Bank of Marin Bancorp (BMRC) 2020 Q3 法說會逐字稿

Good morning, and thank you for joining the Bank of Marin Bancorp Earnings Call for the third quarter ended September 30, 2020. I'm Andrea Henderson, Director of Marketing for Bank of Marin. (Operator Instructions) This conference call is being recorded on October 26, 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 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, October 23, 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 the Chief Credit Officer, Beth Reizman, will be available to answer your questions. 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 you and your families are healthy and safe.

We reported solid third quarter results, demonstrating Bank of Marin's disciplined risk management, the strength of our deposit franchise and capital base and our bankers' commitment to proactively working with clients to address financing needs.

We and our clients have acclimated through the current environment. The vast majority of our borrowers that temporarily deferred loan payments because of the pandemic have resumed normal payments. Our overall credit quality remains excellent, with both classified and nonaccrual loans declining in the third quarter from the low levels we reported a quarter earlier.

Before we discuss highlights in the quarter, I want to note that we also remain committed to our employees and communities. To help address expenses and challenges linked to the pandemic, we made payments of $1,200 to every employee in the third quarter, totaling $360,000, with executive management directing their payment to nonprofit organizations of their choice. In addition, we made contributions of $360,000 to ensure equitable access to remote learning resources for underserved students in Marin, Napa and Sonoma County as well as the City of Alameda.

Turning to our results. In the third quarter, Bank of Marin generated net income of $7.5 million, with diluted earnings per share of $0.55. Total loans have held steady at $2.1 billion as we balance our commitment to sound underwriting with our bankers' uninterrupted efforts to serve existing clients and continue to win new business.

Total deposits decreased $210.6 million in the third quarter to $2.6 billion, primarily due to normal fluctuations in some of our large business accounts and the transfer of balances to deposit network as part of our ongoing liquidity management. The average cost of deposits remained steady at 9 basis points, reflecting the low rate environment in our proven relationship banking model. Noninterest-bearing deposits represented 54% of total deposits compared to 52% of total deposits in the second quarter.

Our total risk-based capital ratio was 16.1% at September 30, well above the regulatory well-capitalized level. Nonaccrual loans totaled $1.4 million or 0.07% of the loan portfolio as of September 30 compared to $1.6 million or 0.08% in the second quarter. Classified loans decreased by $2.5 million from the prior quarter to $11 million, primarily as a result of an upgrade in the risk rating for our commercial real estate loan.

In light of our continued capital strength and improvements in the economic environment, on October 23, the Board of Directors approved reactivation of the $25 million share repurchase program that was suspended on March 20, 2020, as part of our early pandemic response. Finally, reflecting our continued and reliable profitability, Board of Directors declared a cash dividend of $0.23 per share on October 23. This marks the 62nd consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on November 13 to shareholders of record as at the close of business on November 6.

In summary, our loan portfolio and balance sheet remains strong in our markets, while impacted by the pandemics are showing great resilience. Our more than third year of managing through various cycles will help us effectively execute for our clients, communities and shareholders in the near term and position Bank of Marin for continued growth in the post-pandemic era.

Tim will now provide more detail on our loan modification program and an update on PPP.

Thank you, Russ. As we reported last quarter, thanks to the dedication of our committed team, the bank successfully helped almost 2,000 companies the same funding through the SBA Paycheck Protection Program. We are now preparing to launch the forgiveness portion of the program with a secure online portal as soon as the SBA and the Treasury department finalized their guidance on the process. In the meantime, we are in regular communication with all of these customers and look forward to helping them complete the final phase of the program.

As Russ noted, the number of borrowers in need of loan payment relief declined markedly in the third quarter. Only $47 million of the original $389 million in loans receiving payment relief need continued assistance as of October 19. Of these remaining loans, 37% are in the education industry, 33% are hospitality or tourism-related and 26% are split evenly between retail-oriented commercial real estate and health clubs. It is important to note that 97% of these remaining balances are secured by real estate with loan-to-value ratios averaging 42%.

While California's wildfire season has again been challenging for many communities in Northern California, fortunately, Bank of Marin and our clients have been minimally impacted.

Tani will discuss the trends in net interest margin in greater detail later, but I want to note that yields on new loan production held steady during the third quarter. The dollar-weighted average interest rate on new loans was similar to those made throughout all of 2020. While that averages approximately 50 basis points below all loans made in 2019, we are working hard to mitigate the effects of this declining rate environment.

