Q1 2020 Earnings Call

Significant quarter of a quarter growth also came with growth in average deposits making it the fifth consecutive quarter, which are average non destroying deposits increased.

We have continued to reduce rates as relationship deposits replace Legacy transaction oriented deposits reducing our total cost of deposits by 16 basis points this quarter.

Second we reduced our core expenses by 5 million or more than 10%

Third we continued our repositioning of the balance sheet with further reductions in our non-core assets, which will be replaced in time with relationship-based loans and appropriate investments in our submission portfolio.

I feel it's important to highlight these accomplishments as the events of the past two months have shifted Focus to the Future and risk overshadowing the significant progress. We have made and continue to make

His little explained there was a fair amount of noise in this quarter's results, but our earnings were largely aligned with Q4.

In summary hard work of the past year to reposition. The bank is taking shape. We enter this crisis with high levels of capital and a relatively conservative credit profile. We are moving forward with the vision that the relationship based business bank. We are building will create tremendous long-term value that will be able to be unlocked when this crisis has passed.

Now I'll hand it over to Lynn will provide more color on our operational performance. Then I'll have some closing remarks before opening up the line for questions.

Thank you Jared first as mentioned, please refer to our investor deck which can be found on our investor relations website. We significantly revised our format. This quarter's to provide more granularity just certain areas including the new current expected credit losses methodology or Cecil our loan portfolio and the clo portfolio the net loss available to, talk holders for the first quarter was 9.7 million or -19 cents per share due to the impact of a 15.8 million dollar provision for credit losses combined with the impact of declining Market interest rate and a $355 million dollar decline in average interest-earning assets pre-tax pre-provision income with seven million dollars for the first quarter and assisted pretext pre-provision income with 10.6 million dollars, despite the volatility and Market rates our net interest margin was relatively stable at 2.97% off.

7 basis points from

Let me begin with the Cecil discussion to provide some context for the largest driver of this quarter's net results. The first quarter results included the adoption of peaceful, and we recorded a six point five million dollar increase in our allowance for credit losses on day one which increase the allowance to 68.1 million dollars in the allowance coverage ratio from 1.04% to 1.14%

are de one forecast scenarios included unemployment rates ranging from low to mid-single digits and near-term GDP growth of approximately 2 to 3%

Returned to March 31st, we evaluated the effects of the pandemic being felt throughout the entire economy. And we recognize the provision for credit losses a 15.8 million month resulting in a total allowance for credit losses at eighty two point 1 million dollars for an allowance coverage ratio of 1.45% This provision reflects the new seasonal allergy using current economic forecast and the estimated future impact of the covid-19 pandemic on Lifetime credit losses using the Moody's model in a cast published at the end of March approximately $19 of the provision for credit losses was attributed to the change in economic forecasts since the beginning of the year and took off set by a five million dollar downward adjustment to account for changes in the portfolio.

The forecast used to inform a reserve level generally indicated a recession followed by a relatively quick return to the long-term Trend which forecasts included a shot contraction and annualized GDP growth ranging from -13 per cent to -26 per cent and a sharp spike in near-term unemployment rates ranging from 8% to 30% before returning to moderate long-term trends our visibility at the end of the quarter indicated that local unemployment was heading higher and that the economic recovery would suck before accordingly. We incorporated qualitative factors to address an economic Outlook that was worse than the late March forecasts used in the model.

Jared mentioned our Capital position is very strong with the one ratio over 11% and has benefited from the Strategic actions completed over the past thousand reporters prior to pausing are common stock buyback program on March 17th. We repurchased approximately 828000 shares of common stock for an aggregate amount of twelve million dollars and we took the opportunity to repurchase par value 2.2 million dollars in the aggregate a series D and Series E preferred stock took a total purchase price of one point six million dollars looking forward to June or series D preferred stock is redeemable, and we are evaluating options regarding the Redemption.

We will continue to be.

in strategic with the use of our Capital to maximize benefits to shareholders and to continue building franchise value while protecting our very well-capitalized position at a time when the economic Outlook remains uncertain

our balance sheet repositioning continued as we reduce total assets by $166 billion dollars to seven point seven billion dollars. The largest driver was expected run off of our Legacy took a family residential portfolio. As you may remember who stopped originated as far as in the second quarter of 2019 consistent with our focus of being a relationship focus our business bank accordingly. We expect to see additional declines in this portfolio as we concentrate our efforts on originating core relationship-based loans as noted in law passed. We expect production to outpace payoffs in the second half of the Year resulting in relatively stable level of assets.

