Q3 2019 Earnings Call
Hello, and welcome to Banc of Californias third quarter earnings.
Earnings Conference call.
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Today's call is being recorded.
A copy of the recording will be available later today on the company's Investor Relations website.
Today's presentation will also include non-GAAP measures the reconciliation of which an additional required information is available in the earnings press release. The reference presentation is available on the company's Investor Relations website.
Before we begin we would like to direct everyone toward the company Safe Harbor statement on forward looking statements included in both the earnings release and the earnings presentation.
I would now like to turn the call conference over to Mr., Jerry Wolf Banc of California, as President and Chief Executive Officer.
Good morning, everyone welcome to Banc of California third quarter 2019 earnings Conference call with me today is banc of California, CFO Jumbo Blur, who will talk in more detail about our quarterly results shortly.
We finished the quarter with a net loss to common stockholders of 22.7 million.
And they diluted loss per common share a 45 cents.
As you know the main reason for the quarterly net loss is we incurred a charge off related to a 35 million dollar line of credit originated by the back in November of 2017 tour borrower purportedly the subject fraudulent scheme.
The effects of this charge off at a very clear impact on our quarterly earnings.
Notwithstanding this event our team continued to make significant progress during the quarter on our core strategic initiatives, which we will discuss momentarily.
Let me first address what we've done suffering of the fraud.
In addition to evaluating the loan itself and ensuring we're taking the necessary steps to pursue recovery.
I wanted to evaluate our existing portfolio to make sure. There's nothing else, we should be aware of no.
Following this event.
I direct you didn't extensive review of all loans, you not relationships 5 million and above not secured by real estate.
Through the use of internal audit and outside parties, we looked at loan security and collateral documentation for each credit.
And converting the existence of our collateral is held by a third party outside of the bag.
In addition, I also requested a review of the top 10 relationships and our warehouse lending group.
She confirmed that we have the appropriate documentation in place.
Well the reviews are not yet complete and we await final confirmations for certain loans to date, we have not identified any other instances of fraud or concerns that the collateral how by third parties does not exist or material concerns with our documentation.
Turning to our overall business I want to highlight some of the significant accomplishments this past quarter, which are much more indicative of our overall performance represent our ability to execute on our strategic plan.
As you may recall.
We set forth in three areas of focus for 2019.
Reducing our cost of deposits.
Lowering our quarterly operating expenses.
Eliminating noncore assets.
All of this is intended to create the foundation upon which we will grow in 2020.
We view cost of deposits is one of the key litmus test for how we're executing on our plant.
In Q3, we continued to make great progress and reduce our cost of deposits by 14 basis points.
Well lower rates have helped.
Our ability to generate noninterest bearing deposits has been a key component as the mix of our deposit portfolio is most important for the long term.
This progress reflects the significant effort, we have made internally to transform the bank into a relationship focus business bank.
In the third quarter, we saw non interest bearing deposits increased by 11% for the prior quarter to over 1.1 billion I.
And the now comprise almost 20% of our total deposit portfolio.
Additionally, we eliminated a significant amount of broker deposits, which now make up less than 2% of our deposit balances.
We expect our broker balances to move up and down like FHLB advances to bridge funding.
Well, we anticipate running brokered and wholesale funding at reduced levels going forward as we continue to make progress on increasing our low cost deposit base.
On the asset side of our balance sheet.
The third quarter, we opportunistically exited lower coupon and longer duration mortgage backed securities with the remainder to be sold in the fourth quarter.
This will give us the opportunity to begin the process of building a more traditional and belt securities portfolio consistent with what you would expect at a community bank.
You will take time to build but would be more accretive to us long term.
We have significantly reduce yellow balances over the last year, and we'll look for opportunities to reduce those balances to the extent, we can find comparable yield and duration.
As a result of our targeted efforts to eliminate noncore assets. We ended the third quarter at 8.6 billion with core assets, playing more prominent role in our profitability.
Expenses were nearly flat and came in slightly below last quarter when adjusted for the gain on investments and alternative energy partnerships.
This quarter was particularly good given we viewed the second quarters noninterest expense as potentially a low point for the year.
John will talk in greater detail on overall expenses and operating expenses, specifically, but at a high level, we remain focused on simplifying our operations and improving the client experience, which in both cases will help us manage expenses to an appropriate level based on the size and complexity of our business model.
We continue to place an emphasis on hiring very talented and experienced professionals.
This past quarter, we brought on a true of talented executives.
Constituted at our community in business banking Division, how many Hussein as head of commercial real estate banking and Bob Dike as executive Vice President of credit administration.
Bob will step into the Chief credit officer role when our current CCOH, Chris Gagner retires early next year.
These talented executives along with the rest of our executive team are among the most accomplished bankers I've ever worked with.
Our story and opportunity is incredibly compelling and we're highly focused on taking advantage of it.
The entire team with Banc of California is very dedicated and talented leaders are reflective of the tremendous talent we have throughout our organization.
With that I'd like to now turn the call over to John to provide more detail on what was mostly a positive quarter for the back then I'll come back to wrap it up before we take questions go ahead John .
