Good morning and thank you for joining the Bank of Marin Bancorp’s Earnings Call for the Second Quarter Ended June 30, 2020. I am Andrea Henderson, Director of Marketing for Bank of Marin. During the presentation all participants will be in a listen-only mode. [Operator Instructions] This conference call is being recorded on July 20, 2020.

Joining us on the call today are Russ Colombo, President and CEO; Tim Myers, Executive Vice President and Chief Operating Officer and Tani Girton, Executive Vice President and Chief Financial Officer. Our earnings press release which we issued this morning can be found on our website at bankofmarin.com where this call is also being webcast.

Before we get started, I want to emphasize that the discussion on this call is based on information we know as of Friday, July 17, 2020 and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements.

For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in our earnings press release, as well as our SEC filings. Following our prepared remarks, Russ, Tim and Tani along with Chief Credit Officer, Beth Reizman will be available to answer your question.

And now, I’d like to turn the call over to Russ Colombo..

Thank you, Andrea. Good morning and welcome to the call. I hope everyone remains healthy and safe. As COVID-19 persists in impacting our daily life, we all find ourselves responding to a very fluid situation. In the face of so much uncertainty, Bank of Marin continues to execute on our guiding principles.

Relationship banking, discipline fundamentals and community commitments, which positions us well to assist our customers in weathering the pandemic. At the outset of the public health crisis, the bank swiftly responded to customer needs, including actively participating in the PPP.

Since the inception of the program we have funded over $300 million in PPP loans, helping over 1800 local small businesses and nearly 28,000 employees. These loans will aid many of our customers in bridging the gap through economic recovery. We also implemented a 120-day loan modification program for borrowers with hardship requests.

As of July 10, the bank had approved 260 loan modifications exceeding $386 million. As that problem [ph] moves forward – moves towards maturity in August, we continue to have active discussions with our customers about loan modification and will be able to provide more detail next quarter.

Although many of our employees continue to work from home, our branches are open and enhanced with safety protocols. And our banking teams across our markets are dedicated to helping our customers. Now, I’ll turn to the second quarter results.

Our performance reflects a financially sound and stable community bank with a proven ability to manage through changing market conditions. We are very well capitalized and our loan portfolio is supported by disciplined underwriting standards as well as conservative loan-to-value ratios and personal guarantees.

As we reported last quarter, our loan portfolio exposure to the most affected industries is low, which leaves us with less vulnerability relative to the bigger bank. We’ll give a more detailed breakdown later in the call. Here are some key highlights from the quarter. We generated net income of $7.4 million, with diluted earnings per share of $0.55.

Total loans of $2.1 billion were up about 14%, with solid commercial and industrial growth driven by PPP loans. We will not see continued growth from PPP loans because we completed that lending program at the close of the second quarter. Our Commercial bankers are working to understand and meet their customers evolving credit needs.

They are also identifying new opportunities across our markets. We expect these efforts will help to grow our portfolio over time. Total deposits increased $473 million in the second quarter to $2.8 billion, driven by a combination of PPP loan proceeds and increased liquidity throughout the banking system as a result of higher savings rates.

The average cost of deposits decreased to nine basis points in the second quarter, reflecting a low rate environment in our relationship banking model. Non-interest bearing deposits represented 52% of total deposits. Our total risk based capital ratio was 15.8% at June 30, well above regulatory requirements and the 15.3% we reported at March 31.

While we are very well capitalized, our share repurchase program remains suspended indefinitely as a precautionary response to the pandemic. Management and the board of directors continue to monitor this situation and will reinstate the program when appropriate.

Non-accrual loans decreased by $45,000 in the first quarter to $1.6 million, or 0.08% of total loans. Classified loans increased by $1.5 million from the prior quarter to $13.5 million, but we're still down relative to the first quarter of 2019. The full impact of COVID-19 crisis will take time to materialize.

Our bank is not immune to the significant economic pressures. But we are confident in our conservative lending philosophy and long history of strong asset quality. Finally, due to our continued profitability, the Board of Directors declared a cash dividend of $0.23 per share on July 17, 2020.

