Q4 2019 Earnings Call
All right, your name, please?
And your company?
You spell that please.
Thank you.
One moment.
All right. We'll join you in now.
Thank you, sir.
The one towards the company's Safe Harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would now like to turn the conference over to mister Jared Wolfe Bank of California's president and chief executive officer.
Good morning, and welcome to Bank of California's fourth quarter 2019 earnings conference call joining me on today's call is Lynn Hopkins Chief Financial Officer who will talk in more detail about our court results and Mike Smith Chief accounting officer and director of Treasury who also be available during Q&A.
mm
19 was a terrific year for Bank of California. And then the fourth quarter we continued to make meaningful progress on our core initiatives resulting in net income available to Common stockholders of 10.4 million and diluted earnings per common share of $0.20.
We'll talk some more about the highlights in the moment. But first I want to welcome Lindor first earnings call with Bank of California and joined us just last month and brings a wealth of experience and knowledge to our leadership team.
As we have previously discussed Lynn and I have known each other for nearly Twenty Years, and we're closely together for over a decade. So I know how much value of she brings to our organization she shares my vision of how we are transforming Bank of California into a relationship Focus Community Bank, and I look forward to working alongside her as we continue executing on the business strategy.
I'll turn the call over to her in a few minutes. However, I want to first talk about some of the business results and trends that set us up. Well for twenty twenty.
When I joined the bank three quarters ago and after careful analysis of the business, I gave our management team three initiatives to focus on in order to build a short and long-term value for the bank.
first and
For most we need to reduce our cost of deposits.
During the fourth quarter. Our cost of deposits was 1.27% down significantly from the 1.67% We reported on my first earnings call.
Internal deposit incentive programs and a concentrated effort to remix our deposit portfolio demand deposits made up almost 50% of our total deposits at your end would not responding deposit prizing just over 20% of total deposits up from 13% when the year began.
The second goal we set out to accomplish was lowering our quarterly expenses.
Total non-interest expenses for Q4 were 47.2 million, which when annualized would be a 17% improvement over the full year of 2018.
As we continue to transform the balance sheet and invest in business initiatives aligned with our core objectives are operating expenses May fluctuate. I expect our operating expenses are currently in a lower end of the range for the near-term. However, we will remain diligent to ensure our expenses are at an appropriate level and will continue to look for efficiencies.
Finally, we targeted the asset side of our balance sheet specifically non-core assets with the goal of re mixing the balance sheet in order to optimize the banks earning power and lower overall risk profile.
During 2019. We lowered our Securities portfolio from nineteen percent of total assets at the start of the year to under 12% in Q4. And we significantly reduced balances of brokered multi-family and single-family Life by 33% and 31% respectively. Our balance sheet is now much stronger with total assets at seven point eight billion further as a result of these efforts are named expect to 3.04% for the quarter.
Discussed when I joined the bank the purpose of these three goals was to create a foundation that would have the sustainable franchise value and set us up for future success. We believe that Foundation now been established and while there is more work to do in many ways. We are a very different more focused bank today than we were nine months ago.
the key
A focus for us in 2020 will be keeping our balance sheet at the right size as non-relationship loans payoff and we originated new high-quality relationship loans that results in changing the mix of our balance sheet. This is a process in our transition will continue through the year, but we are doing it from a base that is more representative of the bank. We want to be
In addition to adding Linda the team we also welcome Conan Barker and Andrew thought of our board of directors during the fourth quarter Conan and Andrew have Deep Roots within the southern California business community and I look forward with valuable contributions in 2020 and Beyond with erudition. Our board is now comprised of ten directors nine of whom are independent.
Hang on the topic of corporate governance in December . We were pleased to be notified by the SEC staff that they have concluded the investigation opened in January of 2017 and that they do not intend on recommending enforcement action against the company to the commission. As you know, I expressed a desire to move past as much of this as possible and we are excited to close that chapter and finish 2019 a much stronger than when the year began with a clear focus and stable Foundation from which we intend to become a high-performing relationship-based Bank.
all in my opening remarks
By thanking our amazing colleagues at Bank of California for their tireless work this year. Our organization is filled with highly professional and capable team members dedicated to Excellence and determined to ensure clients receive the best possible service.
It is through their significant efforts this year that we were able to successfully execute on all of our initiatives and are now poised to enter the new decade a stronger and more focused Community Bank month now, I'd like to introduce Lynn Hawkins will provide more color on our operational performance than all have some closing remarks before opening up the line for questions.