Finally, to amplify Russ' comments, we have adapted to life amidst the pandemic. We are operating business as usual in this environment. We continue to attract talent and develop strategic opportunities to expand and grow our businesses, and we are poised for stronger growth in coming quarters. We remain optimistic about our teams in new markets such as Walnut Creek and San Mateo while continuing to pursue growth opportunities in our more established markets.

With that, I will turn it over to Tani for additional insight on our financial results.

Thank you, Tim, and good morning, everyone. Once again, Bank of Marin produced strong results for our shareholders in third quarter 2020. We generated net income of $7.5 million and diluted earnings per share of $0.55. The decline in earnings per share from $0.69 for 2019 was primarily due to the economic impact of the pandemic and the historically low interest rate environment.

Because of the potential for long-term impact from the pandemic, 2020 provisions loan losses exceeded what was recorded in the first 9 months of 2019 by $5.1 million. However, our credit quality remained strong, as Tim and Russ have outlined earlier.

Net interest income was $24.6 million the third quarter compared to $24.4 million in the prior quarter and $24.2 million a year ago. The increase from the prior quarter was due mostly SBA PPP loan income and an additional day of interest income in the quarter, partially offset by lower yielded on non-PPP loans and investment securities.

The tax-equivalent net interest margin was 3.44% in the third quarter, 9 basis points lower than the prior quarter and 16 basis points lower than the third quarter 2019. The year-to-date tax-equivalent net interest margin of 3.59% was 44 basis points lower than 2019 due to the lower interest rate environment and the SBA PPP loans. Nonaccruals loan represented only 0.07% of the bank's loan portfolio at September 30.

We recorded loan loss provisions totaling $1.25 million in the third quarter and $2 million in the second quarter, primarily due to adjustments to qualitative factors related to the pandemic. We also booked a $248,000 provision for losses on off-balance sheet.

As discussed in prior quarters, we postponed the adoption of the current expected credit loss accounting standard or CECL in accordance with the accounting relief provisions of the CARES Act. We will adopt the CECL on December 31, 2020, at which time we will report a cumulative adjustment to retained earnings in our financial statement, net of taxes, based on economic forecast and other assumptions as of January 1, 2020. That adjustment will result in an increase to our allowance for credit losses of approximately $1.6 million and an increase to the allowance for off-balance sheet commitments of approximately $122,000.

In addition, we will also recognize the difference between the allowance for credit losses calculated under the CECL model as of December 31, 2020 and the allowance of credit losses calculated under the incurred loss model as of September 30, 2020. This business will be recognized as a provision for credit losses and a provision for credit losses on off-balance sheet commitment.

Non-interest income of $1.8 million in both the second and third quarter was down from $2.7 million in the third quarter a year ago. The year-over-year third quarter decrease was due to largely to a $562,000 benefit collected in bank-owned life insurance policies.

Lower ATM fees and service charges on deposit accounts as well as increased dividends on FHLB stock and lower fee income from sales to deposit networks in the third quarter of 2020 also contributed to the decreases.

The efficiency ratio of 57.82% reflects continued expenses in the quarter. Third quarter noninterest expense of $15.2 million increased $1.1 million in the second quarter and $1 million from the year earlier. The increase in the second quarter was primarily due to the $890,000 in deferred loan origination costs related to PPP in the second quarter and higher charitable contributions in the third quarter. The increases in expenses from the third quarter of 2019 included higher charitable contribution, annual merit increases, provisions for loan losses on off-balance sheet commitment and FDIC.

The bank delivered a return on asset of 0.98% and a return on equity of 8.37% in the third quarter. While there is no clear answer to the pandemic yet, we are confident that our proven relationship banking model, low cost deposit base (inaudible) will enable us to deliver steady, consistent results with high asset quality and reliable process for (inaudible).

And now Russ would like to share some closing comments.

Thank you, Tani. I want to conclude by emphasizing that we are confident in the strength of our loan portfolio. This is consistently supported by disciplined underwriting, conservative loan-to-value ratio and personal guarantees. Our very low and declining levels, classified nonaccrual loans amplifies this.

