Q2 2020 Banc of California Inc Earnings Call
Hello, and welcome to Banc of California second quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star keep both zero today's call is being recorded in a copy of the recording will be available later today on the company's Investor Relations website today's presentation will also.
Non-GAAP measures reconciliation for these additional required information is available in the earnings press release. The reference presentation is available on the company's Investor Relations website, where we'd be again, we'd like to direct everyone to the company's safe Harbor statement on forward looking statements, including.
Included in both the earnings release and the earnings presentation I would like to now turn the conference call over to Mr., Jerry Wolf Banc of California, as President and Chief Executive Officer.
Good morning.
Welcome to Banc of California second quarter earnings call.
Joining me on today's call or when Hopkins, Chief Financial Officer, who will talk in more detail about our quarterly results.
As well as Mike Smith, our Chief Accounting Officer, and bought back our Chief Credit Officer will all be available during Q1 <unk>.
Our second quarter performance reflects both the conservative well capitalized bank we have built.
It is well positioned to manage through the impact of covered 19 pandemic.
As was the bank that is reached an inflection point its transformation from restructuring to growth.
We continue to benefit from the inherent advantages we had entering the crisis, most notably high levels of capital in a well underwritten credit portfolio predominantly secured by southern California real estate with relatively low loan to values.
Approximately 66% of our loan portfolio is secured by properties that service primary residences, including SFR multifamily and warehouse portfolios. We have very limited exposure distressed industries, such as hotels restaurants energy Airlines and other hospitality.
Well, our hard work over the past year.
We have substantially enhanced the long term earnings power of the bank.
Proving our deposit base lowering our cost of funds, increasing our net interest margin reducing operating expenses.
These efforts have enhanced our operating leverage and brought us to an inflection point, where we believe we're positioned to deliver profitable growth and generate higher levels of returns subject to of course economic recovery from the effects of the pandemic.
Despite the challenges created by the quota virus.
We continue to execute on our strategic initiatives and the transformation of our balance sheet.
The run off that are SFR portfolio continues with the low interest rate environment, well the paycheck protection program enabled us to fund the type of relationship based commercial loans that we are targeting.
As a result at June Thirtyth loans to commercial customers increased to 75% of our total loans up from 73% at the end of the prior quarter, it's 70% at this time of year ago.
In other key areas, we made substantial progress and the second quarter.
Our noninterest bearing deposits increased by 135 million or 11% from the ended the prior quarter. When they portion of this growth attributable to PPP loan proceeds received power commercial customers.
In the past year or non interest bearing deposits have increased 40%.
This has resulted in significant improvement in our mix of deposits.
Non interest bearing deposits comprise 23% of our total deposits at June Thirtyth up from 16% at this time of year ago.
The improvement in our deposit mix, along with the lower interest rate environment contributed to a further decline or average cost of deposits this quarter, which dropped to 71 basis points from 111 basis points in the prior quarter. It reached the spot rate of 59 basis points at the end of the second quarter.
Yeah, and largely as a result of the substantial reduction or cost of deposits. Our net interest margin expanded by 12 basis points compared to the prior quarter, reaching 3.9%.
We believe the progress we're making reflects the clarity of our vision and the consistency of our execution.
Our organization devoted considerable resources to providing high quality deposit products and high touch services.
Enable us to gather low cost deposits and to deploy them profitably into relationship based loans to small and midsize businesses.
Well the value of these deposits may not be is obvious in the time like this.
Over the long term this focus and execution will provide a stable funding base that will protect both margin and earnings and translate into a true franchise value.
Yeah. That's since we have made in personnel and technology reflect our commitment to developing multiple channels, we're bringing in low cost deposits.
We're seeing strong deposit gathering contributions from all areas of the company.
Well, our specialty deposits in private banking team <unk> relationship managers in both community in business banking as well as the commercial real estate banking teams were successful increasing our deposit share of existing clients and adding the operating accounts of new clients each quarter.
On top of our core business strategies, we have some additional opportunities to accelerate our progress as market conditions and timing permit.
One of these opportunities was terminating our naming rights agreement with LFC, which we were able to complete in the second quarter.
Under the terms of our new agreement, we have been released from over 89 million in future expats.
While still retaining our position is LFC. His primary banking partner there were many as a partner and a number of other collaborations are restructure relationship we'll see if the company approximately 7 million per year for the next 12 and a half years.
Well, the onetime charge associated with terminating our naming rights agreements impacted our second quarter results.
This is a significant step forward and our continued efforts to reduce expenses and approve our future operating leverage.
Let me address our near term focus of managing the impact of coping 19.
We accommodate a significant number of deferral and forbearance request for our clients early in the quarter and the pace of our loan to for like to be quite dramatically as we move through the quarter.
After approving a total of 205 loan deferrals in March and April we approved 87 deferrals in May and just six deferrals in June.
We ended the quarter with 290, Dr. deferments on 604 million of loans are approximately 11% of the loan portfolio and this includes both SFR, where deferments are actually forbearances non SFR loads.
They charge in our presentation lays out deferrals by asset class.
Many of our borrowers with deferred loans are now coming up on the expiration of their 90 day deferral periods.
We are reviewing their current financials as we evaluate extensions of the deferral periods.
But those commercial borrowers that demonstrate a continuing need for deferral, we generally expect to obtain some additional credit enhancements such as additional collateral personal guarantees are putting in a reserve in order for an additional deferral period to be granted.
We expect the legacy SFR loans to run with a higher percentage of deferrals or forbearances due to the consumer rules, but that portfolio as well underwritten with an average loan to value below 60%.
As the Paycheck protection program has been extended we continue to offer these loans as a means for helping clients manage through the crisis.
We ended the second quarter with 262 million in PPP bone approvals for businesses that represent an aggregate workforce of more than 25000 jobs.
We viewed keep you loans has the opportunity to reinforce the high touch client experience that we offer at the back.
So rather than opening up in all my portal to take applications. We had our relationship managers guide our clients through the entire process to ensure a successful application and timely funny.
Additionally, we believe this approach will provide administrative efficiencies to facilitate the loan forgiveness process with our clients.
Well, we focused on serving existing clients with our high touch model. We also used our framework to attract new clients and use the P. P to differentiate ourselves showing how true service can make a difference.
As a result, we're able to add many new clients, who are consistent with the type of commercial customers that we are targeting in our traditional business development efforts substantially all of whom brought over their primary deposit relationship.
