Q3 2020 Banc of California Inc Earnings Call
[music].
Hello, and welcome to Banc of California is third quarter earnings Conference call.
Participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions.
Lastly question do you need to press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Today's call is being recorded and a copy of the recording will be available later today on the company's Investor Relations website.
Today's presentation will also include non-GAAP measures reconciliation for these and additional required information is available in the earnings press release referenced presentation is available on the company's Investor Relations website before.
Before we begin we would like to direct everyone to the Companys Safe Harbor statement on forward looking statements included in both the earnings release and the earnings presentation.
I would now like to turn the conference over to Mr., Gerard Wolf Banc of California's President and Chief Executive Officer.
Good morning, and welcome to Banc of California is third quarter earnings call.
Joining me on today's call are Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results as well.
As well as Mike Smith, our Chief Accounting Officer, and Bob Dyke, Our Chief Credit Officer will all be available during Q and a.
As noted on our earnings call for the second quarter.
We expected our third quarter to demonstrate the earnings momentum we had been building toward following nearly 18 months of restructuring.
I'm pleased to report that we executed well and delivered strong operating and financial results that we anticipated in the third quarter.
We will get into more detail later in the call.
Here are just a few highlights of the positive results we generated on many fronts this quarter.
We had significant improvement in the level of profitability.
Generating net income available to common shareholders of 12.1 million.
Or 24 cents per share this quarter and 19.4 million in pretax pre provision income.
Our net income benefited from a lower than normal tax rate, which Lynn will detail later.
Adjusted for a normalized 25% tax rate net income available to common stockholders would still have been strong at 9.9 million or 20 cents per share.
We were able to maintain a stable net interest margin due in large part to our continuing ability to improve our deposit base as we recorded our fifth consecutive quarter of D.A. growth.
Further lowering our cost of deposits.
We've continued to reduce our cost structure without impacting our ability to service existing clients and bring.
And bring in new business.
And we are actively managing and monitoring our asset quality with the majority of our deferred in non SFR loans, returning to the regular payment schedules and deferments dropping to just 5% of total loans at the end of the third quarter from 11% at the end of the second quarter.
With the improvement seen in our deposit base opera.
Operating efficiencies and asset quality, our third quarter performance underscores many of the attractive characteristics of our franchise that we have been building and that we expect will drive further improvement in our financial results going forward.
We've kept a sharp focus on credit quality.
Closely monitoring our loan portfolio and actively reaching out to our clients.
Loan portfolio continues to hold up well and.
And our exposure to areas most impacted by the current crisis remains limited.
With a well underwritten credit portfolio predominantly secured by southern California, real estate with relatively low loan to values and strong debt service coverage ratios were seen.
We're seeing encouraging asset quality trends with limited loss exposure.
A decline in problem loans, and a significant reduction in loan deferrals.
This trend contributed to a lower level of provision expense this quarter. Following our significant reserve build during the first half of the year and the rapid decline in deferrals.
In addition, our conservative approach continues to keep us very well capitalized with a high level of liquidity.
Even with the progress we have made we still have several opportunities to improve operating leverage to further enhance financial performance many of which are timing dependent and will benefit us in quarters to come.
In the third quarter. The most notable progress came and the continued improvement in our deposit base, our mix of earning assets and our operating efficiencies all of which led to a higher level of earnings and improved returns. Our total cost of deposits continues to decline.
As we successfully expand existing client relationships and bringing new business customers to our service platform.
Which is further shifting the deposit base toward lower cost relationship based deposits.
Our total cost of deposits it 39 basis points at the end of the third quarter.
20 basis points from the end of the prior quarter.
At the same time.
We've been able to effectively protect our average loan yield as we have relatively limited exposure to repricing within our existing portfolio given the level of fixed rate and hybrid loans, which are not scheduled to mature reprice for at least two years.
As a result, our average loan yield was relatively stable in the third quarter declining just two basis points from the prior quarter.
The lower deposit costs and relatively stable loan yields help us to offset pressure on yields in the securities portfolio and.
And we held our net interest margins steady at 3.09% for the quarter.
We also continued to see the positive impact of our actions to reduce our cost structure.
On an adjusted basis, our noninterest expense declined by more than 2 million from the prior quarter results.
Resulting in further improvement in our efficiency ratio and our ratio of non interest expense to total assets.
Positive trends, we are seeing in these key areas resulted in the strong earnings improvement this quarter.
Simply put this.
Despite the very challenging operating environment relative to 2019, we are now making more money with a smaller balance sheet the finance.
The financial performance this quarter as a result of the significant changes we have made and the type of customers that we bank. The talent. We have added at all levels of our organization and the strong execution on the strategies, we have identified to enhance franchise value.
And importantly.
Having solidified our foundation through the strategic actions, we have taken over the last 18 months. We were very pleased we were able to deliver results. They clearly demonstrate our improved earnings power.
While the operating environment created by the pandemic remains challenging.
We're seeing some encouraging signs within our markets and into financial health and behavior of our customers.
Most of our commercial borrowers that received a loan deferral everytime.
Have returned to the regular payment schedules and we.
We have had very few require a second loan deferral.
Total deferments and Forbearances decreased by 53% from the end of the second quarter.
Deferments or lower across the entire portfolio with commercial deferments decreasing from $440 million to $145 million and SFR forbearances decreasing from 164 million to $130 million.