This represents the 61st consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on August 07, 2020 to shareholders of record at the close of business on July 31, 2020. Now, I'd like to recognize an important change to our leadership team.

Tim Meyers, most recently Executive Vice President, Commercial Banking, was named Chief Operating Officer on June 30. Tim has nearly 25 years of experience in finance and banking, planning, standing small business, middle market and corporate segments.

After 13 years, with Bank of Marin, Tim has a deep understanding of our business model and a strong connection to our customers, and to our people. I am pleased that Tim was prepared to step up to the role of COO. In these challenging times, stability, and consistency and management are more important than ever.

Tim will now provide more detail on our PPP and loan modification programs, as well as an update on our overall loan portfolio and expansion efforts in the Peninsula and South Bay region..

Thank you, Russ. The bank's execution of PPP is a testament to our dedication to meeting our customer’s needs. A small team of subject matter experts devoted a great deal of time and energy to launching the program and helping hundreds of customers get their loans.

After receiving approval to become an SBA lender, we formed cross functional teams that successfully processed and funded more than 1800 loans, totaling over $300 million. We committed to focusing on smaller businesses that needed funding to weather the downturn and in time, help our local markets grow during the recovery.

Notably, 73% of the PPP loans were for $150,000 or less, and almost 90% were $350,000 or less. Only 48 loans were $1 million or greater, representing approximately 30% of the total balance.

Among all the businesses we were able to assist, we are proud to say that were 178 non-profit organizations, ranging from education to health and human services that received $57 million, which helped protect payroll for over 6000 of their employees.

Bank of Marin stopped taking applications for PPP loans on June 30, to focus our efforts on helping customers through the loan forgiveness process.

We have contracted with a technology provider and the CPA firm to streamline the submission of applications to help educate our bankers and borrowers on the SBA guidelines, forgiveness process and necessary calculations. We were pleased to play to play a key role on this program and are excited to see it through to completion.

In the first quarter of 2020, with the onset of the pandemic, we identified industries within our portfolio that could be most impacted. These included retail, transportation and energy, medical and dental, hotels and motels, entertainment, private schools and the wine industry.

Not including PPP loans, exposure to these segments totaled $430 million at June 30, or 20% of the loan portfolio. $366 million of these loans were secured by real estate.

The greatest exposure was related to both retail businesses and retail related commercial real estate, totaling $198 million, or 9% of the total portfolio, $185 million of which is secured by commercial real estate. Our average loan-to-value on these properties is 39% and the majority are also backed by personal guarantees.

The wine industry exposure was $77 million, or 4% of the portfolio, of which $42 million is secured by real estate. Education was $67 million or 3% of the portfolio, of which $63 million is secured by real estate, and hospitality was $48 million, of which $45 million is secured by real estate.

We made $103 million in PPP loans to these industry segments as of June 30, the largest of which were in the medical and dental sector at $33 million, hospitality at $17 million, retail which is mostly commercial real estate at $16 million, and education at $12 million.

We also continue to work with customers that need a temporary assistance; loans for which we process payment relief requests exceeded $386 million at July 10. $223 million were for payment deferral and one $163 million allowed for interest only payments.

While our loan modification agreements largely span a 120-day timeframe, this number of customers requested only 90 days of relief.

Of the loans on payment relief, almost 50% fell into our expected pandemic impacted industries, the largest being retail related commercial real estate at $70 million, hotels and motels at $37 million and education related commercial real estate at $25 million.

Over 90% of the payment relief loans are secured by real estate, and have a total average loan-to-value of 45%. Within the largest categories, average loan-to-value was 43% for retail related properties, 39% for hotels and motels, and 37% for education properties.

Even as we respond daily to the impact of the pandemic, we continue to look for strategic opportunities for expansion. During the second quarter, we hired Jake Nguyen to establish a commercial banking office in San Mateo, focusing on the Peninsula and South Bay regions of the Bay Area.

