Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Operating earnings in the second quarter significantly improved from the first quarter, driven by a lower provision for credit losses.
- The company has onboarded a team to lead its expatriate banking services division, contributing to deposit diversification.
- Average deposits have grown by $710.3 million from a year ago, with insured deposits totaling 73% of total deposits.
- Net charge-offs declined to a more normalized $2.3 million in the second quarter from $19.1 million in the first quarter.
- Tangible book value per share increased to $38.74, representing an annualized 5% growth rate from the prior quarter.
Negative Points
- The company reported a GAAP net loss for the quarter totaling $84 million, primarily due to a $104 million impairment in the value of goodwill.
- Operating pre-provision net revenue declined to $34.4 million from $38.3 million in the linked period.
- Net interest income before provision decreased to $71.4 million in the second quarter from $74.7 million in the first quarter.
- Non-performing loans increased to $98.2 million at June 30 from $91.5 million at March 31.
- Operating noninterest expense, excluding goodwill impairment, increased to $42.3 million from $40 million in the previous quarter.
Q & A Highlights
Q: Can you provide details on the $254 million in office loan maturities coming in the back half of the year? How much of that is already classified or criticized?
A: Approximately 60% of those loans are already classified or criticized. We have taken a hard look at all our maturities, and a significant amount are short-term extensions initially put in place for modifications. We have absorbed losses on non-performing real estate with current appraisals, and while there is always a risk of further deterioration, recent appraisal consistency gives us cautious optimism.
Q: Is there any update to your guidance on the allowance for credit losses (ACL) and charge-offs for the remainder of the year?
A: We are close to where we need to be on the reserve, but external data sources heavily influence the reserve level. Charge-offs have been driven by appraisal valuation issues rather than performance-related issues. We are cautiously optimistic about charge-offs, as recent market trades show less valuation risk going forward.
Q: Can you elaborate on the appraisal process and its impact on valuations?
A: Our policy requires an appraisal within one year for non-performing loans. Recent appraisals, particularly in suburban markets, have shown less severe discount rates and cap rates compared to central business districts. While there is still some volatility, the consistency in discount rates is encouraging. Potential interest rate drops could further stabilize valuations.
Q: How does the exposure to suburban markets versus central business districts impact your portfolio?
A: Exposure to suburban markets has been beneficial as recent appraisals in these areas have held up better. We are getting more and better live examples and data collection, which helps in assessing valuations. Rate cuts, if they happen, will also positively impact valuations.
Q: What is the capacity of borrowers to make incremental paydowns or provide more collateral support?
A: Each situation is unique, but we have seen borrowers willing to make call paydowns in return for extensions. There is more optimism among property owners, and they are more willing to invest what it takes to get through the next year to 18 months.
Q: What are your thoughts on the future of the office sector and its impact on your portfolio?
A: We remain cautious about the office sector, understanding that a return to pre-COVID absorption rates is unlikely. However, we are dedicated to working closely with our customers to find solutions that maximize the value of their collateral. Our strategy is to gradually diversify our loan portfolio while continuing to offer exceptional value to our commercial customers.
Q: How are you addressing the challenges in the assisted living segment of the market?
A: We have seen weakness in the assisted living segment due to enhanced in-home coverage from federal programs and increased human capital costs. These loans are current, but stabilization is taking longer than expected. We have adjusted our internal risk ratings to reflect the heightened risks associated with these projects.
Q: What steps are you taking to mitigate maturity risks in your CRE office loans?
A: We are assessing all CRE office loans with maturities over the next 18 months and taking appropriate actions, such as cash flow sweeps, paydown requirements, enhanced guarantor support, payment reserves, and additional collateral. Our goal is to have mutually acceptable solutions for our clients and an improved credit posture for the bank.
Q: How do you view the future performance of your loan portfolio?
A: We are cautiously optimistic about the future performance of our loan portfolio. While there are still risks associated with appraisal valuations, recent trends show more stability. We continue to build reserves as a precautionary measure and remain focused on comprehensively considering risks each quarter.
Q: What are your growth strategies to enhance pre-provision net revenue?
A: Our growth strategies aim to enhance pre-provision net revenue, thereby supporting returns on assets and equity. This approach allows us to reinvest in innovative products and services for our customers and communities while also delivering strong returns for our shareholders.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
