Bank of Marin Bancorp Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 24, 2023

There are 13 speakers on the call.

Operator

Morning and thank you for joining Bank of Marin Bancorp's Earnings Call for the Q1 Ended March 31, 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 April 24, 2023.

Operator

Joining us on the call today are Tim Meyers, President and CEO and Tani Gurden, 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 bankofmorin.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, 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, Masako Stewart, will be available to answer your questions. And now, I'll turn the call over to Tim.

Speaker 1

Thank you, Andrea. Good morning, everyone, and welcome to our Q1 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 Ren'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 the perceived security and returns of money market funds outside of the banking system, According to the latest Federal Reserve data, those transfers have since stabilized.

Speaker 1

Overall, we have continued our efforts to Industry leading cost of deposits in light of pandemic related surge balances exacerbated by our American Riverbank acquisition and its lower loan to deposit ratio. It is not unusual for Bank of Ren to experience deposit decreases In the Q1 of the year due to the working capital needs of our customers. In fact, in 4 of the last 8 years, We showed linked quarter declines in Q1 deposits. This year, the 9% decrease of $323,000,000 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: 1st, 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.

Speaker 1

2nd, 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 $200,000,000 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.

Speaker 1

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 our reciprocal deposit network programs that offer depositors expanded FDIC insurance. The result was approximately $80,000,000 of incremental funds placed into these programs And we now have $220,000,000 with Raishantang and Entrify and are continuing to see interest from our customers.

Speaker 1

I would also like to note that throughout the Q1, we successfully opened over 1,000 accounts with $60,000,000 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.

Speaker 1

At quarter end, our liquidity was roughly $1,900,000,000 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, Well, 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 4th quarter.

Speaker 1

We will continue to carefully manage deposit pricing on a customer We grew loans by $20,000,000 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 Q1, 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 in total loans.

Speaker 1

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 was 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.

Speaker 1

Our $370,000,000 of non owner occupied office portfolio consists of more than 140 loans with an average loan balance of $2,600,000 the largest loan being 17,200,000 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 $72,000,000 with an average loan size of $7,000,000 and average loan to value of 60%. 10 of these buildings are considered low rise office And 8 of them report 100 percent occupancy. Vacancies averaged around 50% on the other 3. $19,000,000 or 26 percent of the $72,000,000 portfolio is graded as a substandard As first reported in our Q4 2021 earnings and remains performing.

Speaker 1

While we understand the heightened The first question is from 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 Q1, we also delivered on the final phase of our plans to gain efficiencies from our acquisition of American Riverbank by consolidating 4 Northern Sonoma County branches into 2 that had overlapping customer coverage. In addition, we closed 2 other branches where we can serve customers effectively from nearby branches.

Speaker 1

This strategic decision enables us to optimize our physical footprint without sacrificing customer service And by extension, generate savings that we can reinvest into talent and technology. Finally, I'm excited to share that we welcomed our new Chief Information Officer, Satish 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 strategic priorities. Throughout our 33 year history, we have not wayward from our guiding principles of relationship banking and disciplined fundamentals and continue to serve the banking needs of local small to midsized 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.

Speaker 1

Now, I'll turn the call over to Tani to discuss our financial results in greater detail.

Speaker 2

Thank you, Tim, and good morning. First, I'll start with some key highlights. We generated net income of $9,400,000 in the Q1 or $0.59 per diluted share. Net income was down from the 4th 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 Q4 and full year of 2022.

Speaker 2

Our Q1 tax equivalent net interest margin of 3.04 percent was down 22 basis points from the 4th quarter, 37 basis points of which was related to higher deposit and borrowing costs, partially offset by a 17 basis point improvement from higher loan yields. We expect continued pressure on the margin as recent 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 $20,000,000 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 percent down from 1.21% and 12.77% in the previous quarter.

Speaker 2

Our Board of Directors declared a cash dividend of $0.25 per share payable on May 12, 2023. This represents the 72nd 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 Q1 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 risks 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 $37,400,000 reduction in unfunded commitments.