Of these balances at September Thirtyth. The majority of the loans are on a second deferment or forbearance period. We're also beginning to see some clients utilize that liquidity. They had built up in their deposit balances during the first half of the year to fund transaction and investment opportunities.
For the most part, though we were able to offset these deposit outflows through the acquisition of new clients and the expansion of existing relationships, which kept our deposit balances relatively stable.
During the third quarter newly opened de accounts contributed more than 340 million of low cost deposits.
The deposit engine that we have built continues to produce strong results with contributions coming from all of our business units Providence.
Private and specialty banking community and business banking and commercial real estate banking.
Our lending teams are also gaining traction and we're bringing new loan relationships to help offset the planned run off in our single family portfolio.
As a result, our total loan balances increased at an annualized rate of 4% during the quarter, while the mix in the portfolio continued to move in the desired direction. That's it.
At September Thirtyth, Lowe's to commercial customers increased to 78% of our total loans up from 75% at the end of the prior quarter and 71% at this time a year ago.
As I've said in the past our goal is to show progress each quarter and keep moving the ball down the field in terms of improved operating leverage quality deposit growth and higher earnings.
We clearly did that this quarter and improved our franchise value in the process.
Now I'll hand, it over to Lynn, who will provide more color on our operational performance and then we'll have some closing remarks before opening up the line for questions.
Thank you Darren.
Great and then can you please refer to our investor deck, which can be found on our Investor Relations Web site very hearing third quarter performance.
I'll start by reviewing some of the highlights from our income statement before moving onto our balance sheet trend.
Net income available to common stockholders for the third quarter was $12.1 million or 24 cents per diluted share.
Our adjusted pretax pre provision income and $18.9 million, an increase of 2.8 million from the prior quarter.
Jared mentioned, our net income benefited from a lower than normal effective tax rate, which I will detail later.
Adjusted for an effective tax rate of 25% net income would have still been strong and an estimated $9.9 million or 20 cents per diluted share.
Although revenue declined $1 million, 1.7%.
Compared to the prior quarter.
The 1% increase in net interest income was offset by a decline in non interest income.
The decrease in non interest income is due primarily to a gain on sales securities of $2 million in the prior quarter versus none in the third quarter.
A half a million dollar increase in net interest income is due mainly to lower funding costs.
More than offset by a decline in interest income.
Our net interest margin of 3.09% with any change from the prior quarter.
A decline in our cost of funds was largely offset by our lower yield on average earning assets.
Our earning asset yields declined 20 basis points due primarily to our CLM portfolio repricing down into the current market as well as the impact is temporary excess liquidity being held in lower yielding assets.
The average yield on our $686 million Fiona portfolio decline.
And 3.22% in the second quarter to 2.16% in the third quarter.
I don't agree with library, beginning to stabilize after the significant declines earlier. This year, we anticipate limited repricing pressure on the CLM portfolio yield in the fourth quarter.
Our average ammonia declined by just two basis points in the prior quarter due in part to lower yields on Sta loans as we extended the weighted average life of our P.P.P. land. It 12 months from nine months.
The change in the estimated life is to provide additional time to account for the government delaying processing forgiveness application.
And then October 16th about 25% of our P. P. P line count right.
Today about 30% of our P.P.P. around dollar when the forgiveness process.
We are actively working with our clients to help them through that forgiveness and.
And using the opportunity to deepen relationships and identify additional lending opportunity we will.
We will continue to monitor our estimated life relative to the government's ability to manage that forgiveness process.
Garrett highlighted our period end total cost of deposits fell 20 basis points to end, the third quarter and 39 basis points.
The average total deposits for the quarter with 51 basis points or 20 basis points below our second quarter average.
Looking ahead, we have $521 million in Cds, and FHLB advances maturing over the next six months, but the.
The weighted average rate of about 1.6%, which would further reduce our cost of funds.
With our cost of funds likely to continue trending lower and considering a meaningful opportunity to deploy excess liquidity into loans.
The potential for NIM expansion in the fourth quarter.
Non interest income decreased $1.6 million to $4 million and then.
As I mentioned on our last call. The three year earn out from the sales the bank mortgage banking Division, which contributed average quarterly fee income of approximately $800000.
We did in the second quarter, which lowered our other income and India.
In addition, the prior quarter included a gain on sales securities and $2 million well. The current quarter included a gain of approximately $300000 on the sale of $17.8 million of loans held for sale we can.
We continue to drive operating efficiencies at core expenses declined to $40.7 million for the third quarter.
13% decrease from the same quarter last year, and a $2.1 million or 5% decrease from the prior quarter.
The most significant contributors to the decline from the last quarter were lower salaries and benefits expense.
Advertising expense and lower legal settlement expense.
The latter of which were included in other expenses.
Based on our actual and projected level of earnings and tax differences for 2020, we've made a change in our estimated effective tax rate for the full year to a negative tax rate ranging from approximately 10% to 15%.
As a result of the change in the effective tax rate applied in the third quarter, 13%.
We expect our fourth quarter effective tax rate to be approximately 25%.
Turning to our balance sheet.
Our total assets decreased by $32 million in the third quarter to $7.74 billion.
Chris We ended the third quarter, we reduced the portion of our excess liquidity to repay maturing brokered deposit and then.
And it's temporarily reduce the size of our balance sheet.
And as we selectively add high quality, earning assets in the future both in terms of loan and investment security.
The flexibility to add overnight and other wholesale funding if needed to strategically support our growth in earning assets.