Our exposure to the industries most affected by the pandemic is relatively small. And among clients initially impacted, most have adjusted to this new climate and are again making payments as usual, as evidenced by a decline in payment release data at [Mshares]. Of the fewer than 15 borrowers who continue to defer loan payments, we anticipate that the vast majority will work through this (inaudible). We know every single one of these clients very well. We are in close contact and helping them -- each of them navigate remaining challenges.

In summary, Bank of Marin continues to execute on our guidance as related to banking, disciplined fundamentals and community commitment. These principles have served our communities and our shareholders accept really well for 3 decades, and we are confident that they will continue to do so as we weather this pandemic and position the bank for growth alongside our customers in 2021.

Thank you for your time this morning, and now we will open it up for your questions.

(Operator Instructions) We do have a question coming from the line of Jeff Rulis with D.A. Davidson.

First question on expenses and really strategy. I think you've seen peer banks, I think, with more vocal branch consolidation plans or expense management. You run a pretty lean bank as it is. But wanted to get a sense for your strategy of sort of balancing expense management with -- I think you also alluded to some opportunities or reinvestment as well. So it's, I don't know, broad strategic question, but then I don't know if it narrows down to, Tani, on -- you've had some charitable contributions, but how does that narrow into the kind of expense run rate ahead?

Well, I'll take a shot first, and then I'll kick it over to Tani, but we're very focused on expenses. And I think that's what the pandemic has shown all of us, is that we could probably be more efficient, and we can utilize the opportunities to have a portion of our workforce remote. And that will certainly as we do that -- and it's not all of it because, obviously, we make a living of being close to our customers and being in contact with them and seeing them and all those things. So as we go forward, we will take opportunities to utilize certain positions remotely because it's -- there's many benefits. There's benefits that you can attract people who don't have to necessarily live in the area. Number two, you don't have to have real estate for that, so that can be more efficient.

The other thing we're looking at is that the pandemic has -- in many cases, forced people who weren't comfortable with technology to utilize technology. And so the branch -- obviously, the branch visits aren't as great. And so we certainly, every day, look at opportunities to potentially consolidate branches and things of that nature. And I think that there's plenty of savings like that. We would -- if we did any of that, we reallocate our workforce, we don't look at any layoffs at all, but there's always opportunity for people to be reassigned for branch to branch. So that's another real opportunity for potential savings.

And by the way, we've been looking at rev space for many years. We've been reducing our space. Our biggest branch is Corte Madera in terms of deposits, and it's about 2,200 square feet. So we've been looking at keeping our branch locations very small, and wa want to lower our smallest location, is 1,400 feet in Tiburon. So we're always looking for opportunities to keep expenses down and utilize opportunities like that now with -- potentially with remote workforce. But I'll ask Tani to follow-up on that.

Yes. Thanks, Russ. So Jeff, I think that the charitable contributions you can see now has its own line on the financial statements because it is a material -- was a material amount this quarter. We are looking at further charitable contributions in the next couple of quarters. Then also balances, though, with lower expenses for travel and other things because of the pandemic. So there is a little bit of trade-off there.

I do -- when you look at the expense base, though, in terms of -- we laid out in the earnings release a lot of detail on the expenses. But I do think if you take into account that detail in the current expense base, it is pretty consistent, as Russ indicated, we're pretty diligent in watching the expenses. So I think it's -- the base is still indicative of where we'll be in the future.

Okay. I appreciate that. And the -- just wanted to touch on the reactivation of the buyback. In your comments, it seems like, while no end to the pandemic, but it's kind of a growing comfort or visibility, and I guess it's indicated with the buyback language. And just in terms of all, maybe, Russ, use of capital, it seems like that's going to be a near-term lower execution type option relative to seeking M&A. Any follow-up comments on capital use would be great.

Sure. And I'll briefly comment, and I'll again ask Tani to talk about capital, but we had a buyback in place, and we paused it back in March because it was the right thing at that point, not knowing where we are.

But if we -- I kind of fall over to the credit side. When we look at our portfolio and look at how the deferments have all dropped significantly and everything is left, so we know these -- every one of these borrowers. And frankly, most of them, most of the loans that are on some kind of deferral have real estate collateral, and the average is well under 15%.