Speaker 2

As Tim mentioned, credit quality remains strong. Classified loans of $31,000,000 increased $2,900,000 primarily due to higher usage of a revolving line of credit that was previously downgraded. Other changes include $1,700,000 in payoffs and paydowns, dollars 314,000 in upgrades to pass Risk rating, partially offset by $1,400,000 in downgrades. All of the downgrades in the Q1 were for loans that are secured by real estate collateral. Accruing loans past due 30 to 89 days totaled $1,200,000 at March 31, 2023 compared to $664,000 at December 31, 2022.

Speaker 2

1st Non interest income was up 13% from the 4th quarter at $2,900,000 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 $19,800,000 in the first quarter was up from $18,300,000 in the 4th 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 Q1 typically has elevated non interest expense related to 401 matching and lower utilization of vacation accruals. Additionally, the Q1 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 400 $70,000 in 2023 $1,400,000 per year thereafter.

Speaker 2

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 percent 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 $16,200,000 improvement in AOCI as the value of our available for sale securities portfolio increased with falling interest rates.

Speaker 2

After adjusting for $76,400,000 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 risks and maintain contingency plans that support rapid and comprehensive responses if warranted.

Speaker 2

We also make it a priority to learn from developing situations and we are incorporating enhancements The 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.

Speaker 2

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

Speaker 1

Thank you, Tani. In closing, we are opportunistically looking for We believe this will lead to consistent earnings and improved 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.

Speaker 3

Thank You will hear a 3 tone prompt technology request. If your question has been answered and you would like to withdraw your registration, please press 13. Our first question comes from the line of Matthew Clark with Piper Sandler. Please go ahead.

Speaker 4

Hey, good morning, Tim and Tony. Good morning, Matthew.

Speaker 5

Good morning.

Speaker 4

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

Speaker 6

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 models, which is still above the historical norm, but we are doing some catch up right now, as you know. So In the 15 of the 15 basis point in the non maturity interest bearing deposit beta, That's not fully reflected in the Q3 margin or even in the March Cost of deposits, because it was ongoing through the month of March.

Speaker 6

So we've got some catch up going there. 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 such a catch up. And I will Pulled the margin for March, but that will take me a second.

Speaker 4

Okay. 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?

Speaker 6

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 Employ 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.

Speaker 7

And Matthew, we do tend to have Within our borrowing 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, There's some 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.

Speaker 4

Okay. And then A couple more here. How much was the Bully 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

Speaker 6

The BOLI benefit was 313,000 And I didn't hear the second half of the question.

Speaker 4

Just around your any guidance around the noninterest expense run rate with the cost Savings coming through from the branch closures?

Speaker 6

Yes. So what I would do on the run rate is look at so we have Several adjustments 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 400 and $70,000 net of those initial write offs for the year for 2023 and then for future years $1,400,000

Speaker 4

savings. Okay. Thank you.

Speaker 3

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

Speaker 8

Thanks. Good morning. Toni, just on that last point, the 470,000 net, Could you unpack the I assume there's upfront costs with that, of which I think maybe you Encourage some in the Q1 and then I guess the savings for the rest of the year and I guess Also, if there were savings in the Q1 that you called out, just to try to break that piece out, the $470,000,000 out a little bit.

Speaker 6

Yes. So the accelerated amortization for the 2 branches closing For 2 of the branches closing was $274,000 the others 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.

Speaker 8

And no savings in the Q1 just yet?

Speaker 6

I have to run that number for the Q1, so, to break down that 4.70 net for the year over the 4 quarter period. I can send out an email after the call on that if you like.

Speaker 8

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 costs, thanks. Wanted to go back, Tim, to that. Appreciate the breakout of the outflow, but Focusing in on that 14% that sort of left the bank, just trying to get us just circling back, I think you gave some reasons that some were seeking safety, some were seeking yield.

Speaker 8

1, could you confirm Those reasons for departure? And 2, how has that conversation changed kind of mid April versus The early stages of the news events in March.