Our gross loans held for investment increased by $50 million during the third quarter as growth in seeing high theory, and multifamily loans more than offset ongoing run off of our legacy single family residential portfolio.
The Investor presentation includes updated details on our loan portfolio.
Portfolio continues to be largely weighted towards real estate, which are supported by high quality collateral and underwritten with strong debt service coverage and low loan to value.
We continue to closely monitor credits in all sectors within our portfolio and varied.
Very limited exposure to the sector that had been most impacted by the pandemic.
Deposits were relatively flat at 6 billion at quarter end, but our.
But our mix and cost continues to improve as a result of our very focused initiative.
Yeah activity included a $90 million a decrease in broker deposits offset by a $59 million increase in noninterest bearing deposit and a $26 million increase in other interest bearing deposit.
Noninterest bearing deposits represented 24.1% of our total deposits at quarter end up.
Up from 23% at the end of the last quarter.
Man deposits non interest bearing cost low cost interest checking.
Increased by 8% from the prior quarter, representing our fifth consecutive quarter of D.A. grows a goal.
My goal, we remain very focused on to drive franchise value.
Over the past year demand deposits increased to 68% of total deposits up.
Up from 45%, reflecting the significant improvements we have made in our deposit base there.
This increase combined with the lower rate environment, and our proactive effort to reduce deposit costs and bring in new relationships.
Drove our all in average cost of deposit down from 148 basis points, a year ago to 51 basis points achieved in this quarter.
The securities portfolio increased $70 million to $1.25 billion, driven mostly by security purchases, a $48.5 million and lower net unrealized losses of $23.9 million.
We ended the quarter with a slight net unrealized gain of $1.8 million.
The composition of our portfolio at the end of the quarter was 88% in AAA and Beverly rated securities and the remaining 12% and Triple B corporate security.
The majority of the Triple B rated securities our subordinated bank that investment.
For the second consecutive quarter tighter credit spreads reduced the unrealized loss in our Seattle portfolio.
Improvement in pricing this quarter at a 25 cents to our tangible book value per share relative to the prior quarter.
As the economy stabilizes and the ceiling spreads continue to narrow the improvement will contribute directly to our tangible book value.
Next a few comments on asset quality.
Credit quality overall continued to show resiliency in spite of the challenges created by the pandemic we're.
We are pleased that the trends in Ireland deferrals, and Jared highlighted earlier link.
Delinquent loans decreased $12.2 million in the third quarter to $83 million or 1.46% of total loans at September thirtyth.
Nonperforming loans decreased $5.8 million to $66.9 million as of September Thirtyth 2020.
However, 31.5 million or 47% of this balance represented loans that are in current payment data, but our classified nonperforming for other reasons.
$5.8 million a decrease in net number and included $10.2 million a tournament since last quarter I stepped by $4.4 million of new non accrual loan.
The quarter end balance includes three large loan relationships totaling $34.9 million.
52% of our total nonperforming loans.
He's consists goes $116.1 million or legacy shared national credits and.
$9.1 million single family residential mortgage loans with a loan to value ratio of 58%.
$9.6 million legacy relationship well secured by commercial real estate and single family residential properties with an average loan to value ratio at 51%.
Aside from that it's three relationships nonperforming single family residential loans totaled $17.7 million and the remaining nonperforming loans totaling $14.3 million.
Based on our current discussions we believe it is likely a resolution will be reached during the fourth quarter on our largest nonperforming loan.
$18.1 million shared national credits without any additional reserve requirement on thing.
All things being equal it could put us in a good position to once again show improved asset quality at the end of the year.
Let me turn to our provision for the quarter briefly.
As we've discussed in the past our AC on methodology uses a nationally recognized third party model that includes many assumptions based on our historical impaired loss data, our current loan portfolio and economic forecasts.
Economic forecast published by our motto provider, which include numerous times and have improved modestly since the second quarter.
Accordingly, the forecast component of our E mail methodology does not drive additional provision expense in the third quarter.
Yeah.
Combined with the improved asset quality metrics and modest loan growth, resulting in our third quarter provision for credit losses, being just $1.1 million.
Following the provision expense recorded in the third quarter, our total allowance for credit losses totaled $94.1 million, which represents an allowance to total loans coverage ratio of 1.66%.
Excluding the P.P. loans, which have a 100% government guarantee CAC our coverage ratio was 1.74% at September 30, Oh.
Well the allowance to total nonperforming loans coverage ratio was 141%.
Our capital position remains strong the common equity tier one ratio of 11.64% and has benefited from the strategic actions completed over the past several quarters we.
We will continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value, while protecting our very well capitalized position at a time when the outlook remains uncertain as we.
As we have noted in prior quarters when the environment is supportive remains an opportunity to repurchase preferred stock with the cost of over 7% with our current capital went to other vehicles, such as the issuance of lower coupon tax deductible where needed that.
At this time I will turn the presentation back over to Jeremy.
Thank you Lynn.
Looking ahead.
As long as we don't have any meaningful setbacks related to depend demick.
We are optimistic that we will be able to make additional progress our key initiatives to deliver continued improvement in financial performance.
As we mentioned on last quarter's call.
Having completed our restructuring we're now on profitable growth mode, albeit tempered due to the pandemic and a slower economic environment.
We are carefully managing credit so we'll be prepared to grow more rapidly as the economy improves but.