So we're pretty comfortable at this point that the loan portfolio is in good shape. And despite the pandemic, our customers are performing. We have -- we don't have a big percentage of our -- the portfolio and kind of what we call risk areas. So we feel comfortable with reinstating the stock repurchase plan, and I'll kick it over to Tani to comment on that.

Great. Thanks, Russ. Yes. So we continue to have profitability. And so our capital base continues to grow, and we want to be sure that we are deploying our capital in the most efficient way possible.

And M&A continues to remain a priority, and we are watching all the time, and Russ is out talking to folks all the time to make sure that we're aware of any opportunities that come available as a result of the pandemic or for any other reasons. And -- but we feel that we have sufficient capital to cover both. And we run a capital plan 5 years forward twice a year that takes into account all of our expected dividends and dividend growth as well as share repurchases and potential M&A to make sure that we have sufficient capital going forward to handle all of that.

And just one quick housekeeping, Tani. The increase, the $1.6 million in the ACO. I just -- we can expect to see that 12/31? Or is it as a January 1 adjustment?

So that'll come in on December 31, and that is the adoption adjustment that takes into account the difference between CECL in the incurred loss model as of January 1, 2020, but it will be booked in the third quarter. Additionally -- I mean in the fourth quarter, apologies for that.

In addition to that, we will be also running the CECL model on the current provision requirement in the fourth quarter. And so there will be another provision amount taken, if needed, to reflect the difference between CECL at 12/31 requirement 2020 and the incurred loss model at 9/30/2020. And we don't expect that amount to be more than 10% of the ALLL, the allowance for loan losses at 9/30.

Our next question comes from the line of Matthew Clark from Piper Sandler.

On the off-balance sheet strategy, can you just touch on the rationale there? I mean your loans were flattish on an end-of-period basis. But obviously, your core deposits were down, I think, 8% or so. Just any color on the strategy there and whether or not, I guess, how much in the way of basis points you might have earned by pushing that off balance sheet.

I'll ask Tani to answer that question.

Sure. Thanks. Matthew, yes, so we typically will push significant deposits off-balance sheet for liquidity management if we have excess liquidity that we're still looking at potential fluctuations and volatility and liquidity.

We don't earn that much incremental, but we do earn some incremental, and every basis point counts right now because we're not earning a lot at the Fed either. So typically, we'll bring those back at the end of each quarter. But this quarter, we decided not to do that because there is a lot of liquidity in the banking system, and we were concerned that the deposit networks wouldn't be able to place it again after quarter end if we went back out with that chunk of money and said we wanted it place. So we decided just to leave it out, leave it off balance sheet for quarter end.

Okay. Great. And then I noticed your classified numbers came down. I think you upgraded the credit. Can you give us a sense for what the watch list did in the quarter? Just knowing it's not in that number.

Let me ask -- we have our Chief Credit Officer. Beth Reizman is on the phone. So why don't I ask Beth to answer that question?

Hello, this is Beth Reizman. So our classified loans did go down. We have seen -- any loans that were on a payment release, we classified watch, and so those have actually declined as the payment release have paid off. We've had some special mention increase, but we do that anytime we feel there's a potential weakness in a credit that we do want to watch a little more closely. We don't feel that any of these credits would be moving towards a classified substandard rating.

Okay. Great. And then maybe just on the broader Bay Area and your thoughts there around commercial real estate and just activity in general.

I can answer that. The commercial real estate market is certainly in question. Certainly, people are looking at that and saying what's going to happen. A lot of what drives commercial real estate prices certainly is San Francisco, certainly on the peninsula, not quite as much in Marin County, but there's technology and certainly in the U.K., too. And we've had -- we've seen lots of announcements from tech companies where they have decided to keep employees remote. Certainly, a lot have said remote until the end of June. Others have said, we're going to keep the remote workforce -- bigger remote workforce going forward. So obviously, if they push some of their real estate out and sublet that, that's going to have an impact on the market. So it's unclear as how much impact, but it will have an impact.

Now the good news for us is that we have always had a very conservative approach to commercial real estate. And as you see, and particularly in those credits that are -- that we already had pearls of principal or principal and interest or we have an average loan-to-value on those -- the commercial real estate secured 41%.

So we're in a position -- while I think there's going to be impact on the commercial real estate market across the Bay Area, we are in a position that because of the way we've underwritten historically, now we're going to benefit from that. We -- people have said, I suppose they said it some time to time that we're a bit too conservative, but that's not the case. We've been rational about how we've underwritten and done a very good job and been very consistent about that.

