Earnings Call Transcript
Bank of Marin Bancorp (BMRC)
Earnings Call Transcript - BMRC Q2 2024
Krissy Meyer, Corporate Secretary
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. 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 and on the webcast replay. Before we begin, I want to note that we will discuss 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 known as of Friday, July 26, 2024 and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ significantly from those mentioned in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in our earnings press release and our SEC filings. After our prepared remarks, Tim, Tani, and our Chief Credit Officer, Misako Stewart, will be available to answer your questions. Now, I'd like to turn the call over to Tim Myers.
Tim Myers, President and CEO
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 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 costs, 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 improvements 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 non-owner-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 non-performing status due to idiosyncratic issues with the borrower. The borrowers are actively pursuing refinancing and asset sale options and are 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 securities 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 on our balance sheet repositioning and on 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, Executive Vice President and CFO
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 increase 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, President and CEO
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.
Operator, Operator
Our first question will be from Matthew Clark at Piper Jaffray. Matthew, please unmute yourself and you can ask your question.
Matthew Clark, Analyst
Can you hear me?
Tim Myers, President and CEO
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, Analyst
I appreciate that. How much in interest income reversal did you have this quarter versus last on new nonaccruals?
Tim Myers, President and CEO
That's okay. Matthew, Tani was answering a question that came in online. Can you repeat that again? I apologize.
Matthew Clark, Analyst
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, Executive Vice President and CFO
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, Analyst
No worries. And the weighted average rate on $64 million of new loan fundings, what was that rate?
Tim Myers, President and CEO
The weighted average rate on the new loans was 7.15%.
Matthew Clark, Analyst
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, Executive Vice President and CFO
We don’t have a spot rate for June 30.
Tim Myers, President and CEO
It was 146, I think. It was up 1 basis point for June, yes.
Matthew Clark, Analyst
Okay. What was the margin in June? I know you mentioned it increased from May by 21 or 22 basis points, but what was the margin in June?
Tani Girton, Executive Vice President and CFO
What was the margin? The actual margin was 2.64%.
Matthew Clark, Analyst
And that didn't include any interest income reversals, I assume?
Tani Girton, Executive Vice President and CFO
No.
Matthew Clark, Analyst
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, President and CEO
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 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. 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, Analyst
Yes. Thanks.
Tim Myers, President and CEO
You're welcome.
Operator, Operator
Our next question will be from Andrew Terrell with Stephens.
Andrew Terrell, Analyst
Hi, good morning. Can you hear me?
Tani Girton, Executive Vice President and CFO
Hi, Andrew.
Andrew Terrell, Analyst
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, Executive Vice President and CFO
Yes. That will be done.
Andrew Terrell, Analyst
Thank you. Could you provide some expectations on the margin for the third quarter? There are many factors at play. June's numbers are up, and it seems there are still some reinvestments occurring in July. What do you anticipate the margin will be for the third quarter and the second half of the year?
Tani Girton, Executive Vice President and CFO
We expect to gain at least another 10 basis points from the securities repositioning. I haven't calculated precisely how much will come from the new loans originated in June that were not included for the entire quarter, but that will contribute positively. We have 37 basis points factored into the balance sheet for loan repricing over the next 12 months, which averages about 3 basis points per month. The deposit costs remain uncertain, although they are less unpredictable than before, as we are seeing a consistent trend of them slowing down.
Andrew Terrell, Analyst
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, Executive Vice President and CFO
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, Analyst
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 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, Executive Vice President and CFO
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, President and CEO
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, Analyst
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 standing 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, President and CEO
I think that's a fair point. I'll provide an overview while Misako will delve into the specifics. We've been discussing that $16.7 million loan since the fourth quarter of 2021, which was significantly affected by the pandemic and remote work. It's become a prime example of such impacts. We've been transparent about it. If you exclude the dedicated reserve for that loan, our average loan-to-value ratio in San Francisco is 58%, and even with that property included but after factoring in the reserve, it's 72%. Out of the 11 properties we have in San Francisco, seven are fully occupied. This particular case is unique, not just in terms of size but also regarding occupancy and vacancy rates. The required increase in rents necessary to refinance the loan in full at maturity in two years is significant, making it the most affected by current valuations. We're continually evaluating these values, whether through appraisals or our own assessments. This situation stands out as distinctive regardless of size. Misako, do you have any additional thoughts?