Thank you Jared.
As mentioned, we have continued to opportunistically shed non core assets.
Total assets ended the third quarter at 8.6 billion, a $735 million decrease from the prior quarter.
The change was driven by the $574 million multifamily securitization mentioned on the last earnings call, which settled in August .
Additionally, as part of our efforts to begin diversifying and building a more traditional securities book.
We saw 371 million of mortgage backed securities during the quarter.
The majority of which occurred at quarter end.
We still hold approximately 40 million of MBS and expect to sell the remainder of those during the fourth quarter.
As a reminder, the MBS portfolio was long duration and low coupon.
With the decline in the middle portion of the Treasury curve, we were presented with an opportune to exit the position and begin the process of diversifying into less price sensitive securities.
That provided better cash flow structure.
Sale of the MBS resulted in a 5.8 million dollar loss inclusive of an other than temporary charge and the loss on interest rate swaps used to partially mitigate the price fluctuations are the securities.
The securities sold at the ended the quarter are shown as a receivable on the balance sheet and we expect by the ended the year. The securities. The total assets ratio will be approximately 10% to 15%.
Held for investment loan decreased to 6.4 billion this quarter due mainly to at $220 million net reduction in SFR and multifamily balances driven by an increased level of loan payoffs.
This was expected as we are focusing on more relationship oriented loans that are less price sensitive.
The loan portfolio mix of SFR and multifamily loans is 52% at quarter end down from 59% at the end of the prior year and we expect this mix to continue to decline to a more reasonable percentage component of the loan portfolio.
Our net see Eni balances decreased by 162 million due to lower production for the quarter that $35 million charge off exiting one larger relationship.
Lower utilization of revolving facilities and other credit related exits as we continue to prudently monitor our loan portfolio and sharing potential credit risks are being managed actively and swiftly.
Rounding out the changes in loan portfolio, our CRT and construction balances increased by 54 million.
The overall loan portfolio yield decreased five basis points to 4.75% during the quarter due to variable rate loans, resetting and higher coupon commodity loans being refinanced two other institutions.
The loan yield did see a benefit of four basis points due to a higher level loan prepayment fees and accelerated discount from the repayment of purchase loans.
In addition to the securitization of the low coupon multifamily loans.
However, the combination of higher prepayment fees and the multifamily securitization was not enough to offset the negative impacts on following LIBOR.
Currently seen I balances are approximately 29% of our total hfive portfolio and relatively flat compared with 30% last quarter.
Going forward, we expect the mix of seeing eye loans to comprise 25% to 30% of the overall loan portfolio.
Moving onto deposits higher cost brokered Cds decreased by 325 million or 86% to 54 million by quarter end.
Additionally, higher costing money market and savings accounts fell by 105 million and 19 million respectively.
Overall, our targeted efforts to lower our funding costs reduced average deposit cost by 14 basis points from Q2 to 1.48%.
We further reduced our wholesale funding by 562 million in Q3, primarily due to apply in the proceeds from the multifamily securitization toward paying down overnight FHLB advances.
We expect our wholesale funding to progressively decline with alternative lower cost funding and as we continued growing relationship based lower cost deposits.
Core deposits or non brokered deposits now account for 98% of total deposits up from 92% last quarter.
Turning to the income statement, our net loss to common stockholders for the quarter was 22.7 million or a loss of 45 cents per diluted common share.
As Jerre described earlier the quarterly results were negatively impacted by $35 million charge off in the quarter $5.8 million loss in the sale of mortgage backed securities and 5.1 million dollar loss from the preferred stock redemption.
The charge off pushed up by our historical loss factors used in our a triple our calculation, which add an additional 3 million to the quarterly provision expense.
These outlying charges were partially offset by net non core expense benefit items totaling 2.5 million.
After adjusting for non core items, along with the amortization expense associated with our solar tax equity program, our operating expenses for the third quarter were 46.7 million.
Normalizing our tax rate to 20% operating earnings from core operations were 19 cents per diluted common share for the third quarter.
Reconciliations for this are located within today's earnings presentation.
[noise] average interest, earning assets decreased from the prior quarter to 8.2 billion with the average yield decreasing nine basis points to 4.5%.
Since the CLL investments our index to three month, LIBOR and reset quarterly the securities portfolio average yield decreased by 23 basis points to 3.60%.
The CLL booked largely reset at the end of July and is currently resetting lower again based on LIBOR rates from 90 days prior or about nine basis points from the quarter end level.
The bank's net interest margin was flat to Q2 at 2.86%. This is mostly due to the effects of lower cost of deposits.
More rate resetting in the securities portfolio higher mix of wholesale funding and a LIBOR driven decline in loan yields.
Net interest income decreased by 5.9 million from the prior quarter to 58.9 million.
Loan interest income decreased by 8.9 million in Q3 due to a 746 million dollar decrease in average portfolio balances as well as a five basis point decline in the average yield.
Interest income on Securities declined by 2.4 million on lower average balances and a LIBOR rate reset previously mentioned.
On the liability side interest expense and deposits decreased by 5.8 million.