New clients accounted for approximately 25% of our total PPP originations.
We saw an increase in delinquencies nonperforming assets due mostly to 111 and a half million dollar relationships that as well secured by both commercial and single family properties.
Additionally, we took a specific reserve a $5 million related to the legacy shared national credit that it's been on non accrual for several quarters.
I will address the components of the provision built under Cecil for the quarter.
Before I turn the call over to her I want to briefly address our COO portfolio as we received a number of questions about it following a piece almost feel little market that appeared in the Atlantic last month.
Well it isn't our place to be defenders of the overall feel little market.
And many investment banking analysts and firms did an excellent job of rebutting some of the assertions maybe the Atlantic piece.
I would highlight wells fargo's analysis in particular.
We do want to provide as much information about our particular CLL holdings as possible.
That our shareholders are comfortable that we have minimal loss exposure our portfolio.
As with last quarter in our slide deck. We have included some detailed information that should be helpful. In understanding the level of risk in the portfolio.
Without getting too much into the we've done this.
The key takeaways from Marci, a little portfolio are as follows.
One.
It consists entirely of doubling in AAA rated securities.
To our portfolio is broadly diversified with minimal minimal exposure to severely stressed industries.
Three.
Our analysis indicates that the underlying securities would need to experience approximately 25% of losses before we take our first dollar loss and our analysis was also supported by the conclusions reached by two whether brokerage firms.
And lastly, perhaps most importantly, Moody's data shows that no U.S. double a. or AAA rated CLL has ever had a principal impairment.
All that being said.
We still consider the fuel a portfolio to be noncore legacy assets that we want to diversify away from as market conditions permit.
Following the dislocation that occurred in the seal a pricing at the end of the first quarter.
We saw a tighter spreads at the end of the second quarter that reduced our unrealized loss in the portfolio by 44.8 million or approximately 63 cents per share an after tax basis.
Given the level of credit enhancement, we have in the portfolio. We continue to believe that at this point in time.
We are best served by holding the securities until there's a more attractive opportunity to trade out of them.
When the timing as appropriate we view this is another one of our larger opportunities to accelerate the progress.
Of our franchise by removing the volatility that this portfolio experiences and diversifying and amplifying our investment returns.
Now I'll hand, the call over to Lynn will provide more color on our operational performance then off some closing remarks before opening up the line for questions.
Thank you Darrin.
Sorry, I've mentioned, please refer to our investor deck, which can be found on our Investor Relations website, and I'll review, our second quarter performance.
And that's available to common stockholders for the second quarter 21.9 million negative 44 cents per share.
Our net loss net loss per share were impacted by our decision to exit the long term naming rights agreement.
Well they have to see.
She's talking in a onetime pretax charge of 26.8 million and a provision for credit losses of 11.8 million in.
In addition, during the quarter, we recognize the 2.5 million Bali debt extinguishment see pretty early termination <unk> hundred million dollars and I told became a downside and a 2 million dollar gain on the sale of $21 million in corporate security.
The core operating performance the company is more accurately reflected in our adjusted pretax pre provision net income of 16 million for the quarter, which compares to try and 2 million an adjusted pretax pre provision income for the prior quarter.
We continue to build momentum in our core underlying earnings power and we think we can continue to progress in the second half of the year and into the future.
Let's start by reviewing some of the highlight of our income statement before moving on to our balance sheet trend.
We saw strong growth in our total revenue compared to the prior quarter, driven primarily by 6% increase net interest income.
Increase in net interest income resulted from a combination of higher average.
<unk> hundred $65 million.
And an increase in our net interest margin.
Net interest margin.
3.9%.
An increase in 12 basis points in the prior quarter. Other cost then fell by more than the yield on our average earning assets.
Jared highlighted earlier, our average cost of deposits fell 40 basis point.
One basis point during the second quarter and illustrate the progress we have made and improving our deposit franchise.
Oh It was mentioned.
Spot rate for our cost of deposits at the end of the corridor, that's 59 basis point.
[laughter] 12 basis points below the second quarter average and it will provide us a dismal opportunity for NIM expansion and the third quarter.
In addition, we have 497 million of Cds maturing over the next six months the weighted average rate of about 1.7%, which will further reduce our cost of deposits.
In May June we restructured 111 million they told me truck.
Damn close lowering the rate of such advances by 79 basis point.
While extending their duration about two and a half year.
And we treat paid $100 million HLB, chairman balances, which had a November 2021 maturity date, and a 2.07% interest rate.
The results the aggregate cost about if he told me advances are expected to further reduce our overall cost if I'm going forward.
Turning to our earning assets.
Our average loan yield declined eight basis point from the prior quarter.
Reflecting both the challenging interest rate backdrop, I know relatively limited exposure to repricing within our existing portfolio.
Given that a large portion of our fixed rate and highbred loan or not scheduled to mature reprice for at least three years.
During the quarter, we collected $7.5 million.
For approximately 3% in fees on P.P.P. loan, which we recognize your interest income right made in light of nine months.
My name P.P. loans added three basis points towards second quarter NIM.
Well on loan yield only decreased eight basis points.
Our earning asset yield decreased 21 basis point, due primarily torsiello portfolio repricing down to the current market.
As well, it's temporary excess liquidity being held and lower yielding assets.
Briefly noninterest income increased 3.5 billion to $5.5 million.
The second quarter included a gain on sale security $2 million.
The prior quarter included an unrealized loss of $1.6 million.
The record loans held for sale at their fair value.
He's accounted for the majority of the linked quarter increase.
I'd also like dimension, the three year earn out from the sale of the banks mortgage banking division.
Which contributed average quarterly fee income of approximately $800000 concluded in the second quarter.
Moving on to non interest expense.
Well, there's been a fair amount of volatility in non core expenses, which I'm happy to address in Q in a short answer is declined 13% from last year's second quarter $42.8 million and decreased by $558000 and the first quarter.
We received some benefit I'm reduce regulatory stuff.
Or be below $10 billion, an asset for four consecutive quarter.
Second quarter regulatory inquiries are reflective of our current run rate and higher than first quarter, which benefited from an FDIC assessment credit.
Well the courts and the average basket ratio increased 16 basis points year over year, you'd point to 2%. It's important to keep in mind that our total I explained by 17% year over year, we work to reduce noncore assets and transform into a relationship focused business bank.
