Bank of Marin Bancorp (BMRC) announced financial outcomes for the fourth quarter of 2023, emphasizing their strategic balance sheet improvements and strong credit quality. Despite flat total loan growth due to payoffs and strategic exits, the company saw an expansion in net interest margin and a stable deposit base. The quarter's net income was reported at $610,000. The company's capital and liquidity positions remain robust, with a declared cash dividend of $0.25 per share. Looking forward, Bank of Marin Bancorp is focused on relationship-based banking and prudent growth for 2024.
Key Takeaways
- Net interest margin expanded, supported by strategic balance sheet actions.
- Credit quality remained strong, with non-accrual loans at 0.39% of total loans.
- Loan originations saw improvement, but total loans remained flat due to payoffs and strategic exits.
- Deposits experienced a moderate decline, attributed to seasonal factors, but increased in January.
- The company declared a cash dividend of $0.25 per share, maintaining a strong capital and liquidity position.
- Expectations for further margin improvement and a conservative approach to credit grading are set for the coming quarters.
Company Outlook
- Bank of Marin Bancorp is committed to relationship-based banking and anticipates prudent growth in 2024.
- The company expects further net interest margin improvement in the upcoming quarters.
- A tax rate of 25-26% is projected for 2024.
- Adjustments across the balance sheet and expense structure aim to accelerate net interest income expansion and efficiency.
Bearish Highlights
- Profitability ratios were impacted by a loss on the sale of securities and an increase in the provision for credit losses.
- A decrease in the average balance per account in the deposit base was noted, dropping by $5,000 over the quarter.
Bullish Highlights
- The company's total risk-based capital and TCE ratios have improved significantly.
- Positive deposit trends include an increase in non-interest bearing deposits and new money from existing customers.
- The company has not repurchased any stock, focusing instead on building capital and repositioning the balance sheet.
Misses
- Net income for the quarter was relatively low at $610,000, reflecting the impact of strategic actions.
Q&A Highlights
- The company addressed a discrepancy in loan repricing disclosures and clarified that some loans are ready to reprice sooner than initially disclosed.
- Executives discussed the potential for loan yield expansion, with around $100M of loans set to reprice in 2024.
- Volatility in interest-bearing deposit costs was acknowledged, but the margin is expected to stabilize in the first quarter.
Bank of Marin Bancorp's fourth-quarter performance reflects a company in transition, strategically positioning itself for a more profitable future. The company's conservative approach to credit grading and proactive measures to improve the balance sheet are key points of focus. As the company enters 2024, the anticipation of loan repricing and continued expense management are expected to drive growth and stability. With a strong capital and liquidity position, Bank of Marin Bancorp remains committed to delivering value to its shareholders through prudent growth strategies and disciplined financial management.
InvestingPro Insights
Bank of Marin Bancorp (BMRC) has demonstrated a commitment to shareholder returns, as evidenced by its track record of raising dividends. The company has raised its dividend for 18 consecutive years, showcasing a consistent approach to rewarding shareholders. This is in line with their recent declaration of a $0.25 per share cash dividend, reinforcing their stable capital and liquidity position.
Investors looking at BMRC's valuation metrics will find a mixed picture. The company's P/E ratio stands at 16.97, while the adjusted P/E ratio for the last twelve months as of Q3 2023 is more attractive at 9.96. The PEG ratio during the same period is -0.4, which can suggest that the stock might be undervalued relative to its earnings growth. Moreover, the company's price/book value as of Q3 2023 is 0.78, potentially indicating that the stock is trading below its net asset value.
In terms of performance, BMRC has posted a strong return over the last three months, with a 22.66% total price return, which aligns with the company's focus on strategic positioning for profitability. However, it's important to note that analysts have revised their earnings upwards for the upcoming period, which could signal confidence in the company's ability to navigate through its strategic transitions and achieve growth.
For readers interested in deeper analysis, there are additional InvestingPro Tips available for BMRC, including insights on sales projections, profitability, and gross profit margins. With an InvestingPro subscription now on a special New Year sale with a discount of up to 50%, subscribers can access these valuable tips to inform their investment decisions. Use coupon code "SFY24" to get an additional 10% off a 2-year InvestingPro+ subscription, or "SFY241" to get an additional 10% off a 1-year InvestingPro+ subscription, and gain a comprehensive understanding of BMRC's financial health and future prospects.
