Bank of Marin Bancorp (NASDAQ:BMRC) Q2 2024 Earnings Call Transcript

Bank of Marin Bancorp (NASDAQ:BMRC) Q2 2024 Earnings Call Transcript July 29, 2024

Bank of Marin Bancorp misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.19.

Krissy Meyer: Good morning, and thank you for joining Bank of Marin Bancorp’s Earnings Call for the Second Quarter ended June 30, 2024. I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. [Operator Instructions] 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, can be found along with a supplementary presentation in the Investor Relations section of our website at bankofmarin.com, where this 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, July 26, 2024 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 our Chief Credit Officer, Misako Stewart, will be available to answer your questions. And now I’d like to turn the call over to Tim Myers.

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

During the quarter, we originated $94 million in loan commitments with $64 million in outstanding balances, 69% of which closed in June and will thus positively impact net interest income and margin next quarter. The new loans are coming on the books at higher rates than those paying off, which along with our continued success in effectively managing our deposit cost is contributing to positive trends in our net interest margin, which in June was 21 basis points higher than it was in May. During the quarter, we also made some staffing adjustments throughout the company to adjust our expense levels to the current operating environment while investing in talent and technology that will support our future growth and improvement in efficiencies.

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

July redeployment activity includes additional purchases of investment securities, new loan originations and the purchase of a $36 million portfolio of high-quality end market and residential mortgage loans with good credit metrics and an expected yield of approximately 6.3% based on our prepayment expectations. So far, the rates at which we are reinvesting confirm the estimated average yield of 5.75% assumed in calculating the capital earn back, accretion to net interest margin and the accretion to earnings. In terms of asset quality, as I mentioned earlier, we are seeing general stability in the portfolio, and we are not seeing the formation of material new problem loans. During the second quarter, we moved a $16.7 million nonowner-occupied CRE classified loan to nonaccrual status, which was the primary contributor to our provision.

The underlying collateral property is a multistory office building located in San Francisco that was materially impacted by the pandemic and subsequent remote work and vacancy issues. This isn’t the first time we’ve discussed this credit on these calls as we downgraded the credit to substandard in the fourth quarter of 2021 and have continued to evaluate the occupancy operating income, underlying valuation and sponsorship support. The loan is guaranteed and payments have always been current with enough pledged cash held at the bank to cover payments to maturity in 2026. Nonetheless, a recent appraisal indicated that the current value of the property would not support the par value of the loan. If the loan were due today, a substantial reduction in the loan balance would be required to repay the loan based on current rents, occupancy and sponsorship wherewithal.

Based on this consideration, we chose to provision for that potential shortfall. The provision amount is based on information we have today and may be adjusted depending on future developments. Leasing activity for the property has seen improvement in recent months, and we continue to monitor closely. By placing the loan on nonaccrual, the contractual payments we continue to receive from the borrower will go towards paying down the principal, reducing our loan balance at a faster rate. We also had one commercial banking relationship to a consumer goods company that we moved into the nonperforming status due to idiosyncratic issues with the borrower. The borrowers are actively pursuing refinancing and asset sale options and is currently in the due diligence process of a sale, which will substantially reduce our borrowings.

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

Even with the loss recognized on the security sales, our capital ratios remain very strong, with a total risk-based capital ratio of 16.5% and a TCE ratio of 9.92%, which increased from the prior quarter due to a decrease in our tangible assets. In summary, we made substantial progress to our balance sheet repositioning and our growing momentum in business development, further strengthening our foundation for profitability improvements and long-term growth. With that, I’ll turn the call over to Tani to discuss our financial results in more detail.

Tani Girton: Thank you, Tim. Good morning, everyone. Bank of Marin continues to focus on further strengthening our core deposit franchise and maintaining robust liquidity and capital levels while delivering exceptional service to existing and new customers as we position for earnings improvement in 2024 and beyond. On a reported basis, we incurred a net loss of $21.9 million for the second quarter or $1.36 per share, which was due to the $32.5 million pretax loss we recorded on the sale of investment securities as part of our balance sheet repositioning strategy. Excluding the loss on securities sales, on a pro forma basis, we had net income of $1 million or $0.06 per diluted share compared to $2.9 million or $0.18 per share in the first quarter.