And so as I look forward on the commercial real estate side, I personally feel very comfortable with our position in commercial real estate, and historically, over our 30 years for loans that we have underwritten, I'm not counting any loans that we've taken on from acquisitions. On the commercial real estate, we've had net losses of $220,000 over 30 years. So we feel pretty good about our position there.

Great. And then last one for me, just on the pipeline and how that has changed maybe year-over-year or linked quarter. Are you starting to see your -- some of your borrowers take advantage of opportunities? Or is it still too early?

Let me have Tim Myers, our Chief Operating Officer answer that question. Tim?

Yes. Thanks, Russ. Matthew, there's no question it's down at this point from the same period last year. Although the customers have been pretty resilient, and we have some folks in new markets like San Mateo, Walnut Creek that are really doing their best in this environment to source new client acquisitions. And certainly, we continue to get some activity out of our existing portfolio. So I think you ended your question, it's too early to tell exactly how that plays off -- plays out. And while we love it to be higher, it remains somewhat resilient, and that's been nice to see. .

Our next question comes from the line of David Feaster with Raymond James.

I just wanted to follow up on the commentary about loan price. I mean, it's -- you're having tremendous success on pricing new ones that were down only 50 basis points year-over-year despite the 150 basis point decline in rates. Just curious on competitive landscape. What are yields on new loans? And just where do you -- what do you think differentiates you versus the peers and just being able to maintain pricing?

Well, I'm going to ask Tim Myers to answer that, but I'll make one quick comment. When you have a -- the model that we have, which is relationship base, and while we compete on price often. We also build relationships where the relationship and the ability to talk to your banker is worth a lot and hopefully is worth a better price than you would get if you just went out in the market.

And the fact is, historically, we've done very well with that. And while that's good to say, it's just -- that's the way we operate. And our customers have a lot of loyalty and vice versa. And so that's worth some pricing. How much that is, who knows? And in an environment like this, everything is still low, it gets compacted quite a bit. But that's just kind of a comment about the relationship, and I'll ask Tim to talk about the market in general. Tim?

Yes. Thank you, Russ. Thanks, David. Yes, the relationship model is really critical to that. And we don't -- every deal is a competitive bid situation right now. It is a highly competitive market. And then to be honest, I've seen rates on fairly long duration money that I don't think I've ever seen. And so we never chase that all the way to the bottom. We do our best as rest to be competitive. But we try to leverage, whether it's our industry expertise or our relationship banking or combined with a treasury management proposal about other ways we can add value to these clients or prospects. We try to really leverage all of that and get as much as we can.

So every one of these deals has that kind of discussion. We don't need to go there, let's do this. And that is ongoing. I expect the market to remain competitive, especially when you're choosy for your borrowers and credit profile as we are. That's the kind of borrower that everyone wants. And so that will continue, but we will do our best to maintain those -- that discipline and really continue to emphasize the relationship banking and model, but also what other value can the bank provide. We really are never just sitting on a loan just for a loan.

Okay. That's helpful.

Russ, could you add one point to that?

Sure. Go ahead, Tani.

And that is that I think it's really key also that we were very proactive in lowering floors on existing loans when the pandemic began. And I think that, that produces a significant amount of goodwill with our customers.

Good point, really. That's a good point. Go ahead.

Yes. And then just kind of taking all this together with the deposit initiatives to deploy some of the excess liquidity, the defensibility on the loan pricing side with the loan growth. And just how do you think this all translates to the margin and your thoughts on the margin? When do you think we trough? Just any thoughts on that front.

Well, I mean it's hard to look forward to rates rising. So are we at the bottom? I kind of hope so. I don't know how much lower we can go. The problem is, I mean, we have positive deposits of 9 basis points now. So that can't get much lower. And so as competitive factors yes, you continue to get a push to -- as Tim was talking about. A lot of the stuff, which is just so price-driven. And so the term and the price at some point, you have to say this doesn't work for us. And I think that we're at a point now, hopefully, that we're getting closer to the bottom, but competition makes you do crazy things. And at some point, you just have to say, we can't participate in that. And if we have a good relationship with our borrowers, hopefully, that works, that they keep the financing with us. But one never knows about these things. So anyway, I don't know, Tim, you had anything to add to that?