Thank you Jared. And thank you for the kind introduction first. I'd like to start off by saying how pleased I am with the team work and enthusiasm. I have gotten to be a part of and starting with the bank about six weeks ago. It's clear the team has been able to accelerate the banks transformation considerably over the past ten months and I think that is a reflection of their exceptional commitment to the company's Vision as well. The high-performance culture Jared has built in partnership with the executive team and throughout all levels of the organization. I'm inspired to have joined such a great team and look forward to making a contribution for the benefit of all of our key stakeholders moving on to our quarterly results assets declined $797 million dollars resulting from a net Define and Loan balances of $431 along with a decline and unsettled security sales of $335 million dollars and a decline in cash dead.
153 million
These declines were offset by an increase of $137 in Securities the bank benefited from this decline by reducing Reliance on wholesale funding.
During the quarter and furtherance of our plans to create a more traditional Securities portfolio. We sold the remaining $39 million of our longer-duration agency mortgage-backed Securities and purchased $190 million of new Securities comprised of $126 billion of agency commercial mortgage-backed Securities, fifty-three million, a municipal bonds and 14 million of corporate debt Securities at the end of the year Cielos represented 79% of our Securities portfolio, and we remain comfortable with the credit quality. We will opportunistically look to transition out of the CLS to the extent. We find other interest-earning assets that provide an equivalent yield at the same or less risk profile at the end of the fourth quarter. Our overall security portfolio has a lower duration and outside of our clo balances is transitioning to a more destructive.
and Traditional Bank
Securities portfolio representing 11.7% of total assets we expect to complete the rebalancing of our Securities portfolio in the first quarter and that security is Will Smith in a range of ten to fifteen percent of total assets going forward.
We also saw positive effects from changing the mix of our loans within our total portfolio as total commercial related loans represented 72.4% of our loans held for investment up from 71.3% at the end of the prior quarter. The overall decline in loan balances was due mostly to accelerated payoffs in the brokered single family home and multi-family portfolios payoff from a few large cni loans as we continue to timely manage our potential credit risk and lower total Warehouse loans line and Loans included reductions in most categories, including lower single family Residential Mortgage Loans of $185 million cni loans of ninety-eight million commercial real estate loans of seventy-two million and multi-family of $69 million the loan portfolio mix of brokered single family and multifamily Loans is 52% at quarter-end.
which is consistent with
Prior quarter end but down from 59% at the end of Prior year and we expect these loans to represent a lower percentage of the total portfolio. Overtime Edition cni balances are 28% of our total held for Investment Portfolio and within our target range for cni loans of twenty-five to thirty percent of the overall portfolio with the new Loan Production totaled $182 million during the quarter at a weighted average rate of 4.82% The average production rate has come down in line with the decrease in Market interest rates. Generally. However, the fourth quarter average production rate is 11 basis points higher than the current average portfolio yield of 4.71% on the margin. We believe this will continue to be the case as the loans. We're bringing in our more relationship-based which will then contribute to a better earnings profile and a stronger balance sheet in the long term.
The short-term the challenge, of course.
Will be to maintain are earning capacity as we rebuild the balance sheet against the backdrop of payoffs in The Brokerage portfolio.
Overall the loan portfolio yield declined by 4 basis points quarter-over-quarter is we have originated and repriced our loans in the lower rate environment and it's higher coupon commodity life continued to be refinanced other financial institutions. The fourth quarter loan yield does include 7 basis points due to a higher level of loan prepayment fees and accelerated death count from the repayment of purchase loans. However, the positive impact of higher prepayment fees was not enough to offset the impact of lower Market interest rates turn off deposits total deposits decreased by $343 during the fourth quarter driven mostly by controlled run off of higher costing deposits including matured cities that were not renewed and other non maturity accounts brokered CDs decrease 54 million to 0 higher cost savings decreased by $157.
dollars and non
Good CDs decreased $163 million dollars in addition non-interest-bearing deposits declined $19 while interest checking increased 31 million month. Balances were down for non interest-bearing checking average non interest-bearing checking and interest checking increased $95 for the quarter am not interested in checking represented over 20% of our total deposits at your end over all our efforts to place a higher priority on Gathering lower costing faith-based deposits combined with the impact of lower Market interest rates reduced our average deposit costs by 21 basis points to 1.27% from the prior quarter off.