Full transcript - Bank of Marin Ban (BMRC) Q4 2023:
Operator: Good morning and thank you for joining Bank of Marin Bancorp Earning Call for the Fourth Quarter ended December 31, 2023. I'm Yahaira Garcia-Perea, Marketing and Corporate Communications Manager 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. 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 and supplementary presentation, which we issued this morning, 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-GAP 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, January 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 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, Yahaira. Good morning, everyone, and welcome to our fourth quarter and full-year earnings call. I'd like to begin by providing a high-level overview of our financial results. During the fourth quarter, we took several actions to further bolster our balance sheet that contributed to improvement in our pre-tax, pre-provision income, excluding losses on security sales, in the quarter as well as laid the foundation for improved earnings growth in 2024. First we strategically repositioned our balance sheet by divesting lower yielding securities and further reducing our short-term borrowings. While the loss generated on the security sales lowered our earnings, we directed the proceeds toward new loan originations and repayment of borrowings to accelerate margin improvement in the coming quarters. These actions countered the adverse impact of increased funding costs and supported our net interest margin expansion during the quarter. We believe that our current interest rate risk position will better support increased profitability in the year ahead as we navigate the potential higher for longer interest rate environment. Second, in keeping with our long established conservative approach to credit administration, we continue to proactively identify potentially vulnerable loans and during the fourth quarter, created specific reserves for select loans dealing with idiosyncratic issues that have exhibited extended periods of weakness. Specifically, we added to our provision for credit losses in the quarter, contributing to the increase in the allowance to 1.2% of total loans, compared to 1.16% for the prior quarter. Overall, credit quality remains strong with non-accrual loans standing at just 0.39% of our total loans at quarter end. Additionally, classified loans declined during the quarter and comprised 1.56% of total loans and improvement from 1.9% at the end of Q3. We believe it is wise to conservatively address possible challenges early and proactively. This includes exiting relationships, evaluating loans with unique characteristics individually, or pursuing other credit enhancement opportunities on potentially problematic loans. We remain highly selective and committed to strong asset quality amid economic uncertainty and the likelihood that interest rates will remain elevated this year. During the quarter, our lending teams continue to build momentum, further developing relationships with our clients, and finding compelling new opportunities to grow originations as we cultivate and build a more diversified loan portfolio. Our loan originations improved from $22.7 million in Q3 to $53.8 million in Q4 and were largely offset by payoffs, scheduled repayments, and strategic exits and certain lending relationships as part of our risk management process. Overall, this left total loans for the quarter essentially flat. Still, rates on loans we originated were 175 basis points higher than those paid off, helping provide margin support. We are positioning the overall portfolio for modest growth in the year ahead. Non-owner occupied commercial real estate loans made up 73% of total classified loans at year-end, up modestly from the prior quarter as we carefully monitor vacancy rates in the office sector. Our non-owner occupied office portfolio is diverse and consists of 153 loans with an average loan size of $2.4 million, the largest loan being $16.9 million. The weighted average loan to value was 59% and the weighted average debt service coverage ratio was 1.6 times based on our most recent data. Our office CRE book in San Francisco represents just 3% of total loan portfolio and 6% of our total non-owner occupied CRE portfolio. Just to reiterate, we are continually looking for ways to enhance our collateral on potentially problematic credits, including working with our borrowers to secure additional collateral and/or revised credit terms, all with the view of minimizing the risk of future credit losses. Now turning to deposits. We continue to successfully attract new clients and deepen ties with existing customers to support our funding base. While deposits grew over the past two quarters, our deposits in Q4 declined moderately mostly due to activity from clients executing typical seasonal and year-end business transactions. Since year-end, deposits have increased by as much as $104 million during January, which illustrates the impact normal large fluctuations can have on the daily balances due to our high level of operating accounts and why we maintain such high levels of liquidity. Additionally, we saw some customers move cash into alternative investments to capture higher returns, some of which were directed to our own wealth management group. Non-interest-bearing deposits at year-end remain strong at 44% of total deposits, and