No, that's it.

This is Tani. If I could just add. I think it's going to be -- it could go down a little. It could go up a little. It's -- I think the volatility is going to be somewhat difficult to predict because when forgiveness comes in on PPP, that's going to obviously have a significant effect. And so the timing of forgiveness is very hard to predict right now. But when it does happen, it will be a big piece.

Okay. That makes a lot of sense. It's tough out there. And then the last one from me. I'm glad to hear that there hasn't been any real impact from the wildfires. Just wanted to get your thoughts on the wine industry in that portfolio, what you're seeing in there. And then just maybe whether there could be an opportunity to potentially drive some loan growth on the other side of this as you help some of those wineries come out of it.

Well, I'll make some general comments about the industry, and Tim has more specifics on different borrowers. The -- and I've talked to a lot of different wineries about the fires, and there's been a lot of wineries that have just let the grape drop to the ground because the fear that they're tainted. Particularly if you're a high-end winery, you don't want to produce something that doesn't -- isn't up to your standard. And so there's just a lot of concern now about the 2020 crop, what it's going to produce. So I think it's going to be a real short crop, which is a function of the fact that a lot of these -- probably these wineries result when we pick the grape, they'll let them drop.

But for our borrowers, in particular, we had -- we really didn't have a lot of impact of borrower. We had one borrower, unfortunately, who was sold a couple of weeks before the fires and the buyer -- and then the winery burned and the new buyer has owned it for maybe 2 weeks. We weren't financing the new buyer, but quite unfortunate set of circumstances, that's for sure. But most of our other wineries came out of this pretty well. And I think Tim has got some more specifics on that. Tim?

Yes. David, I think, as Russ said, we -- our clients, first and foremost and us dodged a bullet with these fires. But a lot of the negatives have been offset by positives in areas -- in different areas with both the pandemic and fire-related. So as Russ mentioned, the fires are certainly affecting the yield on this year's crop. But if you talk about the bulk wine market, that's going to help support prices because in certain categories, certain geographies that have been a real glut. So a lot of our wineries relying on the direct-to-consumer, they've done a really good job on that, they started to recover from the tasting room activity. I think it remains to be seen how tourism fluctuates or visitations to wineries related to this round of fires plays out over time.

But in general, with these different movements of prices, grape prices, bulk wine prices, you could really see some clients be able to work through some excess inventory they have because this year's production is lower. So we really have had a scenario where they've been positive to offset the negatives, not that there's been any shortage of those. But overall, they've been very resilient.

I'd add to that, David. I'd add -- I'd just add that the wineries, a lot of the wineries are using this as an opportunity to reduce inventories, as Tim said. This is a time to rationalize inventories. And then it firms up pricing going forward for '21 and '22 going forward. Because you reduced inventory, so you're not having to move -- if winery doesn't able to move all of their inventories, then you see discounting, things like that. So this is a real -- I don't say it's a good opportunity, but it's an opportunity to do that.

And our next question comes from the line of Tim Coffey with Janney.

Great. Just driving down the commercial real estate question. So we are seeing a bit of an air pocket in terms of investment. Does that imply that your loan originations are kind of going to be around this $50 million level going forward?

They're going to be -- I'm sorry, I don't -- state that again, Tim, I'm not sure I understand what you mean the $50 million pocket?

Sure. So there's a slower growth in commercial real estate investment right now, obviously. Does that mean that your loan originations on a quarterly basis are going to be at kind of this low level?

Okay. Tim, why don't you answer that?

Yes, of course. Thanks, Tim. That's really hard to predict. And a lot of it -- bank our size is timing of opportunities. We are pursuing a number of opportunities. Do I think it's going to vary wildly or increase wildly from that in the immediate or near term? That's hard to predict. But I guess the short answer, Tim, is I don't know if that's a normalized number, but we are actively seeking to grow the pipeline and to close deals to increase that. So I wouldn't be surprised if one off, but the timing is things are very delayed these days. Timing is hard to predict. And so quarter-by-quarter that -- some of these deals have a long lead time now.