Or by 20% on lower average balances and 11 basis point decline and the average cost of interest bearing deposits.
Interest expense on FHLB advances increased by 230000 from the second quarter due mostly to a higher average balance slightly offset by the average cost being five basis points lower from the prior quarter.
The overall average cost of interest bearing liabilities fell by six basis points to 2.03%.
With respect to potential reductions in the fed funds rate or other indices are modeled interest rate risk position is slightly asset sensitive.
The provision for loan losses in the quarter increased to 38.5 million and included $35 million charge off and the related additional 3 million provision described earlier.
Hey, Triple our coverage ratio of nonperforming loans is 139%, while the overall a triple ratio to held for investment loans is 99 basis points.
Total non interest expenses for the quarter were 43.3 million, which include the previously discussed net noncore benefit of 2.5 million.
Adjusting for non core expenses Q3 core operating expenses were 46.7 billion or 2.17% of average assets annualized.
As we continue to align run rate expense scar size and footprint, we expect to see near term quarterly operating expenses remained below 50 million.
Our capital position improved during the quarter, mainly due to a reduced asset base. The common equity tier one capital ratio was 10.3% and tier one risk based capital totaled 14.31%.
Tangible common equity increased to 7.8% up from 6.57% one year ago.
During Q3, we completed a partial tender offer for shares of the series D and series E preferred stock for an aggregate total consideration of 46 million inclusive of premium and accrued dividends.
We continue to maintain it fairly robust capital position, which provides us with flexibility to allocate and execute on capital strategies, which the board deems appropriate.
Lastly, let's move on to credit and asset quality metrics.
Our nonperforming asset ratio for the quarter was 52 basis points up 21 basis points from the prior quarter. This was due mainly to a 14.5 million shared national credit.
Which was reclassified to nonaccrual late in the quarter.
This Nick continues to remain current honest payment status and any subsequent payments received will be fully applied to reduce the loan amount.
Total delinquent loans increased by 4.1 million, resulting in delinquent loans to total loan ratio of 88 basis point.
The upturn was mainly driven by SFR loans.
Since the ended the quarter 8.7 billion of delinquent loans have cured and are now current.
With that summary of our third quarter financials, I'll turn the call back over to Jared.
Thank you John .
In the seven months I've been at the bank, we have made tremendous progress advancing our strategic priorities of transforming banc of California's balance sheet, and becoming a relationship focus business bank.
This past quarter, we undertook significant capital management activities, and we'll continue to look for efficient and optimal strategies to deploy excess capital.
Such a transformation is not easy and the fact, we have done so much is such a short period is a credit to the talented professionals here, who come to work each and everyday seeking to do better than the day before.
We're doing all this while still serving and expanding our client base.
We ended the our clients most trusted banking partner by listening to their needs and working to develop solutions and assure they're getting the exceptional service and execution for which banc of California is known.
We're currently working on numerous technology initiatives to continue to deliver and improve on the client experience.
This month, we launched a new platform to onboard clients faster.
I will soon launch an upgrade to our core system that will improve system functionality for our business clients.
By investing in technology, we're simplifying the way, we do business with our clients and approving the way our clients access and interact with their counts with us and their clients and vendors.
This is all being driven through client feedback we've received which we are taking action.
We are in the early phase of rolling out our Investor Real estate program, providing ready capital to sophisticated real estate investors in southern California.
We're also building onto our business banking program as well as our healthcare lending program.
These are all initiatives with routes that are taking hold now and that we expect to show results in the coming quarters.
Each of these initiatives is built around in need we see in the market that we believe we can respond to with our talented colleagues.
We are building relationships by understanding our clients' needs and bringing solutions to address those needs.
Looking ahead into the coming quarters, we will continue to execute on the three critical areas of our focus which have the most bearing on our strategic success.
I expect to see noninterest bearing deposits become a larger part of our overall deposit portfolio as we actively managed down our funding costs and build client relationships.
The deposit incentives, which were introduced to our employees earlier. This year are centered on building relationships rather than just transactions and have shown impressive results.
I'm excited to see what a few more quarters will bring.
We've made incredible progress, reducing our expenses to be more aligned with our size.
We will continue to look opportunistically to improve expenses and our efficiency going forward.
Additionally, our balance sheet has transformed over the last several quarters.
Since the beginning of the year, we have exited over 2 billion of noncore assets, allowing us to exit higher cost liabilities and building a foundation from which we can further grow our franchise value.
I also expect we will continue finding ways to drive incremental value for our balance sheet through additional refinement and the thoughtful accumulation of high quality assets.
Overtime, we expect to CCRC loans, which are comprised of commercial real estate multifamily and construction balances.
Moving closer to 70% to 75% of our total commercial loan portfolio, we'll see an eye loans, making up the remaining 25% to 30%.
This will be due mostly to our initiatives to grow our portfolio of relationship real estate loans and the incremental business is expected to generate for the bank.
Overall, I see as a very well positioned on both sides of the balance sheet.