Turning to our balance sheet I total assets increased by 100, an $8 million and the second quarter to 7.77 billion as we continued our repositioning.
We remain focused on increasing relationship based lending.
We ended the second quarter, we had $262 million M. P. P P loan approval.
250 million had been funded.
P.P.P. production off at the expected run all of our legacy family residential portfolio, which declined by 97 million.
And declines in most other loan portfolio segment.
We continue to expect a relatively flat balance sheet coming here, but all we expect operating leverage to continue to expand.
Investor presentation include updated details on the disclosures, we provided last quarter around our loan portfolio. In addition to details on Deferment Island Ackman.
Portfolio continues to be largely weighted towards real estate loans, but your supported by high quality collateral underwritten by low loan to values.
We also continue to have limited exposure to sector that are most at risk from the pandemic energy hotel restaurant airline.
Oh.
Deposits increased 475 million dollar.
Point over $4 billion at the end of the corridor.
Noninterest bearing deposits, reaching 1.39 billion and representing 23% total deposit.
Demand deposits non interest bearing interest checking.
Increased from 41% to 54% of total deposit.
From the end of the second quarter of 2019.
The second quarter of 2020.
This increase combine the rate environment, and our proactive efforts to reduce deposit costs and bringing new relationships drove our all in average cost of deposits down from 162 basis points to 71 basis points over the same time period.
As previously mentioned, we believe building a strong truly low cost deposit base. That's one of the most valuable thing we can do to create franchise value.
Oh, we recognize a portion of our noninterest bearing deposit growth relates to the P.P.P. loan program overall, our progress and generally ahead of plan due to our investment in products and system and the tremendous dedication of our team.
We have posted six consecutive quarters of growth and average non interest bearing deposit.
Our mix of noninterest bearing deposit and interest bearing checking the total deposit continues to grow even on a growing deposit base.
With deposit growth exceeding bone growth our loan deposit ratio declined from 102 person to be under the prior quarter a 94%.
Our securities portfolio increased 207 million to 1.18 billion driven mostly by net additions of 94 million of corporate security and 61 million of agencies demos.
And the 54.7 million dollar reduction and the net unrealized loss of our portfolio.
We ended the quarter with 87 of the portfolio and AAA are definitely rated securities and the remaining 12% and triple the security.
Jordi of the Triple B rated securities or subordinated bank debt, but that's.
As Jerry discussed tighter spreads reduced the unrealized loss in our $668 million yellow portfolio.
However, this yellow portfolio continues to weigh on our tangible book value wasn't unrealized pretax loss of $35.3 million the ended the quarter.
Turning to asset quality.
Credit quality overall is showing resilience to getting the challenge it's created by the pandemic.
Nonetheless, delinquent loans increased $95.2 million or 169 basis points, a total lounge and nonperforming loans increased to 72.7 million dollar or hundred 29 basis points of total land.
Increases in delinquent loans, and then yeah $10.2 million and $16.2 million are due mostly to 111.5 million dollar lending relationship. It is well secured by both commercial and single family residential property.
At quarter end nonperforming loans included three relationship totaling 37 million dollar 51% of total nonperforming loan.
He's anything 11.5 million dollar relationship added this quarter and but my guess is $16.4 million shared national credits and 9.1 million dollar so far with the 58% loan to value, which have both been discussed in prior quarter.
We believe the risk of loss on the single family portfolio was low given the weighted average loan to value is below 60%.
However, due to consumer lending regulation single family loans tend to take longer to work through it can temporarily elevate our total delinquency nonperforming loans.
As a result, we show our asset quality metrics, both the entire portfolio and for the portfolio, excluding SFR in our investor deck.
Let me turn this piece, though our provisioning for the quarter.
I think discussed in the past.
All right. So if you use as a nationally recognized third party model that include many assumptions based on our historical empirical data our current loan portfolio an economic forecasts.
Economic forecast publish a model provider had deteriorated in the first order.
June baseline unemployment rate forecast for 2020 and 2021, increasing.
And a real GDP growth rate declining.
Using current economic forecasts.
And the estimated impact as a pandemic on our portfolio's lifetime credit losses.
We recognize the second quarter provision for credit losses of $11.8 million.
The provision included $5 million in general reserves, reflecting the deterioration the macroeconomic variables any updated forecast.
In other qualitative factor.
So I'd be Cree encode alone.
And.
$28 million in specific reserves, including the $5 million related to previously disclosed legacy nonaccrual shared national credit.
We also had a nominal amount of net recovery with no charge offs in the quarter.
As a result of total allowance for credit losses increased $94.6 million.
Which is an allowance coverage ratio total loan.
1.68%.
Excluding the P.P.P. loan, which had a 100% government guarantee.
Yeah coverage ratio total 1.76%.
Our capital position remains strong.
The common equity tier one ratio of 11.7%.
And is benefiting from strategic actions completed over the past several quarters.
We will continue to be prudent and strategic with the use of our capital maximize benefit shareholder and to build franchise value.
While protecting our very well capitalized position at a time when the outlook remains uncertain.
Well, we're currently operating and capital preservation environment, we plan to deploy our excess capital over time through organic growth preferred redemption redemption of share repurchase activity and other opportunities in the market.
This time I will turn the presentation back over to parent.
Thank you Lynn.
Since implementing our strategic plan to enhance the value of our franchise. Our goal has been to show progress each quarter.
Some quarters, we will have more progress than others, but every quarter, we want to keep moving the ball down the field improving franchise value and profitability.
We think about our strategic plan and three phases.
The first phase consisted of reorganizing the bank.
Realigning, our personnel and business lines appropriately for the type of relationship oriented bank, we want to be.
Building the foundation of a deposit focused institution.
Second phase builds on that foundation.
Enters the period of generating profitable growth and operating leverage.
Third phase is one to profitable growth and improved operating leverage fully stabilized as a mature organization with the opportunity to be consistently a high performing financial institution.
Well, we didn't put a timeline around these phases.
Given that market conditions put some of the timing outside of our control.
We feel comfortable in saying that we're now entering phase two of our strategic plan.
We will continue to focus and execute on all the initiatives that help build the foundation of phase one.
Proving our deposit mix managing expenses et cetera.
But now we feel optimistic about our ability to generate greater operating leverage and better profitability.
Well, we see loan demand.