Speaker 7

Sure. No, it's a good question. So As we've talked about before going into the Q1, we're slow to increase our deposit rates Trying to see what Mark was going to do and how our customer base responded. We actually have started talking to clients And doing more broad based deposit rate increases towards the end of February 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 duress.

Speaker 7

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 The number of tier increases 2 days before or 3 days before the failure of Silicon Valley Bank. So we thought we were getting well, 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 As you saw, the numbers have made some pretty healthy increases for us. We still think we're very But most of the banks are left to reduce deposit accounts here and still maintain the

Speaker 9

Does that answer your question?

Speaker 8

Yes, it was audio was starting to get a little choppy there. I don't know if that's on my line, but I got the gist of I appreciate it. One other question on just the you mentioned the 3.7

Speaker 3

The operator, we hear choppiness from the line Right now, coming from that main line.

Speaker 7

Jeff, are you there?

Speaker 8

I am. You sound quite a bit clearer, Tim.

Speaker 7

Yes, as do you, but I couldn't hear I couldn't hear you either. So would you mind repeating what you said? I apologize.

Speaker 8

Sure, sure. I wanted to ask about thanks for the Detail on the office CRE, I think you mentioned $370,000,000 in the non owner occupied. What's the balance of the owner occupied office CRE?

Speaker 7

That's 17% of the $2,100,000,000 total. So on Page 9 of the present, so 3.57 So all

Speaker 8

of well, so in the office Specifically, owner occupied CRE that accounts for that entire amount?

Speaker 7

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

Speaker 8

Sure. Just a last check-in. The loan pipeline, You scratched out some growth in the Q1. It looks like pay downs were down. You came in with kind of a lower pipeline, but ended up a net growth.

Speaker 8

How is that pipeline look Day or at least the start of the quarter versus as you entered the year?

Speaker 7

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.

Speaker 8

Okay. Okay, I'll step back. Thank you.

Speaker 7

Thank you.

Speaker 6

This is Tani interjecting. In answer to your question, Matthew, the tax equivalent net interest margin for March was 2.74 percent.

Speaker 3

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

Speaker 10

Hey, just thanks for taking the questions. One quick one off the bat is, could you remind us of the cash flows off the securities book? I think we had talked about $25,000,000 a quarter. It's been running ahead of that. I guess, what do you think about the pace of securities cash flows?

Speaker 6

Yes. We usually we do usually think of it as around $100 a year. Of course, that fluctuates from quarter to quarter. And If anybody if we have any calls on securities, it would accelerate that. But, yes, it was Higher than a little higher than normal this quarter.

Speaker 10

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.

Speaker 7

You're talking about the branch saves cost savings? Correct. Yes. Yes. So eventually we do want to use The cost saves there to invest in things like technology that are tied to our 5 year plan, our strategic initiatives, That will take some time.

Speaker 7

Hiring will be opportunistic. So we don't have that money earmarked currently for things. So I think for So, on an 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.

Speaker 7

Okay.

Speaker 10

That's helpful. I just want to make sure we're thinking about that. Maybe touching 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, D and I was good. Just curious how you think about growth and where you're seeing new opportunities?

Speaker 7

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 the 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 risk 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.

Speaker 7

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. 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 build up in the Sacramento market and it's really hard to predict at this point. But by and large, We think there will be opportunities, but it's not going to be at a first half twenty twenty two pace.

Speaker 6

And if I could just add to that, on a looking Backwards basis, so over the last few months, the rates on Loans coming in new to the portfolio versus the portfolio rate, they are significantly higher on average, so almost A couple of 100 basis points. So, we do continue to see upward momentum on the yields for the asset side.

Speaker 7

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 at 20 year fixed rate loans at what I would not call a risk adjusted return, and I don't know what point that will abate. So we will have choices to make on those right assets to put on our books based on the credit quality and the relationship opportunities.

Speaker 10

Okay. Okay. That's helpful. And just following back up on the margin, if I hear your comments earlier about You're seeing a slight increase in trend in the margin. Do you think we've troughed here kind of from that $274,000,000 that you just mentioned.