Economic conditions having deteriorated and being mindful of credit quality Loan Production will likely be less robust.

However, we will look to add quality earning Assets in the loan and or Investment Portfolio to improve our level of interest income and earning assets going forward this year. We will continue to build the foundation that will drive improve performance in 2021 and Beyond.

The investor presentation includes details about our loan portfolio and there are a few points with making first. We have limited exposure to the sectors that are most at risk from the pandemic took me hotels restaurants Airlines and Hospitality second. We have a well-diversified portfolio and an increasing focus on relationship-based Commercial loans, which is supported by high-quality collateral including residential real estate total installed for investment at the end of the first quarter or five point seven billion dollars with an average yield of 4.56%

Real estate loans which include multi-family housing cre construction and single-family totaled just under four billion dollars eighty eight percent of which had current LTE is of less than 70%

for single-family portfolio totaled 1.5 billion dollars eighty percent of which have ltvs of less than 70%

The commercial real estate and multi-family portfolios which totaled 2.3 billion dollars have an average LTV of approximately 62% or well-diversified and are mainly secured by California real estate. My loan book totaled 1.6 billion dollars with an average loan size of about 2 million dollars and like our other portfolios have limited exposure to industries that have seen the greatest impact from the covid-19 demek.

I need to ask a quality. There are a few key takeaways.

Overall asset quality is strong but the Legacy sfr portfolio add some noise. So we show out the quality metrics for both the entire loan portfolio and for the portfolio excluding sfrm that email so far as the side total delinquent loans would have been thirteen point six million dollars or twenty four basis points and the non-performing loans would have been thirty two point five million dollars as we've discussed before the npl include a legacy 16.4 million dollar shared National Credit the growth of delinquencies and sfr Loans is expected given a Dynamics in that portfolio. All the growth and delinquencies was considerable in the first quarter. We believe the risk of loss on single-family portfolio is low given the conservative ltvs month. However due to Consumer rules single-family loans tend to take longer to work through and contemporarily Elevate our total delinquent and non-performing loans.

Or Securities portfolio totaled $969 at quarter end and had an average yield of 3.3% in the first quarter 95% of this portfolio is Triple-A or double-a rated Securities with the remaining 5% and Triple B corporate debt securities.

About 64% of our total security portfolio was comprised of Investments and Cielos which due to the market dislocation during March and did the quarter with an unrealized pre-tax off of eighty million dollars of which 64.8 million dollars occurred during the quarter in addition to our regular credit monitoring and quarter-end other than temporary impairment evaluation wage clo we conducted additional stress testing analysis and continue to conclude the credit quality and cash flow will support the invested clo balances.

The additional stress testing analysis considered constant prepayment speeds ranging from zero to twenty and Recovery rates ranging from fifty to seventy percent.

Our Holdings include only double-a and Triple-A and the collateral underlying the Cielos as well. Diversified across many Industries without concentration in any one sector and specifically no significant exposures to Industries, which have been hardest hit in the recent weeks due to the Health crisis that being said the effects of the recent Market movements have touched the entire economy sucks. So all Industries have been adversely affected to some degree given our current view of the credit risk in the underlying collateral and the significant unrealized loss position of the clo will not look to exit the Cielos at this time at a loss.

Harbor should credit spreads improve and a Cielos run off in the normal course, we expect to continue to diversify out of our clo concentration and we will continue to Adnan clo Investments with a crack at levels of risk and yelled volatility in the clo credit spreads did have a negative impact on our tangible Book value specifically lowering it 45.7 million dollars or $0.51 per common share as of quarter-end do the after-tax and realized loss.

in response

Unknown potential impact of the covid-19 demek. We increased our on balance sheet liquidity to 18% of total assets up from 16% in the fourth quarter. This additional liquidity was used to purchase a hundred forty seven point four million dollars of corporate debt and government agencies Securities and increased cash balances by sixty two point five million dollars may not observe any significant credit line utilization during the back half of March and they continue to remain stable anticipate maintaining this for quiddity until the longer-term impacts of the pandemic on the economy and to our operations become clear.