We are being selective in the credits that we pursue.
There are attractive opportunities, particularly a stronger borrowers looked to capitalize on current conditions in the marketplace.
There were still lot of uncertainty about the pace and the strength of the reopening in economies our markets. However.
We serve clients from Santa Barbara to San Diego and there are a lot of differences in how each market in southern California is opening backup.
But we are seeing enough activity and loan for demand for us to continue to believe that into back half of the year loan production should outpace write off.
Our balance sheet should remain relatively flat for the year as we continue to remix our loan portfolio as planned.
And with a heavy lifting of cleaning up some of the legacy issues largely completed we believe there will be less noise or quarterly results going forward.
We also continued up a lot of additional levers that we can pull at some point in the future to further accelerate our performance.
One of which is around or expense levels as we make decisions about how we operate in the future based on what we have learned and our learning during this crisis.
We have been very successful in delivering or services digitally to clients and the commercial customers that we have added are now accustomed to conducting business digitally.
All of our experience will inform how we think about our real estate, what's appropriate for the type of commercial bank we are building.
It's certainly a potential opportunity that will further enhance efficiencies without impacting our business development capabilities.
As we look ahead to the end of 2020.
We're very excited about what our bank will look like after two years of transformation.
A bank that was well positioned defensively for the pandemic.
Well, having the foundation in place to substantially improve its earnings power in the years ahead.
I think is important to highlight the fact that from an operating standpoint, and just a year in a quarter, we have a vastly improved deposit base.
Expanding net interest margin.
And improving operating leverage in core earnings were significant <unk> excess capital and a healthy reserve.
The boot our loan portfolio was 66% residential related.
As mentioned with very limited exposure distressed industries.
We have radically transformed our franchise, particularly on the deposit side, and we're well positioned to drive a higher level of earnings the returns.
Really strong credit culture that has made it a priority to exit and moved beyond the few remaining legacy loans that represent the past.
Most importantly, we have a truly incredible team.
Alan It experienced dedicated colleagues that make a difference everyday on behalf of our clients and in our communities.
You have created a unique in powerful culture banc of California, and as a results we are achieving our goals.
Moving to attract high quality talent.
Supporting existing and new clients with our special brand of relationship banking.
As a nearly 8 billion dollar franchise and one of the top markets in the country.
Our continued execution should ensure significant value for shareholders going forward.
Thank you for listening today.
I hope it you and your families are safe and healthy.
Look forward to sharing more about banc of California's progress in the coming quarters.
With that operator, let's go ahead, now and open up the lines for questions.
Thank you ladies and gentlemen, we will now begin or question and answer session topic question. You May Press Star then one on your Touchtone phone. If you use any speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
Our first question comes from Matthew Clark from Piper Sandler. Please go ahead.
Hi, good morning.
[laughter] one another.
Maybe just first on deferrals as you speak with all your customers.
During the quarter I guess what percent of.
The deferral amount do you think might resume normal payments in the third quarter.
That's a good question I don't have an exact number for you I'm a lot of it is gonna be waiting to see and it's pretty fluid I.
I think we're obviously very encouraged by the trend and we're not seeing an uptick in requests were on top of it but I'm I'm nervous that.
You know at the last minute people could just say look we're not we're not ready yet we need another deferral and of course, if they did that we'd want to see the financials that support that and as we mentioned we would ask for some sort of credit enhancement to support that.
Overall, our portfolio is performing very strongly I went through our top.
You know retail credits and as you know we have limited exposure to retail a small percentage, it's 5% of our total loan portfolio, but I went through our top retail credits and I was encouraged to see.
Really high debt service coverage ratios very low loan to values and lot of rent collection and so we just didn't didn't raise me flags for me.
So as of right now I think we're optimistic that we're not going to see [noise].
An uptick but there will be so there will be some for sure. We just don't know the you know the SFR portfolio.
He's being serviced by third party.
They're doing okay, they're not doing great a which is why there's so much noise in the portfolio. It's it it'd be a terrible time to change Servicers and we've been very vocal with them about the changes that we want to see for example, if you ended the quarter delinquencies went down by $28 million and huge percentage that was SFR and so we keep mentioning it's running with a lot of.
In noise, but we don't think theres loss exposure in the portfolio not because of the loan to values and just knowing what we have it's a it's fundamentally a white collar portfolio.
So we think we're gonna be good there.
Okay, Great and then on the the 11 million dollar a new problem relationship.
Resolution process there.
I'll, let Bob dike, our chief credit officer dress, it, but it's basically a business divorces two families that a it's a family that is split on two sides that disagrees on on the portfolio. Its tons of SFR is with some commercial property as well Bob you want to talk about what our processes right now.
Yeah, we're going to continue dot to Mont monitor and work closely with the borrower the relationship as Jerry said, it's split about 50 50 that 11, just over 11 million between the commercial CRT piece and the SFR piece both of them both of those pieces.
As has been very low loan to values the single family or the a commercial real estate piece has a family related business in it as the primary anchor. So there's there's lots of motivation there, we'll just continue to to monitor for payments and.
ER.
The SFR piece as Jared had mentioned you know there are there or consumer protection issues that relate to that piece. So I will just we have to move very slowly there.
Yeah, and and Matthew that it actually I believe it but correct me if I'm wrong, but I believe they brought at current after the end of the quarter, but we have to leave it on non accrual for quite a long time, because you you know that show that it's going to come off nonaccrual, but they actually brought occurred and you know it's a family. It's a business divorce basically and so we're we're monitoring it very closely we're getting more aggressive there.
Quite honest and now they're starting to talk to us. So you know, we're well secured but it's just a will get out of it.
Okay, Great and then just shifting gears to the margin.
Maybe for Lynn.
Do you happen to have the spot rate on your borrowing costs at the end of June.
Just to give some visibility into the third quarter.
Oh sure actually.
Oh that.
Yeah, Matt Let me Paul Let me pull my support for you and all share it with the group I apologize I don't have a right here at my fingertips.
That's okay.
And then maybe lastly on the pipeline of new loan and deposit business. Your deposit growth you. This quarter exceeded your PPP loans that were funded.
I guess you speak to the to both pipelines and you know how much of that deposit growth might have been there for for taxes on July 15th and how much of that might stick.
Yeah, we wouldn't know we're talking about the feel that it we think that about 50% of the deposit growth was non TPP [noise].