But we believe there are still good opportunities to be had even in this.
Even in this more cautious environment. Moreover.
Moreover, we are.
We expect to continue to make progress on improving our deposit base and managing expenses as we did in the third quarter.
And as we emerge from the current crisis in commercial loan demand returns to a more normalized level.
We expect continued growth in earning assets to drive additional operating leverage higher earnings and greater returns for shareholders.
We will likely continue to see significant run off in our single family portfolio.
Our loan pipeline is steadily building and as previously communicated we expect the balance sheet in terms of loans and investments to end the year more or less flat with a year end 2019.
Looking at other areas of our balance sheet. We believe we have other levers that we can eventually pull that will positively impact our financial performance and create additional value for our shareholders.
Views that will reprice preferred stock that we may redeem and see a little values. We expect to continue to return to a more stabilized level to positively impacting our tangible book value per share.
Expand a bit more on these opportunities as Lynn mentioned, we have significant amount of Cds maturing over the next six months.
As always our goal is to replace these deposits with lower cost de Dios.
But even if we replace them with Cds, we're issuing at current rates, we dropped the cost of these deposits by at least 100 basis points.
We expect to optimize our capital.
Then permissible we expect to take advantage of the opportunity to redeem preferred stock.
Subject to regulatory considerations initiating a stock repurchase program will certainly be on the table for discussion as well, particularly as our common stock continues to trade at a level that we believe would be good investment for our company.
As we approach the end of 2020, we are very excited about what we've been able to achieve this year and the dramatic improvement we have made and the quality of our franchise.
We are effectively managing through an unprecedented pandemic.
And have maintained good credit quality and capital strength, while continuing to provide an exceptional level of service to our customers during a challenging time.
We've streamlined our operations and reduced expenses, while continuing to invest in the right areas in terms of technology and talent.
Help us build the foundation and culture of a deposit focused institution.
You're clearly seeing the results of our efforts and the quality and quantity of new client relationships that we're bringing into the bank on a daily basis.
Well the ongoing pandemic creates a level of near term it's uncertainty we built.
We believe that we are very well positioned to generate earning asset growth expand our net interest margin realize additional operating leverage and deliver a higher level of earnings and returns for our shareholders as the economy strengthens.
We have done so notwithstanding the environment and an improved economy will only accelerate that progress.
I want to thank our banc of California colleagues for their tremendous effort and tireless dedication during these challenging times.
They give california has become the standout bank in our communities thanks to their hard work and execution.
They give California is the go to relationship focused business bank in our markets.
Our team is proving day in and day out to both existing and prospective clients that banc of California has the people products and services to deliver an exceptional banking experience.
Thank you for listening today.
I hope that you and your families are safe and healthy and I 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 the question and answer session.
Lastly question you need press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys if.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Tim or was it learn of Wells Fargo. Please go ahead.
Hi, good morning.
Morning.
Maybe starting a starting off where Jared left off and looking at some of the remaining opportunities you guys have done a good job in checking off a lot of the boxes that you outline on slide four looking at.
Looking at the two remaining you know green marks there the redemption of the preferred stock we could we could start there.
Is the conversation now just what's the best option to replace it with or is there still a scenario on the table, where you choose not to redeem that and keep that as part of the capital stack.
Well good morning, it's nice nice to.
Nice to speak with you, we still intend to redeem our preferred stock and it will likely find a way to do it issuing sub debt.
We do need regulatory approval to redeem preferred stock and so any action that we take is subject to regulatory approval.
Ah the fed has made it clear that thanks.
They have my understanding is based on everything that I've read is that the fed is.
No not not looking right now at allowing a whole bunch of banks to redeem capital.
And so we just are waiting for the right time, and when we think it's appropriate will approach them and.
So we think that's something that we're likely to be able to do down the road.
Okay would you take advantage of the attractiveness of the market now in issuing subdebt, maybe in advance of the redemption or would that be more of a concurrent <unk> I think we would look at that I mean, it's really hard to time it perfectly and so you know market conditions being what they are we're constantly looking at what would be a good option.
But I think would be too hard to time it to try to do both.
Do both at the same time, so we're going to be opportunistic.
Okay, Great and then switching over to the CFO portfolio with the reduction in unrealized losses that reduction of $23 million was that entirely on the Cibolo book and I guess whats the remaining negative mark on that portfolio right now.
When you want to address that.
Sure.
So the improvement in the unrealized net loss in the portfolio that moved to a slight gain I was not entirely due to the CLL portfolio and there has been improvement generally in the <unk> and.
All the security, but the majority was related to CLS portfolio and it has the remaining net unrealized loss about $17 million.
Okay, and that's pre tax so after tax is little bit lower.
Okay. Thanks, So maybe looking out a little bit longer when more of that loss is recovered can you just talk us through the transition out of that's yellow book is that really as those things mature or are they just kind of every place or something else is a larger kind of broad sale on the table or is that going to be too detrimental.
The balance sheet levels, where it is likely going to be piecemealed off.
Sure. So I think generally we recognize that we're working on a pretty low interest rate environment with a flat yield curve. They extend that these are able to recover to their.
Carrying cost I think we would look to what other opportunities are already transitioned out and to where the concentration risk related to the sale loans on our balance sheet, that's something that we've talked about it is the goal.
But I.
I think from a transition standpoint, we would be needing to look at what other alternative investments that would be available to us I'm now kind of on a risk adjusted basis, and what kind of returns they forget.