Deposits increased 136 million to 5.56 billion dollars at the end of the quarter but non interest-bearing deposit switching 1.6 billion dollars nearly 23% of total deposits a summary of our current and historical deposit mix and the investor presentation highlights the progress we've been making an improving the composition of our deposits and bringing down total cost over the past five quarters demand deposits increased from approx 35% to nearly 51% of total deposits from the first quarter of 2019 to the first quarter of June twenty which when combined with the rate environment and our proactive effort to lower deposit costs drove the all-in average cost of deposits down from 1.67% down to 1.11% over the same time period as we previously mentioned we believed building a strong truly low-cost deposit base is one of the most important things we can suck.

to create franchise value

Overall, our progress is slightly ahead of clowns. He was a tremendous dedication of our team with Jared mentioned. We have shown five consecutive quarters of growth in average, non-interest-bearing deposits and our mission, non-interest-bearing and deviated total deposit is continuing to grow. We look forward to continued progress in this area and having it be one of the Hallmarks of Bank of California.

record CDs grew from 0 to 208.7 million in the first quarter as we took advantage of attractive pricing in that market to reduce some of our remaining higher costs interest-bearing deposit fhlb advances decreased 217 million dollars in the first quarter resulted in a stable amount of wholesale funding

Our net interest margin decrease 7 basis points to 2.97% for the linked quarter despite significant volatility and Market rates and illustrates the progress we have made and managing our cost of deposits and asset mix at the end of the quarter our deposit cost spot rate reached $89 basis points while below the quarter average of 1.11% off. We are seeing the benefits from our Focus efforts to increase lower-cost deposits as a portion of our total deposit portfolio and expect the declines in the average and. And rates.

No.

Better area of focus for us at the managing expenses to match the size of our business. Well, there has been a fair amount of volatility and non-core expenses, which I'm happy to address and the Q&A course chances decreased 21% over the last year to reach forty three million in the first quarter of this year and down 5 million dollars from last quarter while the core expense to average ratio is 15 basis points higher than it was a year ago. It's important to remember how dramatically average assets have declined as we've worked to run off non-core assets and transformed into a relationship Focus Business Bank.

And lastly, I would like to comment when we look at pre-tax pre-provision income and exclude. The unrealized fair value adjustment on loans held for sale and a legal setting the concluded and acquired Banks Legacy issue. We made approximately 13.1 million dollars for the first quarter in this compares to 13.3 million months prior quarter accordingly our core underlying earnings when adjusted to these items are largely in line for the linked quarters.

This time I will turn the presentation back over to Jared.

Thank you. Lynn has Lynn described many of the transformative actions. We've taken over the last few quarters have provided the company with the capacity confront from a position of strength from or adverse conditions that have been projected.

As I previously described we believe our high-touch relationship focused approach is filling a void in the market in Southern, California.

Are perched a relationship banking is one that clients are searching for and appreciate especially in times such as we are facing now.

There is no better evidence of our progress in this area than in our growth of non-interest bearing and demand deposits. We believe that the development of a true low-cost deposit franchise with a high percentage of non interest-bearing and relationship deposits is among the most important things. We can do create long-term franchise value.

Are proactive targeted approach includes Gathering more deposits from existing clients and bringing over operating accounts from new business clients or referral activities high and everyday walking straight into clients old and new the benefits and flexibility of having a true relationship focused Business Bank as a financial partner.

With this is the backdrop and given the uncertain economic Outlook our strategy for the upcoming few quarters is to continue to serve clients and add value as we add value plan to Deepak ships with clients continue reducing deposit costs by increasing relationship-based deposits one client at a time.

We will likely see some expected run off of loans in the near-term due to the low-rate environment. However, in the back half of the Year subject to economic conditions, we expect production outpaced runoff combined with additions to our Investment Portfolio bring us to an overall flat balance sheet year-over-year.

Well, we don't.

Like the total balances to change much from December to December. We do think that the mix will be more favorable with a growing base of a relationship based loans and with fewer Legacy broker bones. Finally, we should continue to evaluate ways to optimize the use of our Capital during we are enhancing franchise and stockholder value to our actions and our investments.

We will continue to monitor the economic environment closely making adjustments along the way is necessary. However, I am confident in our ability to continue executing on our strategic plan.

We are now in the second year of our transformation and progress has taken hold. We are fortunate to have entered this economic. On firm footing robust. Capital reasonable sized allowance for credit losses and a conservatively underwritten loan portfolio.

