Tim Coffey

Tim Coffey, an analyst at Janney Montgomery Scott, asked if the higher percentage of SBA loans sold relative to originations in Q4, compared to previous quarters, was due to the government shutdown or the new originator incentive program. He also inquired about the timeline for GBank to return to the Q3 credit card transaction volume of $330 million and sought an outlook on non-interest expenses for Q1, considering recent fluctuations, and the net interest margin outlook assuming two rate cuts during the year.

Answer

Jeffery Whicker, EVP and CFO, clarified that the skewed relationship between SBA sales and originations was primarily due to the government shutdown, as many loans originated in Q3 could not be sold until Q4. Edward Nigro, Chairman and CEO, further explained that originations were high in late Q3 due to anticipation of the shutdown, but sales were delayed, and clarified that about 64% of total originations are typically sold, accounting for pari passu loans. Nigro stated that GBank expects to return to Q3 credit card transaction levels 'rather quickly' once marketing relaunches, noting that players typically pay off cards quickly. Whicker anticipated Q1 non-interest expenses to be 'very similar' to Q4, with one-time items offsetting some salary increases, and explained that variable expenses tied to transaction volume will lead to overall expense increases with growth. Whicker also stated that the net interest margin should remain 'very similar' to the previous year, as the anticipated increase in non-interest-bearing deposits is expected to offset the impact of Fed rate decreases.

Tim Coffey asked if 2026 presents an opportunity to lower the loan-to-deposit (LDR) ratio, considering potential reductions in interest expense and growth in interest income. He also questioned the current competitive landscape for commercial real estate (CRE) loans within the company's operating footprint and whether competitors are undercutting loan spreads relative to the yield curve.

Answer

CFO Lynn Hopkins stated that while the company has reduced reliance on wholesale funding, lowering the LDR significantly would require deposit growth to outpace attractive loan growth, or opportunistic loan sales. She suggested a potential move into the mid-90s for the LDR. President and CEO Johnny Lee acknowledged ongoing CRE competition, particularly on rates, but emphasized the bank's relationship-driven approach, focusing on overall client potential beyond just yield. He noted that competitors are offering 5-year fixed rates below 5.75%, while RBB Bancorp is maintaining pricing above 6%.

Tim Coffey asked if 2026 presents an opportunity to lower the loan-to-deposit ratio, considering potential reductions in interest expense and growth in interest income. He also inquired about the competitive landscape for commercial real estate (CRE) loans in the company's footprint and whether competitors are undercutting spreads.

Answer

CFO Lynn Hopkins stated that while the company has reduced reliance on wholesale funding, lowering the loan-to-deposit ratio significantly would require deposit growth to outpace loan growth, or opportunistic loan sales, with a general target of reaching the mid-90s. CEO Johnny Lee acknowledged ongoing competition in CRE lending but emphasized the bank's relationship-driven approach, which allows them to maintain yields above 6% despite competitors offering lower fixed rates (e.g., 5.5%-5.75%), indicating they are willing to forgo some business to maintain pricing discipline and focus on overall client relationships.

Tim Coffey asked Chairman and CEO Li Yu about the best opportunities for loan growth by product for the upcoming year. He also questioned CFO Edward J. Czajka on a reasonable full-year growth rate for non-interest expenses and inquired about the bank's general thoughts on share repurchases for the year, as well as the expected timeline for the disposition of classified loans.

Answer

Chairman and CEO Li Yu indicated that commercial real estate and C&I loans are expected to drive growth, with the bank budgeting a higher number than the previous year. CFO Edward J. Czajka confirmed a mid to high single-digit growth rate for non-interest expenses. Chairman and CEO Li Yu stated that share repurchases would depend on loan and deposit growth, suggesting the situation is less conducive than last year. He and Chief Risk Officer Nick Pi aimed to resolve a good portion of the classified loan issues within two quarters.

Tim Coffey asked about Preferred Bank's best opportunities for loan growth in the upcoming year, the expected full-year growth rate for non-interest expenses, and management's general thoughts on share repurchases for 2026. He also sought clarification on the timeline for the disposition of the recently classified loans.