The remaining $1.9 million decline in earnings was primarily due to the $5.2 million second quarter provision for credit losses related to the loans Tim discussed earlier, somewhat offset by a reversal of the tax provision recorded in the first quarter. Other than the securities sales and provision, operating earnings were stable quarter-over-quarter. While net interest income was slightly lower than the prior quarter, we had a 2 basis point increase in our net interest margin, primarily due to new loans coming on the books at higher rates, a moderation in the pace of deposit cost increases and the initial benefits of our balance sheet restructuring. Our noninterest expense increased this quarter, mostly due to our annual charitable contributions typically made during the second quarter.

Salary and benefits increased $280,000, reflecting both annual merit increases and the costs associated with the staffing adjustments Tim discussed. Aside from those items, most areas of noninterest expense were relatively consistent with the prior quarter. Moving to noninterest income. Excluding the loss on security sales, all other areas of noninterest income were also relatively consistent with the prior quarter. Our total deposits were $3.2 billion at June 30, which was down $70 million from March 31 related to the activity Tim mentioned earlier. Due to the strength of our deposit base, we have not needed to tap the brokered CD market or run CD campaigns and noninterest-bearing deposits continue to account for 44% of our total deposits.

And as Tim noted, we have seen total deposits increased so far in July, consistent with our typical historical pattern. Our average cost of deposits increased just 7 basis points in the second quarter compared to a 23 basis point increase in the prior quarter, and monthly trends continue to show a moderation in the pace of deposit price increases. Disciplined credit management remains a Bank of Marin core value as well. We continue to prudently add to our level of reserves and the $5.2 million provision for credit losses we recorded in the second quarter increased our allowance for credit losses to 1.47% of total loans. Importantly, actual charge-offs remain low. Loan balances of $2.1 billion at the end of the second quarter were up $28 million from the prior quarter with a notable percentage increase in our C&I portfolio.

Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on July 25, the 77th consecutive quarterly dividend paid by the company. With that, I’ll turn it back to Tim to share some final comments.

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

Given the strength of our balance sheet and the progress we are making on our strategic initiatives, we may resume repurchasing shares should we decide that’s the best use of capital at that particular time. As always, we will make the decisions that we believe are in the best long-term interest of our shareholders and that we believe will further enhance the value of our franchise. With that, I want to thank everyone on today’s call for your interest and your support. We will now open the call to your questions.

Q&A Session

Operator: [Operator Instructions] Our first question will be from Matthew Clark at Piper Jaffray. Matthew, please unmute yourself and you can ask your question.

Matthew Clark: Can you hear me?

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

Matthew Clark: I appreciate that. How much in interest income reversal did you have this quarter versus last on new nonaccruals?

Tim Myers: That’s okay. Matthew, Tani was answering a question that came in online. Can you repeat that again, I apologize.

Matthew Clark: Yes, I’m just looking to quantify how much interest income reversal you had that negatively impacted the margin in 2Q versus the first quarter from the new nonaccruals.

Tani Girton: You know what, I’m going to have to pull that number and get back to you on that one, Matthew. Sorry, I don’t know that on the top of my head.

Matthew Clark: No worries. And the weighted average rate on $64 million of new loan fundings, what was that rate?

Tim Myers: The weighted average rate on the new loans was 7.15%.

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

Tani Girton: The only — we have for the month, we don’t have a spot rate for June 30.

Tim Myers: It was 146, I think. It was up 1 basis point for June, yes.

Matthew Clark: Okay. And then the margin in the month of June? I know you said it was up from May, I think, 21 or 22 basis points, but just — what was the margin then in June?

Tani Girton: What was the margin, the actual margin was 2.64%.

Matthew Clark: And that didn’t include any interest income reversals, I assume?

Tani Girton: No.

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

Tim Myers: Well, I think they’ll stabilize and hopefully, we can start to reduce them. So if you look at some of the runoff we had, about $17 million of the deposit outflow were monies where we stopped bidding on a — what seemed like rate shopper money. So we will cautiously look to allow deposits to run off that are overpriced. There’s always going to be some lag, but we have been strategizing for 1.5 quarters now about how to manage our customers because of the exception pricing and do that, effectuate all those changes as quickly as possible, but like I said, we are allowing some of that to start to run off if it’s really going to exacerbate the overall deposit cost. Did that answer your question, Matt?

Matthew Clark: Yes. Thanks.

Tim Myers: You’re welcome.

