Q4 2020 Banc of California Inc Earnings Call
Hello, and welcome to the Banc of California fourth quarter earnings Conference call.
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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. The reconciliation for these and additional required information is available and the earnings press release the.
For reference presentation is available on the company's Investor Relations website.
Before we begin we would like to direct everyone to the company's Safe Harbor statement on forward looking statements included in both of the earnings release and the earnings presentation.
I would like to now turn the conference call over to Mr. Jared Wolff Banc of California, President and Chief Executive Officer. Please go ahead.
Good morning, and welcome to Banc of California's fourth quarter earnings call.
Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results.
We ended 2020 with an exceptional quarter, one that demonstrates the potential of the franchise that we're building.
We continued to execute well on all of the key initiatives that have led to our improved financial performance in recent quarters.
And then the fourth quarter, we were able to add and the loan and earning asset growth and enhanced our profitability.
As a result, we finished the year with a return on average assets north of 1.1 per cent for the fourth quarter.
On our last couple of earnings calls, we indicated that we expected to end of year with a larger balance sheet and the first half of the year to drive greater profitability.
Our fourth quarter results reflected these efforts as we realize strong operating leverage and a significant increase and our pretax pre provision income net income and earnings per share.
Looking back on 'twenty and 'twenty.
We are proud that we delivered on the key objectives that we laid out for the year.
We dramatically improved our deposit mix and reduced our cost of deposits.
We maintained good stability and our net interest margin despite the dramatic decline in interest rates.
We reduced expenses and increased our operating leverage we shifted our loan portfolio more towards business related relationship loans.
We ramped up commercial loan production and the second half of the year to replace the run off of the single family loan portfolio and finished the year with a balance sheet. It was just about even with the end of the prior year.
We manage credit quality and improved our overall credit quality ratios. Despite the pandemic no less while still building up reserves.
And we had several large wins that will accelerate our earnings growth going forward, including <unk>.
And the L. A F C contract and a way that eliminates future payments.
Issuing sub debt at attractive pricing setting the table for preferred redemption that we hope to complete this year.
Restructuring expenses of F. H, all day long term borrowings.
And obtaining sizable legal and insurance recoveries on old matters that contributed meaningfully to tangible book value.
The result of these accomplishments, we made significantly more money on a core basis, and 'twenty and 'twenty than we did in 2019 well.
While operating with a smaller balance sheet for most of the year.
And we were able to do it while dealing with the challenges presented by the COVID-19 pandemic and.
And operating at a low rate low growth environment.
We closely evaluate our performance relative to other community and regional banks.
And in many of these key areas, most notably reducing deposit costs holding of our loan yield and improving our net interest margin.
As laid out and our investor presentation of our relative performance since the beginning of 2019 has been among the best and the entire country.
These results speak to our ability to execute on the strategies, we have put in place to enhance the value of our franchise.
We are consistently adding new commercial banking relationships with clients, who are choosing banc of California, because the value of our level of service and execution not necessarily based on our pricing of loans and deposits.
Our ability to effectively identify and cultivate these types of customer relationships.
And the value proposition, we can offer them.
It has been critical to our success and adding low cost transaction deposits and originating loans with attractive risk adjusted yields that support our net interest margin.
We have also continued to optimize our operations to reduce expenses and enhance efficiencies with investment and technology to improve and provide exceptional banking experiences for our customers.
And a year when the ability to serve clients digitally became even more critical to the financial services industry.
We were able to leverage our technology platform effectively to not only drive increased efficiencies, but also to deliver more convenience and superior service to our customers at critical moments like the rollout of the PPP program.
It was a year of incredible progress and I want to extend my gratitude to our entire organization for their dedication and hard work.
I believe that together, we have truly made banc of California, the Goto relationship focused business bank and southern California.
And the positive reputation we have built is yielding more referrals every day and giving us more opportunities to add the type of high quality deposits and lending relationships that will further enhance our growth and profitability and the future.
Specific to our fourth quarter performance.
We generated net income available to common shareholders of $17 7 million or <unk> 35 cents per diluted share and $29 6 million and pretax pre provision income.
As I mentioned one of the initiatives, we had in 'twenty and 'twenty was pursuing insurance recoveries for historical legal matters, where we might not have received sufficient reimbursement from the insurance company.
And where we determined we should've seen of recovery through litigation.
We successfully recovered approximately $2 $8 million and the fourth quarter, which added to our earnings and growth and tangible book value during the quarter.
We continue to work on behalf of shareholders to pursue recoveries and other matters that the timing of resolution of such of matters of course remains uncertain.
Excluding these recoveries, we still had significant growth and earnings which was driven by a number of factors most notably.
We continued to drive down our funding costs with our total cost of deposits declining 15 basis points to 36 basis points for the fourth quarter and ending the year with a spot rate of 29 basis points.
The lower deposit cost was primarily driven by the continued improvement and our deposit mix.
We our sixth consecutive quarter of DDA growth with strong inflows coming from both our traditional banking groups and our specialty deposit areas the growth and DDA enabled us to reduce our balances of higher cost time deposits and other wholesale funding.
The reduction in deposit costs combined with good stability and our earning asset yields helped drive of 29 basis point increase and our net interest margin to 3.38 per cent.
We continued to maintain good expense control and our core expenses decreased 9% from the same quarter a year ago.
And we saw positive trends across our asset quality metrics with a 45 per cent reduction there and are nonperforming loans to $36 6 million.
And a 29 per cent decrease and loan deferrals to $202 million is our credit team has been very successful and resolving problem loans at a pace that exceeds the amount of inflow.
During the quarter, we resolved two of our largest nonperforming loans with no additional reserves required for either alone.
Given the positive trends and asset quality and a substantial allowance that we have built.
We had just a small provision requirement and the fourth quarter.