a majority of the non-interest-bearing outflows align with the same customer business activities we saw with overall deposits. Our average cost of deposits increased 21 basis points in the fourth quarter to only 1.15% continuing the deceleration of the last quarter. We believe we are appropriately competitive on deposit pricing, while maintaining a strong core deposit franchise and excellent customer relationships through exceptional service and our local market expertise. As many of you know well, our overall cost of funds has historically trended well below pure averages, reflecting our long-term approach to customer engagement. We prove our value to customers with a robust suite of products and services rather than competing on price alone. Importantly, as we pursue improved profitability, we also remain highly focused on expense management. Our fourth quarter non-interest expenses declined 2% from the prior quarter. With respect to liquidity and capital, we continue to maintain high levels of both. Security sales during the quarter reduced our capital sensitivity to rising interest rates. Our total risk-based capital ratio improved to 16.89% at year-end, compared to 16.56% at September 30. The 31% improvement in AOCI raised tangible common equity to 9.73% of tangible assets. Total available liquidity of approximately $2 billion at year-end consisted of cash, unencumbered securities and borrowing capacity. Importantly, our liquidity covers all of our uninsured deposits by over 210%. Uninsured deposits declined by a percentage point from the prior quarter and stood at 28% of our total deposits as of December 31. In summary, we made important progress on both sides of our balance sheet in the fourth quarter and throughout the second-half of 2023, aggressively taking strategic measures to drive profitability in the quarters ahead. With that, I'll turn the call over to Tani to discuss our financial results in greater detail.
Tani Girton: Thanks, Tim. Good morning, everyone. We've been working hard on many fronts to enhance and accelerate our profitability growth. Our tax equivalent net interest margin increase of 5 basis points in the fourth quarter followed a 3 basis point increase in the third quarter. Our balance sheet repositioning contributed 15 basis points reflected in reduced borrowings and securities and a lower average rate on borrowings and higher yields on securities. Loan yield improvements contributed another 10 basis points. Deposit cost increases reduced the margin by 20 basis points. We are optimistic that we will see further margin improvement in the coming quarters with a full effect of the balance sheet restructuring, our ongoing focus on selectively growing the loan portfolio, and the natural repricing of the existing loan book. We generated net income of $610,000 in the fourth quarter, or $0.04 per diluted share, as compared to net income of $5.3 million, or $0.33 per share in the third quarter. There were two primary drivers of the fourth quarter decline in earnings. First, we recorded a $5.9 million pre-tax net loss on the sale of investment securities as part of our balance sheet restructuring, which reduced net income by $4.2 million, or $0.26 per share. Second, we had an $875,000 increase in the pre-tax provision for credit losses, due in part to specific allowances on loans that have exhibited credit risk characteristics not indicative of pooled loans under the CECL model. We have taken a proactive approach in recognizing these characteristics by removing the loans from the pooled loan categories and analyzing them individually. Additionally, a $406,000 loss on the sale of an owner-occupied agricultural commercial real estate loan was charged to the allowance concurrent with the sale. Non-interest income, excluding the loss on the security sale, was stable for the quarter as modest increases from wealth management and trust services and other income were partially offset by a decrease in debit card interchange fees. Non-interest expenses were again well controlled in the quarter at $19.3 million, down from $19.7 million in the third quarter. The improvement was due to a combination of factors. Salaries and related benefits decreased $380,000, largely due to a decline in incentive-based compensation and partially offset by increases in regular salaries and accruals for insurance and employee paid time off. Deposit network fees also decreased by $287,000 due to a decline in reciprocal deposit network balances. Decreases were partially offset by a $164,000 increase in professional services expenses. Putting it all together, our profitability ratios were significantly impacted by the loss on sale of securities in the fourth quarter, without which pre-tax, pre-provision income would have been 4% higher than in the third quarter. As everyone on this call is aware [Technical Difficulty] challenging year for the banking industry with several regional bank failures following the fastest increase in interest rates in 40-years. Bank of Marin was characteristically well positioned to weather the storm. We've always maintained strength in our capital and liquidity positions and exercise disciplined credit and interest rate risk management and conscientious expense control. Since December 31, 2022, total risk-based capital improved 99 basis points to 16.9% for Bancorp and 89 basis points to 16.6% for the bank. Bancorp’s TCE ratio has improved 