And so you know.
We still have an engine that's working and we see a really really good deposit pipeline right now and so we're going to keep doing what we're doing we have the right incentives in place.
The right you know technology to write tools, everybody is really aligned around this and which is why we're showing five consecutive quarters of very strong deviate growth and we want noninterest bearing but we also were getting low cost checking which is just as valuable and you know at all times, because it's true low cost relationships deposits and so.
I feel very very good about that we had said that we thought that run off without his production in the first half of the year in production without pace pay offs would outpace runoff in the second after the year I think that's still the case.
Whether we put on production in terms of earning assets either through the investment portfolio were loans, we think the balance sheet will be relatively flat at the end of the year, yeah, but it'll be a better mix of assets and we're going to continue to expand our margin.
Okay.
Thank you Matthew.
The next <unk> well get the the early gossip the loan yield for you.
The next questioner okay.
Comes from David faster from Raymond James. Please go ahead.
Hey, good morning, everybody warning David.
Just wanted to follow up on Matt's question on deferrals and maybe the thoughts on reserve builds going forward. I mean, you had a larger instead to build this quarter I'm only you know some modest credit migration I guess I would estimate the heavy lifting seems like it's probably being done but.
As we start getting some more re deferrals and no maybe some risk rating downgrades would you expect some modest builds in the second half a year or I, just how do you think about the reserve here.
I'll, let Linda dress that I'm glad Lynn.
Sure.
So.
As far as far as anything other than June I think were appropriately reserved I think it's important to note this second quarter provision.
Had $5 million in general reserves, we did have some nominal recovery.
The majority was related to specific credits that we called out on a 5 million made related to that shared national credit it's been on non accrual.
So looking forward in the <unk> and.
Nipigon loan growth, we'd expect the provision can stay relatively the same I mean, we do have to look at up due to economic factors them how that impacts it.
But we think we've considered a the risk in our portfolio.
Appropriately now and I don't see significant reserve build.
Yeah, I think David I think your note you know this morning got it right.
We have [noise].
Our top three npls.
Nonperforming loans are our 50% over 50% of or nonperformer. So we've got a you know we've got that shared national credit that we now have specific reserved against I think we're well reserved against it we got a 9 million dollar SFR and this is all legacy stuff. We've got a 9 million SFR that's being sold.
Right, that's like got a 16 million dollar value and we have this new a letter and a half million dollar you know relationship that's on nonaccrual, that's well well secured.
So those three loans alone. So if I expect some migration out of those credits as well.
I don't you know that's going to offset.
Any sort of loan growth in terms of you know kind of reserve build and we also have you know were 66% residential I mean look at our peers, who have that concentration.
They're nowhere near reserve the way that we are.
And so I think that we are very healthily reserve right now maybe in some ways Conservative and in addition to that you know as Lynn points out frequently.
We've got a huge amount of capital too and so whether it's in the reserve or whether it's just sitting in capital. All those are buffer. So I I feel good about where we are in <unk>. It would take a lot I think for us to reserve more.
Okay. That's that's true up in color I appreciate that and then just on the TV program just had a couple or you know maybe minor one do you estimate for the overall level of forgiveness. The timing of fees I guess that nine month I expected life is that the rate that you're going to amortize those fees versus you know what were.
We're seeing for most it like 24 months and then how many of those loans were under 150000.
Just curious there.
Good.
Yeah sure. So we didn't take a view that the estimated life is nine month. So that is a period of time that we'd be amortizing are.
Deferred fees related to it we collected about seven and a half million dollars and by the end of the second quarter, a second quarter included about $1.7 million.
Given that we approach the P.P.P. program and that we have about $250 million TPP lines at the end of the second quarter.
And a decline from now until I and the most part.
We do expect moves through the process, obviously subject to a governmental and how they're able to work with the P.P.P. program.
So we think we'd have a high level access and helping our clients through the process and see it.
The majority of it concluded by the end of the first quarter I'm 2021.
[music].
And then as far as a percent.
Portfolio that below a $150000.
There is a large percentage a the deferral amount you know from a dollar per cent per site.
Easy for me to say from a dollar perspective.
Hi, a mountain majority are under hundred $50000 and then from a numbers perspective, I can get those ratios, where you have done on the other piece of paper.
You know we have about US dollar we have about it that the that 260.
I just pulled out the 260 million.
[noise] is about 1100 loans.
So you can do the average there [noise].
Okay.
And may not shipping a half million fee estimate is that net of expenses or was that.
That's great and he we do not have a material on the low cost I'm being deferred we use our standard S.P.A.
Deferral amount.
But you got to the Gretzky.
Okay I don't know.
It's interesting thing about that I saw that a lot of banks are using two years I I'm not sure I get.
Why that is.
Because the stuff as you know, we're not going to have a life of.
It's only the percent of the signs that weren't being used for an approved purpose that get termed out over a period of time.
Otherwise it was supposed to be two and a half months of average monthly payroll, which means the funds are.
Almost expired and you know there expired in August for the most part and then they're going to be applying for forgive us. So I I didn't understand why people were doing two years, but we just took their purchase diamonds.
I hear you and skin and then just maybe more of a bit of a strategic question. You know you talked a bit about you know being good customer acquisition I guess, just what's your thoughts on you know maybe hiring or your growth trajectory going forward and maybe just being a bit more aggressive.
You know what some others are beautiful.
Yeah, well so to two different questions. There one is our kind of hiring and second is kind of where we're being aggressive so on the hiring side.
We're hiring production people.
You know, we've got a good formula but folks have too.
Pay for themselves and you want to see a quick return otherwise your expenses are growing and then you've got to delay before you know you start showing production and that kind of goes the opposite way for operating leverage. So we've got to be really thoughtful about bringing on people and make sure the production support it.
Yeah, you kind of want higher ahead of the curve, but then don't so we're trying to balance that and really want to continue to capitalize on that positive operating leverage that we're getting right. Now. We did you know the core earnings 60 million versus 12 than in prior quarter. We know we want to keep building on that and that's not nearly enough I mean, it's just got to be higher and higher and higher as far as I'm.
Concerned in terms of where we're growing.
You know.
We don't want to make any credit missteps here as much as we want to grow.
We're trying to we're trying to be the bank.