As I mentioned earlier.
The most significant difference and our fourth quarter performance relative to earlier in 'twenty and 'twenty was our level of earning asset growth.
We added $773 million of newly originated loans and the fourth quarter, which was up 39% from the third quarter and which resulted in net loan growth of $220 million. As we are still seeing considerable run off and sort of legacy areas of the portfolio.
Loan production is coming from both new relationships to the bank as well as from expansion of existing relationships.
Due to the good production, we had and the fourth quarter and our targeted areas loans to commercial customers increased to 79% of our total loans up from 78 per cent at the end of the prior quarter and 72% at the end of 2019.
Well, many borrowers remain cautious and the environment is extremely competitive.
We are still seeing good high quality opportunities throughout our markets and.
And our banking teams are doing an outstanding job of filling our pipeline and closing relationship loans.
The pipeline remains healthy as we begin the new year and the volume of opportunities that our bankers are generating allows us to select credits with attractive risk adjusted yields and achieve the type of profitable growth that we're targeting.
As a result of our pricing discipline, we were able to maintain good stability and our average loan yield throughout 'twenty and 'twenty, which ultimately helps to support significant increase we saw and our net interest margin at the end of the year.
Overall.
We are pleased that despite a difficult environment, where we were able to deliver on our key objectives for 'twenty and 'twenty.
And deliver strong profitability that we will continue to build upon and 'twenty 'twenty one.
Now I'll hand, it over to Lynn, who will provide more color on our operational performance and then I'll have some closing remarks before opening up the line for questions.
Lynn.
Thanks Jared.
First as mentioned please refer to our investor deck, which can be found on our Investor Relations website as I review, our fourth quarter performance.
And we will start by reviewing some of the highlights of our income statement before moving onto our balance sheet trends and.
And otherwise indicated on prior period comparisons are with the third quarter of 'twenty and 'twenty.
Net income available to common stockholders for the fourth quarter was $17 $7 million for 35 cents per diluted share our adjusted pretax pre provision income of $24 $5 million and increase of $5 $6 million from the prior quarter.
This resulted in a return on average assets of 1.11 per cent and an adjusted return on average assets of 92 basis points.
Total revenue increased $8 $7 million and $14 six per cent compared to the prior quarter and net interest income increased by $5 $7 million and.
Noninterest income rose by $3 million.
Net interest income growth reflected the ongoing benefit from lower funding costs combined with the impact of a larger balance sheet.
The increase of noninterest income stemmed, mainly from higher settlements and insurance recoveries and.
Past legal matters.
You see the net interest margin of 3.38% of 29 basis points and the prior quarter due to both an increase and our overall, earning asset yield and a decline and our cost of funds.
Our cost of funds declined by 12 basis point for 70 basis point, despite having two months of carrying costs associated with our $85 million subordinated debt issuance.
Our earning asset yield increased 18 basis points due to the combination of of higher total loan yield and an improvement of mix of interest, earning assets and we deployed excess liquidity into higher yielding loans.
Average yield on loans increased 12 basis points and for five 8% during the fourth quarter.
And you higher average commercial and industrial loans and higher prepayment fees from refinancing activity and accelerated accretion from P. P P loans and forgiveness and.
Jared highlighted our average total cost of deposits fell 15 basis points and 36 basis points for the fourth quarter.
We successfully lowered our cost of interest bearing deposits by 19 basis points and increased our average noninterest bearing deposits by $91 million.
We ended the year with a spot rate of 29 basis points for our all in cost of deposits.
Looking ahead, we expect our funding costs to continue to trend lower in 'twenty and 'twenty, one, albeit not as much is in 'twenty and 'twenty.
With that said, we have a few larger money market accounts and time deposits that should move down our cost of deposits once they reach the end of their agreed terms.
Over the next six months, we have $324 million of C D and and they told me advances scheduled to mature with a weighted average cost of one 3%, which should further reduce our cost of funds.
With our cost of funds are likely to continue declining and our balance sheet might lead to attain modest growth.
And the potential for further net interest margin expansion over the course of 'twenty and 'twenty one.
And the impact of P. P P related income.
Noninterest income increased $3 million to $7 million well.
Well of customer service fees increased by $455000 and processing fees for credit facilities increased by nearly $300000.
Biggest driver of our noninterest income growth and a quarter with higher settlements and insurance recoveries of $2 $4 million and several historical legal matters.
The opportunities and timing of recovery and such moneys are not predictable, but we will continue to strategically pursue them.
We continue to drive operating efficiencies as adjusted expenses of $44 million for the fourth quarter declined 9% from the same quarter last year our.
Adjusted expenses increased $3 $4 million or 8% from the prior quarter due mostly to higher incentive compensation related to our balance sheet growth and profitability.
Effective tax rate for the fourth quarter was 24 per cent compared to 13% for the third quarter and the effective tax rate for one 'twenty and 'twenty is approximately $12 five per cent.
Turning to our balance sheet and.
Total assets increased by $139 $2 million and the fourth quarter for $7 $9 billion.
And we deployed a portion of our excess liquidity into high quality commercial loans, and we continue to replace high cost deposits and brokered Cds.
Core deposits in the quarter.
As we selectively add high quality, earning assets and the future both in terms of loans and investment securities.
We continue to have flexibility to add overnight and other wholesale funding if needed to strategically support our earning asset growth.
Our gross loans held for investment increased by $220 million or three 9% during the fourth quarter and growth and CNI loans more than offset lower multifamily CRE and SBA balances.
And C&I loan growth of $501 million and the quarter was primarily due to growth and mortgage warehouse line and.
$47 million decline and SBA loans and the quarter was primarily due to the P. P. P loan forgiveness.
And as of year and about 39% of our P. P. P loan accounts, representing about 56 per cent of our remaining PPP loan dollars, where and the forgiveness process.