152 basis points over the year to 9.7%, and the bank's TCE ratio has improved 143 basis points to 9.5% at year-end. If the net unrealized losses on held to maturity securities were treated the same as available for sale securities, Bancorp’s TCE ratio at December 31 would have been 7.8%. On balance sheet and contingent liquidity remain strong and represent 213% of uninsured deposits. Our deposit base is well diversified with businesses representing 59% of total deposit balances and 33% of total accounts, while the remainder are consumer accounts. The average balance per account on our deposit base decreased by $5,000 over the quarter. Our largest depositor represented just 1.7% of total deposits, while our four largest depositors comprised 4.6%. Our interest rate risk position continues to be fairly neutral, although more liability sensitive than in past years due to the upward repricing of deposits. Security sales and reductions in borrowings added some asset sensitivity to the position. Cumulative deposit cost increases this interest rate cycle or the deposit beta have reached the levels assumed in our modeling and we are revisiting those assumptions in the context of our 2023 experience. Our Board of Directors declared a cash dividend of $0.25 per share on January 25, 2024, which represents the 75th consecutive quarterly dividend paid by Bancorp. While our share repurchase authorization remains in place, we didn't repurchase any stock during the quarter as we were focused on continuing to build our strong capital, increasing our allowance for credit losses and repositioning the balance sheet for the new interest rate environment. We have identified and implemented incremental adjustments across our balance sheet and expense structure to accelerate net interest income expansion and to self-fund efficiency improvements. And we will continue to look for further opportunities. Our vigilant credit administration, consistent expense discipline, and commitment to strong capital and liquidity levels give us a strong foundation to continue pursuing prudent growth in the year ahead. With that I'll turn it back to Tim to share some final comments.
Tim Myers: Thank you, Tani. In closing, the actions taken in the fourth quarter significantly impacted profitability metrics in the fourth quarter and without them the pre-tax, pre-provision income would have increased over that of the third quarter. We continue to emphasize our relationship-based banking model to maintain an attractive deposit mix and healthy liquidity levels, while proactively managing our balance sheet to expand our net interest margin. We remain committed to recruiting top talent and further building our teams to grow both deposits and loans, positioning the bank for increased profitability into the future. We continue to fortify our balance sheet and maintain robust capital levels to manage risk and are exercising consistent expense discipline as we lay the foundation for prudent growth in 2024. 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.
Operator: [Technical Difficulty] the floor for questions. [Operator Instructions] Our first question will come from the line of David Feaster with Raymond James. Your line is now open. Please go ahead.
David Feaster: Hey, good morning, everybody.
Tim Myers: Good morning, David.
Tani Girton: Good morning.
David Feaster: Perhaps not surprisingly, I was hoping to start on the margin. Can we talk a bit about how you think about, I guess, first of all, what do you think would be a good core margin run rate? I mean, there's been a lot of balance sheet maneuvers that you guys are doing. You've been very active. So curious about how you think about a good core margin? And then just the trajectory in a potentially declining rate scenario. You screen as modestly liability sensitive. You alluded in the press release maybe a bit more rate neutral. So just curious, anything about the margin trajectory if we do get potential cuts?
Tim Myers: Yes, thank you, David. Good question. I'll let Tani jump in here.
Tani Girton: Yes, thanks, David. So we still have some residual loan repricing coming off the book to the current levels of interest rates. So, you know, in the go-forward quarter or the first quarter, that's worth about 7 basis points end-to-end or 14 end-to-end 7 on average. And over the year, about 46 basis points end-to-end or about 23 basis points on average. And that is roughly, you know, that's in the base case with interest rates flat. So, you know, if you have rates going up, it’s more than that, but you also then have offsets of deposit rates going up possibly. And we are revisiting our deposit data assumptions there. But if you, you know, if we go down, we still have some residual repricing on the loan portfolio, plus we would have repricing on the deposits. So it's really difficult to say what the deposits are going to do on the repricing, although we do feel that that's going to continue to moderate in terms of increases if the Fed stays on pause. And then, you know, the last factor there, as I mentioned, was the residual or the full effect of the securities or the balance sheet restructuring. So we have zero borrowings on the balance sheet right now. And so I think that, you know, there's some, the full effect for one quarter versus we executed those transactions over the course of the fourth quarter. So we didn't get the full impact in the fourth quarter.