For the smartest real estate entrepreneurs in our markets and people that I want to before that I wasn't comfortable running too because I didn't think we had the infrastructure to support them not because I didn't like them now that we have the infrastructure. We have the right people. We have this we have the talent on the credit in the relationship side.
And our whole organization is aligned we're doing our best to lend to people in the market who were going to take advantage of dislocation and these are you know institutional real estate borrowers who are gonna be buying properties that are underperforming that might be not collecting rents the whether they should be.
They know how to perform they know how to operate and we're going to lend to them, let them turn around the property and then we'll be there for unabridged basis. It will be there for a takeout loan to if they like it.
That's where I think we can really play and then also.
<unk> grabbing relationships by providing really high touch service. So I got a story. This morning of a new $9 million relationship that we just brought over on the deposit side.
We've been we've been working it for quite a while.
We finally got them to come over to us and the agreed to do it and they were very concerned because they thought they were one of the largest customers at the bank. They were adding that they were you know they could never be treated as well <unk> the bank that they're leaving didn't even protect them on the way out no counterproposals no phone calls know anything and so it's as if.
They've got a wakeup call that they want as important as they thought.
And we're focusing on being a high touch relationship bank the way that we did the PPP program <unk>.
It was kind of like an h. ammo versus a PPL.
We were you know you didn't have to wait in line pick up the phone you got somebody on the phone. We walked you through we understood. Your business that is going to translate to really high quality client base.
And so and we need the people that were hiring need to understand how we're going about things, it's not about throwing rate against the wall, it's about bringing over real relationships not selling on rate and so we're working hard to find those try to those types of people.
We are being as aggressive as we can.
I just had a conference with my team. This morning about about not turning down any good credits I don't want them turned down based on rate yet I want to have a conversation about it as our deposit costs drop it gives us more flexibility to be a little bit less price sensitive on the loan side.
And because our deposit costs still have a long way to go in terms of Oh, we still have a lot of levers to pull we have so many securities excuse me Cds that are maturing that or you know near 200 basis points.
So we can still drop our deposit costs quite a ways, which gives us some flexibility on the rate side on the loan side.
And so we're gonna be as aggressive as we can but we don't want to any credit missteps here because that those are headlines we don't need.
That's that's extremely helpful. I appreciate it thanks, guys. Thanks, David.
The next question comes from Timur Braziler from Wells Fargo. Please go ahead.
Hi, good morning.
Good morning, or its more good. Thank you, yes, I appreciate the wells Fargo Shout out and I guess would only be fitting to start where they see a low question. We saw another bank exit their celo portfolio earlier in the quarter I guess, how close are we getting on price to seeing additional divestitures out of that portfolio and how do you ways.
Piece of that with the expectation for flat balance sheet.
Mhm.
Lender, Mike when you want to start.
Sure and so as far as time progresses.
As we mentioned we'd be still have a 35 million dollar unrealized loss and they feel that portfolio I think as it stands today, we're close to three $4 million given our stress test their analysis, a says that we believe this yellow there's some money good they none of them are.
Downgraded during the quarter.
They're still double and triple a rated.
No.
For now I think we're still looking to hold on them and not divest that a lot.
They are if I look forward for the remainder of 2020, a in the earning asset mix and the absence of significant better opportunity Oh.
That's why we stay on no, but we are evaluating in looking at all and opportunities arise, we will ostriches afraid that them into alternative and assets.
Given how low I mean, it used to be that at least they had a good yield on him even though they had some volatility.
Now that you've been had a crappy yield. So it's like you know how quickly can we get out of them, but we don't want to do it at a loss and we also don't want to take the rest of the portfolio by so I went to <unk> than having to.
Permanent the loss that's remaining and so.
We have to be careful about it and.
I don't think it's gonna be much of a problem to replace them in terms of your any asked a question because the yields are so low we'll be able to find something.
So that that that I think is less of an issue than just not wanting to take a loss just to take a loss.
Okay, that's good color and keeping on that topic the opportunities for investments. So we saw there I investments increased during the quarter I guess, what's the plan to put incremental liquidity into the securities portfolio. At this point a then how much of the I guess the P. P to P.
Was it stickiness is going to play into how fast are aggressive youre into investing further liquidity.
On the people are and I'll, let him go but on the PPP question, but our deposit engine. It's just we're continuing to go I mean, it was just a portion of the deposits were PPP and I don't think that's going to influence us much.
As long as we see our general deposit flows continue the way they are.
<unk>.
Okay do you see opportunity and we didn't take the opportunity either in the corner or but some of the additional liquidity into the securities portfolio on both a work in corporate securities. Its mother CMO. It's certainly gets you a security portfolio grow during the quarter along as we look forward.
But there's a portion of.
The additional liquidity that will be the play, but the securities portfolio, well you'd be looking for the net loan growth that we've talked about said, she's oh lattus balance sheet growth a year over year.
Okay, and then what what do you have the investment yield for the quarter on new purchases.
And that's me on any purchases during the quarter was.
Probably I'm on about 100 million I know, there's about 5% and on the other portion that was around 2%. So.
[noise], how many okay great.
Yes, good about 60 million to minimize and then a superstar and 100 million was at 5%.
Kind of broad restaurants.
Okay. That's great color in last from me there was a statement in the in the release that part of the decline in C and I was in response to strategically reducing certain facility.
Due to the change in economic Tibet can you just provide a little bit more color on that statement, yes sooner warehouse group you know the market backed up and.
We we lend to nonbank lenders, who are originating mortgages and their duration is very short 30 to 45 days and they they lend and then they securitized. They you know they clean up the line and then they lend out again and so we saw the market's easing up on the securitization side.
For Nonqm mortgages, and we wanted to make sure that we weren't going to get left holding long duration. So we cut back our lives.
And some of our borrowers also you know said hey, we're going to slow down here, because we want to make sure theres the takeout and we don't want to violate any of our covenant. So it was you know looking at the marketing just saying, okay, let's let's pause here and make sure that we see.
We are where things are going we have a very experienced warehouse lending team there they're very good at what they do.
It's you know, it's an important business for us it's not an outsized business for us, but it's it's very good we have several hundred million of deposits that are true low cost deposits below 10 basis points from institutional borrowers we tend to lend to you know very well known institutions on the.
On the more on the warehouse side, it's not again, it's not a huge business for us, but it's it's an important business and it's what we have a very strong team and they did a great job looking out for the bank.