We are actively working with our clients to help them through the forgiveness process and using the opportunity to deepen relationships and identify additional lending opportunity.
In addition, we have already started participating in round two for PPP loans to support our existing and prospective clients.
Deposits were relatively flat at $6 $1 billion at year end, but our mix and cost continue to improve thanks to our focused initiatives.
Activity in the quarter included of $64 million decrease and brokerage C D and of $65 million decline and non brokered Cds.
These decreases were substantially offset by a $63 million increase and low cost checking and gross of $109 million and non interest bearing deposits.
Non interest bearing deposits represented 26% of our total deposits at quarter end.
And from 24% at the end of last quarter.
Demand deposits non interest bearing cost of low cost checking increased by 5% from the prior quarter.
Pending our sixth consecutive quarter of demand deposit growth of goal, we remain very focused on to drive franchise value.
Over the past year of demand deposits increased to 60% of total deposits.
And from 48%, reflecting the significant improvement we have made and our deposit base.
This increase combined with the lower interest rate environment, and our proactive efforts to reduce deposit costs and bringing new relationships drove our all in average cost of deposits down for 127 basis points from a year ago to 36 basis points achieved and the fourth quarter for.
Our securities portfolio was substantially unchanged at $1 $2 billion, however, $16 million of CLO, where calls and for the third consecutive quarter tighter credit spreads reduced the unrealized loss and our CLO portfolio to $9 $7 million.
The improvement and CLO pricing of this quarter added 11 and to our tangible book value per share relative to the prior quarter.
Our entire securities portfolio ended the quarter with a net unrealized gain of $11 million.
One of the highlights from the fourth quarter was our strong credit quality performance. We resolved a couple of our largest N P. As during the quarter, leading to the 45 per cent reduction and our non performing loan balance.
Our loan deferral number's also declined by $81 million to three per cent of total loans held for investment.
Down from 5% of at the end of the third quarter.
Delinquent loans decreased $51 $4 million and the fourth quarter to $31 $6 million for 0.54% of total loans.
Nonperforming loans decreased $33 million for $36 $6 million as of year and how.
For $17 seven and $10 for 48 per cent of this balance represented loans that are in current payment status, but our classified and nonperforming for other reasons.
The $33 million decrease is a net number and.
And included $35 $8 million of loans resolved and since the end of the last quarter offset by $5.5 million of new non accrual loans.
Let me turn to our provision for the quarter.
And as we've discussed in the past our ACL methodology uses of nationally recognized third party model that includes many of assumptions based on our historical and peer loss data, our current loan portfolio and economic forecast.
We saw less volatility and economic forecast during the second half of the year, which resulted in a lower impact on our allowance for credit losses.
This combined with the improved asset quality metrics resulted in a fourth quarter provision for credit losses of just $1 million.
Following the provision expense recorded in the fourth quarter, our total allowance for credit losses totaled $84 $2 million, which represents an allowance to total loans coverage ratio of one point for 3% or down 23 basis points from the third quarter.
This decline reflects the number of factors, including our improved asset quality metrics.
Net charge offs of this specific reserve related to our largest nonperforming loan that was resolved in the quarter.
And mix of our loans as much of our gross and the quarter occurred and our mortgage warehouse portfolio, where historical loss experience is extremely low.
And our view on how the current economic forecasts will impact our specific portfolio.
Excluding our P. P P loans and the ACL coverage ratio stood at one point for 8% of December 31st while the allowance to total nonperforming loans coverage ratio also remained healthy at 230 per cent.
Our capital position remains strong with of common equity tier one ratio of 11.19%.
And has benefited from the strategic actions completed over the past several quarters.
We will continue to be prudent and strategic with the use of our capital to maximize benefits for shareholders and to build franchise value, while protecting our very well capitalized position at a time when the outlook, although improving still remains uncertain.
The successful subordinated debt raise of $85 million and the fourth quarter for their positions the company to move forward on capital actions during 'twenty 'twenty, one subject to regulatory approval that are expected to be accretive to earnings.
At this time I will turn the presentation back over to Jared.
Sure.
Thank you Lynn.
As we begin 2021.
We're still facing an uncertain environment.
Our southern California markets are still significantly impacted by Covid restrictions, although we haven't seen and impact on our credit quality for a new wave of deferral requests.
And as our fourth quarter performance demonstrates while we remain cautious around credit there was still good lending opportunities available.
The rollout of the vaccine is certainly positive news, but it's hard to predict the timing of when the operating environment will begin to normalize.
So we will continue to operate in and appropriately conservative manner, maintaining high levels of capital liquidity and reserves.
And the same characteristics of our loan portfolio that enabled us to maintain strong credit quality throughout 'twenty and 'twenty remain in place and.
It should enable us to be very well positioned from a defensive standpoint.
Our goals and priorities for 2021 are similar to the goals, we set and achieved in 'twenty and 'twenty.
We expect to continue realizing positive operating leverage as we grow the balance sheet.
And maintain the 1% plus return on average assets, we achieved and the fourth quarter.
We have to continue to enhance our funding base and grow the balance sheet too of size that matches our expense base.
We expect of largely complete those goals during the first half of the year.
Which will put us on a sustainable path to consistently higher returns beginning in the second half of the year.
Subject of course to the operating environment and economic landscape.
We feel the organization is that the right size now and we don't need to make meaningful investments to drive near term growth.
We believe that we can generate balance sheet growth, while keeping expenses flat to modestly higher this year.
There's quite a bit of capacity to grow with our existing banking team and.
As of talent, we have added over the past couple of quarters continues to build their books of business.
We still have opportunities to lower our deposit costs.
Though not to the same degree as we did in 'twenty and 'twenty.