I think we'll be opportunistic more as well.
Okay, Great and then one last one if I could I'm just looking at the remaining level of deferrals.
It seems like roughly half of that balance isn't is in resi I know you made the comment that majority of what's remaining is second deferrals as are the resi deferrals also on the second request or is that still a portion six months that was originally granted they're there they're either in the second request.
They're in the second deferral or they're in the process of being reviewed.
So far as you know we we.
He is managed by a third party it serviced by third party and you know, it's a legacy kind of you know not core portfolio for us.
And the consumer rules being what they are it's it's you got to manage it obviously in a in a very different way.
We're focused on it though I mean, we're constantly having conversations with our service or to to get our arms around the portfolio I think one thing that's really clear about the single family loans is.
Unlike some other deferments you know.
You can't expect people after three months six months whatever the initial deferment period was just to come up with a huge lump sum of money and make it make you know a whole bunch of payments and so if they were out of a job, but they don't have the money.
Worth or they were on furlough, they don't have the money and.
And so it will as it relates to single family.
Generally what happens is you take the missed payments and you put them at the end of alone in you're going to get paid on and that had a refiner sale and.
And then they start making their new payments you know they start to kind of the new period going forward current and so.
And so.
We manage that a little bit differently than than the rest of the portfolio, but I don't think there's a lot of loss content. There. We're working really closely with our servicer, but yes to answer. Your question is most of those loans are either in second to from it. We're in the process being reviewed for a second there from it there is a kind of a a lag it just depends on when it started but most of them are or move into second.
Bob take any any comments there.
[noise] no jerre and I think that's a very accurate representation, we have moved through most of the first deferral buckets, because as Gerald said they didn't all come on at once and most of them have have moved.
Have moved either into a second or under consideration.
Thanks, Bob.
Okay, that's great color nice quarter I'll step back there. Thanks, yeah. Thanks tumor.
The next question comes from Matthew Clark of Piper Sandler. Please go ahead.
Hey, good morning.
Good morning, Matthew.
Sorry, if I missed it jockeying between another <unk> no two calls here, but the PPP related.
Income this quarter in net interest income do you happen to have that number off hand, so we can isolate a.
Core NIM.
Sure Lindsay, Joe that but yes, sure and believe it or not.
Point $1 million as the themes that came through interest income this quarter.
And that positively impacted our net interest margin a 11 basis points.
Okay got it.
Got it.
And then.
On the.
On the pipeline both loans and deposits can you give us an update there where are you seeing new business opportunities on the commercial side.
And again, both on the deposit side as well sure.
Sure. So look we had a great quarter and the pipelines are building as we thought that they would.
We're seeing a lot of opportunities continue to see opportunities in multifamily on the bridge side and then on permanent financing and we're taking opportunities there.
We're seeing it throughout all of our business units in terms of good commercial opportunities for lending lines of credit and the term loans or even some SPD opportunities as well, it's it's pretty balanced you know opportunities in health care some opportunities in entertainment as things get back to normal. So we're looking at.
Across all of our business units to show production, we still believe that we're going to be able to end to end the quarter at a place where the production out pieces run off in terms of Outstandings. So that we and you know flat or slightly up from the the end of last year and that will provide a really good platform, especially with a lower expense base.
Two.
You know deliver really solid earnings next year, and you know keep improving quarter over quarter on the deposit side. We're seeing the same thing even though we're starting to see some use of liquidity as we mentioned, we're still we're bringing a lot of new relationships and new deposits and so while the the balances from our existing client base are going to fluctuate.
That's being offset by new relationships that were bringing in and deposit flows continue to be strong you know I expect that this.
I expect that this quarter will show positive GDP growth as we have for the last five quarters, which were really really proud of everybody. In this company is very focused on delivering very very high quality services, and bringing new relationships and in terms of loans and deposits and making sure that we have the most that we can from our existing clients and you know we're <unk> we're actively.
[music].
Managing that as well as were managing you know looking very closely at credit I want to go back to the NIM for a second.
Got you you know I I think the NIM you eat it got hurt a little bit by this feel those repricing.
But we are bringing on loans at good yields and you know it's.
It's hard to know exactly where it's going to end up because I would say that in this environment. Because we're focused on quality, we're likely to go after the highest quality loans, which may mean that we're going to protect which may have a lower yield.
I just think given the visibility down the road in terms of the economy and credit if we're going to bring on loans or we're gonna grow we want to do the safest type of loans right now that's not to say that we won't take you know some loans at higher risk.
We're but we're very selective about it and so I do see the NIM holding up I think our deposit cost continue to drive down I was pleased with how well our loan yields on originations actually hold up in the quarter, but it's hard to see kind of where things are going but as of now we believe that our NIM is going to hold and maybe expand a little bit. We do we still have so much room to go on the deposit side.
<unk>.
Great and then along those lines did you happen to have the weighted average rate on new production this quarter.
Yeah sure what that is.
[noise] production yield [noise].
For this quarter was around 4%.
Weighted average.
You know last quarter, its hard to hard to see because it was lower because of all the PPP loans that came on.
And I don't have it broken out without that in front of me, but it was around 4%, which you know blended across everything that were doing I thought was pretty good.
Yes, Okay and then just on the I know you guys have been cutting costs for quite a while now that run rate.
Dropped even further here just under 41 million adjusted.
Overhead ratio around 2.1% I assume we're kind of hitting a bottom here but.