Even the uncertainty of the depth and duration of the potential economic crisis. We're moving carefully on lending and managing credit very closely. However are other initiatives continue to move forward as we expand deposit market share in our Target markets and remix our balance sheet driving shareholder value.

Thank you for listening today again. I hope that you and your families are safe and healthy and I look forward to sharing more about Bank of California's progress in the coming quarters.

With that operator, let's go ahead now and open up the line for questions.

Well now begin the question-and-answer session to ask a question, and we press star that one on your touchtone phone for using the speaker phone. Please pick up your handset before pressing the keys to withdraw your question, please press star then to this time. We will tell us momentarily go symbol the roster.

First question comes from Matthew Clark of Piper Sandler, please. Go ahead.

Hey, good morning morning.

On the negative swinging by from the Cielos and 91-cent impact, you know credit spreads have come back in I believe since you know, the FED stepped. In fact, I guess how much is that? $0.91. Do you think you got back if you were to take a snapshot of of that portfolio here at the end of April?

Sure, Matthew, this is Lynn. You're right credit spreads have tightened up since quarter end and we've been monitoring it closely. I think that off the price of our clo portfolio is improved. Just shy about eleven million dollars. So it's approximately fifteen cents on our tangible book value per share Improvement a quarter end.

Just wanted to get your updated thoughts on the expense Outlook given what's transpired here with the economic shock and and what opportunities you might have to find additional savings with this month. Sure. I think that's where we ended this quarter for a core. Operating expenses is approximately how long as we look forward. We really been working hard to right-size and operating expenses relative to our operations as we go forward. So probably about forty four thousand million dollar range.

One other thing I would add and try to remind people of this from time to time. We have a couple of large anchors as we for we refer to them which includes outside the expense in support of the naming rights for the deal as well as our fhlb long-term advances. Both of which might have made sense at the time they were done but they're no longer consistent with what we think we need going forward. So we're trying to figure out ways to improve our costs in both of those areas and we hope to be able to figure it out over time, but those jobs, it's just important to remind people that those are two things that are fairly outsized on our balance sheet.

And and the spot right on deposit cost came down pretty meaningfully here at the end of March 89 basis points. Just wanted to get your thoughts on on the near-term margin Outlook and as we progress through the year here.

Sure. So the spot right at the end of the quarter is also a reflection the composition as we were able to increase on it just going to pause. It is a bigger percentage right there quarter in Palm Beach. Non-interest-bearing deposits was up quarter-over-quarter. I think as we look forward and given the dramatic drop in rates during the first quarter, we expected to net interest margin or rather the deposit pricing them more opportunity to to lower that probably more so than the decrease in earning assets. Um, so it expected to stay approximately the same or have the opportunity to come up with it.

Yeah, we're we're cost of deposits is continuing to drive down and we're going to get more benefit in the second quarter from you know, the spot rate obviously that dropped off. I don't have the most current estimate, but I would expect it to be, you know, continue to drive down quite a bit not.

Okay, and then just on the PPP program?

Wanted to get your thoughts on how your modeling it is. It should we just assume that those balances come and go by the end of the third quarter and kind of an average origination fee of 3% Maybe you're in off completely wasn't that exactly. I mean we look we we thought it was really important to participate in it, but we work in a build our bank around it. And this was an important thing to do to support clients and see if we could gather new relationships as well. We chose to be a very high Touch model with our clients walking through the program build relationships and we knew that that would also translate into referrals. We thought of this of really setting ourselves up to be more of a PPO than an HMO and we talked about that a lot internally about what our model looks like. We were also concerned frankly about what the post-mortem on this whole program would look like and how it would be ridden. You know, I've seen this story before having done many FDIC assisted deals.

You know this overall.

He's important but it's very short-lived. It's non-recurring and we wanted to do it the right way. So I think you know as I look at it we have the most recent numbers I got is I guess we have about two hundred seventy million plus of

Loans, that could be funded it's all going to depend on each ran and if the funds, you know run out, but of those two hundred seventy million assuming they all fund we would expect to earn just below on it.

Thank you. Yep.

Next question from Jacky Bolen, please. Go ahead.