We expect to continue to make progress, bringing in low cost deposits and reducing our overall cost of funds and on the asset side. We will continue working to remixed our loan portfolio, replacing non relationship loans that payoff good yielding relationship loans that bring deposits.
We also expect our securities portfolio to start to fill out with more balanced.
In the short term pure earnings maybe lower as we build assets backup, but our way should grow importantly, we have laid the foundation for the bank to create true franchise value going forward generating relationship based loans and deposits in a way that is more traditional for community bank and that deserves a higher valuation as.
We continue to execute on our strategy.
As a whole we made some very meaningful and significant strides in achieving our strategic goals this quarter.
I'm very pleased with the direction, we're heading and excited about the incredible work in progress we've made to get us to this point.
We have a very talented team of colleagues who are successfully executing everyday.
Thank you for listening today, and I look forward to updating everyone on our full year progress during our next call in January with that let's go ahead and open up the line for questions.
Thank you ladies and gentlemen, we will now begin our question and answer session to ask the question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble our roster.
The first question.
We will come from Matthew Clark of Piper Jaffray. Please go ahead.
Hi, good morning.
Good morning.
Maybe we could start just on.
The outlook on the size of the balance sheet, I mean brokered CD done a 2% kind of bouncing around I guess from here, but.
I guess, how should we think about the overall size the balance sheet as we get into next year do you feel like we can stabilize around that 8.4 8.5 billion dollar level or you feel like it's it's going to go a little lower than that.
No I think right now we're.
Were pretty good and it's hard to know exactly but.
We ended the quarter to 8.6.
We have repayments in the pace of repayments is whats hardest to predict.
But I expect that our loan generation will replace the payoffs and so we're probably read mixing more than growing.
For now and then we'll have to assess the balance that we're looking to maintain is on the on the liability side. So we don't get into position where are our loan growth is so substantial that we put pressure on the liability side again and I think we're doing a really good job of that we're generating deposits in the way that keep pace. So from the short term I expect us to remix and then over.
Over time, I expect that we're going to grow.
Okay.
And then maybe just on the NIM outlook.
Given a lot of the.
Work you've done on both sides of the balance sheet I would anticipate we'd see some expansion from here.
Yes.
What are your thoughts on kind of the trajectory of the margin.
No I assume we get above 3%, but beyond that.
Any any.
Hello would help.
Yes.
Can't get their fast enough, but we're trying to try to be smart about it.
I think given all the movement in the quarter.
With that being flat was was pretty good, especially there's a lot of pressure out there right now.
On a rates, it's very competitive.
Our loan yield.
Our new originations was 5.1, which was above our portfolio yield for 75, and so we're still generating loans.
Above our portfolio yield, which is why would we remix I expect that what's going to enhance.
It will protect or enhance our current yield and then we're continuing to make new on the on the on the liability side in our deposit costs. We expect to continue to decline we have a lot of maturing Cds in the fourth quarter a significant number.
That we expect to reprice downward and so.
That's isn't about as much color as I can give you.
It's hard to harden through its hard to say exactly where it's going to move to but we've said that 3% of somewhere we want to get into sooner rather than later and I think we're going to we're going to make progress this quarter as we've talked about in the past. Our primary focus is really on that driving down the cost of deposits and.
We had quite a bit of brokered CD that ran up very late in the quarters, we'll get the full benefit of that in the fourth quarter and as Jeremy mentioned, we've got.
Substantial amount of retail Cds that come due and in the fourth quarter and they carry rates that are between two and a quarter in $240 and will reprice those down.
Don't necessarily expect to retain all those but they will be repriced and we will have some retention that will materialize out of that so those are a couple of the drivers are we continue to see opportunity is drive down our cost of deposits.
Okay, and then maybe just on the the snick that went into non accrual can you just.
Give us.
Some color in terms of the type of.
[noise] business or industry, there in them and remind us how much in the way you have in snacks and then maybe as a follow up just where your criticized classified stood at the end of the third quarter versus the second.
Sure so.
On this Nick it's a $14 million relationship it's a private equity led deal.
In the.
In the apparel industry.
And retail.
I think were properly reserved on it but it's a current payload and.
And so this was a circumstance where.
No the regulators came in and I guess change that.
James the rating on it for the lead bank and therefore.
We are all forced us to make the same adjustment we already had a reserve on it.
And it is it is pay and so.
No. It was nothing that we really have control over which is why I hate to shared national credits I mean, I don't really like being in any of these we have five relationships left five shared national credits.
And our total commitments are.
And the shared national credits and looking at a shoe right now.
Approximately 47.5 million, so it's not it and not a huge huge amount.
But were we'd like to exit the more we can.
What was your second question.
Just on where your criticized classified stood at the end of the third quarter relative to the second.
Yes, that's an company we typically don't disclose what are the earnings I would say that overall, though we've seen improvement in criticized classified.
The quarter.
Okay. Thank you.
The next question comes from Jackie Bohlen of KBW. Please go ahead.
Hi, good morning.
Welcome back Jackie.
Thank you good to be back the they shared national credit.
From the quarter is it that the same when that we discussed on the first quarter the leverage loan because I know that was a snack as well the sponsor.