The biggest opportunities and 'twenty 'twenty, one and are centered around some larger time deposits that mature during the year.
As these deposits reprice or run off we will see further declines and our deposit costs.
We will continue to leverage technology to both increase efficiencies and enhance business development.
And as Lynne mentioned, we will look to take capital actions to optimize our capital and ways that will be accretive to earnings.
Now that we've added the sub debt. We have started working on these actions and expect to make progress as we move through the year.
These were our goals and priorities for 2021.
And the progress on these goals won't be linear.
Historically, the first quarter isn't as strong as the fourth quarter due to seasonal expenses that have a greater impact early in the year.
And some quarters. This year, we might have progress on one or two goals, while others, we might make progress on all of them.
But over the course of the year. We believe we can achieve all of our goals just as we did in 2020, which would result in a strong year of earnings growth and value creation for our shareholders.
Well I used the term profitable growth earlier, it's important to understand that our emphasis is really more on the profitable growth.
We are interested and growing for growth's sake, we are focused on growing and a way that benefits the franchise over the long term.
Our growth is being driven by adding full commercial banking relationships that generate attractive risk adjusted credits not transactional loans.
This is the approach we've had since I joined the bank.
Requires patience and discipline, but we believe this is the best way to truly enhance franchise value.
And we work hard to make 'twenty 'twenty, one another rewarding year for banc of California shareholders.
Thank you for listening today.
Hope that you and your families are safe and healthy.
And I look forward to sharing more about banc of California's progress and the coming quarters.
With that operator, let's go ahead now and open up the line for questions.
Thank you, ladies and gentlemen, we will now begin our question and answer session.
To ask a question you May press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
And our first question comes from Tim Your of Brasilia of Wells Fargo. Please go ahead.
Hi, good morning, everybody.
Good morning Timur.
And in May.
Maybe just starting on the balance sheet gross and looking at the loan growth this quarter, and certainly pretty impressive, especially compared to.
Some of the comments and the transitioning over the past couple of quarters, I guess, what drove that magnitude of the growth I know, it's coming from the warehouse business, but is that taking on new warehouse clients and says from increased utilization and is there something that's more onetime in nature of that at all appeared in the fourth quarter or some semblance of.
Of the sustainable into 'twenty one.
Well, yes.
Yeah, we we're certainly gratified by our loan production and the fourth quarter. It was.
It was distributed though warehouse was the bulk of it and it came from new relationships that we brought on and as you know we focus on.
Mid and lower size mortgage brokers and not the huge guys. Although we have some of those relationships as well.
And we expect warehouse lending in terms of those balances to remain relatively flat for the year. So there's a lot of volume in terms of moving in and out but we think of the level of which route as it is about right.
But we also had 230 million of growth and and other areas and you know when you compare that to our overall loan portfolio. It was three 8% on a quarterly basis, but it was about 15% annualized and then if you look at our debt 230 million across our loan portfolio, excluding warehouse it was closer to 5% or.
For 7% or 18% annualized so I think we had a good distribution of loans, we had a good inflow of C&I.
And as we look at this quarter, we're starting to see pretty good inflow of CRE of the bridge side right now all of our teams are working really hard and obviously, we have the P. P. P. That's in process right. Now you know early indications are that we're going to.
Try to be somewhere where we were last time.
We have about 500, almost 500 inquiries right now that are a little north of $100 million.
The loan sizes are a little bit smaller, but there's obviously the $2 million Max and the program this year, but for the second round.
Okay. That's helpful. Thank you maybe switching over.
Two margins and know when you had mentioned that prepayments speeds helped and also higher linked quarter P. P. P fees can you specify the linked quarter increase and prepayment speeds and then the absolute dollars of P. P. P fees for the fourth quarter.
Sure Tomorrow, and I think I would start out by saying that you know each of the quarters have had some prepayment activity and P. P. P fees and them and you know and I look at the trends quarter over quarter I think we've done a really great job of.
Keeping our loan margin I'm relatively steady for the linked quarter and based on our production.
And so I appreciate that there is a little bit of these and additional revenue items, but the core I'm gonna stay low and yield is hanging in there and about flat quarter over quarter and with respect to our and.
And P. P. P mm piece itself I think it was just around a $2 million.
$2 million tariffs try and put my hands on my notes.
For the.
Around two two and a half million dollars for our P. P. P CS and the fourth quarter and you know the P. P. P fees do you have an estimate of life of about a year and so.
So we expect the majority of those to wrap up during the first quarter.
Especially as we launch into the second round of PPP.
Okay, and I have to remain.
And then I'm sorry go ahead.
Yeah of the remaining amount.
Yes.
Yeah.
So from the first round him with a few that are we had reported there's about approximately $2 million.
Right.
Sorry, Jeff go ahead.
No I was just kind of say in terms of loan yields as I look across our portfolio of it slipped a little bit, but it held up pretty well certainly relative to an environment that the biggest dressers are really.
Coming from the C&I side, I mean, it's highly highly competitive right now.
And we're doing everything we can to find the rate loans that are <unk>.
Giving us the appropriate risk adjusted return for the service that we provide and our teams are doing a fantastic job.
Of of doing it where we're not you know we're trying to elevate every every.
Opportunity to of conversation and not kicked it out on price alone. So that we can figure out.
What could be done, but at some point, there's a lot and we're going to draw and.
I'd say in terms of looking at you know where where loan yields are going there.
While theres some optimism out there that debt loan pricing is going to start rising given where the 10 years ago, and it's still pretty competitive.
Good news is that our interest obviously are our deposit changes have outpaced.
The changes on our loan yields and also of our loan yields have declined much much slower than the market generally so were holding up pretty well.
Yeah, it's pretty impressive to have flat C&I yields at the levels and you guys Havent met but I'll step away for now and I'll, let other people and thank you.