Jake is a seasoned and highly regarded banking leader in these markets. Subsequent to joining Bank of Marin, Jake hired an experienced commercial banker David Myers [ph] and secured an office location in San Mateo that we will occupy soon This positions as well to serve eight of the nine Bay Area counties.

And we are very excited about our prospects South of San Francisco. With that, I will turn it over to Tani for additional insight on our financial results..

Thank you, Tim. And good morning, everyone. As Russ noted, we generated net income of $7.4 million in the second quarter of 2020. Diluted earnings per share of $0.55 compared to $0.53 in the prior quarter and $0.60 in the second quarter last year.

Net interest income totaled $24.4 million in the second quarter, compared to $24.1 million in the prior quarter, and $23.8 million a year ago. Second quarter, and year-to-date net interest income included $1.7 million of interest income and fees from PPP loans.

The tax equivalent net interest margin was 3.53% in the second quarter, which compares to 3.88% in the prior quarter, and 4.02% in the second quarter of 2019. Interest in fees on PPP loans negatively impacted the net interest margin by three basis points in the second quarter of 2020.

The tax equivalent net interest margin was 3.7% in the first six months of 2020, compared to 4.03%, for the same period in 2019.

Declines in net interest margins from the first quarter, the same quarter last year and year-to-date versus 2019 were mostly attributed to a full quarter impact of low interest rates that weighed on our asset yields and put downward pressure on the margin.

As you know, we previously postponed the adoption of the current expected credit loss accounting standard or CECL in accordance with the accounting release provision in the CARES Act. We will be prepared to adopt CECL when the national emergency ends or December 31 2020, whichever comes first.

Non-accrual loans represented only 0.08% of the bank's loan portfolio at June 30. We recorded a $2 million provision for loan losses, and that $260,000 provision for losses on off-balance sheet commitments in the second quarter versus $2.2 million and $102,000 respectively in the prior quarter.

Under the existing incurred loss model, we made adjustments to qualitative factors to account for the impacts of the COVID-19 pandemic, primarily the significant increase in the unemployment rate.

Non-interest income of $1.8 million in the second quarter decreased from $3.1 million in the prior quarter primarily due to significant gains on security sales in the first quarter, and lower service charges and fees in the second quarter related to COVID-19.

The efficiency ratio of 54% reflects continued expense control, in addition to deferred loan origination costs of $890,000 associated with PPP loans.

Second quarter non-interest expenses are down from the prior quarter due to seasonal first quarter expenses, and from the prior year due to reduce data processing expenses associated with our digital platform conversion. The bank delivered a return on assets of 1.01% and return on equity of 8.53% in the second quarter of 2020.

The impact of COVID-19 on Bank of Marin’s second quarter performance is meaningful. But we believe our strong underwriting and limited exposure to industries most impacted by the pandemic, position us well as we move into the second half of 2020. And now Russ would like to share some closing comments with you..

Thank you, Tani. We will continue to address both the impact and the unique challenges created by the pandemic. We enter the second half of 2020 with a strong capital position, high quality loan portfolio, and low cost deposit base. We have a 30-year history of supporting our customers and communities in both prosperous and difficult economic times.

I am confident that by continuing to work together, we will all emerge from this downturn, strong and poised for growth. Thank you for your time this morning. And now we will open it up to your questions..

[Operator Instructions] Our first phone question is from the line of Jeff Rulis with D.A. Davidson Company. Your line is open..

Thanks. Good morning..

Good morning, Jeff..

Interested in the response on a couple fronts that you've had. You mentioned, lowering some interest rate floors, also waiving some some fees. I guess that first one, just on the margin impact then going forward, is that you -- maybe you’d still take that on a case-by-case basis.

But largely, do you anticipate the lowering of floors to sort of ebb or stop going forward? And how that might affect the margin?.

Jeff, I'm going to ask both Tim Meyers and Tani Girton to answer that. Tim is directly dealing with his clients, day-to-day and Tani can talk to talk about the impact on the financial. But Tim, why don’t you go ahead..