We reduced our Reliance on wholesale funds including lower Shob advances during the quarter. We use the proceeds from our prior quarter asset sales to pay down the fhlb advances by $655 million dollars or 28% We should continue to see the Reliance on higher costing wholesale funds decrease in the coming quarters as our funding needs are expected to be achieved through our deposit initiative.
Cannot the income statement net income available to Common stockholders for the quarter was ten point four million dollars or Twenty cents per diluted common share after adjusting for non-core systems along with the amortization expense associated with our solar tax Equity program our operating expenses for the fourth quarter or forty eight point 1 million dollars normalizing tax rate to 24% operating earnings from corporations or $0.18 per diluted common share for the fourth quarter reconciliations for this are located within 30 days earnings presentation for 2020. We expect our tax rate to be in the 20 to 24% range.
That interesting, was fifty six point seven million in the fourth quarter down 2.3 million from the prior quarter do the impact of lower average earning assets offset in part by a thousand net interest margin average earning assets decreased $781 and our net interest margin increased eighteen basis points to 3.04% gain interest margin expansion. If you mainly to a 20 basis-point decline in our overall funding costs to 1.55% while the yield on interest-earning assets remained flat at 4.50% yield remained flat due to an improved asset mix is higher-yielding loans represented a higher percentage of our interest or assets combined with an increase in yield on our Securities portfolio and offset by a lower loan portfolio yield.
Income was down by six point four million dollars from the third quarter due to a $478 decrease in average portfolio balances combined with the four basis point decline in average yield is previously described interesting. Come on security is declined by 2.2 million on Lower average balances offset by 12 basis point increase in the field to 3.72% increase the security Shield is due to the higher-yielding clo portfolio representing a higher percentage of this earning asset class offset by an overall lower yield on the clo portfolio is the seal Lowe's have reset lower based on 3-month Libor.
Fourth-quarter interest expense from deposits decreased by four point six million dollars due to lower average interest-bearing deposit of $468 million dollars and a twenty one basis point across in the average cost of such deposit interest expense on fhlb advances decreased by two point 1 million dollars from the prior quarter due to a lower average balance of $313 and a 4 basis-point decline in the average cost of these funds the overall average cost of interest bearing liabilities decreased by 18 basis points to 1.85% off average deposit balances decreased by 408 million dollars due to the decline in average interest-bearing deposit offset by a sixty million dollar increase in average non interest-bearing deposit average, non interest-bearing deposit represented 19.4% of total average deposits and this contributed to the lower total deposit cost and lower table.
spending cost as previously
described
looking ahead to the first quarter. We have a good opportunity to continue this trend and maintain our net interest margin above three-per-cent. We will continue to focus on re mixing our loan portfolio away from family and into other high-yielding loan types, which should help to offset the impact of the September and October market rate changes in addition with continued emphasis on relationships checking we expect to improve both the mix and pricing of our funding base. We recognize the reversal in our provision for loan losses during the quarter of two point seven million dollars due to the 431 million dollar reduction in total loan balances.
Your loans for loan loss coverage ratio of non-performing loans is 133% while the overall allowance reached out to held for investment loans is 97 basis points.
Total non-interest expenses for the quarter or forty seven point two million and as I mentioned a few minutes ago adjusting for non-core expenses fourth quarter or operating expenses about 48.1 million dollars or 2.42% of average assets annualized we expect on average our quarterly run-rate expenses to remain below fifty million dollars for the near-term. However, as a reminder, there are historically more expensive built into the first quarter of the year. So we expect to see an uptick in expenses for q1.
our Capital position
And remains robust and above well capitalized due mainly to a smaller asset base Canticle common Equity increased to 8.68% from 6.34% full year ago.
R-series D preferred stock is redeemable in June 2020 and we're currently evaluating various options for funding the Redemption of our series D preferred stock in addition. The company filed a shelf registration statement on form s-3 with a Securities and Exchange Commission yesterday to provide the company with flexibility and enable it to access the public Capital markets would respond to financing and business opportunities that may arise in the future the companies prior shelf registration statement expired in August 2019. Finally, I'll move on to credit and asset quality. That's a quality remains strong as total criticized and classified loans declined by 25.8 million dollars in the quarter. Our non-performing assets also decreased 1.8 million thousand to forty three point four million dollars as of your end The decrease in non-performing loans was due to the sale of 11.9 million of non-performing loans and 4.1 million returning to
performing status
I'll set by 14.3 million of loans being placed on non-accrual status our non-performing loan balance includes two large loans that make up 54% of our total non-performing loans. One is a $14 shared national credit that went on non-performing status in the third quarter and the other is a $9 single family Residential Mortgage off with a 38% loan-to-value ratio that went on non-performing status in the fourth quarter aside from those two loans non-performing loans totaled twenty million dollars and accidentally 48% are single-family loans.