And have those have those trends reverse that all post quarter end or is it still is still pretty there's just no jammed up on the security will actually after quarter end. It went back it when it went down but we see it building back up and getting back to you know more historical levels.
Got it thank you very much.
Yeah. Thank you to work.
The next question comes from Steve Moss from B. Riley FBR. Please go ahead.
Hi, good morning.
Morning, Steve It.
Just on expenses here kind of curious you know what your expectations are for third quarter in Jersey thinking kind of hit a little bit about looking at.
Rationalizing expenses, a little further kinda.
I'm wondering you know how do we think about that whether we see initiative. This year is up more but 2021 sort of the but.
Sure I'll, let Lin start and then I'll all dovetail on it.
Sure.
I think everyone I'm, there that or expenses it continued to come down over the last several quarters.
A portion due to the decrease in the overall balance sheet side, but well paying attention to how to continue they pretty operating efficiency.
So using technology and our own personnel resources.
Better so I think based on the levels that we see in the second quarter. I think there continues to be some opportunity maybe at a lower percentage or lower degree Oh, we look forward I'm sorry, large initiative I'm you know I think we all have lessons learned.
Working remotes, you know continuing to look at you know branch network.
Let's say properties, so that I think will continue into 2021.
And.
Oh, Yeah, Yeah, So me down a little <unk>.
Yep.
We obviously, we're going to look at branches as you know if they come up for renewal in terms of or are they the right location are there to rightsize do we need as many branches as we have now we're always looking at that and you know I think that there's some opportunity there I think.
Putting aside branches just thinking about leases overall I mean, I think every business just looking at this right now like do we need as much office space.
As we as we historically have had you know.
I think.
I would expect you know what some people are saying well well, let's just keep the same same office space and just really spread people out I don't know that that makes a lot of since it seems kind of silly to me I mean, we're probably going to figure out a way to have less office space.
Or you keep the same size office space and and you know you you rotate people, but I don't see us getting more office space and I think as we lending to we're thinking about okay. What's the new environment are we really going to London office right now yeah, if you're looking to office, where the tenants tenant mix looks like and you know how comfortable do you feel about them re upping it.
There's a you know any issue of duration on the leases so.
I think we're looking at the same thing everybody else's in terms of other sorts of expenses, obviously LFC was a big one a really really you guys have heard me talk about that since the day I got here and and it's a great partner and we're still a partner with them, but we're doing it in a way that's more appropriate for our bank.
And in terms of other expenses I mean, we listed in the presentation. A couple of accelerators that we haven't if you don't feel those are obviously one.
When their team did a great job of restructuring or FHLB, we have a long way to go on the deposit cost side, we saw the whole bunch of maturing Cds as I mentioned, so I think there's other levers we can pull.
Alright, Thank you very much appreciate that.
Thanks, Steve.
No questions on the COO Steve.
[laughter] no Oh I'm good for I enjoyed our conversation last quarter you got some really good insights for us that was that was great. So.
Well good good call I did appreciate that too yeah. That's.
Thanks.
Again, if youve any question. Please press Star then one.
The next question comes from Gary Tenner from D.A. Davidson. Please go ahead.
Thanks, Good morning, everybody.
A couple of.
Morning, just couple of questions on PPP I don't know if I heard you guys. That's number out there, but what was the average PBP balance for the quarter.
Well the average balance in terms of Outstandings.
Yes.
That's good question.
Everything from the corner and dairy I'm going to put it around $153 million.
Okay, perfect and then.
Sure, especially in her comments about kind of pick up.
Are you not look for originations back after the year do you think originations.
Should we thinking about them offsetting.
Run all the portfolios back after the year or just run off of the portfolio X PPP Rob.
No. It's we've Gotta makeup TPP as well so if we had 250 million round numbers of P.P., We got our single family running off at a.
You know I don't know for 100 million more potentially.
And then other stuff. We've got you know 350 400 million to make up.
Okay, but you'd be thinking of the originations sufficient to me make that number for the back Yep Yep.
All right. It's all have thank you.
Thanks, Gary.
The next question comes from Luke we tone from KBW. Please go ahead.
Hey, good morning.
<unk>.
Just wanted to keep a and shouldn't be rolling off did you give I I don't did you give any more quickly.
Hi, I know you Didnt think was so the two arisen per se it but I didn't the having or are they the total dollar amount lives of those rolling them.
Luke could you. We you were cutting out when you were speaking can you can you say it again.
Yes, I can hear me better.
Hopefully, yeah, Oh, sorry [laughter].
He is rolling off give a little bit more clarity on the timing of the about Oh is it what or is it kind of in the next 12 months.
Okay. So it sounds like.
It sounds like you're asking about because you're cutting out what the timing is for the run off of PPP logs.
Sorry.
It was about the <unk> the Cds well.
You know the C.D. that got it got it sure.
<unk>.
Yeah.
But it does seem to have any reference to 409 me about the half a billion dollars.
Those are gonna stay pretty evenly.
Hi spread out over the next six months Barry.
There's not 100 and.
70 million, it's in December but the rest is kinda evenly spread over there and then a third quarter I would mention that a portion as retail and then I think we flagged that we had some brokered Cds at the end of the.
Second quarter, you know we'd put on some additional liquidity ended the first corner. So those are running their core.
After the panamaxes liquidity than the market place, we'll look to let those go oh or roll them over and those are bad hundred $50 million maturing this year.
Okay.
That's your me now is it any better right Yep, that's better [laughter].
[laughter].
[noise] kinda well looking at <unk>.
<unk> yields looked like.
<unk>.
And see it I kind of hit from the the rate dropped but look like the CR you.
Categories kind of held its strong.
Well.
Kinda model roughly flat on the yield.
Or.
[laughter] BP.
So on the Seery loan you I, it's probably going to come down I mean, we're we're trying to be a bridge lender in the bridge lending is holding our yields higher.
But you know I'm gonna have to probably trade a little bit to put on some volume and to put on the earning assets.
And so it might come down a little bit on the on the.
Commercial side, and you know multifamily side.
Okay.
I hope it doesn't have a lot and I try not I'm going to try not to I have a whole bunch of employees listening on the phone really happy that I know that but.
But you know we're gonna do our best.
Gosh.
Probably the <unk> you can.
Oh.
Yes deposit growth and the D.A.
Prior to two given that was kinda [laughter], but can you just talk a little bit more about the product.