Hi, good morning. Everyone morning. I wanted to touch on the new customer portion of the break out between the existing customers in terms of applications and then a more broad question, you know, what kind of products you're hoping to offer to those new customers and how deposit balances may have reacted as a result in April sure. So we're we're not going to break out new vs old whole bunch of reasons for that but

I can give you some anecdotes about you know for I think the numbers will speak for themselves in terms of our continued growth and deposits and average deposits quarter-over-quarter in the categories that we really care of non interest-bearing and low-cost checking which combined add up to PDA. You know, we're we're getting tons of calls, you know, the the large Banks play an important role in society, but this was not they weren't built for this and you know people got stuck on eight hundred numbers. They didn't get calls back people can figure out where their applications were down. We were getting active referrals from you know, people that we know that we serve well saying, hey so-and-so because we were hand holding people through the process. We were getting active calls from people saying hey the way that you helped me. Could you help this person? They're having a really hard time. They'll bring over there balances to you if you can help them and so, you know, obviously we want to serve our existing clients first name.

It's a capacity permitting. You know, we are helping new clients as well. That being said these stories will not die. They will live for a very long time. People will remember we treated them right now and what we did to help them secure These funds and at a time, we have people calling us crying and Thanking us for, you know, keeping the lights on the current estimate I have is that our funds said, you know, we're helping to save close to eleven thousand jobs, you know, and I'm sure there are banks that are going to do a lot more than us. We're comfortable with the way that we did it and really wanted to handle their clients wage and not and make it a meaningful experience in a relationship or an experience and not just kind of trans axle. We even had to special emails that we send out to clients when they got their you know, their each rant number because that's the moment where you know, the phone not reserve for you and so our client. I just can't stress enough.

How incredible our colleagues were during this entire process. I've never experienced anything like this in banking and I was I've been saying this is like like building.

Your car is you have to drive it. You know, I'm proud of the banking industry the way that the banks government, you know, the trade associations all came together to figure this out. I'm not sure how you could have done it any other way. I'm sure there will be criticisms of it. But I'm really proud of our teams are employees are incredible. We have an incredibly talented resilient and dedicated group of colleagues who are making Bank of California standout at a really important time like this and they've been working incredibly hard. And so, you know, we're really I think motivated by an inspired by what we're able to do to help our clients that may answer your question Jackie, but at this time we're not going to break out the difference between clients and on clients.

Okay, no understood and that was that was good background color with when you think about the you know directionally the cost of your deposits and understanding that, you know, other than the thoughts there's no number on that do these new deposit accounts play into that or would that be an added benefit beyond what you're already thinking? Well, they're consistent with them. You know, they're definitely accelerating our growth. There's no question that you know, we're we're making progress every day in terms of bringing in operating accounts, but we didn't see the program coming when we were budgeting at the beginning of the month is aggressive as we thought we would be you know, this is either going to help us get to our budget at a time when maybe things look slower or if things continue on the pace that were on which are faster than we projected months, you know, we're going to outpace our budget from a deposit standpoint a lot of the hard work that we did last year in terms of transforming our culture around deposits and all the programs that we put in place, you know, the special program.

So we talked about or taking hold right now and we have teams that everybody is speaking deposits that our company it's become kind of the culture of our company and I truly believe that you know, when we've talked about this when you look at what banking really is. It's a license to gather deposits. It's not a license to lend. There are a lot of non-bank lenders so we can go by loans. We can go get loans. We there's a whole bunch of strategies to put on a whole bunch of loans took our whole goal was to bring this company back into balance the company started when I joined the company, we're completely out of balance. We had a an expanding balance sheet. That was that couldn't keep up on the deposits were bringing on Brook Road loans and Gathering expensive deposits and it just didn't work. And so the whole idea was to bring it back into balance and then figure out a way to grow from there reasonably and you know, if if you can grow your deposits faster than your loans that's pretty impressive. And so we're we're starting to get to a point right now where we're making the same amount of money on a smaller balance sheet because we've controlled expenses dead.

We are seeing tremendous progress with deposits. It won't be that way forever. But we're taking advantage of it while we have the momentum and then we're going to add loans that make sense for our company and I realize people want us to start learning tons of money right now. And you know now it's not going to see the right environment to to have you know outside loan growth. So we're going to be careful about it and we're going to take advantage of the environment to make sure that we took in an operating accounts that are really added it for us the deposit accounts that we're bringing in are all really low cost and we have a couple of different groups in the company. We have especially deposit group goes after institutional deposits, especially deposits like bankruptcy trustee and things like that and other sort of institutional large kind of chunky deposits. We have our private banking team, which is you know, exceptional they do very high touch, you know gathers deposits from a whole different host a whole host of of sectors and then our community community and business banking teams as well as our commercial real estate teams. Yep.

and in terms of bringing the

So it's become a really an Enterprise role, but we have a lot of different buckets through which we are gathering at the deposits.