Knowing a lot of other banks are announcing all these cost initiatives. Just curious if you ever be if you still think there might be some you know incremental opportunities.
Lynne you want to.
Yeah sure something here I think you.
Where did it correctly I think there is the opportunity or incremental opportunities I think we continue to look at expenses and you know we find them and look for opportunities.
Whether it's operating efficiencies are leveraging technology haven't said a with our current object and then operation So I.
I think there's probably some small opportunities that were probably getting to where you know we need to have an expense base is that when things. Yeah. We turned to maybe more normal operations that will be able to kind of leverage I'm not very good when things return back to normal.
I think we're at a pretty good pretty good spot right now there will find incremental stuff, where we're at we're constantly looking are constantly evaluating everything as I've noted on the call I shared with our team and our team is constantly looking at just because we've done something is certainly in the past doesn't mean, we should be doing it that way in the future and you know it was that is that the most efficient way to do things. So.
So we're constantly looking and we but we got to layer on more earning assets on top of our existing base.
To keep growing earnings and you know I'm confident we can do that.
Okay. Thank you.
Thanks Matthew.
Question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks, Good morning folks morning, Hey, you know real strong quarter I was curious about as you're thinking about 2021, you know weve talked about kind of the journey to what percent are away as sort of an interim term target or goal.
81 basis points. This quarter, I think you know, but with a lower tax rate HM pretty low provisions. So just kind of as you're thinking about 2021 is a path.
Our way level so.
Still in front of you do you think for next year.
I think I think we do you know.
You know, it's hard to know which quarter, we're gonna hidden but everything.
Everything that I'm seeing suggest that we will it's really about earning assets.
Putting them on Theres theres, a tremendous amount of.
Opportunity, we have on the expense side still in terms of.
Deposit cost, we have 500 million plus of.
Of Cds that are maturing.
Where we know we're going to be able to take out 100 basis points.
We have some other you know mature bar Oh, we have some other deposits that are kind of time based with some larger relationships that are going to reprice.
Talked about the preferred stock and incremental benefit that can give us.
I think there's there's really a lot of leverage on our <unk> and still in the numbers on the expense side and then you know in terms of in terms of putting on converting assets I believe that our teams can do that.
And so I see.
Got it. This is you know achieving a one hour away.
On a normalized basis is something that we'll be able to do next year or two.
Hard to know exactly but we're certainly pushing really hard to try to get there.
The other thing is I'm just in terms of the pure fundamentals you know our tangible book value is just going to continue to climb we still are finding plenty of opportunity things that were.
Sort of missed in the past that but that will be additive to our tangible book value not only are they feel that was going to continue to reprice as the economy improves and we're obviously, making money that's going straight to test the book value, but there's there's there's some legacy stuff that were our teams have done an exceptional job collecting on whether they're you know no reimbursements that the insurance company notice that we didn't get.
And things like that but they've gone back and tried to find where.
Whether its litigation that we finally are resolving were where the plaintiff where we're.
We're we're going to get some money back for things that maybe how were charged off in the past. So all of those things are going to contribute to tangible book value, which we are going to contribute to a higher share price. In addition to the fact that we're gonna be expanding earnings so I'm optimistic about both of those things.
Great. Thanks for the thoughts there and then just to clarify I think you said that you expect crude or your end loans to be flat year over year is up.
<unk>, Yeah, I think we you think about earning quality, earning assets so in terms of loans and investments because.
Because we you know we bought a bunch of bank sub debt and which was a good replacement for.
In our investment portfolio earlier in the year I think in terms of the combination of loans and you know investments should be flat to up at the end of the year relative to the year last year the variable there being cash.
Which you know at different points, we run with higher or lower amounts of cash.
Yeah.
Okay. So it sounds like though actually if I was to isolate loans because of where we are right now versus 19 loans will be lower but the overall combination of loans and investments you are saying.
<unk> no loan loans might lets see a fourth quarter of 19, let me they're garland.
Let me make one comment you know I think the I think you know we have some visibility into where we think there are growth opportunities. The one thing that yeah. The P.P. Peatlands may only have about $260 million. It does.
On our balance sheet at the end of the third quarter.
We believe that forgiveness process, maybe starting so we expect that there would be some.
It would be some decrease actually in that portfolio I think that.
May somewhat and drive that overall alone.
Balance.
In addition to [noise].
Hi, there and growth in our loan portfolio. So you know to pinpoint that number I think there is you know that's a little bit beyond our control and as I mentioned in my comments I'm. The only dependent on governmental agency that help move that to the process.
We're most focused on obviously, putting on high quality loans, and then you know where where we have.
The ability putting on high quality investments and between the two of those earning enough to continue this company, earning more and more each quarter and so if we.
If we find really high quality investments that have a great duration and the proper duration and a great yield and obviously, we're going to put those on as well, but we want to get this company to the right place from earning asset perspective to make sure that we keep learning.
Keep running well going forward.
Okay. Thank you.
Yep.
The next question comes from David Feaster of Raymond James. Please go ahead.
Oh, good morning, everybody Werent David.
Oh I just wanted to kind of follow up on that that earning asset a topic. You know you guys have done a great job on the growth front first of all I guess, how much of that you don't see it I wouldn't was up solidly this quarter just curious how much of that was warehouse in what you're seeing on there and then I guess just as we look out to.