Speaker 10

And kind of just how do you think about the margin looking forward? I know it's a tough question to ask, but

Speaker 6

Yes. 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 $2.74 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.

Speaker 10

Okay. All right. That's helpful. Thank you.

Speaker 7

Thank you, David. Jeff, back to your question on owner occupied CRE office, that Total is

Speaker 9

65,000,000

Speaker 3

Next question from the line of Woody Lay, ABW. Please go ahead.

Speaker 11

Hey, good morning, guys.

Speaker 5

Good morning. Good morning.

Speaker 11

I wanted to start off with the office portfolio. I mean, I know that Sam Fran gets a lot of the headlines, but can you talk about the trends you're seeing in the other 81% of the portfolio?

Speaker 7

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.

Speaker 7

With that though, I would ask Masako Stewart, our Chief Credit Officer to weigh in as they we have a very robust annual review process That gives us a lot of insight into the markets as we go throughout the year.

Speaker 5

Sure. Good morning. Like Tim said, Francisco is probably the most impacted and maybe next would be Sacramento in terms of office. But as noted in the Presentation slide. So our entire non owner occupied office portfolio of about $370,000,000 We do The 55 percent average loan to value in debt services is based on the most recent information as of Twelvethirty Onetwenty 2.

Speaker 5

And I think our underwriting standards 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.

Speaker 7

And I'll just reiterate something that Satya 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, service coverage occupancy, that information in the deck, that is all based on All 3122 results in San Francisco based on operating statements and rent rolls and then internal valuations When we don't have a more recent appraisal adjusted for current cap rate trend. So we really do try to stay on Top of those and do an annual review process for a very large percentage of our portfolio throughout the entire bank.

Speaker 5

Yes, we do reviews for about 1,000,000,000 $1,200,000,000 non owner occupied real estate portfolio.

Speaker 11

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 Class A, B or C exposure in the portfolio?

Speaker 5

That's a tough one to answer Since, as you point out, it is subjective. I would say in our San Francisco office portfolio, these are not high rise skyscraper type buildings. They are relatively smaller in size. And as noted, as Tim mentioned, 8 out of our 11 Properties are 100% occupied. So yes, it's a hard question to answer.

Speaker 7

Okay. Got it. 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 2, 3 stories.

Speaker 11

Right. Okay. And then lastly

Speaker 7

And the ABC is subjective, as you said, so

Speaker 11

Right. Yes. 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?

Speaker 11

I mean, is Are you seeing the non interest bearing composition continue to decline or is that holding relatively stable as well?

Speaker 7

No, that's holding stable. In fact, there's a slide in the investor presentation that we posted that shows almost an identical mix 5, on Page 4. I'm going to hand signals. Hang on. Yes, it's on Page 4 of the deck there.

Speaker 7

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 has remained very stable. A lot of the big outflows that we did have in the quarter, both before and after The failure of Silicon 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.

Speaker 7

Like I said, commercial real estate acquired with cash, We had 2 companies that sold and those funds were dispersed and unrelated to the owners that was $40,000,000 It was $20,000,000 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 22nd and that mix really hasn't changed a lot.

Speaker 11

Got it. All right. That's all for me. Thanks for taking my questions.

Speaker 7

Thank you.

Speaker 6

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 data for the quarter Versus what we indicated for the cycle. So, they're both the same because Yes. 15% for the cycle, I'm quoting through March 31. So, there will likely be more, but that is the cycle and March 31 The same as of right now.

Speaker 6

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 1 or 2 years.

Speaker 6

Hopefully, that answers that question.

Speaker 3

Next phone question from the line of Andrew Terrell with Stephens. Please go ahead.

Speaker 12

Hey, good morning.

Speaker 7

Good morning, Andrew.

Speaker 12

Maybe just to go back and start on the margin here. I just want to clarify 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.

Speaker 6

83 basis points? I'm sorry, I'm not following what

Speaker 12

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. Okay. On January 2020, that's average throughout the month, correct? Yes. Okay.