But.
We had three leveraged loans, we have two left and so this is one of the two that we have left I don't remember, which one we had one that we that we got out of.
Quarter I told you guys I was trying to get rid of them in one of them, we actually were able to get out of and so we have two left this is one of them, it's a leverage loan yes.
Okay. Thank you.
And then in terms of balance sheet changes. So it sounds like most of the large work has been done in terms of reshuffling things I'm going forward, it's going to be a gradual remixes opportunities provide themselves without significant decline in assets did I interpret that correctly.
Yes, I think Thats right I mean, we've we've made some really I think.
Significant progress on some very specific objectives, you know on that on expenses on the deposit costs. We obviously have have room to grow and then shedding kind of these noncore assets to create the foundation for the bank for growth for I'm really pleased with with what we've done there. It's it's obviously frustrating to have the noise that.
Is kind of legacy to.
That kind of distracts from that but the progress with substantial and we're going to continue to execute on our plan. So I think we laid the foundation for growth going forward, we still have a couple of levers to pull.
Holding our margin in a down rate environment was was not that easy, but we've been originating loans above our portfolio yield and wondering I would say Jack is we can actually grow much faster.
And but I just trying to keep the spigot turned at the right level right now as we get kind of our deposit infrastructure in place. If we grow too fast we're going to kind of end up back were worse I need maybe another quarter quarter and a half to make sure that we don't turn the engines on too fast but.
We're going to we're going to start growing here in a couple of quarters.
I can't say, where we could see the pressure again, what Jeff said earlier is that with the rate environment. We could see increased repayments, we still have roughly a billion agent single family loans and roughly a million six in multifamily and so those two categories could see some elevated repayments, but the low rate environment. So that was a little bit of pressure on us.
In terms of the overall balance sheet size, yeah, I mean look I if the SFR goes that's fine I mean, there's there's some stuff that's actually pretty good yielding and won't leave but we can we I think we can replace it the runoff we can put on multifamily pretty fast if we just drop our rates too.
The commodity levels, we're holding rates higher than.
What the commodity pricing is because we're asking for deposits and we're trying to do better better relationship loans.
But we can we can generate in pretty fast if we just turn the engine on and so that's the balance we're holding to right now and.
We're trying to do this right the right way for the long term.
So when you earlier comment when you said that you could grow faster. If you wanted to you in that you might look to see more growth in future quarters that understanding you're managing the liability side as well.
That referring to the way that your pricing year loans or is there something else that.
Mitigating some of your growth.
Two things.
First is that we've just brought these teams in these new executives in place to leave the teams.
We're making sure that.
We're putting out the right products.
And that their price the right way from a relationship standpoint, and we should be looking in a lot more deals than we actually do to bring in the right credits and so thats.
The.
I would say the patients and the discipline to do the right deals.
And this pipelines are building up as as we introduce our teams and if they get out into the markets and so that's going to take time on the multifamily side again, we're trying to exercise discipline and do the right deals I think it's a really important part of our portfolio I think the fact that we can be a cradle to grave letter to first mile lending as that.
Talked about in the past, which is acquisition and bridge in rehab on the front end even light in full construction and then do permanent financing on the on the end is a takeout is really really.
Competitive in the marketplace there aren't a lot of lenders that are doing it and how the capacity to do that.
And we can and as I talked to more and more prospects and clients. There. They are very attracted to that.
But we wanted to do at a certain way, we can always turn it on the multifamily engine and let it run faster right now we're trying to run it at a pace.
That is appropriate for kind of how we're building up our deposit franchise.
And I think a lot of that is is rate focused I mean, we can to grow it right now without the front end lending it's more rate game.
As we bring on the front end lending the first of all lending it's less of a rate in because we're providing an option for those clients for permanent financing at the end of a project.
And it's less rate sensitive, it's more about certainty and so.
That's the balance in the end.
I will normalize in the coming quarters that but that's that's kind of give you a sense of what it's like right now.
Okay. That's helpful. Thank you and just one last one for me and I'll step back.
You mentioned capital actions I can't recall fiber that down from the press release your prepared remarks, but when you talk about that and the flexibility you have for the future does that refer to additional preferred redemption as that becomes a possibility or were there other items that you were looking to do.
All options are on the table, but certainly we are looking at the proud that becomes callable in June of next year.
So we will we want to be in a position that that's a decision of the board that we could call.
The that series.
Yes, so both for looking at both the Optionality for doing preferred and whether we should do common looking at both of those thanks.
Okay, great. Thank you.
Thank you.
The next question comes from Andrew Liesch of Sandler O'neil. Please go ahead.
Hey, guys good morning.
Just wanted to circle back to.
You're kind of expense outlook from here.
Things stay below 50 million.
Yes, and initiatives and our planned.
I guess, how far below 50 million and is this 47 or so a decent run rate or is this kind of the low for the quarter and it's going to build from here or look for the year thats going to build from here.
No and we've got a lot of initiatives that are still under way and that's in technology that we talked about in the past its coming online and that was described earlier.
Platforms that are being launched and those will be launched over a couple quarters as we roll it out.