2021, <unk> as the run off of single family kind of abate somewhat and you know you continue to beat.
Be that go to business banking you alluded do you think about loan growth as we as we head into next year.
Well.
Let me take the second part first I don't think we broke out what's warehouse versus other parts to see and I. So I don't think we have that are publicly disclose stuff, but like I said before.
Like I said before I it was pretty balanced I mean, we have we had production across all of our business units.
And we feel we feel good about it [noise].
Hard to predict in terms of next year, if you're trying to figure out kind of how the balance sheet is gonna grow I mean.
It's really economy dependent Theres no reason, why we would be growing slower than the economy, and certainly not slower than our peers.
If the economy holds up in this environment specifically.
We're taking a relatively conservative approach and trying to go after the highest quality credits because we feel that we need the visibility to make good decisions not knowing how long. This pandemic is going to last [noise].
And so we're sticking to what we know and doing it well and trying to lend to the strong as borrowers that's not to say we're looking at it we aren't looking at everything we are and you know, but I think our pipelines are building I'm really have a lot of confidence in our teams.
But if that have come here there, they're working they're working really hard to bring in new relationships and mine existing relationship. So I.
You know David I don't have a number that I'm throwing out there in terms of production for next year.
But I know that we need to put on the highest level.
Level of earning assets that we can on our existing expense base to March toward in the past you know a one hour away and.
And so if assuming the economy gets better.
Provisioning returns to normal levels, you know I think that's what's going to happen.
Okay, I'm, sorry, I'm told me and I would just add one a one comment I think in the investor materials Ah, we do provide some additional detail related to our theater <unk> portfolio.
And so.
I think that's in the second quarter in the third quarter.
And you can see I think that finance and insurance.
They're within our Cnine portfolio. So the majority of the C. and I agree with his Thunder in the finance and insurance I'm part of our portfolio, which includes.
On our warehouse credit line.
Got it okay that makes Oh, and I would say regarding warehouse you know we haven't built our company around it and we've said that we're going to make today.
Appropriate portion of our growth, but I. It's you know, it's very favorable from a seasonal perspective in that it's very short duration.
Yeah, Weve never had a loss in that portfolio and our team is very experienced and.
I'd say that we get above average yields because we focus on mid sized mortgage bankers as opposed to the largest folks and we have several hundred million a very low cost deposits. You know below 10 basis points that comes out of that portfolio. It's because we're lending institutions that have the deposit relationships with us. So it's it's very balanced, but we but we keep it within a.
A size range, so that doesn't become kind of you know take.
Take over our portfolio.
Okay.
And then just kind of following up on that a bit I mean, you.
The path to margin expansion pretty clear right I mean grew deposit repricing, you're getting good yields and yellows aren't a headwind I guess as as you think forward kind of what do you think the margin expands back to like how what's your car.
Target for where we should get the that name back to you.
Based on the earning power of your franchise. It's yeah. It's a good question. So the way that we're trying to set the company up right now is to feel somewhat liability sensitive.
Because we're obviously you know Memphis.
Emphasizing the ability to drive down our deposit cost, but because we're putting on noninterest bearing deposits and low cost checking.
From businesses that really neither have really much expectation of yield because they're very service focused.
That that deposit base will not reprice when rates move back up certainly.
Certainly not as fast as interest rates are going to move so we're and we're putting floors on all the loans that were originating today.
And so we expect to participate heavily in a rising rate environment and.
And we will be able to take opportunity more. So then you don't have the upside and the downside. So in terms of where our margin would would go to it's a function of how quickly rates move.
But anyway, you know I don't know why our margin wouldn't <unk>. So I think we'd have to play with some scenarios David of where interest rates relative today.
When I don't know if you have any comments on that.
No I think that's and that's a good summary, and I think it would be difficult and you don't pay a number I think you know we're working with the same interest rate environment and would take advantage of the opportunities to improve the mix and cost of deposits through our business initiatives and then.
Thank you Karen mentioned I think that the loan pricing in the loan structure is important.
And then you know obviously in a rising rate environment, we'd expect gets stronger earnings growth, which would help the NIM expansion as well, but all things being equal I think Ah where they're still in a good position to have some improvement there.
Oh, that's for sure. So okay. That's a I appreciate that and then just last one so on the 89 million you guys have done a great job on the deferral from a of the 89 million in CR, even deferrals that are remaining just curious whether there's any concentrations in there was there any you know any.
Trends that you've noticed in there and then I guess a you asked me second deferrals expire how do you think about a potential third round for those those borrowers that might need additional relief or would you rather just kind of put it on non accrual or TDR at that point it and go ahead and work it out.
Well, let me let me address that first and then open up the bottom line.
So when we look at putting alone on deferral.
And we're looking at second to focus we are actively looking at you know whether or not that loan needs to be risk rate changed as well. So it's not a blind okay. It's on deferral, let's leave everything is is we're we're actively looking at the loans.
And making sure that we're aware of any loss content to the extent, we can see it and making sure that our risk ratings are appropriate.
So it's not just kind of a you know, let's let's check it let's look at it again in another couple of months that being said you know, we're we're also giving our clients if they each have a path and.
And you know were fundamentally a secured recourse lender. So we're looking at our borrowers looking at their statements. We're looking at what collateral they have if they have a path to recovery and fundamentally it's been the pandemic that has kept them where they are then you know we're working with them and I don't think there's any reason we shouldn't.
We do you know the rules are there for a reason and we're doing everything we can to.