Speaker 12

And just I mean, given the velocity there, the 23 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?

Speaker 6

No, we don't have that right now.

Speaker 12

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 timeframe were enough, if you've to move further in April so far. I'm just trying to get a better sense of where the deposit cost number is headed.

Speaker 6

You know what, Andrew, I can send out April year to date number after the call.

Speaker 7

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, 2 or 3 days before Collapse of Silicon Valley Bank and accelerated that shortly thereafter. But most of those adjustments But I've seen so far, we're done through the end of the month.

Speaker 12

Okay. I appreciate it. And then the one other question I had, you guys have, I think it's close to a $35,000,000 buyback in place and capital ratios look 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 it in the quarter, but Love to hear your thoughts.

Speaker 7

Yes. 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 securities, 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.

Speaker 12

Okay. Well, the rest of mine were asked and answered already. So I appreciate you taking the questions.

Speaker 7

Yes. Thank

Speaker 3

We have a question from the line of Tim Coffey with Janney Montgomery. Scott, please go ahead.

Speaker 12

Yes. Thank you. Good morning, everybody.

Speaker 6

Hi, Tim. Hello.

Speaker 9

Hey. I appreciate I really appreciate all the detail that you provided in the investor deck And on the call today, and I just have some kind of follow-up questions on some of those items. The construction book in San Francisco, can you provide some color on that?

Speaker 7

Yes. I am going to ask Musaka to weigh in on this. She is much better versed in the intricacies of it.

Speaker 5

Sure. The construction portfolio mostly is in multifamily or single family residences.

Speaker 6

When you ask about color,

Speaker 5

is there anything specific you want me to address? I mean, they

Speaker 12

are all performing well. Yes, exactly. Well, more than kind of property type and location, I mean, Specifically in and around the Central Business District?

Speaker 5

They are mostly in San Francisco. They're multifamily. And so they do Number of different neighborhoods in San Francisco. If there's anything we have seen softening in terms of just condo sales, But they are all performing currently.

Speaker 9

Okay. And then with Paul, with the total CRE loans in San Francisco, are you seeing you seeing any signs that they're behaving differently than say the office portfolio?

Speaker 5

In San Francisco?

Speaker 12

Yes.

Speaker 6

Yes. I would say that the general trend

Speaker 5

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 San Francisco, I think we have a few industrial properties at which are performing as agreed.

Speaker 9

Okay. And then my last question has to do with account openings.

Speaker 12

How many deposit accounts do you open in a typical quarter?

Speaker 7

Give me one second.

Speaker 12

Yes. I'm just trying to get an idea of kind of you put the 1,000 that you opened in this last quarter in

Speaker 7

Yes, probably in the 500 to 600 range.

Speaker 9

Okay. All right. Great. All right. Those are my questions.

Speaker 9

I appreciate the time. Thank you.

Speaker 10

You're very welcome.

Speaker 3

And we have no further questions on the phone line.

Speaker 6

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 a On the asset side, it's a gradual increase.

Speaker 6

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.

Speaker 7

Well, she's getting that. We did have a question. What are the opportunities to hire out of the recent dislocation in the wine 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 They're new owner as well, but we have had conversations with teams with various specific focuses within commercial banking From some of the other dislocation. So I do think there will be hiring opportunities.

Speaker 7

The right the question for us is going to be, is it the right fit? Will that 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, we'll enwine as we say that see this continue to play out.

Speaker 6

And going back To the reserve for unfunded commitments as of March 31, it was 1,300,000 Looks like we have another question from the line. Please hang on.

Speaker 7

So I will say this. I'll read Question that came in, what does the back book of loan repricing look like through 2023, 2024? We have about 18% of our book Re prices 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 to Andre or Tony directly.

Speaker 7

I'm not sure who the question came in from.

Speaker 3

We have no questions in the phone queue.

Speaker 7

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.

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Earnings Conference Call
Bank of Marin Bancorp Q1 2023
00:00 / 00:00