Misako Stewart, Chief Credit Officer
Yes. The loan that Tim mentioned is the largest office property we have in our portfolio. While I understand San Francisco is a concern, the San Francisco office portfolio only represents 3% of our total, comprising 11 properties that are well diversified geographically. We do not have any in the financial district. As Tim said, if we exclude that one loan, our loan-to-value ratio and our weighted average debt service coverage are at 120% and 58%, respectively. We also have strong occupancy in most of those properties along with good sponsorship. Thus, we believe that particular loan behaves differently from the rest in our portfolio.
Andrew Terrell, Analyst
Yes, it does. Okay, thank you for the call and I appreciate the questions.
Misako Stewart, Chief Credit Officer
Thank you.
Operator, Operator
Our next question will be from Woody Lay with KBW.
Woody Lay, Analyst
Hi, good morning, guys.
Tim Myers, President and CEO
Morning Woody.
Woody Lay, Analyst
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, President and CEO
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.
Woody Lay, Analyst
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, President and CEO
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.
Woody Lay, Analyst
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, President and CEO
Yes, give us a second.
Tani Girton, Executive Vice President and CFO
I do. 6.7 is a specific reserve.
Woody Lay, Analyst
And how much of the provision reported in the second quarter was related to that credit?
Tani Girton, Executive Vice President and CFO
I'd say it's a major contributor for the 5.2.
Tim Myers, President and CEO
The reason's primarily they don't match, Woody, 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?
Woody Lay, Analyst
Yes. All right. That's great. Thanks for taking my question.
Misako Stewart, Chief Credit Officer
I wanted to take it a factor too. Sorry, I was just going to mention that the unemployment forecast looks pretty optimistic. And so that also contributed to offsetting that amount.
Woody Lay, Analyst
Got it. Makes sense. Thank you.
Operator, Operator
Our next question will be from David Feaster with Raymond James.
David Feaster, Analyst
Hi, good morning, everybody.
Tim Myers, President and CEO
Morning David.
David Feaster, Analyst
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, President and CEO
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, Analyst
Yes.
Tim Myers, President and CEO
As mentioned in the script, we have scheduled payments due by 2026 regarding the pledge with the bank. There has never been an issue with payment, and we expect to receive those payments. Over the next two years, we will closely monitor the situation, and we are noticing an increase in leasing activity, which gives us some optimism. While we can't guarantee it, we hope this could indicate that we are nearing the bottom of the valuation, especially as leasing activity continues to rise. This situation allows for two years of potential improvement in tenancy. The spaces are relatively small, ranging from 3,000 to 4,000 square feet, so we don't need a large number of tenants to significantly impact the net operating income and consequently the property's valuation. There are various reasons to believe that whether AI's influence on leasing activity in San Francisco is the best solution, we stand to benefit from it, and it seems likely that we will. Thus, any valuation discrepancies may resolve as we approach maturity. Although we are confident of being paid, we are actively monitoring the situation and have set aside reserves at the current value, giving us a cushion to follow this closely.
Misako Stewart, Chief Credit Officer
Yes, I agree. The relationship that Tim mentioned is our only non-owner-occupied office classified in the substandard category. We monitor the portfolio closely on a quarterly basis. As Tim pointed out, any issues with our other office properties are supported by our sponsorship, which has the capacity to address any shortfalls or resolve problems. We continue to work with our borrowers in these areas. In fact, last quarter we achieved a couple of upgrades because we reached resolutions through additional pledged cash or unencumbered real estate with cash flow to support it. These are the discussions we are having, and I believe we have found good success in resolving issues with our borrowers.
Tim Myers, President and CEO
Yes, I think that's a fair assessment. Regarding the migration question, we did not observe any increase or change in classifieds. We did have two significant relationships move to nonaccrual. As we mentioned, one is related to the property in San Francisco, and the other involves a consumer goods program with brands they can sell, which faced some unique issues. They do have a Letter of Intent to sell some of those brands. Therefore, we don't think it's unrealistic to suggest that the company can take action. They have done this in the past, and we believe they can sell some brands and significantly reduce the debt to a manageable level for refinancing or cash flows. However, due to the timing and various factors, we deemed it wise to move it to nonaccrual. Nonetheless, we remain optimistic about the outcome, and this situation does not reflect issues with the rest of the portfolio.