David Feaster: Sure. Do you have maybe kind of any expectation for what inclusive the margin would be inclusive of all the balance sheet actions?
Tani Girton: You know, I think in the next quarter, you know, 5 to 10 basis points. And for the core margin, boy, that's a really tough question. That's a hard one to say just, because there's so many moving parts.
David Feaster: Yes. And to your point on the deposit side, maybe switching gears there, appreciate all the commentary about seasonality and the potential benefits in January. I know there's some seasonal tax impacts in the quarter as well. Could you maybe just dig into and maybe quantify some of the seasonal dynamics that you saw in the quarter? And whether you started to see those balances recover in January like you had mentioned. And just how do you think about your ability to reprice deposits, just given deposit betas are relatively slow on the way up? And just any thoughts on the deposit outlook and kind of what you're seeing?
Tim Myers: Sure. So about 80% -- 79, 80% of the deposit outflow overall in the quarter was related to some combination of seasonal or what I would call unique but normal business transactions, business sales, trust distributions, business or real estate acquisitions. So not vendor payments or tax payments like you alluded to, but normal business activity. That was the vast majority of it. And we've had inflows in those same kind of accounts upwards of over $100 million throughout the month of January. So, you know, we know that that's a real factor. We did have about $25 million leave to go to outside brokerage rate, but that's down dramatically from Q4 when we admittedly got flat-footed trying to be stubborn about deposit pricing before the events of March, that was over $70 million in that category at the time. So, but those aren't customers we've lost. If you look at the dollars of deposit decline from lost business, it's less than 1%. So we've really done a good job of repricing the amount we brought in through our deposit campaign, we talked about the last couple quarters, almost $130 million, that weighted average is about 3.36 all in. So to your point, we're trying to hold the line on a relationship-based pricing model, still almost everything exception-based pricing, and we've already been strategizing about, okay, what do we do when rates start to come down and how do we respond? So a pretty minimal amount in time deposits, all of which mature in this year. But that was a fairly, I think, $18 million. So really trying to keep it in a few types of accounts that we can manage as proactively as possible. But that's kind of the math around. In deposits overall, we had about $25 million also moved from non-interest bearing into interest bearing. But those are clients that are again, still within the bank. So we don't, you know, that's -- and we had about $5 million net of money that went from deposit accounts here into our wealth management trust group to put into higher yielding securities. So that's the general breakdown, David.
David Feaster: Okay. That's extremely helpful. Thank you. And then maybe just last one for me, just touching on the growth outlook in the loan, some of the dynamics in the loan decline. It seems like maybe there was more asset sales and payoffs in the fourth quarter. Maybe there's some strategically that you're moving out of the bank, but I'm just curious maybe the pulse of the market from your standpoint, now demand's trending? How the pipeline's shaping up? And just how you think about organic well growth going forward?
Tim Myers: Sure. So we had a lot of robust activity, pipeline and closing in Q4. The mix is slightly more skewed towards C&I and owner users than maybe some of the prior quarters, but kind of overall mirrors the makeup of the overall portfolio on the originations. Obviously, when you close that much, you've got to rebuild the pipeline, but we feel better about where it is than we did a couple quarters ago for sure. And so we are aggressively looking, we've added some hires on the commercial banking side, looking to add some more, but part of that behavioral, part of that market sentiment, we are seeing a loosening of people willing to consider some of these options, you know, business transactions for which they need to borrow. On the asset sales side, I -- you know, I know that's been a bit of a recurring theme for us, but really is marginal in terms of the things we can control. Between assets, sales, and people just paying off debt with cash, that was almost 40% of that total. A couple larger or mid-sized, I would say, construction projects that completed and, as expected, and paid off. Only $3 million of that total refinanced and went to another institution. And then we had about $12 million of those payoffs that we put in the workout category, things we were doing that caused them to look for financing elsewhere. But that helped us get rid of some of our largest classified loans So we view that as a positive. In the end, did that depress the overall net loan growth? Of course, but in the long run, that was a positive for us.