To help our borrowers and this time, while still holding their you know holding holding the ground and making sure that we're not being taken advantage of in it that we're working through things more as quickly as possible as quickly as possible.
In terms of we've been really giving three month deferments, not not and kind of monitor. It every three months. So we're not doing longer fronts I'll, let Bob answer if there's any that I'm not aware of but generally we have been doing two or three month deferrals Bobby.
Bob any any color there on on order from a strategy.
I don't talk here, you're absolutely area, yet yeah, you're absolutely right that three month is is our is our philosophy and our practice and that gives us an opportunity to as you indicated examined the borrowers and their fundamentals and the phrase that used I think is is the most appropriate we're looking.
And then to determine a path to recovery.
Yeah.
But David to answer your question, if we get to a.
A a need for a third it's going to be only considered yes, we do continue to see improvement and a movement down that path to recovery otherwise if it doesn't look like we're going to get there it's better to deal with that problem right away.
And then and then on the CRT you know I do I do look at retail on page 20 of our deck. We have a breakout of you know what's in what's in CRM and where.
Where we have concentration and you know whatever resources, whether it's office retail multifamily hospitality, we have very low exposure as you know to the high risk area. So you know retail scenario right.
I have a lot of focus our top 25 retail borrowers representing about 68% of.
Of our retail exposure as I.
As I mentioned last quarter, we we're looking very carefully at that group. We went through every relationship and marked at red yellow and green.
You know we have far more in the green category than we did last quarter and so the migration of that group is moving along as we hoped it would and so I feel good about it most of it is pharmacy and grocery anchored shopping centers that are you know with well healed borrowers and so were monitoring that very closely.
But that's that's really kind of the CRB concentration that I'm I would be most concerned about our office is holding up and as you know we have very little hospitality.
Okay. Thank you very much yeah I know.
Yeah, no problem too.
Yeah, and if you have a question. Please press Star then one.
Hi, Touchtone phone.
The next question comes from Steve Moss of B. Riley. Please go ahead.
Hi, Good morning, 40, Steve most of my questions have been Jared Mr. Christian than asked and answered here.
The small one just as we think about the balance sheet mix longer term and obviously you want to to grow loans I was just kind of curious how do we think about how large the securities portfolio should be relative to earning assets.
Lynn what's the target that we've talked about there.
So yeah, I mean, I mean, you talked about that for a moment you know there's been a lot a lot of liquidity in the marketplace. So I think that generally speaking you know cash and securities and it had probably a larger percentage then.
You know historically so.
I think as liquidity is to normalize I mean look for securities and cash taxes going to trend back down to between call it 10% to 15% versus being about 15% right.
Given that a portion of our portfolio does have a concentration that cielo.
And then we did invest in the [noise].
Triple B rated corporate debt I isn't that portfolio as well I think it would probably be closer to the 15% versus you know driving down lower considers our on balance sheet liquidity.
Okay sounds great.
I'm sorry go ahead.
No go ahead.
Okay, and I guess, just maybe one just on you know the.
The provision here and how do we how should we think about expense going forward, obviously, the economy seems to be heading in the right way.
So should we just think about you know provision perhaps in future periods are relatively matching charge offs or kind of curious is that any thoughts you may have there.
Sure.
You know I think I went back to get option I see so I I wish it was just as simple as that and you know you have a charge off and then you get to fill the bucket again, you know we are going through a robust process, taking a look at a portfolio the macro act.
Macroeconomic variables that drive on the models you know what does the forecast look like well Fortunately for us.
Yeah I know.
Friend that all sounded positive economic forecasts and we did have the modest loan growth, which we didn't factor in Q and is reflected in the provision, but that's it for me.
There's also a function of the mix as the loan portfolio I, sometimes bad bad loan product has higher if you all coverage ratios than others. So if I was to look forward and you know as the economy improves I think we do have to remain cautious in the fab.
That we all recognize that can damage from the pandemic may have been a not realized quite yet and may be pushed into 2021. So.
Yeah.
To the extent that were participating in and loan growth I would expect that there would be some provision and then we would have to address you know what the charge offs are.
But even in the absence of charge offs I think we'd still you know could expect some expenses me at ground zero down.
Yeah, I think everybody is getting comfortable with Cecil and you know, it's it's a little bit.
Models are still getting tweaked.
Zandi tends to have a lot of power. These days it seems if you're using Moody's.
I think that you know, depending because a huge variable here and you know when people get back to work.
We are.
You know not back to work in Los Angeles in terms of people being in an office environment. There are parts of Orange County, which are there are parts of San Diego, but like fundamentally is still you know working remotely.
And that's going to happen through the year, most likely and you know a lot of schools aren't back yet.
And I think that the longer this last without a major stimulus bill I think the economy is probably going to suffer yeah.
And you know, we're obviously would get hit like everybody else I think based on the makeup of our portfolio.
We're going to get hit pretty late because were 67% secured by residential real estate.
He has held up very very well in this pandemic and other other.
Other difficult times, but there'll be a lot a lot of stuff that gets hit before us, but if it last long enough. We will to hopefully that's not the case and hopefully you know more stimulus will be coming here. If we don't have a vaccine.
All right. Thank you very much I appreciate that.
Thank you Steve.
Thank you ladies and gentlemen, this does conclude today's Q any section and public conference.
You may disconnect your lines at this time and thank you for your participation.
[noise].