Okay, great. Thank you for all the color. I'll set back. Thanks. Jackie. Next question is from Wells Fargo, please go ahead.

Hi, good morning morning. Maybe just starting with a point of clarity. So if I understand this correctly next quarter, I'm still expecting some level of asset reduction as loans continue to run off at a faster Pace. But then in the back end of the year, the expectation is for production wage that run off and actually see stabilizing acid-base.

I'm not sure tomorrow and when you see that squirt, I think you mean this quarter I assume is a second quarter, right? Yeah, so, you know, I would say that in the first quarter single-family. I met our expectations in terms of runoff.

And multi-family was a little slower than we thought and then single family, you know, it kind of came to a halt so and then it might start picking up a little bit again, but we're starting to get a lot of momentum on the loan side in terms of loans that we've been seeking to do as opposed to just taking whatever comes across the bow out so hard to Thursday because we don't know where the economy is going and we're going to be very careful. I would think that I'm starting to hear that refinancing start picking up again, you know a couple of months ago about a month ago people would think that refinances wouldn't happen because you know, how are you going to get something signed in person when we have all this shelter in place. And so I think brokered refinance refinancing of our brokerage single-family portfolio will probably suck to pick up and that's where we're going to see. I think the most run off I think refinancing a multi-family is much harder right now.

Because of the Noise We monitor, you know our credit portfolio very carefully and I so far things seem to be holding up pretty well and I I spend a lot of time on the phone with with real estate folks in Southern California who are owners of you know, multi-family real estate to understand what collections are, you know, what rents what Recollections are and it seems to be running in the low-90s which is which is pretty good and it's running in the wage low 90s for be in a little bit higher for a and it's it depends that you know, I think depending on who you're talking to but on average I'd say it's in the low nineties and so so far things seem to be holding up, but I think it's going to be hard to for people to refinance multi. So our projections on multifamily for what was going to refinance may may be slower than what we thought but a single family may start picking up again. So the address shows, um, but we do expect to still end of the year flat dead.

Okay, that's helpful. And then I just want to Circle back on the cni portfolio. There was a comment in the release that reduction in C and I was partly due to management reducing credit facilities and

To change the economic landscape was this proactively reducing lines was this largely driven by reductions in the shared National Credit portfolio took any color around that, Terry. So the shared National Credit. We don't have very many that you know, that portfolio is is is what it is and we're not doing any more money. I'll let Lynn Bob add any color that they might have but Cena is definitely lower due to reduction in credit line facilities. And that was the other half of our reduction and We proactively Shrunk certain credit lines on a house side just in light of the market to make sure that we were, you know, taking more of a wait-and-see attitude in that that contributed to you know, our reduction. So we obviously can Flex that up anytime and there's there seems to be plenty of capacity right now and that market seems to be picking back up which would be consistent with my comment about seeing uh-uh refinancings in SF are so that's something that we can Flex if wage.

You too, but let me turn it over to Lynn or Bob Dyke if they have any other color here, we're not sitting in the same room. So we're looking at each other on zoom and I think they can see the same signal. So did you have any other calls? I don't have any additional color. It was that we did managed down the credit line as we saw the events of the pandemic on phone now and um, that was the other half of our decrease in our assets quarter-over-quarter or loans.

Okay, but those lines that you're referring to are primarily on the warehouse product. Yes. Okay, and then one last one for me just I'm looking at the deferral information and then some of the more at risk Industries is provided on slide nine. Do you have the deferral balances for those specific Industries and then as we've looked kind of post quarter in has the pace of deferral request slowed or is it still fairly elevated?

So we don't have the break out right now for where the deferrals are other than the way that we broke them out for you in terms of sfr and non is afar off. I expect that deferral request will increase we had more requests for deferral than active deferral. So the way it works is people come to us and say hey, I'm curious about a deferral explain what's necessary to get one which means they have to make a statement about their financial condition due to the pandemic and provide a little bit of information and then they get it'll more money more people than not inquired but didn't actually pursue the Avenue. So there were I think you know, and I've heard this from other we wanted to be careful and not Grant more deferrals that we needed to just because people ask for it off. I think there are a lot of people who would take advantage and you know, get it affirmative they could but we're happy to give it to affirm into our borrowers if they need have no problem with that if that's what they need want to be dead.