David Feaster: Terrific. Thanks, everybody.
Tim Myers: You're welcome.
Tani Girton: Yes.
Operator: Our next question will come from the line of Woody Lay with KBW. Your line is unmuted. Please go ahead.
Woody Lay: Hey, good morning, guys.
Tim Myers: Good morning, Woody.
Tani Girton: Good morning.
Woody Lay: It was good to see the continued balance sheet management. I mean, do you think to the extent that, you know, loan growth opportunities remain elevated? Do you think we could see further restructuring in the quarters ahead?
Tim Myers: Well, I'll start with high level and then Tani can jump in if she wants. But we, you know, throughout that second-half of the year, we look for opportunities to shed lower yielding, some mix of lower yielding, but also that has a lower impact in terms of the losses on the sale of the securities. And we'll continue to look at that. Yes, I mean, we're seeing with the deposit trends, we expect those to continue to trend upward overall outside of seasonal fluctuations. We're outside of the line. I'm not super anxious to take losses on sales, but if we start seeing a real pickup in loan activity and that trade-off of those lower yielding securities and the higher yielding loans at these levels. Yes, we'll continue to look at that. Tani, do you want to add anything to that?
Tani Girton: Yes, I would just say, you know, the ones that we've sold, those had pretty low earn back periods, very low earn back periods relative to loan rates and pretty low earn back periods relative to paying off borrowings and putting money into cash. So we picked the best securities to sell for those based on that criteria. Now, if we, as Tim said, if we have significant loan growth, we would easily be able to target loan or low earn back periods in order to repurpose cash from securities into the loan book.
Woody Lay: Got it. That's super helpful color. Wanted to shift to deposit trends? I mean, they sound pretty positive so far in January. I was just curious how the non-interest bearing deposit trends are faring so far in January?
Tim Myers: I think that's where we saw the bigger fluctuations. That's where certainly some of the seasonal outflow was in terms of business transactions, whether normal vendor tax type payments versus those more one-time or unique things like a business sale where proceeds go to investors or purchase of real estate or a business. Again, we've seen the non-interest bearing increase upwards of $100 million throughout the month. So it does fluctuate. And so it is hard to tell with the seasonality that we see. But again, we're not losing a lot of money out the back door, losing very few to other institutions. And the pace of money moving out of non-interest bearing into both interest bearing and into non-bank financial markets like money markets, that is dissipating. So I don't know how to prognosticate, but we continue to see positive trends there.
Tani Girton: Yes, and if I could just add that a significant portion, so we had a little lift in our interest bearing deposits over the course of the fourth quarter, but a pretty large portion of that was new money from existing customers, as well as new relationships. So I think that's an important data point.
Woody Lay: Got it. And then last for me, I know you're pretty aggressive on the grading process with credit, but just any color you can share on what drove the increase to special mention loans in the quarter?
Tim Myers: Yes, so I'll start really high level and then hand it off to Misako Stewart, but we are pretty conservative or aggressive depending on how you look at that and looking things in a watch category, you know, very finite time period that we let stuff sit there. And so we do have stuff move from watch as a pass credit into criticize, but we also are constantly looking at those that we can upgrade. So I'll let Misako jump in on the specifics.
Misako Stewart: Right, right. So we did continue to see risk-free migration in the quarter, kind of moving in both directions. But in the special mention category, like Tim was talking about, we do tend to take a more aggressive approach in our watch category that if we don't see improvements over about two or three quarters, we will move it into special mention. And so the increase primarily came from those situations, all kind of with individual kind of different situations, but not necessarily further deterioration, just not any, you know, meaningful improvement over the last couple of quarters. However, we are expecting a number of upgrades to pass in the first quarter after we get results from year-end. And so again, like I mentioned, we are going to continue to see migration in both directions. And just in our substandard category, again, that actually balance went down by quite a bit just due to some, you know, some active and successful workout situations. Although we did have two more loans put into our non-accrual category as well. But overall, you know, that's we will continue to see migration, I think, in all grades.