Misako Stewart, Chief Credit Officer
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, Analyst
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, President and CEO
That's a very good question. Yes, our interest-bearing deposits have a weighted average rate of around 3.18%, potentially reaching as high as 3.5%, but that's still considerably lower than the advertised rates. It's a small increment, yet it contributes to our account diversification. The percentage of new accounts we gain each quarter is positive, although it doesn't fully balance out the significant variations in our large operating accounts. As I’ve mentioned before, the decline in deposits hasn’t harmed our relationships; in fact, since the end of the quarter, we've increased to as much as $67 million, finishing Friday with $43 million up. Although we saw a decrease of $70 million at quarter-end, we can observe swift fluctuations, within just a week, that can restore that balance. These variations in our large deposit accounts are noteworthy. Regarding your initial point, both our branches and commercial group—especially the latter—have a strong emphasis on low-cost accounts and managing Commercial & Industrial deposits. This quarter, we've secured new relationships where those deposit accounts have not been completely utilized yet, and we anticipate significant advantages from our focus on professional services moving forward. There are seasonal trends with professional service firms and their deposit balances, but this could substantially help counteract the fluctuations we currently experience. Our strategy encompasses all of these elements, focusing on competitive rates while managing to enhance account diversification to alleviate some of the seasonal and cyclical impact seen in our larger deposit accounts.
David Feaster, Analyst
That's helpful. Lastly, it seems like you have considerable financial flexibility due to the liquidity you have, as well as the significant capital remaining even after the securities transactions you've completed. I'm interested in how you plan to deploy that liquidity and capital in the future. What are your priorities in this regard?
Tim Myers, President and CEO
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 reposition puts 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, Analyst
Terrific. Thanks, everybody.
Tim Myers, President and CEO
You're welcome. Thank you.
Operator, Operator
Next, we have a question from Tim Coffey with Janney.
Tim Coffey, Analyst
All right. Morning, Tim.
Tim Myers, President and CEO
Good morning, Tim. How are you?
Tim Coffey, Analyst
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, President and CEO
I don't recall the specific details from the origination, but the appraised value was $33.5 million when we likely provided the last increase a few years ago. So, if you calculate that, it went from 33 down to 10. When was the last appraisal conducted?
Tani Girton, Executive Vice President and CFO
The last appraisal, yes, was about $33.5 million, and that was...
Tim Myers, President and CEO
No, the newest one.
Tani Girton, Executive Vice President and CFO
The newest one is about $9 million, $9.2 million. So that's a substantial decline.
Tim Myers, President and CEO
Not exactly the trajectory an investor wants, but yes, it was impacted more significantly. Again, this is due to its unique characteristics as a tall office building located in the financial district.
Tim Coffey, Analyst
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, Executive Vice President and CFO
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, President and CEO
Even when we don't have certain insights, we gather data from our portfolio stress tests concerning cap rates, which involves evaluating the overall investor portfolio. We're continuously receiving information, so while we anticipated a downward trend as we discussed, the severity of it caught us off guard. Nonetheless, we believe there's potential for significant improvement. What we have now is based on today's appraisal, reflecting the leasing activity and current trends for similar properties in San Francisco. There's a real possibility for substantial enhancement. Therefore, we are proactively adjusting our provisions today in anticipation of what may occur two years from now, and we deemed it wise to take this step.
Tim Coffey, Analyst
Yes. As you and I have spoken about, this is the outlier in the portfolio.
Tim Myers, President and CEO
Yes, that's right.
Tim Coffey, Analyst
Okay. Those are my questions. Thank you very much.
Tim Myers, President and CEO
Thank you, Tim.
Operator, Operator
Thank you. That was our final raised hand end here. I will now pass it back to Tim Myers.
Tim Myers, President and CEO
We had one online question regarding the coupon yield on the purchased residential mortgage portfolio and whether the purchase was at a premium to par. We paid just over par, specifically a small premium of $0.02. The mortgage coupon was 7.16, and our yield is 6.91. I hope that clarifies the question for the person who asked.
Tani Girton, Executive Vice President and CFO
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, President and CEO
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, Executive Vice President and CFO
Thank you.
Misako Stewart, Chief Credit Officer
Thank you.