We believe the risk of loss on the single-family portfolio is low and that we are appropriately reserved the due to Consumer rules single-family loans tend to take longer to work through a non-performing loans to total assets ratio is 55 basis points at the end of the year up from 52 basis points at the end of the prior quarter. The increase is due to a decline in total loans relative to the decline in non-performing loans, the total delinquent loans increased by 1.3 million to 57.6 million resulting in a year-end delinquent loan. Not a total loans ratio of 97 basis points the increase in delinquent loans for the linked quarters includes the addition of 1 5 million dollar cni loan with a real estate developer that is expected could be worked out single-family loans represents 75% of the total delinquent loans and the other segments reflect continuing positive results that will finish up my summary of the 4th.
For financial I'll go ahead.
Turn the call back over to Jared's.
Thank you. Lynn. 2019 was a truly transformational year for Bank of California. We accelerated the transition of the bank into a relationship Focus business bank robber executed on meaningful Capital Management activities to unlock value within our balance sheet and deployed excess Capital into areas, which better optimized our business.
We are re mixing our entire balance sheet to drive the earnings power of our franchise and we reduced our expenses to better fit our size and footprint. What you have now is a bank with a solid foundation upon which we can build a high-performance relationship-focused Business Bank for the long term.
We would not have been able to accomplish so much this past year. If not for our talented Bank of California colleagues and their unyielding dedication to meeting and exceeding our clients expectations off by providing Superior Service and solid solutions for our clients. We develop a relationship built on trust and it's still confident that our clients will have all of our resources at their disposal in our high-touch service to meet their banking needs.
our focus on
Service is a Hallmark of Bank of California. And we look forward to serving you being more business clients in the upcoming year.
We make sure that we listen to our clients are telling us.
Last quarter I updated you about various technology initiatives. We were working on and some of which resulted from feedback from our clients.
We will costly evaluate how we can improve our clients experience and continue evolving our technology to meet the increasingly integrated needs of our business clients.
Now that we've successfully executed on our strategic initiatives for 2019. We are well-positioned heading into twenty-twenty to show improvements on both sides of the balance sheet.
Our teams are focused on bringing in relationship loans and deposits and as a result, we expect to improve our mix of deposits as well as our overall costs while maintaining our loan yelled as much as possible.
The loan re mixing will also result from the normal course payoffs of brokered sfr and multifamily loans and we will redeploy that Capital into lower duration higher-yielding cni and Bridge real estate loans off.
As we stated before overtime cre loans, which are comprised of commercial real estate multi-family construction balances should move closer to a range of 70 to 75% of our total loan portfolio thousand islands make up the remaining twenty-five to thirty percent. This will be due mostly to initiatives to grow our portfolio relationship real estate loans and the incremental business that is expected to generate for the bank.
Over the next few quarters pure earnings might be a little more tempered as we build assets back up.
However, we are building this Bank the right way for the long-term and creating true franchise value in the process.
As we head into twenty-twenty we have several key objectives. We are focusing on for the year.
Cost of deposits the mix of our loans and deposits and our net interest margin are the areas where we expect to show progress throughout the year.
Additionally our key objectives for 2020 include the rollout of Technology initiatives as well as the further training and development of our colleagues to ensure our teams have the skills and strategies to succeed in a competitive market.
We're in the midst of an exciting and rewarding multi-year transformation and I look forward to showing progress on these initiatives as much as we succeeded in 2019.
Thank you for listening today. And I look forward to updating everyone on our progress toward those initiatives during our next quarterly earnings call 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 a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster. The first question today comes from a few Clark of Piper Sandler, please go ahead.
Good morning. How are you? Good, maybe first question. Just wondering what the spot rate was on your interest-bearing deposit at the end of the year off the spot rate. I'm at this is Lynn. We did not disclose that information or materials quite yet. So we will be providing that subsequent to the exposure we can tell you what the average is were. So forth overall is 125 is you know four CDs. So it's 224 and there's a big bulk of CDs that are going to be re pricing in the first quarter. And so we expect you know to have the option to to replace those down.