Woody Lay: Yes. All right. That's all for me. Thanks for taking my questions.
Tim Myers: Thank you, Woody.
Operator: Next question will come from Jeff Rulis with D.A. Davidson. Your line is now open. You may begin.
Jeff Rulis: Thanks. Good morning.
Tim Myers: Good morning, Jeff.
Jeff Rulis: Just to stay on the credit side. That classified balance, $32 million is any way to kind of break out the larger segments that are kind of most represented what's in that bucket?
Misako Stewart: Yes. So the largest loan that we have in that is an office building in San Francisco that I think has been mentioned before, which was downgraded, I think, three Decembers ago, and that makes up nearly half of that balance. We continue to work with the borrower, loan is continuing to pay as agreed. We have not restructured and there's borrowers continuing to still make contractual payments there. And we continue to monitor that very closely. But that makes up the bulk of the substandard.
Jeff Rulis: Okay. Pretty granular from there. That's helpful. Tani, if I could circle back to the margin. I just wanted to make sure I've got pretty good detail, but I wanted to make sure I have it correct. If we're at, call it, $253 million, I'm looking at the benefits to the margin. I think you said residual on average kind of full-year impact of 23 basis points. So in a vacuum, does that take margins to $275 million, then other additions would be a little tail of the balance sheet restructuring could be a benefit, not to mention if we see some rate cuts, if you mean a liability sensitive and upswing? And then it would be any carving back would be further repricing or pressure on the funding side. Is that -- are those the bigger pieces that we're talking about in magnitude, is that generally in line?
Tani Girton: Yes. Yes. That sounds right.
Jeff Rulis: Okay. Got it. And then I guess one last one, just on the non-interest expense. In terms of management of that, that's been a contained number. I don't know if you typically don't like to throw out outlooks. But in terms of expense growth, what kind of year is that in terms of investments? Or are you really mindful of that line. I just want to -- I don't know what the outlook for expenses ahead is what the messaging is it camp down? Or is it hey, we're seeing -- Tim, I think you mentioned, obviously, you're seeing some talent here and there. Just want investment versus kind of mining expenses with that in the wash?
Tim Myers: If you adjust out about the roughly $600,000 accrual adjustment, that expense level is a good indicator in the quarter of our run rate. We are looking to make hires, but we horse trade around staffing levels and where we can free up some money. We have made some cost save initiatives in a couple of areas to free up some funds for further investment and technology to streamline our lending operations in particular. So there are expenses coming, but we will continue to do our best to offset those elsewhere. So again, if you back out that $600,000 accrual adjustment, that Q4 expense level seems a good indicator to us right now.
Jeff Rulis: $600,000 million is a positive, meaning the benefit in the fourth quarter?
Tani Girton: Yes, you would want to take that out because those were accrual adjustments, yes. And then just a reminder that in the fourth -- in the first quarter, our 401(k) contribution matching tends to spike up, because everybody is resetting for the year. And then merit increases typically will go into effect in the second quarter.
Jeff Rulis: Got it. And Tani, just a quick last one. The tax rate is for '24, what's a good number to use?
Tani Girton: I think you can continue to use the 25%, 26%.
Jeff Rulis: Okay. That's it from me. Thank you.
Operator: [Operator Instructions] Next question will come from Andrew Terrell from Stephens. Your line is now open. Please go ahead.
Andrew Terrell: Hey, good morning.
Tani Girton: Good morning.
Tim Myers: Good morning, Andrew.
Andrew Terrell: Just a couple of quick ones for me. One, can we go back to the margin for just a moment. And Tani, do you have the spot securities yield at 12/31?
Tani Girton: Yes, I do. Just let me grab that, hang on one second. You can go ahead. And I'll come back to that, yes.