Support them and we just we believe this is temporary and help them get through it. So a lot of hours did not take the second step to provide what was necessary for us to actually give them an act of deferral and I'm so in certain cases, I would expect the numbers to pick up I mean

I don't know why you know, the second quarter isn't going to be first worse than the first quarter GDP came out this morning. They were you know on an annualized basis, I think worse than than people were projecting the decline. So we think is going to be worse think you want and so I would expect her first to go up. I don't know how long how much in the aggregate but we hope that this is tempura, obviously the amount and the depth and duration of the crisis will you know affect Banks and and nobody knows what that's going to be yet.

Okay, and are you actively going out to clients letting them know that this deferral option is out there or is it silly when client reaches out the bank then the process of your life. You're you're well, yes and no. So we we are program is to actively reach out to clients talk to them stay in front of them and make sure that we know what's going on in our portfolio took it looks like the client is struggling and needs to Furman. Absolutely. That would be something that we would suggest, you know, we don't want to bring out a whole bunch of TV. So we got to work within within the program and take advantage of the opportunity to give deferrals if appropriate but most importantly we're just trying to stay in touch with our borrowers in the very active way and being proactive to to make sure we're on top of it and can see things coming before they get worse.

Understood. Thank you.

Next question comes from David feast or Raymond James, please. Go ahead.

Hey, good morning. Good morning. Good morning. Is this kind of in light of the commentary that you were just talking about with the the weaker economic data that's been coming out. It sounds like you've already baked some of that into your your provision model. I guess how do you think about you know potential future Reserve build in in light at some of this week or economic data, though?

Well, let me I think we took the opportunity in q1 with the adoption of Cecil to take it reserved. We felt we could justify, you know, based on and off that is conservative.

our materials obviously details some of the assumptions

Our portfolio we think is conservatively underwritten and in theory Cecil is a reserve for the projected life of all loans currently on our balance sheet as I mentioned. I mean, I think the depth and duration of the crisis is going to dictate everything and that's yet to be seen.

David I don't know. I mean, I know everybody wants to know, you know, do you have enough to avoid a provision in the second quarter?

Nobody's yet run their model their Cecil model for the second quarter. So we kind of don't know how it's going to operate and you know, it's going to be in theory. It's it's covers the life of losses of the loans that are currently on our portfolio. And so any new loans we bring our portfolio should be the change to Cecil in Q2 apps and any, you know changes to our portfolio for what's on there that could runs off. I think we're off to see how it works and I hope economic circumstances are not worse than we we modeled. We did model more conservatively than kind of what the the model was projecting as Lynn talk through in her comments. When do you have anything to add their know? I think those are those are generally I think it's difficult to say what the future of the economy will be and what its ultimate impacts would be equal parts that unfold.

We tried to be honest, you know, we we tried to take the opportunity under Cecil.

And you know the the the rules that that permitted it to to be aggressive and a with a reserve that was supportable given our we do think we have a you know, a fairly conservative credit portfolio and we'll see where this goes. We don't want to do this every quarter if we don't have to

Yeah, things seemingly change on a daily basis so that that's a fair answer and just in light of the continued core deposit growth that you highlighted. I guess. Where do you think is the best opportunity to age voice? The those deposit sounds like the appetite for new loan growth is limited. Just how would you use those to fund PPP loans? I mean, I guess just what are you thoughts on on deploying that those the box there is a good learning to do there's good lending to do with relationship borrowers that are you know that are really good, you know actors in This sort of environment so long, you know, Bob died car chief petty officers on the phone. We were together at pacwest and in the downturn we had tons of opportunity to lend to seasoned Real Estate Investors who were taking out dispatch properties and knew how to handle them fix them up and turn them into something better and, you know, give it a little bit of time but there's going to be a lot of lending to do.

Second of all our existing borrowers may have good projects that they're still active on that. We're going to help them with, you know, the everything isn't shut down and there's a current balance between the bid me ask for on the real estate side for a lot of projects. But so I think you know transactions in real estate are probably slowing to a certain extent while that may narrow but there are bridge projects to do to help people improve property that they have and in the meantime, I think there's good opportunities on the investment side with yields that are above our our Investment Portfolio of our loan yields.