Yes, thank you Russ. Hi, Jeff. We are Thank you outside. Yes, we are reviewing those case by case by case. Going forward, a lot of these are our lines of credit with renewals and on an mostly annual basis. So those times for us are going to get naturally adjusted from where they were when they were done, one or two years ago.

So we'll continue to see some impact of that, but I have not quantified that.

Tani?.

Yes, we haven't quantified as Tim said on a go forward basis, because it is on a case-by-case basis. In terms of the current margin, obviously, it's sort of embedded in the 150 basis point decrease that occurred in March, I can segment that out and provide it after the call to the analyst community. And but I don't have a number on that right now..

Okay, thanks.

And I guess on a related front on the, on the service charges, and I and maybe is it safe to assume that a lot of the waving of those fees upfront was at the front end of this and then going forward, you might see some resumption or some growth in the, in the fee income lines?.

Hey Jeff, this is Russ. Yes, at some point, we're going to -- we're trying to be sensitive to our customer’s needs and to the challenge that everybody's going through right now. Obviously, that's, we're waiting to see it now. But that doesn't mean they're going to go on forever.

And once we get back to a, of course nobody knows when the new normal is or what it is. But as we get closer to a time when we can have live kind of normal lives, and businesses can resume their normal activities, then we’ll make changes in that. But for the time being, we're doing that to try and help our clients in this really difficult time..

Sure.

And I just one last one, maybe for Tim, I'm interested in that kind of the sentiment on some of the borrowers, those that have -- that have led to some path activity or reduced line utilization, just the behavior that you're seeing any commentary that you could shed some light on, on what you're saying?.

Yes, I think, Jeff we -- it's a combination of things. In some cases during this last quarter, we had PPP loans for people that were on credit sweeps where PPP proceeds paid down lines of credit. We are seeing people in some cases sell out [Indiscernible] that we're not financing.

They use those proceeds to pay down other loans and we're generally seeing a trend, at least over the last quarter of people just reducing their credit usage. They're not growing at the rate they normally would, which is typically a key driver and increase usage on lines of credit.

But overall, generally speaking, great application of cash [ph] borrowers of cash to loans outstanding..

Jeff, I will add one thing to that. When this crisis began, there were some borrowers who actually just drew their lines, not knowing what was ahead. And then as things kind of settled down, they paid it back. So utilization went, went up initially and then went down..

Right. Okay, well, thank you..

Sure..

Thank you. Our next question is from the line of Jackie Bohlen with KBW. Please go ahead, your line is open..

Hi, good morning, everyone..

Good morning, Jackie..

I, realized this is a challenging question. I'm so just curious on your thoughts and expectations related to the balance sheet size. Obviously, there's a lot of different things at play here. But I'm wondering, a couple of things.

Number one, how you're modeling the pay-off of PPP loans? And number two, how you expect on funding and deposit to flow around that?.

I will, I'll ask Tani to answer the question on the modeling of the PPP, which we, frankly we expect mostly a big portion of that. Maybe all of it to be forgiven, but I'll give it to. Take it over, Tani, Tani..

Well that’s exactly, right wrestler on modeling right now, 100% forgiveness on the PPP loans by the end of 2020, because that's our goal and our expectation, and that's what we're going to put our effort toward is making sure that all of those gets forgiven.

So was there another question there that I missed?.

And how were your deposit flows?.

Yes.

So, the deposit flows are going out slower than we originally expected when we had the, we did have significant deposit inflows associated with PPP loan borrowers, but it is starting to pick up a little bit now and again, we expect those flows to go out be sort of consistent with the forgiveness timing, as we expect those funds to be utilized in order to get the forgiveness..

Okay.

And are there in terms of the flows that you saw in the quarter? Is there excess liquidity? Or what you would consider to be excess liquidity not tied to PPP that might stick around on a different schedule?.

I'm not sure. Yes, there is excess liquidity separate from the PPP. I'm not sure how long that'll stick around. Obviously, we saw a fair -- we saw some outflows associated with tax day recently.