Okay. And I -- Tim, I would add that it's a time when you also have to be pretty careful for the reasons that I mentioned prior, which is we don't know what the valuations of commercial real estate around the Bay Area are going to do because of -- as we get through this pandemic, we have to see how companies are going to react going forward to remote workforces and things of that nature and their real estate needs, which were -- the city was just red hot in terms of the commercial real estate activity prior to the pandemic. Now you go downtown, there's not much going on. So will that continue? Will continue at some level? It will clearly have an impact on prices. So if we're financing space, we have to be pretty careful about advance rates and valuation.

Right. Okay. That's helpful. And then Tani, follow-up on a comment you just made about a PPP loan. Have you started the forgiveness process with any of your borrowers yet?

I'm going to let Tim answer that question actually.

Sure. Thanks, Tani. Tim, we have not. We are on our second round of beta testing. So we really have been waiting for as much finalization of the interim final rules as possible, particularly minimum, almost automatic forgiveness sizes, final rules or guidance on payroll calculations, timing of payroll calculations. There's been some other forms introduced that take some time to get set up with our technology platform provider for that. So we have really been waiting to find out really how this all gets resolved. But we are really ready to go and have been beta testing, like I said, and are hoping to get that guidance and start quickly.

Okay. Tim, is your expectation you'll have some of them submitted by year-end?

We certainly hope so. Again, that minimum or easier forgiveness group, for example, currently, it's a $50,000 or less, right? But discussions in Washington have included iterations of $150,000 or less some higher. So what we've just been reluctant to do is start going through that process, potentially someone doesn't get all their loan forgiven and then find out it ultimately would have automatically been forgiven or the process altered, and that's what we're trying to avoid. It's why I don't want to pretend to predict timing of resolution of these talks in Congress. We are going to try to wait, but we are -- we would certainly be hopeful to get for a lot of that to happen by year-end, if possible.

(Operator Instructions) Our next question comes from the line of Jackie Bohlen with KBW.

I wanted to touch on fees. I know last quarter when we spoke, you discussed about waiving a lot of those still. I just wanted to see if that's what you plan to do through the end of the pandemic? Or if we might see a little bit of a rebound before that happens?

You're talking about the fees -- customer fees and not as opposed to not the fees that we're getting from the PPP program, correct?

No, no. Customer-related fees that are booked to...

Yes. Tim, why don't you jump in on that?

Really, what we're trying to do is continue to provide support to our customers during this time, and I think the short answer to your question is we're going to continue to watch and see how that plays out. Certainly, as soon as we feel like it's prudent to do that without causing undue harm on borrowers who are already dealing with a difficult time, we'll revert back to being fair to the bank as well.

Okay. That's great. And then -- and I realize this is challenging in light of the environment. But just thinking about balance sheet liquidity. You had the proactive actions that you took at 9/30 to keep some of that off balance sheet. But how are you -- what does customer behavior look like so far in the quarter in terms of balance fluctuations? And are there any either outflows or inflows that you might be expecting in the fourth quarter?

Tim?

Yes. It's really a mixed bag, Jack. I mean we certainly have some deposits that resulted from PPP fundings that went pay down lines, left the bank to pay other people. We have some large accounts that fluctuate fairly dramatically month-to-month, but those ins and outs on as mutually exclusive, meaning they might have money large sums going out for one purpose, other sums going in for other purposes. And so it is really hard to predict. We do have some seasonality to that a little bit.

But by and large, we have a lot of debt being paid down. That's been one of our larger loan payoff categories year-to-date this year compared to prior years. People are very conservative, and I would expect that to continue. That's certainly partly why our loan utilization is down a little bit on the revolving credit. So I think you'll continue to see some of that behavior with a slow growth and conservative-minded environment. So that is hard to predict a little bit. Does that answer your question?

Yes, yes, it does. That's helpful. And then my last one is just a little housekeeping item. In terms of the CECL adjustment, does that all the -- and I understand about the $1.6 million. But for the transfer from CECL from the incurred loss model, that one quarter difference there. Is that going to flow through the fourth quarter's provision expense? Or does it potentially result in any sort of a recast or restatement of prior quarter's expense?

Tani?

That will flow through the -- yes, that will flow through the fourth quarter provision expense.

And there are no further questions at this time.

Okay. Well, I thank everyone for your attendance this morning, and we look forward to talking to you again next quarter at the end of the year as we cover the year-end results. So thank you again for your attendance.