Answer

Li Yu, CEO, indicated that commercial real estate and C&I loans are expected to drive growth, with the bank budgeting a higher number than the previous year, while acknowledging potential government policy changes. Edward J. Czajka, CFO, confirmed a mid to high single-digit growth rate for non-interest expenses. Mr. Yu stated that funds would primarily be reserved for loan growth and deposit needs, making the environment less conducive for repurchases than the prior year. Regarding classified loans, Mr. Yu and Nick Pi, CRO, aimed to resolve a majority within two quarters.

Tim Coffey asked about the rebound in loan modifications, seeking to understand the underlying causes and what triggers a loan to fall into that category. He also questioned whether the addition of Heritage Bank of Commerce is expected to materially change the outlook for loan growth in the latter half of 2026 and beyond, and requested the core loan yield for the quarter.

Answer

President and CEO David A. Brager stated that there was nothing abnormal about the loan modifications, explaining that loans enter this category if customers request assistance or if annual reviews reveal issues like unmet debt service coverage or covenant breaches, noting it's not a material number. Regarding the Heritage deal, Mr. Brager anticipates potential tailwinds for loan growth due to new markets and expanded client capabilities, but emphasized maintaining credit quality and integrating cultures. EVP and CFO E. Allen Nicholson provided the core loan yield for the quarter as 5.12%.

Tim Coffey asked about the reasons for the rebound in loan modification balances, seeking to understand what causes a loan to fall into that category. He also questioned whether the addition of Heritage Bank of Commerce is expected to materially alter the bank's loan growth outlook for the latter half of the current year and the next, and requested the core loan yield for the quarter.

Answer

David A. Brager, President and CEO, explained that loans enter the modification category for various reasons, including customer requests for payment assistance or identification during annual reviews of issues like unmet debt service coverage or covenant breaches, noting the number is not material to the total portfolio. He anticipates the Heritage merger could offer tailwinds for overall loan growth due to new markets and expanded client capabilities, but emphasized maintaining credit quality and evaluating integration. E. Allen Nicholson, EVP and CFO, stated the core loan yield for the quarter was 5.12%.

Tim Coffey (Janney Montgomery Scott) asked about Bank of Marin Bancorp's visibility into Q4 deposit balance growth to counteract seasonal effects and whether seasonal deposit outflows due to tax payments are expected to be larger than in previous years.

Answer

President and CEO Tim Myers stated that forecasting Q4 deposit balance growth is challenging due to large fluctuations from existing depositors, despite consistent new account additions. He also noted that active client discussions have not indicated any abnormally large seasonal deposit outflows for tax payments compared to prior years.

Tim Coffey asked if Bank of Marin Bancorp had a clear line of sight to deposit balance growth in the fourth quarter that could offset typical seasonal outflows. He also inquired whether the company anticipated seasonal deposit outflows due to tax payments in Q4 2025 to be larger than in previous years.

Answer

President and CEO Tim Myers stated that forecasting deposit balance growth is challenging due to large fluctuations from existing customers, despite consistent new account acquisition. He noted that the bank has not received any indications from clients of abnormally large outflows for tax payments or other reasons in Q4, though he acknowledged the difficulty in predicting such events.

Tim Coffey from Janney Montgomery Scott inquired about any improvements in the lease-up time for construction projects on existing buildings (property improvements, rehabilitation) within the commercial real estate portfolio, recalling that some of these loans had previously moved to non-accrual status.

Answer

Chief Credit Officer Derek Steward clarified that very few such loans made it to non-accrual. He noted that while lease-up times for multifamily and industrial properties have been longer than hoped due to supply in 2021-2022, buildings are still filling up, sometimes with concessions, and he expects continued improvement in criticized and classified credit over the next year.

Tim Coffey inquired about the commercial real estate portfolio, specifically construction loans for property improvements and rehabilitation, asking if there has been an improvement in the time required for lease-up once projects are complete, and referencing previous non-accrual issues.

Answer

Chief Credit Officer Derek Steward clarified that not many of these loans made it to non-accrual. He noted that while lease-up times for multifamily and industrial properties have been longer than hoped due to supply in 2021-2022, buildings are still filling up, sometimes with concessions. He expects continued improvement in criticized and classified credit over the next year.