Yep, that's right. Okay, and then just on the size of the balance sheet, it looks like it might be down a little bit further here in the first quarter. But I guess what are your thoughts on the size of the bank from here and and your net loan growth prospects? It really depends on the payoffs. If the payoffs continue with the same Pace that they did in the fourth quarter. I would expect for the year for a balance sheet to renew Green Flash or perhaps a little bit larger but not much if payoffs reduce then we should be able to show more growth through the year. They're you know, the the single-family and multi-family loans that are on our books that are higher yields are repricing notwithstanding prepayment penalties. That's how much of a Delta there is with rates. And so it's just, you know, it's to be seen how much they're going to reprice.
Okay, and then just on Capital, I mean a smaller balance sheet your your Capital ratios jumped quite a bit this quarter and you comment in the release if that opportunity is deployed to optimize franchise and improve earnings. Can you just talk more about what you mean there?
Sure. Sure. So obviously the balance coming down means we do have a lot of excess Capital so we didn't file the Shelf registration statement yesterday with the SEC. So that should give us options as we look forward to 20 20. The preferred stock series is redeemable in June or taking a look at that and then we're evaluating other options as well with the additional capital.
Okay, and then just any update on Cecil and what the day one impact might be?
Sure, I believe is a third-quarter release the ten Q. We had given a range of about 0 to 25% So that's the balance sheet is come down during the fourth quarter and we've continued to run our models there. I think we've refined our range to be between 0 and 15%
I I think it'll be you know, I think it will be the upper end of that range as of now, you know, we're going to keep looking at it and you know, we have till 3:31, but I think it's going to be you know, as long as of now Matthew. It's feeling like it's the middle and upper end of that range.
Okay, great. Thank you.
Next question today comes from Tamara braziel of Wells Fargo, please go ahead.
You guys exited?
Tomorrow we can't hear you. I'm sorry. Is this better? Yep, how are you? Good. How are you? Sorry about that. Am I correct in in that you exit all of the brokered single family mortgages this quarter.
No, I mean we we still have a portfolio of brokerage single family mortgages. That's fairly substantial. There's you know, we they are truly broke or their non-relationship based off. We don't have much of a connection with the borrowers. And so, you know, we ceased that business originating those loans several quarters ago. And so there are payoffs that are going to occur with that portfolio.
Okay, so the business.
Okay, and so I guess what's the balance of the brokered sfr and multifamily loans?
We don't I don't think we break out the distinction between what's broken and what's not in our financial. So we we can tell you the size of the portfolios, but we don't break out what's broken and what's not it's not a mixed bag.
I would look at the pace of pay off in the last quarter. And as of right now, we don't know that that's going to change and so we're originating new loans to replace those loans. And so we take off mix improve our balance sheet will have more you know, we're getting deposits with every loan that we bring in and you know, I'm pleased that we were able to hold our portfolio yield pretty well. Uh, and so we're getting the leverage from you know wage deposit cost much faster than our loan yields are declining but it's it's to be seen I mean, it's just something we can't control and we just want to keep putting on really good loans.
Okay, that's helpful. And you had mentioned that there's a large chunk of.
Is that are maturing and the first quarter. Can you quantify that number and what the expected cost benefit is if if you do keep those on or is expectation that they roll what we're looking for. We're looking for the exact number, you know, when what's are going rate right now for the cities that we think they're in the range of 150 to 175. And so I asked specifically in the near-term for the first quarter the CDs that are coming up for around 250 million dollars and they have a weighted average rate right now around the 205 Mark so they'll be right with you pricing down into the current rate and our our retention rate on those CDs.
Is around 50% may be a little bit higher. So, you know, we're not going to save all of them. Some of them are just they're just going to go shopping is great. But our retention rates have gone from like a teenager and all the way up to 50 as we've as we revised our model and uh figure out what we want to keep we could keep all of it. It's just I think we can do better than that and we're trying to get the most uh price we can
Okay, and and as that translates into broader funding costs impressive move. This quarter is the expectation that the pace of future funding cost declines kind of decelerates or as you guys look out at the funding schedule. Is this type of pace going to be sustainable for at least the next couple of quarters off. Well, I think a lot of the low-hanging fruit has been eliminated. I would be very pleased if this quarter we were able to match last quarter. I appreciate your comments and I agree with you know was a healthy healthy drop-off. It's really going to depend upon our pace of bringing in, you know, d d a non-interest-bearing a low-cost checking accounts. And I think Pat's are we have a big opportunity. We have some chunky CD-ROM and but we have less than we used to and so over time the bigger impact is going to become coming from the pace of new clients with new money coming in at local rates wage.