So we'll start to see some expense savings that materialized and those efforts that.
We're continuing to look at opportunities to build out the frontline so I'm hesitant to give any sort of increase guidance around that.
I do feel comfortable that will be below 50 million.
Okay.
And then the added provision that was necessitated from the risk factors on the related to that the fraud here is that going to adjust the or affect provisioning going forward or is that all just captured here in this quarter.
It effects the the loss factors so to the extent that we have changes in the loan balance within that loan type in will affect provisioning for whatever that net change in their loan balances.
But once we move to Cecil next year it won't be a.
Component that will be isolated and called out as part of our provisioning and so it doesn't back for necessarily into our seasonal calculation.
Andrew Let me let me, let me go back and address the expense question definitely well.
And.
Every quarter it seems like we find more stuff and so we're running at a where we're running close to 50, and then we find something and that drops down and we realized so that's something we can take out I think all of those surprises are pretty much done now.
And so.
We had a really good quarter and I think that that is something that I think is sustainable.
I say that knowing that if we found a great opportunity to spend on something that we thought would would generate earnings we would do it but I'm feeling pretty good about where we are obviously theres a range there, but that's why John is kind of holding to the 50 because.
Stuffs come up each quarter, where we've said hey, that's another opportunity, let's let's take advantage of that and.
But we're going to continue to be opportunistic.
Gotcha.
Thank you how you've covered all my other questions.
Thanks, Andrew The next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks, Good morning.
John just on your.
Comments earlier on the CD maturities in fourth quarter and the yields there if you tell us what the dollar amount of seed views that are repricing and then kind of what youre.
Yes.
Rough built there would be on the.
But you keep.
Yeah, it's roughly 600 million on Cds that mature across the quarter.
Again, it's at about a 225 to 240 range.
In the past, we've been retaining somewhere in the high teens.
But with each passing month rate on maturing Cds is higher so.
So we don't know if we're going to be able to continue to retain at that high of what percentage.
So the retention rate might start to drop down as we get into the higher rates Cds.
I just have you been retaining the high teens.
Yes, hi team, we've been selectively like.
We set pricing based on where we think we need retention to be.
Based on our other volumes coming in on other products. So.
We can price Cds to retain 100% or we can price them and say this is probably generate 18% to 20%.
Retention and Thats, all we need and if we get more that's fine because we're happy with the price and that's kind of the exercise we go through.
Based on what assets were generating a retaining each quarter.
This volume of Cds.
It might be that we were going to retain more.
If if our assets are going or are going to stay flat will set figure that out based on our volume of.
Of asset generation, but I would expect that rates would be as John pointed out when you're in the higher end of the range, yes. The most sensitive price sensitive clients and so they are going to go and shop that the most so I think our ability to generate.
To retain a lot and much lower rate will be tested.
But we have other levers to pull to bring down our deposit costs and we're continuing to do that.
Hi, good color. Thanks.
The table in the press release with the new loan commitments.
Notice that the.
Weighted average coupon of the Shanghai originations was down 70 basis points during the quarter.
Was that driven mostly by the decline in LIBOR from come from from second quarter over the course of the third quarter or something else.
Yes.
Okay.
So that's just kind of the competitive environment that we have right now on the new production, it's very competitive.
And so we're just.
Trying to bring on the best credit So we're willing to.
Bring on credits if the credit quality is good and that credit quality is going to demand the lower lower rate and so I think thats a.
Probably best described as a.
Drive towards quality.
And also kind of affected by the rate environment, obviously, we had some rate cuts and the quarter.
Okay, Great and then last question for me.
Slide 16, and in the slide deck, John I Wonder if you could just run through the items that you've embedded there in terms of the noninterest income adjustments that totaled 1.7 million I'm not sure I'm seeing what all of them would be to get to that number.
Thanks.
The page here, Gary which page again, please on slide 16.
The earnings profile.
Yes, and the non interest income adjustment of $1.7 million, just what the items or that you've embedded in there.
That is.
Largely related to the securitization efforts that went on in the quarter.
So there's just some adjustments around the gain on sale of the loan.
Offset by some other factors.
So if you recall we.
We had kind of a two step process with the securitization and so India. The third quarter, we recognize the gain on the securitization and never some offsetting amounts to netted down to roughly that 1.7 billion.
Okay.
Thank you.
The next question comes from team or Brazil or of Wells Fargo Securities. Please go ahead.
Hi, good morning.
If you Murphy.
Maybe just circling back to the remaining shared national credits any of those in retail or with the same lead bank.
Is your question, whether or not any of the other shared national credits that we have.
Led by the same party, that's leaving the one that was that was downgraded.
Yes.
No.
Okay.
And and industry wise any of the any of the remaining share national credits in retail.
Okay.
It looks like there's.
No I don't think so.
And I just want to make sure. This right. So the review that's taking place of the $5 million plus loans secured by real estate and the top 10 warehouse clients.
It was mentioned that the reviews are not yet complete was that just for the warehouse portion of it or review still ongoing for kind of all loan review.
Now let me, let me address that so.
