will comment briefly on the North Bay market. Sales trends are down, but things like cap rates and price per square foot are holding and vacancy is a lot lower. So for example, in the North Bay vacancy for office is around 11%, 12%. So nowhere near the pressure that you’re seeing in San Francisco proper. With that, though, I would ask Misako Stewart, our Chief Credit Officer to weigh in as we have a very robust annual review process that gives us a lot of insight into the markets as we go throughout the year.

Misako Stewart: Sure. Like Tim said, San Francisco is probably the most impacted and maybe next Sacramento in terms of office. But as noted in the presentation slide, so our entire non-owner-occupied office portfolio is about $370 million. We do have the 55% average loan-to-value and debt services based on the most recent information as of 12/31/’22. And so I think our underwriting standards in builds-in enough of a cushion in our loan to values. We typically look for some solid sponsorship as well in all of our deals. So I think we continue to monitor the portfolio closely. But I think it’s we’re in a very manageable situation.

Tim Myers: And I’ll just reiterate something that Misako said because this came in on the line about San Francisco’s exposure and how recently those are refreshed in terms of loan-to-value, best service coverage occupancy. That information in the deck, that is all based on 12/31 ’22 results in San Francisco based on operating statements and rental and then internal valuations when we don’t have a more recent appraisal adjusted for current cap rate trends. So we really do try to stay on top of those and do an annual view process for a very large percentage of our portfolio throughout the entire bank.

Tani Girton: Yeah. We do reviews for about $1 billion of our $1. 2 billion non-owner occupied real estate portfolio.

Woody Lay: That’s helpful color. And then I know that office class can be a largely subjective measure, but any color you could give just on the breakdown of Class A, B or C exposure in the portfolio.

Tani Girton: That’s a tough one to answer since as of you point out, it is subjective. I would say in our San Francisco office portfolio, these are not high rise in our skyscraper type buildings. They are relatively smaller in size. And as noted — as Tim mentioned, eight out of our 11 properties are 100% occupied. So yes, that’s a hard question to answer.

Woody Lay: Okay. Got it.

Tim Myers: Okay. Most are in the few story range. There’s the one outlier that happens to be our substandard credit that we’ve referenced in multiple calls in the past that we referenced in the deck, but that is higher, but the vast majority of our properties are two, three stories.

Woody Lay: Right. Okay. And then…

Tim Myers: Then the A, B, C as objective, as you said.

Woody Lay: Right. Yeah. All right. Well, last, I just wanted to hit on deposits, and I appreciate the color that balances have held in relatively stable since March 22. But any color you could just give on the mix shift over that time? I mean, is — are you seeing the non-interest-bearing composition continue to decline or is that holding relatively stable as well?

Tim Myers: No. That’s holding stable. In fact, there’s a slide in the investor presentation that we posted that shows almost an identical mix of 5, on Page 4, and we get a handing on. Yeah. It’s on Page 4 of the deck there. And the mix is almost identical. Non-interest-bearing DDA is 50.3% versus 51.5%. Money market went from 27.7% to 28%. So from a mix standpoint, it’s remained very stable. A lot of the big outflows that we did have in the quarter, both before and after the failure telecom Valley Bank. I don’t mean to keep picking on them. That’s just the trigger point, was really large outflows tied to specific events that are very easy to point to. I guess I said commercial real estate acquired with cash. We had two companies that sold and those funds were dispersed and unrelated to the owners that was $40 million.

It was $20 on the CRE purchase post SVB collapse, a lot of estate and trust disbursement. So it really was unfortunate timing. But in terms of the behavioral attributes, we really have seen things settle since the’22, and that mix really hasn’t changed a lot.

Woody Lay: Got it. All right. That’s all from me. Thanks for taking my question.

Tim Myers: Thank you.

Tani Girton: So while we’re on the topic and waiting for other questions on the phone, we did have an investor ask, again, about the deposit betas for the quarter versus what we indicated for the cycle. So they’re both the same because 15% for the cycle, I’m quoting through March 31. So there will likely be more. But that — this cycle and March 31 for the same as of right now. And then the same person asked, if we decided to sell the HTM, what would be the time frame if we invested at current market and perhaps shorter maturity. So first of all, we wouldn’t sell held-to-maturity securities. We would sell available-for-sale securities. And if we were going to do any sort of transaction, if we sold it again, or at a breakeven, there wouldn’t be an earn-back time frame, and we wouldn’t be reinvesting the proceeds, we would be paying down borrowings.

If we decided to do any sort of structured transaction, combining a sale with some other event, we would be looking for an earn back under one or two years. Hopefully, that answers that question.

Operator: Next one question from the line of Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell: Hey. Good morning.

Tani Girton: Good morning.

Tim Myers: Good morning, Andrew.

Andrew Terrell: Maybe just to go back and start on the margin here. I just want to clarify that on Page 15 of the slide deck, the 83 basis point interest-bearing deposits for March. I just want to clarify, that is the average throughout the month of March and not the spot at the end of March, correct, the 83 basis points.

Tani Girton: It’s 83 basis points. I’m sorry, I’m not following, what?

Andrew Terrell: I’m looking at the monthly rate paid on interest-bearing deposits versus Fed funds on Page 15 of the slide deck in the bottom right graph.

Tani Girton: Okay. On interest-bearing, yeah.

Andrew Terrell: That’s average throughout the month, correct?

Tani Girton: Yes.

Andrew Terrell: Okay. And just — I mean, given the velocity there, the 23 basis points to 83 basis points is a pretty big step-up. Do you have what the spot interest-bearing deposit cost was at the end of the period?

Tani Girton: No, we don’t have that right now.