Is this account unless from repricing, you know our existing portfolio?
Looking at the gain on sale of loans category any any help you can provide there in in how we should be thinking about that going forward and all that lines all over the place recently, but any guidance there would be helpful.
So I think we have the opportunity to do that going forward. It's just going to depend on we have a great multifamily engine. We have the opportunity to generate loans that we might not want to hold because of the low yield but you know, the market will give us benefit for it and we can have some gain on sale and while we build up our other business lines and while the teams that we hire, you know, get stabilized and start building up their pipelines in generating growth that maybe a lever that we choose to pull. You know, I don't I don't believe that long-term having a huge gain on sale line is is true franchise enhancing off but I think you know, we want to keep earnings up. We want to keep keep producing money for shareholders. And so to the extent that that's a lever we choose to pull we would like to do so
Thank you.
KBW please. Go ahead. Hi. Good morning, guys. Hey Luke. Just wanted to talk. I think you guys had given the CDs you guys have a fax being there currently out of 240 and you were saying you guys are current offering rate is 150 to 175. They have that right. Let me clarify. These are dead. We're working with a client on a relationship basis. So we're reaching out to them and looking to work with our customers. So it's not going to work for everybody. This isn't necessarily A posted rate. So this is a month doing Outreach with our customers and valuing those relationships. So we do expect them to read price down.
Okay, just one last one for me.
Okay, that's that's definitely helpful. And then I think just one of the earlier questions was just on the The Brokerage single family residential portfolio. Just kind of trying to frame what the the yield cut off would be just as those payoff. I mean with that portfolio currently yielding around I think it's like three ninety four months. So we should see that come down there rate that you guys are posting for the single-family portfolio that that we can kind of use as a benchmark or is it still kind of not disclosed? So when you see them were posting for what do you mean cuz we're not originating some family. Okay, so but I didn't know if if there was it said that that entire I mean just based on that single family portfolio. I mean you said that there was a portion of it that was birth and then portion of it I imagine was originated in uh and held internally, so I didn't know if there was there was anything that
the next question today comes from Luke wouldn't
Luke I will tell you that a massive part of that portfolio was just broker originated. I mean, there are no deposit.
It's associated with it and so it's you know, it's a they're all they're all strong loans. We think you know, the credit quality is good. It's a disproportionate percent of our boss yells. But you know overall relatives the size of portfolios very very small and so we think it's good credit quality. We be happy to keep it. I think we're a Community Bank and for a relationship Focus Business Bank, obviously, you know having a large sfr portfolio is not what you would normally see in the mix. So we anticipate replacing those loans over time with you know, better yielding relationship loans where you get deposits. I don't have a cut off for you of what where that is going to settle in terms of loans. My expectation is that they're going to slow I mean, I think if to the extent that you wanted to reprice your multifamily loan or you're single family on my, you know, just in talking to clients people people wanted to take advantage of interface when they moved
And then wanted to do it before interest rates moved again, you know at the possibility that they could they could go the other direction. So I think there was a huge urgency around it and I think people repriced that there might be others that that
Flag and so I I expect there will be more past. I have a hard time thinking the payoffs are going to be at the same Pace but it's to be seen in our expectations that we're going to replace those, uh that run off with with New Jersey. I called you out. Okay, that's that's that's really helpful color. Thank you for that. And then just a question for you. Just I mean touching on the Investment Portfolio that there's great success in the repositioning this quarter given the pickup and yield and just kind of wanted to know what reinvestment rates are on that portfolio. Um, and if we should see I mean cuz obviously it's it's moved from I think essentially off to now just think they're roughly 70% and I didn't know if there should be more repositioning in that manner towards diluting the effect of this yellow and the security portfolio or just kind of do you mind giving us a little update on that?
Sure. I'm going to say generally with the Investment Portfolio. We're looking to keep it under range of about 11 to 15% of the balance. You probably at the lower end of the range the CLS now represent obviously a higher percent of that at the end of the third quarter. There was some unsettled Securities. It came in in cash and that was recently during the fourth quarter which email address there's still a portion that we're addressing during the first quarter during the fourth quarter instead of reinvestment rates range between about 230 up to them. It's a high-end I think so 4% I'm going to say the key there is that the duration is shorter walk to the extent that we came out of a 240 rate. So those were longer duration and we went back in at a 240 rate for a shorter duration. So they were better structured even if the rate was similar. So the rep
Has 240 up to about 4.