So there was some build up associated with that, but there is increased liquidity in the banking system overall and, and that seems to be adding to our cash position as well..

Okay. Okay. Thank you. And just one more for me and then I’ll step back.

So in terms of the San Mateo office that you'll be opening on, if you could just provide some background on you know, what kind of hiring is going to take place with that, what your growth expectations will be in the longer term associated with that? And then just, any expenses that we should be on the lookout for?.

Sure, Jackie, Tim Myers is the person that was responsible for that office. So I'm going to ask Tim to answer that question for you..

Hi, Jackie. As I mentioned in my talking points, we did hire a regional manager and thus far one commercial banking officer. I will say in this environment, having just signed the lease that we're going to play a little bit by here.

I think what we were initially forecasting, while we're by way of growth expectation that we have to review in this environment. So I'm not comfortable saying long term growth objections, but objectives.

But I would expect over time we have a least one or two other commercial banking officers will probably support that from a cash management standpoint from our other regions with a very strong cash management team that's able to do that.

And so I don't expect a great deal more by way of expenses beyond what Tani's has already accounted for, thus far..

Okay..

And Jackie, I just add one thing. You know, opening San Mateo really, really puts us in a position where we have commercial banking offices in almost every market in the Bay Area, with maybe the possible exception of San Jose and/or Santa Clara Valley.

For the time being, San Mateo will be will be focusing on that in addition to the rest of the Peninsula, but our whole intention is to get, to establish established banking offices and serve the entire Bay Area. This is the step..

Okay.

And is this a reflection of renewed focus in the area say, I know this is geographically new for you, is it? Is it a renewed focus in the area? Or is it, did the regional manager just, it finally all clicked and you were able to bring this person on board and so plans that had been in the works for a while you were able to see them through?.

Well, we had plans in the works to open an office on Peninsula. And, those offices, the key to -- the key to opening an office is really finding the right people. And so we were able to identify Jake and, and one other person for that office, find a location in San Mateo.

And so we, we went ahead with it, and obviously, this is the most opportune time to be open offices given. Given the pandemic, however, we had the opportunity and the person was available and we thought it was we thought it was a great hire, and we're very excited about the opportunities for us and for this one..

Okay, great. Thanks for the added color. Thank you..

Thank you..

Our next question is from the line of Matthew Clark with Piper Sandler. Please go ahead. Your line is open..

Hi. Good morning..

Good morning..

Good morning..

Maybe first on the deferrals. As you kind of go through the process with your customers and talking with them.

Just what's your sense, come next month? How much of that might return to normal payments? Do you have any guesstimate or order of magnitude?.

Well, I'll take a stab initially, and then I'll kick it over also to Tim. It's -- our commercial banking officers have been reaching out to other customers and try to get a sense of where they are. And its kind of all over the board, depending upon the industry. Some industries are doing better than expected. Some are still struggling.

So, I would expect that we would have -- we would continue to have some deferrals. We would have some that don't go -- that end the deferrals or end -- go from interest-only back to the normal payment schedules. It's hard to judge at this point. But Tim, could probably add to that..

No. I think, Russ, I think that's exactly right. This is a big unknown in terms of new restrictions or the rolling back of openings, is going to cloud that a little bit. We are constantly speaking with our customers, finding out what their needs are and how we need to adapt. I certainly expect that some of these will continue to ask for deferrals.

However, some of the borrowers that asked for referrals very early on that expected to be impacted were not and resumed payments almost right away. And so, I think it's still a little bit murky in terms of the outlook to make any kind of quantification or forecasts on that.

But we will continue to talk to our customers and figure out the best way going forward. We do have, as been mentioned, lot of these loans have significant sponsorship behind them. And that's going to come into play in making those determinations..

Okay.

And then on the PPP, I guess, what's your experience been so far on the forgiveness process with the SBA? I mean, that $1.7 million of PPP net interest income, was that just accruals over a short period of time, knowing that you're going to -- you're assuming all that gets forgiven by the end of the year? Or were they actually -- that revenue that you actually got from the SBA?.