It was important that we take the opportunity.
To review.
You know all loans are not secured by real estate that were above a certain size and so I directed this review.
It was extensive it was 53 loans, representing almost $540 million commitments.
About 35 relationships and it was all the lending relationships 5 million in above not secured by real estate.
We focused on security and collateral documentation.
Hey, confirmation to support the banks collateral interest.
Our internal audit Department, let it and then we had a third party. It was independent come in and review is actually we had protiviti covenant do that.
And so we have not identified any other circumstances of apparent fraud for the credits review.
Nor nor we identified anything that would give us large concerns over the existence of collateral held by the bank on our behalf third parties earn a lot of those but our view.
Obviously, we can't give assurance is that our review is perfect but.
We're still waiting for kind of the final results in terms of just people completing that work and the final confirmations.
But it's.
I would say is the validation of the work that we did ourselves as opposed to kind of.
In work at all and then the warehouse review as was separate and that was just hoping that we did so.
The confirmations are really around these larger 53 loans, representing that the 540 million of commitments not secured by real estate.
Gary to give you more detail on the non interest income adjustment. If you go to the income statement Theres kind of three lines that make up the majority of that so theres impairment loss.
Theres the loss on the sale of Securities and then there's the gain on sale of loans. Although you are going back to Gary's question.
He was asking but.
A reconciliation right in the 1.7 million okay.
Tim or do we do we answered question what do we answer your question on the on the.
On the.
On the review.
Yes, and maybe just a corollary to that looking at the linked quarter.
Decline and see Eni balances and.
The remix of the loan portfolio to 2020, 5% see an eye.
35% CRT.
Any of that remix or the loans exited this quarter from the C and ibook.
Result of the of this loan review.
No that's.
That wasn't the results of.
Of the loan review.
One thing I should say about about the can funding matter and this this charge off that we had.
As we actually filed a complaint in federal Court yesterday, again, Chicago title, which was the the title company.
Along with one of the other main creditor. So we jointly filed a complaint with one of the other main creditors.
That we're partnering with seeking 86 million in damages.
We are jointly represented by two very prominent firms.
And if you read the can play you understand how complicated elaborate the skin was to the fraud creditors.
We are and we will continue to aggressively pursue recovery. Obviously, we can't give any insurance is that regard, but I would say that the complete speaks for itself and so thats. An example of.
The aggressive action, we're taking to make sure that we do our best to recover here.
Okay. That's good color and just one more question for me following.
Last question earlier looking at deposits and the trends there.
Good acceleration in the reduction of the Casa deposits should we expect continued acceleration and how fast those.
Costs are brought down.
Yes, any color on that would be helpful.
Yes, well.
Certainly the rate environment is helping although our teams are working really really hard right now to generate new relationships. So we're we're asking for more money from existing clients.
And expanding our relationships with them.
And then we're bringing in new accounts as well and new relationships on from businesses.
And bring over their business accounts and.
I thought we made great progress in the quarter.
John you have any any thoughts on how quickly we are going to move do you think that was 14 basis points was.
Yes, so the the items I tests based on earlier, it's going to contribute to the fourth quarter, we had that again $325 million brokered Cds that mature very late in the quarter and they carry to.
Around a 240 rate so we're going to get a full quarter benefit of that and then we'll have the retail Cds that mature that now that will be spread across the quarters and we don't get a full quarter. The other thing that I would start to look at.
Is that we grew our noninterest bearing deposits by 114 million in the quarter, but the average balance was only up around 14 15 million.
So we should see some added benefit to the extent it to the noninterest bearing deposits stick throughout the quarter.
Okay, and John do you have the spot rate at the end of the quarter for deposit costs.
Yes.
No I don't have that.
Sure, we typically disclose that.
I mean look.
Thank you.
Thanks.
The next question comes from Tim Coffey of Janney. Please go ahead.
Great. Thanks, Marni gentlemen.
Morning.
We will do the warehouse lending line.
How much was it down in the quarter and kind of whats the percentage of warehouse lending to total loans right now and where would you like it to go.
Well I like I'd like to warehouse business.
I think we do a really really good job, but that we have it we have a terrific team in place.
Yes, it needs to remain a.
Reasonable percentage of our balance sheet.
So given our size, we we we could growing much faster but.
I think right now we have.
A soft internal cap of just under 1 billion.
And I think the last last time I looked at was down to 80 or something like that John I don't know, if you have to quarter and number.
Lets net ballpark, yes, but I expect that to to expand this quarter.
Okay.
And then from the comments this correct me if I'm wrong, it sounds like you're pretty much down with your securities portfolio repositioning and Remixing, though right now.
No I think we're in it kind of the early stages. So at the very ended the quarter, we laid out a long large portion of the agency MBS. Those are long duration low coupon and then we'll be re mixing into securities that are much more traditional for community bank of our size and complexity.
And you said will be spread across a number of different investment security types.
Where we may still be a little bit on the high side is in our COO portfolio, we're not necessarily looking to sell out of the close any further we do expect that they will be called overtime and then over time the size of the seal portfolio will.