Andrew Terrell: Okay. I mean it sounds like you guys got a little more aggressive kind of February, March time frame and ratcheting deposit costs. But I guess I’m just trying to get a sense of like how that’s progressed so far in the month of April, like whether or not it feels like the cost increases in maybe early March time frame or enough if you’ve had to move further in April so far? I’m just trying to get a better sense of where the deposit cost number is headed.

Tani Girton: You know what, Andrew, I can send out in April year-to-date number after the call.

Tim Myers: So I do know most of our adjustments were made in March, Andrew. And yes, we’ve certainly got more aggressive. We had started that process, like I said, two or three days before the collapse of Silicon Valley Bank and accelerated that shortly thereafter — but most of those adjustments that I’ve seen so far were done through the end of the month.

Andrew Terrell: Okay. I appreciate it. And then one other question I had. You guys have, I think it’s close to a $35 million buyback and place (ph) and capital ratios were very, very healthy with the stock trading kind of around this tangible book value level, can you talk about your appetite for utilization of the buyback here? I didn’t see any in the quarter, but I’d love to hear your thoughts.

Tim Myers: Yeah. We would love to buy shares back at this price. I think we’re waiting and seeing a little bit with the concerns around credit risk, making decisions around whether watching the market and the ability to sell available for sale secures, reposition our NIM based on reducing FHLB borrowings. And so we’re looking at all those options and how that would impact capital, again, in light of potential credit issues coming. So I would love to do that, but I want to be cautious and prudent in the approach.

Andrew Terrell: Okay. Well, the rest of mine were asked and answered already. So I appreciate taking my questions.

Tim Myers: Yeah. Thank you.

Operator: We have a question from the line of Tim Coffey with Janney Montgomery Scott. Please go ahead.

Tim Coffey: Yeah. Thank you. Good morning, everybody.

Tim Myers: Hi, Tim.

Tim Coffey: I appreciate. I really appreciate all the detail that you provided in the investor deck and on the call today. And myself kind of got some follow-up questions on some of those item. The construction book in San Francisco, can you provide some color on that?

Tim Myers: Yeah. I’m going to ask Misako to weigh in on this. She’s much better versus the intricacies of it.

Misako Stewart: Sure. The construction portfolio mostly is a multifamily or single-family residences. When you ask about color, is there anything specific you want me to address? I mean they are all performing.

Tim Coffey: Yeah. Well, more than kind of a property type and location. I mean, specifically in and around the Central Business District.

Misako Stewart: They are mostly in San Francisco. They’re multifamily. And so they do cover a number of different neighborhoods in San Francisco. If there’s anything we have some softening in terms of just condo sales, but they are all performing currently.

Tim Coffey: Okay. And then the total CRE loans in San Francisco, are you seeing any signs that they’re behaving differently than, say, the office portfolio?

Misako Stewart: In San Francisco?

Tim Coffey: Yes.

Misako Stewart: I would say that the general trend that we’re seeing, which I’m sure many others are seeing as well is just with vacancies as leases come due and maturity, many are not renewing or if they are, they’re renewing at lower rates. And so we are continuing to keep a close eye and monitor our entire portfolio for that matter for the non-owner-occupied real estate but mostly for the office property. But it is a general trend that we are seeing. In San Francisco, I think majority of it is concentrated in office in San Francisco. I think we have a few industrial properties, which are performing as agreed.

Tim Coffey: Okay. And then my last question has to with account openings, how many account deposit accounts do you open in a typical quarter?

Tim Myers: Give me one second.

Tim Coffey: Yeah. I’m just trying to get an idea of kind of with the 1,000 that you opened in this last quarter in…

Tim Myers: Yeah, probably in the 500 to 600 range.

Tim Coffey: Okay. All right. Those are my questions. I appreciate the time. Thank you.

Tim Myers: Very well.

Operator: And we have no further questions on the phone line.

Tani Girton: Okay. We have a couple of questions from the webcast. The first one is another one on the net interest margin inflecting back up as assets reprice. In terms of timing, how should we think about that? I would say it’s — on the asset side, it’s a gradual increase. And in like the first — the next couple of months with the beta catch-up on the deposits, that’s definitely going to offset it more than in future months. But hopefully, that’s of some help. We also have a question about the March 31 reserve for unfunded commitments, and I’m working on getting that right now.

Tim Myers: Well, she’s getting that. We did have a question, what are the opportunities to hire out of the recent dislocation in the wine (ph) lending market. We were fairly excited about that opportunity early on, again, not to take advantage of the misfortune of others. But certainly, given that’s been an important segment for us. Thus far with teams from the Silicon Valley Bank, that seems to be a focus of their new owner as well, but we have had conversations with teams with various specific focuses within Commercial Banking from some of the other dislocations. So I do think there will be hiring opportunities, the right — the question for us is going to be, is it the right fit? Will that will help drive us forward in areas we want to continue to grow in is that someone can add value. But I would expect us to have more opportunities within the broader commercial banking for sure, and then hopefully in wine as we see this continue to play out.

Tani Girton: And going back to the reserve for unfunded commitments as of March 31, it was $1.3 million. Looks like we have another question from the line. Please hang-on.

Tim Myers: So I will say this. I’ll read the question that came in, what does the back book of loan repricing look like through 2023, 2024? We have about 18% of our book that reprices over every 12-month cycle. We can go back and do some more research, but it’s generally been in that 18% to 20% range. If you would like more specificity around that, please reach out to me or through Andrea or Tani directly. I’m not sure who the question came in from.

Operator: We have no questions from the phone.

Tim Myers: With that, I want to thank everyone for their time, attention and questions. Please feel free to reach out to any of us if you want further information, but we appreciate your involvement. Thank you.

Tani Girton: Thank you.