I may ask Tani to answer that, because I think its kind of an accounting question. Let's Tani go ahead..

Yes. So on the PPP loans, right now, we are amortizing the fee income that hasn't actually been received already from the SBA over the contractual 24 months life of the loans. As those loans are forgiven, then we will accelerate the fees into interest income.

So if you assume that we are successful in getting 100% of those loans forgiven by the end of this year, all those fees will come into income..

Okay. And then, I know over 70% of them are less than $150,000, which comes with a higher origination rate.

What's your updated estimate of the weighted average origination fee when it's all said and done?.

Tani?.

Yes. I think it's somewhere between 2.5% and 3%..

Okay. And then assuming you do get the lion share of the PPP fees in the second half of the year.

I mean, what's your flexibility being able to move some of that into your reserves? Or you feel like a lot of that one might hit -- a lot of that might hit the bottom line?.

Actually we're still evaluating what that's going to be use for. Certainly reserves are -- one thing there's opportunities to potentially help people within our communities, with some of that without coming to income.

We haven't determined exactly the total use, but we're in conversations internally with the board on how we utilize those funds and put them to the best possible use..

Okay. And then, FAS 91 benefited you guys on the PPP side by about $0.05. It looks like in non-interest expense run rate assume we should normalize that for the upcoming quarter.

But what are your overall thoughts on expenses going forward?.

Tani?.

So I think going forward, yes, you see $890,000 that was included this quarter. Those were origination costs deferred. So that won't repeat. So other than that, though I'd say that the expenses are pretty indicative of where we're going in the future..

Okay, great. And then, Russ, great to see that you're sticking around.

How much of that was related to not been able to find the talent or the right cultural fit? Or was it solely related just being in the midst of the pandemic?.

We are in the midst of the pandemic. And its important to maintain stability, consistency, throughout this time. We just don't know how long its going to last. We don't -- and I am -- I will retire.

The question is when? But we want to make sure that we keep this consistency and continuity through a very challenging time for not only for the bank, for our customers, for the general population. And I think -- and I guess I'm liking it to changing horses in the middle of the stream, and we seem to be in the middle of rapids right now.

So it's probably be a good time to do that..

Okay. Thank you..

Okay. You're welcome..

Thank you. Our next question is from the line of Tim Coffey with Janney. Please go ahead. Your line is open..

Thank you. Good morning everybody..

Good morning, Tim..

Russ, if we look at the at-risk or the loans to industries impacted by COVID.

Has the balances of those loans changed in the last quarter?.

No. We have Beth Reizman on the line who is our Chief Credit Officer. I'm going to ask Beth to answer that. I don't believe there's really been as much in a way of changes of those categories.

But Beth, do you have more color for Tim?.

Yes. This is Beth Reizman. No. there have not been any meaningful changes that I'm aware of it at all in those categories..

Okay.

And what was -- in that hospitality bucket, what types of industries are in there?.

We have some hotels, some restaurants, things of that nature..

Okay..

Not only restaurants, I mean, Tim, I would say, if we have any restaurants, they're guaranteed. But they may have restaurants in commercial real estate that we finance. Typically we have guarantors with liquidity. So, its not our practice. We'd doing a lot of loans directly to restaurants. That's just not an industry we have the lot of exposure to..

Correct. And I believe our health clubs. We have a couple of those in that industry as well..

Okay.

And then, Tani, do you have the amount of deposits that were tax payments since quarter end?.

No, not specifically. We just saw leading up to tax day, some typical build and then outflows, but I don't have specific numbers..

Okay. The rest of my questions have been answered. Thank you..

Thank you, Tim..

Thank you. And our next question is from the line of David Feaster with Raymond James. Please go ahead. Your line is open..

Good morning everybody..

Good morning, David..

I just wanted to ask maybe more of a strategy questions. I mean, given the evolving customer behaviors and maybe more employees work remotely. How does that changed longer term strategy? And maybe open up opportunities for additional expense rationalization or back office space reduction.