Sense based on the type of security and we're looking to invest in sort of the same Diversified basis that we were able to do in the fourth quarter as far as the CLS judge. Generally, we don't necessarily have any plans to sell them specifically appreciate that they are a large portion of the portfolio. But until such time we have an opportunity to redeploy them into wage, um, another interest or any asset class with similar credit quality, um will probably hold on to those. Okay, that's definitely helpful. And then just just one long one for me. I mean and you kind of touched on it earlier just with the S3 filing and everything like that. I know historically you guys have kind of tempered with the idea of potentially issuing some sort of sub debt just to kind of either buy back stock or or paid on the preferred and I didn't know if that was still in the toolbox or I mean given the current capital that ratio if you think that you wouldn't have to kind of issue any capital in dog
To to to redeem some of the outstanding.
We we probably don't have to I mean, you know, we have Ninety Six Million come in.
You in June of 2020 and then we have another slug coming due in June 2021. We want to be smart about it. You know, we don't know which way rates are going to move and we want to be you know, appropriate our Capital. So we are looking at issuing subject. We haven't made a decision yet rates are pretty attractive. There's obviously, you know with trading at 7 and 3/8 the preferred, you know off with subject you would have interest expense deductible but the line and so whatever rate we go out at you know is going to be immediately accretive relative to the preferred. I don't think we're going to need issue a hundred million bucks. You know, we have we have plenty of capital so we can use a combination of stuff but we're looking at all the all those options.
Okay, that that's that's really helpful. Thank you for taking my questions. The next question today comes from Gary tenor of d a Davidson please. Go ahead. Thanks. Good morning. Hey a couple of questions here. So on the loan production for the quarter, you know understanding that the payoff activity obviously drove numbers down, but you know, I talked about specifically within seeing eye and see where you having the most success bring in the types of credits that that your profile and kind of relationship banking Focus.
Yeah, sure. So, you know I
Think there's two areas where we're going to show the most the most the most growth both an actual dollars and percentage dollar. So on a percentage basis, we're going to show the most growth in traditional see my loans to businesses in our footprint and I think we've talked about in the past. You know, I don't think we were doing a very good job at that previously. We didn't have the right team in place. I got the right team. We're adding players as we talk and I think just traditional lending to businesses our footprint of all Stripes, you know lines of credit and term loans is going to show uh-huh. Good growth for us because we're starting from a relatively low base. They're all coming with deposits. These are you know doctor offices. These are manufacturing facilities. These are you know, local businesses that need our special service and appreciate our execution.
From a dollar percentage. I think we're going to show probably the most impact from bridge lending on the CRV side lending to you know, well-heeled real estate sponsors who are active in, you know denser markets where where we have our footprint who are buying properties. They need to rehab them and then the ultimately they'll take them out with permanent financing from us or somebody else. You know, that's that's a big part of of Market in Southern California, you get paid more for execution and for ready access to Capital and when you're letting the people who do this over and over again for multi-faith and other types of properties, you can build up a good track record and they call you and say hey that building we did last time we got another one just like it and you become their go to letter and we're really focusing on that with the team that we brought in fact, you know, as I said in in the prepared remarks it takes time to build this stuff up and we're in the middle of the process in terms of transforming our bank.
It's not going to happen overnight. And so, you know over this year. We look to remix the balance sheet and I think the real growth is going to come in terms of you know.
Levels of low growth next year I could I could be wrong because payoffs could could temper and the love the opportunity show real growth along with deposit growth. But for right now, I think it's going to be, you know, kind of a remix in a story and hopefully that's going to make us more profitable.
Thanks for the call there. And then just one other question you guys have been under ten billion for four consecutive quarters now. Can you remind us what the mechanics are for a bank to get out from under Durban wage walls under a 10 billion for some period of time and and just from an impact perspective if that would be meaningful. Yeah, so we have we have effectively know German impact here, but I can talk more generally about being a ten billion means from a regulatory perspective. Uh, generally The Regulators want to see you stabilize for a a long period of time to make sure you're not bouncing back and forth between you know, the different tiers of regulatory oversight. So, you know, if if there's no Prospect of going back over they'll kind of look at you and and say, okay. It looks like you're you're you're below 10 billion in will treat you as such.