You know that have appropriate risk, but as long as we don't get too wide any of our pockets we have obviously we have an Investment Portfolio. We're building back up finding it looks like Thursday. It's cooperating in terms of giving us some options. And so we're going to look to deploy funds there in a reasonable way, but we're not getting you know, we have certain kind of buckets and I can let Lynn talk about we have there.

And if you want to jump in on anything that we're looking to do on the investment side, yep. Sorry. I think the phone was on me and I apologize the on the investment side. Yeah, we've been looking at opportunities. They're obviously I'm lower interest rate environment. The yields have been a little bit lower. We have looked to some corporates which is primarily off Bank subordinated debentures that have come into the market lately goes up in yielding or he'll opportunities around four and half percent. That's primarily one of the Investments we've looked at and then just other agency government securities as well. So those are about 250 million dollars that we mentioned in the materials that we purchased off.

I think on the where the warehouse in the warehouse side is

You have an opportunity there to take advantage in two ways one not only to support that market as it continues and we do that in a very conservative way. But second of all, you know, the underlying the underlying loans that were financing they're available for us to purchase it at discount. And so we can look to buy those loans if we have visibility into them, which is what I was mentioning earlier. I mean we can buy loans at any time. I mean that that's not the hard part of banking the hard part of banking is is building a true culture and you know relationships and loans that people that keep coming back to you time after time for high-quality loans. And so we're very focused on doing that that being said we're mindful of the fact that we're getting to a balance sheet size want to have the right amount of earning assets to support the expense space which we can only take down so far and so knowing that will put on the assets will put in the assets that makes sense and and make sure that we build this back up dead.

You know this year is about managing credit and managing.

Getting out of this crisis and setting up our company in the right way for the future and I think we're well-positioned to that. Next year is going to be a pretty pretty good year. I mean, I'm very very pleased with how things are going on the deposit and like I said, it will last forever. So we're going to keep taking advantage of it and hopefully it'll will be able to to keep this momentum up for quite some time and continue building. We're getting a great reputation in our Market. Our teams have just done a remarkable job of of being out there and and getting a following in a way that we want.

That's that's great color one more for me. I just want to talk on the preferred Redemption. It sounds like you're interested in potentially Redeeming the the series be I guess how do you balance the desire to to org what this point given the uncertainty with opportunistically, you know, demon miss that series you want to check that. Yeah. Sure. I can start. Thanks first and foremost, we're starting with extremely high Capital position. Give them the balance sheet to come down in size that left us with a lot of excess Capital if I can say that so and to balance sort of the preservation of capital during uncertain times against our ability. I think to look at the Redemption of the preferred stock, you know, we're looking at a closely obviously very expensive relative to current market conditions. So if there's an opportunity potentially to bring it down with our current call log

Or to refinance it with potentially other debts such as subject, you know, we're looking at both of those. So we are definitely balancing it but I think we're starting from a position of a lot of capital as we had into this crisis.

On top of thank you that answer your question David. Yep. That's perfect. Give you enough color. Okay.

Next question from Gary 10 or D A Davidson, please. Go ahead. Good morning morning. Gary questions. In terms of the fact. I think they remove stress in this question. But in terms of funding it you're going to fund that do you think would your balance sheet liquidity or are you going to utilize the Palm Celebi? How are you thinking about that? Yeah. We're we're fine from given, you know are kind of the way that we decide to approach the program and not you know, be all things to everybody and just kind of focus on Thursday in a pretty high touch way. We don't have an outsize position it so we're we're comfortable finding it with our own liquidity.

Okay, great. And then in terms of the clo portfolio just wanted to clarify. I thought it said in the press release that the average yield was $360. And then I thought in the slide I could said 3:40 p.m. Confirm which was the right deal for the quarter.

Sure, let me let me look at that. I believe it's the 3:40.

Okay, great. And then on the repricing is that an April first repricing date for that portfolio or is it when is the best time it's towards the middle of April?

Okay, my questions were answered. Thank you.

Thanks. Next question from Tim Coffey of Jenny, please go ahead.

Thank you morning morning. Can you remind us how big that brokered Residential Mortgage book is?

Yeah, I think it's a billion.

Got a billion for ya.

Okay, what percentage do you expect to kind of refi?

Yeah.

Yes.