And maybe conversely, I mean, is there anything that's you've identified that maybe you need to invest in further or anything like that to keep up with the evolving customer behavior?.

David, that's a excellent question. We have thought about that a lot. And in our strategic planning process, recently we meet and we talked about putting together a strategy and a initiative to determine whether we can implement a strategy where we have employees who are remote. And there's many benefits to that.

Now, we've historically never had remote employees and frankly, its part of our culture, because we like to have our employees on site. And working together, we have our monthly staff meeting where all our employees come together. So we really work together. And it's part of that relationship building.

However, there's opportunities, I think to take advantage of what we've learned from this. We have a big percentage of our employees, I think, I don't know somewhere in the 100 range, or slightly over 100 either working at home or remotely from their normal location. So if you -- by the way, I'm working from home.

I don't particularly care for it actually. I'd rather be in the office. But if you extend that to the future when we're past this. If we can use that strategy to attract employees where maybe they don't necessarily have to be in Nevada at our headquarters or at one of our branches. It f could be in, frankly, they could be in Reno, for all we care.

They're doing their work from home. And that gives us a lot of flexibility as an organization. It's certainly the technology companies have employed. The one risk is you don't want to risk the culture of this bank. So we have to be careful about that.

But we are taking a strong look at that both from the standpoint of attracting employees - and your right, the expense control, because you don't need as much office space. And you have to balance that with the culture of the organization. But it's a really big question.

When you're forced into these things, like we are in this, you hopefully learn something. And I think that's what's great about our organization. When they're taking advantage of this situation, hopefully, we've learned something about our employees, about the way they work and how they work.

And maybe we can do some things different in the future, which hopefully will give us an advantage over competitors..

Yes. It's exciting times, for sure. I just want to get your thoughts on the organic loan grow? Obviously, we talked about the utilization declines and the payoffs and paydowns weighing on growth. But originations, we're seeing that actually stronger in the second quarter and the first quarters.

I guess, where are you seeing demand for new credit? And, has your credit box tightened for new originations? And then just maybe where do you think net organic loan growth exclusive of PPP goes going forward?.

I'll make a comment then I'm going to kick it over to Tim Myers. We've - the one thing you mentioned about credit kind of getting tighter. We've been pretty consistent about the way we underwrite, way we manage our relationships.

And we haven't necessarily -- and obviously, we look at industries different, some industries different than we did pre-COVID. But we've been consistent about how we underwrite and the credit metrics of what we do. But as far as the new loan volume, let me ask Tim to address that..

Of course. Thank you. As you mentioned, our year to-date loan volume, the quarter was good year to-date. It's not all that far off from where we were this time last year. And I think I attribute that to all the conversations we keep having with our borrowers. There has been some new customer acquisition in there.

If I look at our pipeline today, there are some fairly large new opportunities. To Russ's point, I don't think our credit approach has tightened or changed.

But it is taking longer to that opportunities in this environment, because while we might be using the same criteria, we have to apply that criteria to a very rapidly and ever changing situation related to COVID. But I have been encouraged by the level of activity of our commercial bankers, as well as the consumer and construction lenders.

But they're going to continue -- if you're talking about future growth beyond what's in the pipeline today. I think by and large, it's going to come out of our existing portfolio. But we have been pleasantly surprised at a couple points this year. So, we continue to encourage everyone to reach out and do the best we can.

Opening this office will help us penetrate a large and substantial market down south of San Francisco. But it's almost impossible to predict at what point you're going to get traction in light of what's going on..

Got it..

David, I'd add one thing to that too. In the underwriting process, one of the important things when you're underwriting and working with new businesses, actually to go out and see the business and be with your clients and see how they manage their operation. To me that's a huge part of the underwriting and understanding process.

It's pretty difficult today to do that. So, while we're still getting volume, it's muted somewhat because of that. Until we can actually get back to a time when we can go out and visit and meet with our clients, I think it's going to be somewhat less than we would have hoped originally..