Andrew Terrell: Okay, perfect. Yes, yes. If I look at shifting gears, looking at slide 15 on the investor CRE maturities or the repricing in 2024 and 2025. This is a really helpful slide. But when I look at the 2024 bucket for loans repricing, the $26.3 million outstanding, you've got the new weighted average debt service assumption at 120 or 1.2 times. I guess when I look back at the December presentation, the 2024 loan repricings were estimated to carry a 2.01 times debt service after reprice. So I guess the question is, what change in the disclosed debt service? Is it just a function of the mix of loans that are in that bucket, because it does look like the mix changed a little bit? Or were there any kind of model changes that you made within these assumptions?
Tim Myers: I think we had one property in there that in between those quarters where the tenant chose not to renew their lease, so we adjusted that to more market-based assumptions. So that skewed it was, I think, the biggest impact.
Andrew Terrell: Okay, understood. But no change like the model assumptions or anything in there?
Tim Myers: No.
Tani Girton: No, no.
Andrew Terrell: Okay.
Tani Girton: Andrew, back to your net interest margin question, sorry. The average portfolio yield in December was 2.32%. And then that's broken down in the presentation between AFS and Health to Maturity.
Andrew Terrell: Okay, perfect 2.32%, got it. Okay, and then, Tani, I wanted to go back to some of the commentary you gave earlier around the kind of residual loan repricing. And I guess I'm trying to understand a little bit better when I look at -- I think it's page 18, the disclosure around the asset repricing going forward on both the loan and the security side. When I look on the loans in that kind of three to 12-month bucket, it looks like, call it, $100 million or so of loans repricing in 2024. So I'm -- I guess I'm trying to figure out how we get to the point-to-point disclosure of 46 basis points kind of throughout the year in terms of loan repricing, if there's just $97 million in that bucket, if that question makes sense?
Tani Girton: Let's see. So you've got -- well, you've got the three to 12 months at 97%, but you've also got the $240 million in the three months or less. So obviously, some of that $240 million, if you have flat rates won't reprice, but some of it is coming -- rolling down the curve and is ready to reprice. Does that make sense?
Andrew Terrell: Yes, it does. My assumption was just that the three months or less was predominantly floating and had already repriced just given it's the rate was [7.75%] (ph) here. So I was thinking about the impact is more of like the $97 million, maybe you add an extra quarter in there coming from $584 million up to $774 million. It just seemed -- it was tough to get to the type of point-to-point loan yield expansion just based off the slide.
Tani Girton: Yes. Okay, Andrew, I'll look at that offline and see if I can explain it a little better.
Andrew Terrell: Okay. Got it. I appreciate it. And then last question, just on the margin. It looks like if I look at the interest-bearing deposit cost progression throughout the quarter, the December month saw kind of the greatest increase. I'm not sure if that was more of just a function of mix. I know there's some volatility towards quarter end, it sounds like. But just given maybe an elevated amount of pressure in December versus the prior quarter. Would you expect that we could see, I guess, a relatively stable margin in the first quarter before some of these benefits start to kind of kick in as we roll throughout the year.
Tim Myers: Yes. I think some of the movements in the noninterest-bearing to interest-bearing and some that moved out, they were pretty lumpy and that did happen later in the quarter. And so I don't want to say that's a run rate then that can be a little jerky and its impact depending on the timing. So I don't think that's indicative of a run rate per se. But again, I'm really loath to prognosticate that given what's happened.
Andrew Terrell: Yes, totally understood. Okay, well, I appreciate you all taking the questions this morning.
Tim Myers: Thank you very much. So we did have an online question. When you talk about the residual loan repricing opportunity, is it safe to assume that will continue in 2021 and beyond, assuming you do not -- we do not return to a zero integrate policy. I'll let Tani handle that.
Tani Girton: And I would say, yes, there -- the residual repricing continues beyond the one-year time horizon. We typically the duration on our loan portfolio is somewhere around four years. So you can assume that we're going to get residual repricing over that entire time frame.
Operator: There are no further questions. I will now turn the call over to Tim Myers for closing remarks.
Tim Myers: Thank you again, everyone, for both your interest, support and questions. We appreciate it and look forward to seeing you next quarter. Go niners.
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