Operator: Our next question will be from Andrew Terrell with Stephens.

Andrew Terrell: Hi, good morning. Can you hear me?

Tani Girton: Hi, Andrew.

Andrew Terrell: Hi, morning. Going back to the margin. Just quickly, Tani, if you wouldn’t mind if you guys do have the interest reversal figure just sending it around to all of us, please?

Tani Girton: Yes. That will be done.

Andrew Terrell: Thank you. How should we think about — could you maybe provide some expectations on the margin to 3Q? There’s obviously a lot of moving pieces. We’ve got the June that’s up. It sounds like some reinvestments still occur so far in July. Any sense of where kind of the margin heads in the third quarter and the back half of the year?

Tani Girton: So we’ve got probably at least another 10 basis points coming in from the securities repositioning. I haven’t calculated exactly how much I think might come in from the new loans that were originated in June that were not on the books for the entire quarter, but that’s a plus. We have 37 basis points baked into the balance sheet on loan repricing over the next 12 months, so roughly 3 basis points a month there. And then we — the deposit costs are the wild card, not quite as wild as they have been lately because we do see a pretty consistent trend of those slowing down.

Andrew Terrell: Yes. Okay. Those are all helpful. On the cash position, can you just remind us your expectations of where you’d like to run cash as a percentage of either total assets or earning assets?

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

Andrew Terrell: Yes. Okay. And then, Tani, just quickly on the expense base. If I take out the cost savings from the FTE reduction you guys mentioned in the prepared remarks and the normalized, that charitable contribution line lower. It looks like the run rate should shake out somewhere around kind of $20.5 million. Does that feel like a kind of a fair run rate to you? Or how should we think about the cadence of expenses into the back half of the year?

Tani Girton: Yes. I think the back half of the year is going to look a lot like the front half of the year. So there are just things that come in and go out in each quarter that are sort of the same year-over-year, but it looks like the first half is pretty indicative of what the second half is going to be.

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

Andrew Terrell: Okay. Understood. And then just a question around credit maybe. I realize the office book is very granular, call it, $2.5 million average loan size. So the $17 million or $16.7 million is certainly kind of stand out. Can you just talk about the bell curve of the office kind of loan size in the portfolio? Maybe just a bit more, just thinking with context on how maybe outsize is one credit might be, what’s kind of the second, third largest office loans behind that? And then why we should feel kind of comfortable with the collateral on the potential outcome?

Tim Myers: I think that’s fair. I’ll look high level, Misako will look for some of the specifics. But we’ve been talking about that one $16.7 million loan since fourth quarter of 2021, as you know. The one most pandemic impacted, most impacted by remote work. You name it, it was the poster child here. We haven’t been shy about discussing it. If you net out the specific reserve for that, in San Francisco, our average loan to value is 58% or weighted average loan to value on the rest of the properties, even if you throw that property in but include that — net that specific reserve, it’s 72%. Seven of the 11 properties we have in San Francisco are 100% occupied. So this one really was unique, even in outside of the size differentials.

This one was unique in terms of the occupancy or vacancy. The pace with which and the incremental increase in rents, you would have to get in order to refinance that loan in full at maturity two years out, and therefore, the one most impacted by a current valuation. So we’re constantly looking at these values, whether it’s an appraisal because of the timing or our own valuation. And this one does stand out as unique irrespective of the size. Misako, do you have anything you want to add?

Misako Stewart: Yes. That particular loan that Tim was talking about is by far the largest office property that we — or office loan that we have in the portfolio. And understandably, I know that San Francisco remains a concern, but the San Francisco office portfolio does make up only 3% of our total — and the properties are — there’s 11 in total, and they’re pretty diversified in terms of geographic locations as well. We don’t have any in the financial district. And as Tim said, if you exclude that one particular loan out, I mean, our loan-to-value and our weighted average debt service coverage is at 120% and 58%, respectively. And we do have good occupancy in majority of those properties and good sponsorship as well. So we really do feel like that one particular loan had some — I don’t want to call it an anomaly, but does not profile like the rest of the loans that we have in our portfolio, if that makes sense.

Andrew Terrell: Yes, it does. Okay, thank you for the call and I appreciate the questions.

Misako Stewart: Thank you.

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

Wood Lay: Hi, good morning, guys.

Tim Myers: Morning Wood.