Thank you Tamara thank.
Thank you.
The next question comes from Matthew Clark of Piper Sandler. Please go ahead.
Hey, good morning.
Liberty of Matthew.
Hum.
Good morning the.
Your guidance on expenses being flat to up modestly this year I just want to make sure. We're using the rate base and 2020 is that about 170 $171 million and 'twenty and 'twenty.
On a on an adjusted basis yeah.
No I think and as I step back and look at of 'twenty 'twenty you know, we got out of the L. L C.
Agreement. So we had some elevated costs early in the year and then I think our our expense base normalized because I look at the fourth quarter I would expect you know our run rate to normalize down a little bit we had a little bit more and the fourth quarter with a gross and the balance sheet and Hum.
Your and accruals that we fight and the release.
Okay, so flat to down off of fourth quarter then.
The expectation yeah.
Okay.
And then just on the remaining deferrals that are left can you just remind us what the maturities for exploration schedule it looks like there.
And we have a page and the.
And the deck on deferrals and I might need to get you the detail afterwards, well if it if it's and if it's and there I can I can find of interest and take a look at the deck and then if you if you have any.
We don't have a we don't have a chart that lays out and kind of what month of deferrals went on we have a couple of loans and third to for right now, but this is the last deferrals that we're doing.
And it's it's it's dwindling down and we also have the single family and their which is a little bit longer and so, but it's it's definitely coming down and as we've talked about before it serviced by a third party of GMI.
So in terms of of the stuff that we service, it's coming down pretty dramatically there.
Single family stuff is running off and a more measured pace.
But.
We're not giving out any more deferrals for the stuff that we service.
Okay, Great and then Lynn just to follow up on the prepayment penalty income can you just maybe quantify on a dollar basis. If you have it what the what that was this quarter versus last.
Yeah.
From a dollar per spot don't have the dollars per say I would just say that with the refinance activity. You know we had some refinancing of bear some decreases at the end of the fourth quarter, but we had it and the third quarter as well so.
I think generally speaking and there's some portion of them I think and everyone's ammonium but I have the debt prepayment is just the pricing of our loans. So you know.
And think we separate it out.
Just that it's part of the loan pricing structure. So you've given up maybe some portion of the the yields and worry about it and in order to get the prepayments. So it's.
Yeah.
Doesn't really create any variance from quarter to quarter.
Okay.
Okay. Thank you.
Yes.
Thanks Matthew.
The one comment I would add Matthew and <unk> and.
When you talk about our credit quality and our a M. P is came down and we were able to resolve a couple of our large mpls and one of them was a single family residential.
Loan and and the process of placing it back on accrual status and we were able to recognize some additional.
Interest income this.
And this quarter and you know I'd put that around half of million dollars. So that did add a few basis points to our net interest margin and <unk>.
And it's kind of you know above and beyond and as we resolve our nonperforming assets I wouldn't expect him you know to get necessarily those pops.
Yeah, we we think that we can expand the margin it's gonna be tempered I mean, it's not going to obviously, we don't have we have we have a lot of levers to pull but I don't know that they're going to be as dramatic.
As we were able to accomplish earlier, but we still believe that we have some room to go and.
And we feel like we're operating in a fairly normal way right now a lot of the heavy lifting.
We're gonna start reaping the benefits of it and we're going to keep growing the balance sheet.
The next question comes from Gary Tenner of D. A Davidson. Please go ahead.
Thanks, Good morning, guys.
And just wanted to revisit the loan growth a little bit of you know us.
You talked about you know really solid back half of the year and a lot of that driven by mortgage warehouse, but.
As you talk about the non mortgage warehouse growth and the quarter.
Little over $200 million I mean, if you were to keep balances lower mortgage warehouse balances flat from here as you suggest and grow at that pace that would suggest somewhere in the at.
And at least low to mid teens kind of loan growth year over year do you think that that's.
Possible in 2021, given what you've put in place over the past year on the commercial side.
I don't know that I would looked at high I think the environment is such that we're gonna be.
Careful and I think that that debt amount of you look at when we're starting with a really low base, it's easy to grow at a high rate.
But overall I think we're just gonna be.
You know put on good loans, we do have run off and.
And so while production might be a good number.
The actual net growth probably won't be as high as you just indicated because of the runoff.
And so you know we're doing things to hold of run off to make sure that our production actually of results and growth.
But we do have of single family portfolio, that's running off and we got some multifamily is obviously highly competitive and.
And so really proud of what our teams are doing to kind of fill the bucket and keep it at a good level and not have a hole in the bottom kind of <unk>.
Draining it so we're trying to keep the bucket it reasonably full but it's not going to be as high as that would implicate.
Okay I wouldn't have thought gross would be quite at that level I just wanted to get a better sense of where you were thinking about it.
And you know look in terms of and based on based on what we're seeing right now just a little bit more color. If it's helpful. I mean, we've got some we have a lot of great opportunities and warehouse and I will say that our team is exceptional.
If they were.
We're trying to be proactive.
For the opportunities that present themselves.
And at our appropriately risk adjusted so.
And one quarter it might be like you know what warehouses looking really good right now, let's let's let's take advantage of the market and make sure that we bring that and and hold those balances because it's it's the right place and we're fortunate that we have such a high quality team of nice and <unk>.
Other quarters, we're gonna, it's gonna be God, We bridge lending is really working well right now.
Yeah and see you.
And I was just looking to inexpensive and other quarters, you'll see and I was just looking strong and we have a lot of stuff. So we're trying to balance it and we have we're pulling the right levers it's not that we're going to build of all around one one division of or one type of flow. We wanted to have a balanced balance sheet that shows good C&I.
Good real estate and mortgages just one of those.
Curious that we have the flexibility to play and.