To be something Thats.
Much more reasonable component of the overall securities book.
Okay.
And then rent control has come to the entire state of California, How's that going to impact your multifamily business.
That's good question so.
Right control first of all it wasn't pure rental is actually.
At lunch with one of the largest developers in the state who had been up in Washington has been up in Sacramento working with the governor to make sure that this didnt go sideways. So.
They negotiated a.
A percentage increase in annual percentage increase that I think.
The real estate industry felt was good enough to allow them to kind of continue to expand I think for some of the weaker.
Property owners, it's obviously going to delay the improvement of those properties and it's going to kind of suppress values.
But there is a path to increasing rents for.
For units.
Theres, just not going to be able to increase them as fast youre going to have a harder time moving out occupants for existing properties.
It doesn't change the cash flows.
And we obviously underwrite on existing cashless not on projected cash flows.
For for permanent multifamily so.
Those properties are still going to cash flow, they're still going to underwrite the way, we havent coming in I think the real question is on the takeout.
Are you can have those loans for longer than you expected or are they going to take out it might in fact whole the portfolio a little bit longer.
To the extent that people have a harder time refinancing.
But I think it's probably going to have a bigger effect on.
The valuations of properties going forward, you're going to have to find some larger property owners to have the capital to improve properties that need to be improve because they're not going to be able to do it based on getting cashless faster.
Right and have you in the market started to see see higher cap rates.
No not yet.
Okay. So yes, there is one of the one of the reasons for that is.
And what are the reasons I like.
Family and I'd like infill construction as the housing issue in Southern California is very very.
Concrete it's.
It's we have a big housing shortage.
And.
These properties are.
Our very very stable.
All the way through the end of the market. They are very very stable for workforce housing for Blue collar housing and then for young professional housing and even for for older professional housing it's very stable the occupancy is.
He is very very high and I don't see that changing because there just isn't enough new product coming on into the market.
Right.
Do you track or can you provide the.
The average age of the multifamily collateral in your portfolio.
Hi, I don't know if we have that.
Okay.
And then how much of the construction book is to multifamily.
A big part of that's probably probably half, yes, probably half we have a single family right now we're going to be doing a lot more of a going forward I mean, a lot of our our construction right now is single family, but what we expect to do going forward is is infill construction for for housing and.
That's multifamily.
Dense demographic areas to sponsors that that do this.
For a living and so we will work with the best sponsors to do this that's what I've done it my previous banks and.
We have relationships with some of the divested offers in the space.
Okay.
Those are my questions. Thank you very much.
The next question comes from Steve Moss of B. Riley FBR. Please go ahead.
Hi, good morning, guys.
Good morning, I wanted to circle up on the de emphasis on single family loans, just wondering how low could those balances go overtime here.
Well.
If we sold them they could go to zero.
I think that they are paying off right now it at a decent club, which is giving us headroom to put on good relationship loans.
But I don't know how fat theres, some all Doc loans that probably going to have a hard time, refine which is fine because they are at a higher coupon.
Hard hard to predict I don't it's not a relationship business. We don't have any deposits with it it was generated in a broker to fashion. So for me. It's one of the levers we can pull.
To the extent that theres predictability to it in any of these loans that wouldn't otherwise Wi Fi, we can always sell but a lot of them or just kind of refining outerwear using it to reinforce our portfolio, but it's hard to predict how fast it's going to run off it's not a product category that were actively originated we will do it as more of an accommodation to certain of our clients, but it's not a product.
We're looking to originate.
Okay.
And then on the single family delinquencies were those primarily all Doc loans or or was there anything unique about structure within the those delinquencies.
No. It's interesting theres a lot of people that pay late in.
In SFR us, but they they just.
Their current pay but then they pay late and that's just the way that run it.
I don't know if this is really a leading indicator that honestly, but I thought it was important that we lay this out to show that this is really not part of our portfolio.
We're not seeing delinquencies rise across the board and you can see our and our presentation on page six that we laid out where the delinquencies are coming from in fact.
They are stable to declining throughout the rest of our portfolio and they're very very low as you can see.
Yes.
As a percent of our delinquency that stuff ours is the largest.
Okay.
And then my last question just on the CLL portfolio, where their purchases this quarter. It looks like the book yield reported this quarter versus last quarter didn't change.
No there were no purchases during the quarter, we had some sales that occurred in the second quarter, but nothing in the third quarter.
And.
On the CLL book, we're at approximately 750.
1.2 billion.
I were some 35 I think I'm comfortable with.
With where we are we're comfortable with the credit we monitor very closely.
If there are alternative products to trade into that he concentrated in CLL as we would do that now's the time as we build out our securities portfolio and normalize it a little bit, but I'm not interested in getting out and just.
You know abandoning the good yield that we have on it which is around four so I think we're comfortable holding that position unless there are some good alternatives and will latter our securities portfolio with other stuff now that we got out of MBS.
Alright, Thank you very much.
Thank you.
Thank you ladies and gentlemen, this does conclude the question and answer session and the teleconference. You may disconnect. Your lines at this time and thank you for your participation.