Correct.
Category, that's kinda differentiated.
Just give us a low but kind of what the growth rate.
Yes, let me try this growth of the possible.
Yeah. So Luke you cut out again it sounded like you want some color on how we're differentiating ourselves on the deposit side and I think we have a follow up calls so happy to.
If I didn't answer your question properly it we'll we'll get it then too but.
You know I think the thing that we distinguishes us. The most are a couple of things number one is everybody at our company.
He is focused on deposits and so we're not interested in talking to a borrower that isn't interested in moving a good portion of their.
ER relationship to us.
So.
We are making sure that we're bringing deposits with every lending relationship second of all.
We're able to bring over clients because we have excellent.
I think we have excellent services on the deposit side when I got to this bank.
Our technology is really good.
And I every bank I've ever been at or ever acquired complains about their technology.
So you know that that's true here too, but the reality is it's really good and were able to compete by having services that some of our clients aren't getting from pure banks.
I think we punch a little bit above our weight class in terms of the technology that we have to offer their third is you know we've got an excellent team that's dedicated to helping our frontline's figure out how to bring over deposit accounts and so we have a dedicated treasury management team that can.
Work with clients work with lenders, who don't need and no the nuts and bolts of every sort of deposit angle, but we have a dedicated team that can and so when they're working on a relationship you can bring over an expert to help figure out what's the right way to approach this client and listen to the client and figure out how we can help them solve whatever challenges, they're having where they are.
Or maybe identify something that is that they didn't know was a challenge because they didn't know you could do it differently.
And so those sorts of conversations are we're really going to them and our teams are having great success. I would also highlight that we have a you know we have especially deposits team.
That focuses on bringing in you know kind of elephant hunting for large institutional deposits, whether their bankruptcy trustee or fiduciary, otherwise and they're doing an excellent job really really superb job. So company wide were all firing on the same cylinders, we haven't incentive program that's attractive to reward people for what they're doing.
And we have the right products and we've got the right people and I would just say that we do it all at a very high touch way and that's kind of the culture that we're building I hope that answers your question, but if not we'll make sure we circle back with you.
No the great.
Sure I'll definitely although up on the I'm sorry about that thank you guys for taking the question.
Thanks.
The next question comes from Tim Coffey from Janney. Please go ahead.
Hey, good morning, Thanks for taking my questions Washington.
You are looking at the FHLB borrowings Avenue, specifically, the a the 566 million that or I guess have an average life for four years.
What's your willingness to move out of those before trading out of the fellows.
Oh, I mean, when here I am saying the $566 million beyond that.
Goes there longer term I think they'll be advances so the maturity is between five and seven years I'm a big portion of those.
Its pretty expensive to break and given the rate and be.
And that maturity date.
So.
Carrying that it's just a small piece of our overall funding yeah.
Probably not looking to do that we did look at a very hard good quarter and based on the current interest rate environment. So we did come out at $100 million, though I think they'll be advances that matured in November of next year based on the relative price.
And then we ramped the refinance $111 million that we talked about being able to bring down the effective cost Oh.
Those.
Turning advances about 80 basis point, but the other one and pretty expensive.
Yeah overall kind of circling back on I think a prior question the on spot rate for our FHLB advances in particular has come down to add to 47.
And you know combination of when they're coming down because they're rolling off and whats left and then overall, our borrowing spot rate and Threed well, we do have a note payable that five right.
For a longer term.
Okay. That's helpful. And then thank you and then it's kinda just thinking to handle on your your where you want expenses. If I look at your expenses from say a a percentage of average assets. It's around 240 basis points. It seems like you could get this down that ratio closer to two.
2%, if not lower what kind of near term and longer term you know targets do you have for for kind of expenses as a percentage of assets.
Right.
Before you're going to be it'd be free before you jump in and Tim. We just you know we're looking at that yesterday, and we were looking at some future analysis.
And I.
I think 2% is pretty low but site I just want to make sure benchmarking the right way, we looked at we looked at as a percent of assets.
It would be great to get below get to 2% or below.
There aren't a lot of banks I think that are below 2%, but getting close to two would be would be great.
But I don't know that we're going to get all the way there when when what do you think <unk>.
And everything and you know we didn't we we have the right.
I think.
Expense they create some operating library and then many murder and the denominator and I never say allotted time.
Under the numerator well.
Yeah, I think are the more opportunities celebrity technology rationalize expenses.
Connect sharpen our pencil in a few line item.
But notwithstanding the environment instead of our growth objectives, and where we think we should be successful I think we are looking at and expanding earning assets and growing the balance sheet with <unk> and space. We have a if we're not doing out over a longer time here and then we would.
I'd have to yeah chains packed a little bit there so.
Thank you Gerry Wayne the cheaper Sanjay I think a great long term goal.
Not requires I think some balance sheet, great, but I think there's opportunity to bring it down yeah.
10.
Yes, so the we're going to get there by growing the denominator I think is yeah. There yeah.
No that makes sense and dovetails with your prior comments well those my questions I appreciate it. Thank you.
Thank you.
Appreciate it.
The next question comes from a follow up question from Gary Tenner from D.A. Davidson. Please go ahead.
Hey, Thanks, I had one quick question here I think he used to provide this information but in terms of the.
New loan origination yields in the quarter now that you kind of the dust settled from the fed rate cuts on lot more moving quite a bit lower over the course of the second quarter I'm curious, what what type of new business yields you're looking out.
So in terms of are you talking about rate rate wise.
Yes, we're volume or will be okay. So.
I'm looking at kind of what our rates were for production in last in the second quarter behind.
You know seen eyes in the low to mid fours.
Hi, sorry isn't it.
Upper fours and multifamily is in the mid to upper threes.
That's probably where we are you know do we're going to get the best pricing on on execution on loans that we need that borrowers need execution for on bridge stuff, where they need and portware structure is really important and you know your lending against something where you need to have a good understanding of how things work and so.
I think.
I would expect our pricing to remain relatively the same for those sorts of products.
Okay.
There are no more questions in the Q. This concludes our question and answer session I would like to turn the conference back over to Jeff will for any closing remarks.
Thank you very much just wanted to thank everybody for participating on our call today.
As always if investors have any questions. They can feel free to reach out to two merely in and we look forward to tiering for new and reporting quality results for the next several quarters. Thank you all.
Thank you ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation.
[noise].