There were of loans. If there were loans that we thought were attractive to buy that were single family that were loans that we would've made on and around that have the rate risk adjusted yields that are and the non QM space, we probably would do that.
There are a couple of things that we can do.
If if we thought we could sort of the types of loans that we would do and it was just to kind of support.
Hi.
And the run off and try to keep it flat because at the end of the day.
The growth of really needs to come from relationships, where we get deposits and that's what's kind of create the value for it but we're trying to be smart about it so growth is going to be probably tempered, but it's going to be sufficient to achieve our profitability objectives.
Okay. Thanks for that John and then just to revisit the question on kind of the expense outlook and I think he said kind of fourth quarter.
$39 million of show would be the right number but that included.
$4 million recovery or so in terms of a threshold for you.
As for legal fees and I know there was some higher comp expenses, well, so, whereas the balance and there.
Sure.
And I am I think its helpful to look where all the way and at the very end of.
The release, where we go ahead and adjust out the indemnified legal costs that we've been tracking period over period.
And to take out of our alternative energy and <unk>.
And our ship investments of gain and loss and the timing difference there as well so.
You know when you look quarter to quarter, we were up about $3 $4 million and I.
A portion of it was and compensation.
You know as we turn the page to 'twenty 'twenty, one and.
And I expect you know a few increases in some categories, but continue to achieve some other efficiencies that we've identified so.
If you look at the whole year.
And adjusted for them no longer being and the L. A F C contract and I think it gets you back down.
I think the $170 million number that was mentioned.
Mentioned earlier as you know I think of reasonable expectation on them.
How how we're running things.
Yes.
Okay. Thank you for that and then.
Joe just given your comments regarding capital and that you've already started to put things interaction I think is what you said on the capital of front.
Assuming regulatory approval should we be thinking about the March 15th.
The redemption date for at least part of the preferred.
You know what are your periods would be for I prefer I prefer not to comment on that just because.
I think what we've said is that we're moving on that.
There's a couple of things that have to happen.
We're optimistic we can get it done, but it's kind of you know.
And it's one of the things that's going to happen when it happens and I wish we could predict when but just out of respect for the process. I think we're just going to let people know when we have approval as opposed to predicting when it's going to be here.
Okay fair enough. Thank you. Thank.
Thank you.
The next question comes from David Feaster of Raymond James. Please go ahead.
Hey, good morning, everybody.
Good morning, David.
And just I just wanted to and you know talk on the payoffs and Paydowns and especially in the multifamily side. It sounds like things are pretty competitive there just just curious how much of that strategic or is this truly just a competitive issue and you know it's rates and.
In terms of just getting kind of thing and just maybe some some commentary on the competitive landscape for loans and more broadly.
Sure.
So the multifamily refinancing spaces is highly competitive right now.
We do our best to save the relationships when we learned that they are you know.
Being shopped, we've tried to get out ahead of it of course, but it's sometimes hard to do that because what you don't want to do is.
Take care of existing loans, and and you know repriced downward when they weren't even thinking about moving a lot of our loans have prepays on them.
But the environment is so competitive that they can absorb the prepay with lower rates, depending on when they lost financed and so that that's how competitive it is so.
We have you know I think our our five year.
Many firms are somewhere in the middle of the pack.
And we monitor our competition very closely and try to stay there.
But at some point. The question is what are the alternative uses for our.
And for loans and is it too cheap because we can just deploy money everywhere when you're sitting close to 100% loan and deposit you obviously.
Need to be careful where you're putting your money. If we were down at 80% loan to deposits, we would be putting money wherever we're at it could that it made sense to keep the balance sheet at the right level.
So.
Look I, we're trying to save them, it's not strategic there's nothing strategic about having loans go out right now on the multifamily side other than.
It's just too the rates are too low.
Okay.
That makes sense and that's what I thought, but I just wanted to check and then you know.
Look the deposit growth that you guys have been able to post is phenomenal and the pace of the remap. The remix of the deposits is really impressive and it sounds like.
This is based on the strategy I mean, you've got.
Accelerating loan growth compared to I think of lot of peers.
Do you think you can keep deposits the pace of deposit growth in line with loan growth and are you comfortable operating here and kind of in the upper ninety's loan and deposit ratio or potentially go back north of bad just curious your thoughts on on deposits.
And funding growth going forward.
So there's there's a massive amount of liquidity and the market and you know you're you monitor more banks and I do but it seems like most banks are benefiting from the environment.
And there's a lot of liquidity. So we're we're a beneficiary of that although we're obviously looking to remix and one of the ways that we've done it is by <unk>.
Very focused efforts around who we want of bank on the deposit side. So we have a terrific specialty deposits team that sits within our private bank that goes after very large relationships. We just brought on a team for property management HLA.
We had been active in the fiduciary and bankruptcy trustee area and our you know our teams are.
And looking at larger deposit clients that need specialty services, they need to know they need.
And know how to set up of accounts for them quickly and manage relationships that have multiple accounts associated with them.
You know it could be for M&A it could be for for things, where there's just more hand, holding on the deposit side and we have a great back office that that works on that and then our frontline teams.
You know are very focused on you know whose rate sensitive and who's not and kind of migrating away from rate sensitive clients and migrating toward business relationships, where there's really no expectation of yield because of their operating accounts and that's we believe that we can continue to grow and that area.
And meaningfully so and we're just that's where we've we've obviously been placing energy there for two years and.
And so we're reaping the benefits of that now.
I think that our deposit flows can keep up with our loan growth and so we're going to run around you know between 95% to 100% loan and deposit.
And it could be a little above 100 per cent, but I don't I don't see that right now I I actually see our deposit flows really.
Supporting our loan growth.
Loan growth on a net basis is not going to be.