Yes. That's a really good point. Last one for me. Just could you give us -- I just want to follow up on the deferral discussion. Just any color that you can provide? How much are 90 versus 180-day deferrals, interest-only versus full payments? And then, just any initial thoughts on re-deferral rates.

And then maybe whether if you do go to a re-deferral whether that's going to result in a risk rating downgrade? And if -- you've seen any risk rating downgrades thus far?.

I will - I'll ask -- so I'll kick it over to Beth Reizman to answer that. And then I suspect that Tim would like to probably jump in with some color on that too. So, he's capable with that too. So kick it over to Beth..

Okay. So our plan for the payment deferral was to provide immediate relief and not put these borrowers through an extensive underwriting process. So our standard program was 120 days of either interest-only or full deferral. It split about 50/50 between the two. And we did not downgrade at that point in time.

We are watching them just because they have asked for a deferral. But again, most of -- large majority payments will resume in August. So we are having discussions and already some estimate indicated previously, some have already reverted to their original payments. Others were talking to.

And we will analyze each one individually, fully underwrite and determine what's the appropriate grade if they do need further relief..

Tim, did you….

Tim, do you want to add anything?.

Well, I think that was a great answer. As Beth mentioned, the vast majority of the payment deferrals were 120 days versus the 90, because that was our program. I don't remember the percentage exactly. But in terms of risk rating adjustments, as Beth said, it's going to be based on these individualized conversations.

We're having and what the reason would be for any continue deferral request. And whether, it has a longer more meaningful impact on what's going on the nature of their business and our related credit structure. So I would echo what Beth said. Again, with that backdrop, I'm sorry..

Go ahead. Go ahead..

I guess with that backdrop, with the re-deferral or the expiration of the initial deferral period kind of being in the next month or so.

Would you expect if re-deferral rates are relatively elevated, would you expect to maybe that third quarter to be the largest reserve build of the year? Or maybe, I mean, larger than, at least larger than the first quarter and second quarter? Or any thoughts on timing there?.

Yes. Beth, do you any comments on that..

Well, it's going to depend. Because in our portfolio, we generally are very well secured. Tim gave you color on the low loan to -- average loan to values given in the -- what we call the sensitive industries. We also have very strong guarantors. So we anticipate that we will have some prolonged workout, but not necessarily significant losses.

And the reserve is to account for losses. So, it kind of -- it just depends. If we had significant unsecured loans without sponsorship, my answer would be yes, but that's not the case..

Okay. David, we don't do a lot of lending unsecured. And we're, as you know, just listening to the numbers in terms of advance rates and things. We're pretty conservative on the advance rates on real estate, and we also look for sponsorship.

So, while, I'm not -- there will be workouts as there are -- as with any bank, because there as an industry that, at this time we thought, everybody's anticipated by the summer, you know, we'd have this, we'd be doing way better, but we seem to be having a bounce back now. And negative bounce back, I suppose.

And so, that's going to cause a lot of people to step back and say, Okay, this is how's it going to affect my business? And so that's the real benefit for us is that we have done a really good job of a collateralizing these obligations. And it's not a matter of losing money on in on these credits.

It's more a matter of just working through them and working with our clients, which is what we do historically I will remind you that during the financial crisis, we actually didn't foreclose on the property and we worked with our clients and got the best results because we did work with them, and we guarantors that were very strong that could solve problems and make, not make their problem a problem.

So I think we're headed for some of that as we go forward. You know, it's about it's about building it’s about the relationships we have with our clients and working with them to find the best possible results..

Correct. That's, that's extremely helpful color. Thank you..

Sure..

Thank you. And there are no further questions on the phone line..

Okay. If there's no other questions, I want to thank everyone for your attention this morning and for calling in to listen. I hope everyone is healthy out there. And we look forward to speaking with you again.

Next quarter, hopefully, we'll be in better position from the standpoint of the health of this nation, but in the meantime, all the best to everyone. Thank you for calling in..