We don't see a Major Impact from being below 10 billion, you know, we have really good relations with our regulators.
It could be the timing of of exams. Maybe you you'd have them less frequently or they might group them a little bit differently. Uh, we're not that complex of business to begin with. We're pretty simple and Thursday. We don't see a Major Impact from a regulatory perspective. They don't hover below $10.
Right. Thanks Eric. No problem.
The next question comes from Steve Moss of beer, please go ahead. Good morning morning Steve on credit. I realize from the comments on the call. There was a decrease in college and actually an increase in in criticized wondering in particular would give some color around the twenty four point nine million dollar Commercial Credit those downgrade in the quarter what industry type and so forth. Yeah. It's a c and I credit you know, it's a client that we know they were going through some changes. We expect that loan to the upgraded over the net possibly this quarter, but you know, it's not going to be next quarter.
Okay, and then just as we think about the loan loss provision in in the reserve ignoring Cecil for the moment here, you know kind of hard to see whether or not you know, call relatively stable balances. What would you expect for credit costs are going forward.
You're right. That's a tough one to give it and we've we're going to adopt Cecil in January 1st. So what I would expect is with the balance sheet or the loan portfolio continue to undergo it three mixing two for an extensive balances will be let's just call them relatively flat is the single-family and multi-family continue to pay down and we're we're getting loans in our core business line. So based on the factors and the modeling we would expect that there would be Provisions related to the new production, but it's you know, we're we're we're assuming the impact to be um, you know around between the ten to fifteen percent and then we'll be carrying it forward from there based off our current quarters production as well. No, we're recognizing the provision for the entire life of the loan at the time. We put that on the balance sheet. So, yep.
to be elevated elevated
As we move forward, I mean she still really penalize whose duration and so to the extent that we're no longer originating a long-term fixed-rate loans, we're going to benefit there but we can't you know, what we have in our portfolio is worth portfolio. And and you know, that's going to get marked under Cecil day one. Um, also Cecil has you know, different. Averages for the different classes of of loans that you put on and so we're off by March 31st. We will have gone through this process and figured it out. I think one thing that's going to affect Banks generally is they're going to have to price loans differently. You know with the Cecil impact could be uh, a punitive and you got to figure out make sure that you're making money on your loans and so that could change pricing on some loans and and that's something that we're looking at very carefully and it's something that we thought about is we thought about the asset classes and the types of loans that we wanted to go into going forward to be uh to make this bank is you know, as good as we can on credit generally those Steve, you know, I will tell you that we feel really good about it. I mean our credit is is very strong.
overall criticized and classified loans
You know went down by $25 million we had an uptick in in the classified as you mentioned, but you know criticized went down by $49. And so the combined group went down by by twenty-five. So I think we feel good about it. And I'm not seeing any signs of weakness on the horizon that make me nervous. We got those two large npls ones in SF our which is 9 a.m. Box and there's a low loan-to-value and it just takes time to work out and you know, the other one is the sheer National Credit we've talked about in the past and everybody knows we're not doing those anymore. So overall I feel good about our credit quality.
Okay, that's helpful. And then on the Securities portfolio, you know, you guys talked about completing the remix in here in the first quarter. Just wondering you know for the purchases. Should we look for a similar wage level of Municipal Municipal Securities and corporate debt Securities purchases and kind of what is the level of credit risk? You're you're interested in taking within the security portfolio.
So generally I would start with the the credit risk that we're taking in the Securities portfolio. We are it will be a high-quality Securities portfolio. So they'll be limited credit risk generally speaking and we are interested in some municipals as well as agency security. So I think you can expect to see a similar is going forward. Okay. So the Triple B portion of the portfolio is not likely to grow much. Basically. Yes Fair common. Okay, that's helpful and then a terms of the in terms of just the on the Capitol Front One More Time. Sorry if I missed this in terms of it sounds like you guys were going to return capital. I know it's about the preferred, but does that include any thought on BuyBacks?
We're valuing everything. I mean.
Get it at all and we obviously have enough Capital to to take more than one action. And so it's something that we're currently evaluating.
Okay. Thank you very much. No problem. Thank you.
Thank you. Ladies and gentlemen, this does conclude today's teleconference. You mean disconnect your lines at this time, and thank you for your participation.