Astronomical just because of the runoff, but I think it's gonna be good enough for us to achieve our profitability objectives and work.
And to keep moving the needle there.
Okay. Okay, and then last one for me I mean, the the asset quality improvement has been really good obviously your portfolios of lower risk portfolio, especially in light of the growth and warehouse and the economic outlooks and hopefully we're gonna be improving I'm just curious how you think about.
And reserves and provisioning going forward and I guess in light of the the portfolio you have what do you think is it more of a normalized reserve ratio for you.
Well I'll start and let Lynn Zhao of it but I I think we're we're kind of there now.
I think.
We're at a pretty good coverage ratio.
And.
Yeah like you I mean the day.
And the skies look Sonny you know the per.
Prospect of more stimulus.
The economy seems to be holding up all of those things have a hell of a positive outlook associated with them right now and and yes.
There's some noise around taxes and some other things, but overall I think.
The economy is as you know we.
We have more positive outlook for the economy today.
And then we've had and in the last six months.
Especially with the stimulus prospects. So for that reason I think provisioning will be appropriate, but it might not have been as heavy as people anticipated and because we don't have a big consumer portfolio outside of FSFR, which is which is healthy we don't have the same volley.
Volatility there as people, whereas some of the larger and other banks are experiencing when what do you think about provision levels. We haven't we didn't pre her and we didn't rehearse. This so she might give you a different answer so.
[laughter], Yeah, no and I think it's probably more of the same there I think I think we're all talking about the fact that given these are unprecedented times and.
And potentially the impact of the pandemic could be a delayed and we don't know that so don't necessarily see large provision releases and I appreciate maybe there's a bit of that going on and.
And so to the extent that.
There's a modest demand growth I think there's an opportunity for provision levels to tenants that would be appropriate, but I'm, probably not the level of be fine our 'twenty and 'twenty.
And.
And.
And I think that we will have more clarity and you know midway through the year.
No I don't I don't know why we would you know.
Obviously, we follow a model and.
And you know there's there's.
And plug it in and you know there you did you talk about the economic forecast and you toggle all of the things we're supposed to toggle based on your portfolio.
But I think our team has done a good job of just being realistic and.
Not too optimistic not too pessimistic, just realistic and the outputs of seem to see and bright to me and so.
The skills that feels right for the environment that we're in and.
And I haven't seen anything that suggests huge releases yet so.
Okay Alright.
Alright, that's helpful. Thanks, everybody.
Thanks, David.
The next question comes from Tim Coffey of Janney. Please go ahead.
Thanks, Good morning, everybody.
Morning.
Jerry and Linda as we look at sales through and on customer service fees and given the work you've done on the last two years of growing the deposit base and new accounts and new customers and the origination of activity. We're seeing of a loan side would be unreasonable to expect that that line item might increase from where you ended for Q at.
I missed the beginning of what you said, Tim which line item when you're referring to.
Customer service fees.
You know we have a I'm glad you brought that up so we have an initiative that we launched at the end of last year, we've been working on for a while and it kind of kicked off end of last year beginning of this year to really focus on and it's a fee initiative.
We did a huge survey of where do we stand relative to.
Our peers.
For the extent you can get the data where do we think we're low where do we think were high.
And how do we generate more fees.
I think overall.
On the customer service fees, it's never going to be of massive driver for us.
Fee income overall based on the way we're set of today, but I think what and I. Both believe that we have.
You know some some.
Fruit together, there and that we're gonna be growing that and that line. This year, we need to figure out of way to drive more fee income and I think that's going to have to come from other sources.
And maybe there's an opportunity for a business line that will drive more fee income and that's something that I'm looking at right now in terms of thinking about how could we do that.
Without getting into detail there, but in terms of specifically customer service fees. We do have an initiative in place our team did a great job of of.
Calling and the universe and figuring out where we needed to improve and that's been deployed it was deployed and we rolled that out at the beginning of this year. So we should start seeing the benefit of that.
And in turn.
And of like New business lines that you adverse to doing like and SBA business.
More so than you already are.
And <unk>.
No.
Other than I've been pretty clear on you know.
How I feel about SBA I I'm not so.
So I think what you're asking is you know when we do kind of a gain on sale business is that is that what you're saying yes.
So I don't see loans that we want to sell today, given what we're trying to do with our balance sheet.
And then in terms of SBA, specifically I'm certainly open to it we don't have that engine running today enough to be able to do that but I wouldn't be opposed to it and the future. The one of the things I think.
I think I've mentioned this before about SBA.
In the past you know with the number of banks and I've been associated with acquisitions I've seen of every bank claim that they do SBA differently and either they are better at it and nobody else and at the end of the day. It was all the same stuff.
Make loans that they shouldn't make because they're supported by government guarantee and somehow they talked to some of them how they talk themselves into it and then when the economy goes bad you are left with a lot of a big number of loans with an overall portfolio of small dollar balance and it's a really big paint of work. It out because you got you know you've got to follow all of the government rules and I remember that and.
So I've always been high and so the last thing you wanted it was and up with young guaranteed portion I mean, that's like like the worst of all scenarios. So.
I think there are some banks that are probably doing a great job at it I think it can be done and I'm I'm certainly open to it I mean, there's a couple of our peers and thanks to our community that are that are doing it well but.
I don't think we have the engine today to do it right and I think if you do the right place to be and SBA today is on the real estate side and people get hurt more on the on the non real estate.
State of SBA loans, and so that's the engine that we're trying to build up we're not there yet, but hopefully we can build it.
Okay, Alright, that's great color. Thank you.
And this of.
And circle back on the shared National credit. So last time I checked there you had for additional for shared national credits pull down for some $50 million. Excluding the one that you just.
Got out of the bank this past quarter does that none of those numbers still sound right yeah.
Yeah.
Yep, Okay and my.