Tim Myers: Wanted to start on loan growth. It was great to see the pickup. Just how is the pipeline looking for the back half of the year?

Tim Myers: Well, pipelines always have a way of contracting when you close loans, but I think we’re actually pleased with where it sits today, and it continues to build. About half that production in the quarter was related to our new hires, and they continue to be out there finding relationships. So we’re still targeting the same degree of growth, but the net, in terms of gross production, net’s hard to predict. Construction always has some loans that get paid off or do something different and just load the predict net in this environment, but we feel good that we can continue on an origination track to stay ahead of that curve.

Wood Lay: Yes. And it seems like the new hires are sort of gaining steam. How do you think about the forward hiring strategy from here? Are you looking to be opportunistic?

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

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

Tim Myers: Yes, give us a second.

Tani Girton: I do. 6.7 is a specific reserve.

Wood Lay: And how much of the provision reported in the second quarter was related to that credit?

Tani Girton: I’d say it’s a major contributor for the 5.2.

Tim Myers: The reason’s primarily they don’t match, Wood, is because we have been provisioning using Q factors within CECL, to compensate for the enhanced risk or heightened risk we were having in CRE, particularly that portfolio. So when we took the full specific reserve of the 6-plus, we made some adjustments back on some of those other CECL-related Q factors that were really being tweaked to compensate for not doing that. It makes sense?

Wood Lay: Yes. All right. That’s great. Thanks for taking my question.

Misako Stewart: I wanted to take it a factor too. Sorry, I was just going to mention that the unemployment forecast that looks pretty optimistic. And so that also contributed to offsetting that amount.

Wood Lay: Got it. Makes sense. Thank you.

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

David Feaster: Hi, good morning, everybody.

Tim Myers: Morning David.

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

Tim Myers: Sure. So I’ll start, Misako can jump in. But your first part of your question was resolution of that particular large credit?

David Feaster: Yes.

Tim Myers: So I think as we mentioned in the script, we have the amount of payments through maturity in 2026, pledge of the bank. So we — there’s never been an issue with payment. We’re going to get paid through. What we’re going to watch then is over the next two years, and he is seeing leasing activity pick up. I mean we’re hopeful, we can’t say for certain, that this valuation looks like a bottom because he is seeing leasing activity pick up, and we continue to track it very closely. So there is two years for this thing to improve by way of tenancy. These are small footprint floors, 3,000 to 4,000 square feet of floor. So you don’t need to bring in a lot of tenants to materially change the NOI and thus the valuation on this property, right?

So there’s a lot of reason to believe whether the trend of AI driving leasing activity in San Francisco is the right overall solution or not, he is looking to benefit from that. It certainly appears that he will or might. And so a lot of that valuation differential could resolve itself towards maturity. Again, we’ll get paid, but that’s what we’re tracking for, and we reserved as — today’s as is value. So we have cushion there to continue tracking it. On the office CRE overall, yes, values are down, but that one, as we’ve said for several years, is the one most impacted, I know we say 12, we have 13 loans in the city. Those are really 11 properties because there are some pre-locks there. 10 are low rises, as Misako said, seven are 100% occupied and the weighted average LTV, if you remove the big one is 58%.

So there’s a lot of flex — with the 120-plus DCR even at today’s market. So we have a lot of flexibility, and by and large — I shouldn’t say, by and large, almost entirely, we have a combination of property cash flow, collateral value and/or sponsorship to remargin where necessary in the rest of the portfolio. We have not felt compelled or even the need to do something like this.

Misako Stewart: Yes. No, I agree. And that relationship that Tim was talking about is the only nonowner-occupied office that we have — that’s classified in the substandard category. We monitor the portfolio very closely on a quarterly basis. And as Tim mentioned, any issues that we might be having with any of our other office properties, we have sponsorship that has the ability to support any shortfalls or fix the problem. And those are the things that we continue to work with our borrowers and doing so. In fact, we had a couple of upgrades to pass last quarter because we were able to come to a resolution by way of additional pledged cash lateral or additional collateral real estate, unencumbered real estate that’s got cash flow to support it. So those are all the discussions that we’re having, and I think we’ve had some good success in finding resolution with our borrowers.