I have my credit portfolio of sheet I've got to take a look but other than the one that sounds right yes.
And as the strategy unchanged, where theyre going to be this kind of allowed to kind of resolve themselves.
Yes, we're not.
We we actually there was one that we were in that and as I said I I'm not looking to get into new ones, but there was one that was that we're in and I had just performed so well and it was safe and it was good yield and we just kind of re upped. It in terms of participating because we were already and it but we're not looking to gather and any new ones.
Obviously, you know on an exception basis, if something made a lot of sense, we would do it but for the most part I just think they're not.
The way that we're going to grow the balance sheet overall, we're not going to go out and buy all of bunch of them.
Yeah, Okay, no that makes sense.
And those are my questions and I appreciate the time and thank you very much yeah of course.
Okay.
The next question comes from Jackie Bohlen of K VW. Please go ahead.
Hi, good morning, good morning, Jackie.
And you did touch on the balance sheet of little bit I know, we've discussed it quite a bit but just thinking about you know weighing it size first day of its profitability and thinking about it in the context of you know.
Very recent stimulus and and the potential for new you know how do you for discussion and what kind of discussions are you, having I guess on the potential for further inflows from that stimulus, but managing the size of the balance sheet, so that you're able to protect its profitability.
Yeah.
So.
Starting with P. P. P. I mean, it didn't it wasn't huge for US you know, we did 270 million of first time right.
And so relative to our balance sheet. It just didn't do much it didn't.
I mean, a lot to us from a liquidity standpoint, we.
We were there to primarily sort of our clients. We did about 75 per cent existing clients and about 25 per cent new relationships and for the second round.
We're obviously, reaching back out to all of our clients who need help either for the first time for the second time, and then we're going and reaching out to all of the ones that we talk to that maybe you didn't do it through us and see if we can help them. So.
I think we're going to see you know.
Similar sized program. This time around it's not going to be something and maybe a little we have some technology that we deploy this time that is helping us and its making it a little bit smoother. So I think.
We would have the capacity to do a lot more but I also think the b.
Market demand is a lot lower I mean, we're seeing we're not seeing the same amount of demand as we did the first time around.
And the and calls are modest and we're doing a lot of outbound calling whereas last time. It was just you know Hugh.
The phones are ringing off the hook and <unk>.
We were trying to prioritize our clients and give them a great experience and the process. So when do you see it differently.
And with respect to Pvp and now I think for side of what were some of them.
Yeah, Jackie was that the focus of your question or were you speaking about things outside of that.
And it's I think it was part of it is partly P. P. P. And then you know other maybe deposit inflows that you may be getting because of stimulus and I realize that and to the extent of those are coming in and it's also enabling you to reduce other higher cost pieces of debt.
And that's exactly right to the extent of that those deposits are we think that they're sticky and they are the right relationship deposits.
It's allowing us to offload and much sooner and other deposits that we might have.
Modestly been moving out so it affects the rate at which we reprice our Cds for example, right, where we're moving down our Cds at a pretty good clip, especially.
Especially of our expensive ones and we're happy to have anybody who's of take or at the prices, we want to offer but.
Where there's a science to how quickly do you drop those rates on the ones that just matured because how much do you want to let go and we can accelerate that and drop of our deposit cost faster to the extent that we're having a lot of success on kind of origination of a lack of relationship deposits, whether they come because of stimulus or not.
<unk>.
We will see a buildup of liquidity because of the stimulus you know you you got to be careful if because it can flow out and then you you relied on it. So we got to look at that but we don't we don't know what it's gonna look like yet right now it just seems like the economy is just.
You know flush of of of.
Liquidity, you know Stacy I was reading out and not how how savings rates you know savings accounts really havent gone down and and households are really holding onto their their savings.
And I went to stand and I read and Jackie kind of to your point there is a lot of liquidity and the market right now and I think what we observed over the fourth quarter was maybe reaching some level of equilibrium.
And meaning that I think there was more clarity on what part was it would be viewed as temporary and what it's going to be staying around so I think there was an opportunity to improve our earning asset mix by lowering the levels of let's say excess liquidity and of that benefited the margin.
And I think as we turn into 'twenty and 'twenty, one and the P. P. P program has re initiated and forgiveness has also come in through them I think that helps us liquidity was but I do think we're seeing elevated levels of liquidity again and as we've talked about I think of my per I'm looking to deploy them and to earnings.
Asset and.
And that's the extent of that a moderated and I think we might see a little bit of additional liquidity on balance sheet and the first quarter.
Okay, great. Thank you both very much for the color.
Thanks Jackie.
The next question comes from Steve Moss of B Riley Securities. Please go ahead.
Good morning good.
Morning, Steve It looks like more.
And so most of my questions were asked and answered here I guess, just one little thing here in terms of the HOA deposit business, especially deposits you guys getting into kind of how and how big do you see that business growing here going forward.
Right.
And I'm hesitant to make a prediction about it.
We have kind of of our own internal models of what we're looking for but it's part of our overall expected deposit growth.
For the year I mean, I don't I think our goals are to continue to move noninterest bearing.
Two.
You got to get it to 30 per cent before we get into 35 <unk>.
Moving it as fast as we did over the year I was pretty pleased with that.
But I think we're gonna make progress this year and driving non interest bearing closer to 30 per cent, it's hard to do when you're growing the denominator as well.
But we're going to keep moving it down the field and it's part of that number.
Okay, and and I think it is equally as important as just literally been diversification within.
And the deposit business itself.
That's helpful.
Got you alright.
Alright, well. Thank you very much good to see the margin and this corner.
Okay. Thanks.
Thank you.
This concludes our question and answer session.
Ladies and gentlemen. This does also conclude todays teleconference. You may disconnect. Your lines at this time and thank you for your participation.
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