Tim Myers: Yes, I think that’s very fair. And in terms of your question about migration, we really didn’t see — we didn’t have any increase or change in classifieds. We did have the two big relationships move to nonaccrual. Obviously, we just talked about the property in San Francisco. The other one is a consumer goods program with brands they can sell. They just had some idiosyncratic issues. And as we mentioned in the script, they do have an LOI to sell some of those brands. And so it’s not high in the sky for us to say, well, the company has to do something dramatic to do that. This is something they’ve done in the past. So we have every reason to believe that this company can sell some brands, materially reduce the debt to a point where it’s refinanceable our cash flows.

But because of the timing and everything that happened, we felt it prudent to move it to nonaccrual. But I think we also feel optimistic about the resolution and that is not indicative of anything else in the portfolio in that regard.

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

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

Tim Myers: That’s a really good question. Yes, our deposits that are coming in on interest-bearing, I think the weighted average was 3.18%. I think maybe as high as 3.5%, but nowhere near the billboard rates you see. So it’s very incremental. It is helping the granularity. Having that percent of new accounts every quarter is great. It doesn’t really offset the big fluctuations in our big operating accounts. But again, and I know I’ve said this, that deposit decline we had, we didn’t lose any relationships. In fact, we were as high — we’ve been up since quarter end as high as $67 million. And I think we ended Friday, 43 up. So in terms of looking at the quarter end and being 70 down, we can see fluctuations within a week that bring that back.

Those are just the big DDA balance fluctuations. But to your question or your point at the beginning, I think, of that was both within our branches and our commercial group, more so in our commercial group than before, we have an intense focus on low-cost accounts and on the C&I side DDA. So we brought in some relationships this quarter where those deposit accounts really haven’t fully funded, and we expect to get a material benefit from that strategy like around professional services going forward to where we’ll see a nice build in those. And obviously, there’s some seasonality with professional service firms and DDA balances, but that could materially help offset or be countercyclical to the fluctuations we have today. So the focus is on all of the above, but where we are paying a rate, paying a below market rate and managing and improved granularity to offset some of that seasonality or cyclicality we see with the big DDA accounts.

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

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

David Feaster: Terrific. Thanks, everybody.

Tim Myers: You’re welcome. Thank you.

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

Tim Coffey: All right. Morning, Tim.

Tim Myers: Good morning, Tim. How are you?

Tim Coffey: I’m good. Thanks. Can you give us an idea of kind of the change in value of this property in San Francisco. Would you be able to share what the LTV was that origination and what it is now?

Tim Myers: The — I don’t remember way back at origination, but the appraised value was $33.5 million back when we probably funded the last increase to that a number of years ago. So you can do that math, 33 down to 10. What was the last time, the last appraisal?

Tani Girton: The last appraisal, yes, was about $33.5 million, and that was…

Tim Myers: No, the newest one.

Tani Girton: The newest one, yes. It’s a little — it’s about $9 million, $9.2 million. So that’s a substantial decline.

Tim Myers: Not exactly the trajectory an investor wants, but that is — yes, it got hit harder. Again, because of — for us, it’s idiosyncratic nature being a tall office building in the financial district.

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

Tani Girton: Our practice is to do one every year on our substandard classified loans, and that frequency may increase depending on what’s happening in the market. But yes, the plan is to continue to do on annually.

Tim Myers: And even when we don’t, we do get the data points from our portfolio stress test around cap rates and we stress the entire investor portfolio that way. So we’re constantly getting — and so we knew there was going to be some downward trend in this one, as you and I talked about, but the extent sort of surprised us. But at the same time, we felt it better to just — I mean this could improve a lot, right? This is an as is today’s appraisal with the leasing activity he’s seeing, some of the trends for those kind of spaces in San Francisco. This could actually improve quite a bit. So we are ripping the band-aid off from provisioning today for what might happen two years out, but we thought it was prudent to do so.

Tim Coffey: Yes. As you and I have spoken about, this is the outlier in the portfolio.

Tim Myers: Yes, that’s right.

Tim Coffey: Okay. Those are my questions. Thank you very much.

Tim Myers: Thank you, Tim.

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

Tim Myers: Okay. We had one question online. What is the coupon yield on the residential mortgage portfolio purchased? And what was the purchase at a premium to par? So we paid just over par, a very small premium, $0.02 premium. The mortgage coupon was 7.16, and our yield is 6.91 about those are — yes. I hope that answers the question to who member ask.

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

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

Tani Girton: Thank you.

Misako Stewart: Thank you.