Q1 2021 Banc of California Inc Earnings Call
Hello, and welcome to the Banc of California, as first 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 on the earnings press release.
The reference presentation is available on the company's Investor Relations website.
Before we began and we'd like to direct everyone to the company's safe Harbor statement on forward looking statements included in both the earnings release and the earnings presentation.
I would now like to turn the conference over to Mr. Jared Wolff Banc of California's President and Chief Executive Officer. Please go ahead Sir.
Good morning, and welcome to Banc of California's first 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.
Q1 continued the progress we have made for several consecutive quarters on a core basis in terms of growth of her and earning <expletive>ets.
Strong <expletive>et quality.
Moving our deposit mix.
Using our cost of deposits.
Increasing our fee income and.
Maintaining disciplined expense control of.
All of the things and enhance franchise value and drive profitability.
As we indicated on our last earnings call.
We expected that our first quarter results would not be as strong as our fourth quarter for a variety of reasons.
There's quite a bit of noise and the results for each quarter that impact of net income comparison, which Linda will discuss later in the call.
But from the perspective of our core operating performance and.
Our execution on strategies designed to build long term shareholder value.
We had another strong quarter.
Business development in terms of loan and deposit production was very good which continues to support our balance sheet and earning <expletive>ets.
We continue to experience high levels of payoffs, however, and sort of legacy portfolios, which tempered our overall growth.
It's the vaccine rollout continues and restrictions on business operations are gradually rolled back and our markets.
We are beginning to see and increase in loan demand, albeit below normalized levels.
Nonetheless, our banking teams are doing an excellent job of developing and capitalizing on opportunities.
We are seeing well balanced production between C&I and commercial real estate loans, and having particular success in areas, where we have built expertise such as health care financing and specialty commercial real estate projects, where we worked with very experienced real estate entrepreneurs that require of British and permanent financing.
While continuing to be selective and pursuing very high quality credits, we were able to fund $550 million of loans and the first quarter comprised of $487 million of new fundings and 63 million of Y and advances.
Our funding for new loans were 136 million higher than Q4 and rates on new loans. Excluding P. P. P was nearly 10 basis points above Q4.
Our average loan balances increased by 39 million and the first quarter, but on a period end basis, we were lower due to fluctuations and warehouse line utilization and a period and reduction and multifamily balances, resulting from a very competitive environment for that <expletive>et cl<expletive> and pricing that we were not willing to match.
We still expect to reach mid to upper single digit loan growth. We are targeting for 2021 given the positive trends, we were seeing and loan production and our expectation that loan demand will continue to increase as economic conditions improve throughout the year.
Our business development efforts also continue to produce strong deposit inflows from both new and existing clients and further improvement and our mix of deposits.
The robust deposit gathering engine, we have built and our successful efforts to target deposit rich vertical such as the education and not for profit market has produced seven consecutive quarters of DDA growth.
During the first quarter, our non interest bearing deposits increased $141 million, which a replacement of higher cost time deposits that we continue to run off.
As a result of the improved deposit mix of.
Our average cost of deposits declined eight basis points to 28 basis points and the first quarter with our spot rate declined to 24 basis points at the end of March.
During the first quarter, we updated our deposit service fees, which is enabling us to generate more noninterest income.
This initiative was and recognition of both of quality of service being provided by Banc of California and that certain service fees were below market.
With growth of in our commercial client base, the new deposit fee schedule and higher exchange fees and our customer service fees were up nearly 60% over the first quarter of last year.
At this run rate. This represents nearly 3 million of annual incremental revenue that essentially fall straight to the bottom line.
This is an area that we will continue to focus on and to identify more opportunities to generate additional revenue.
Looking at <expletive>et quality, we continue to see positive trends and health of our commercial borrowers with total deferrals of business related loans declining by nearly 50% during the quarter and now representing just about one per cent of total business related loans.
From downgrades of our legacy S F. Our portfolio resulted in increase and nonperforming loans.
However, our npls are very well secured with average loan to values of 62%. So we're not seeing the potential for material losses, but rather the noise that the legacy of S. F. Our portfolio generates.
58 per cent of our Npls, our S F ours with very low loan to values and credit quality remains very strong.
Accordingly.
We are very well reserved and the positive trends, we are seeing and the rest of the portfolio resulted in a small reserve released this quarter.
Outside of the continued progress on our core operating strategies, we had a very productive quarter in terms of executing on other key initiatives.
First we continue to optimize our capital stack by redeeming our series T preferred stock on March 15th.
The elimination of this preferred stock will be accretive to our earnings per share going forward.
And second and more significantly we announced that we entered into a definitive agreement to acquire of Pacific Mercantile Bancorp.
With its similar geographic footprint business model and focus on serving commercial clients. This is a transaction that checks all of the right boxes.
It's manageable and size, but large enough to have a meaningful impact on profitability.
It's straightforward with lower expected execution risk and has a similar focus geographic footprint and business model as I mentioned.
Third and accelerates key objectives in terms of deposit mix loan mix and profitability.
There's clear visibility of the cost savings.
And we expect the transaction to deliver double digit EPS accretion with a relatively short tangible book value of earn back period, even with conservative cost savings <expletive>umptions.
In terms of scaling the company and generating more operating leverage this transaction should accelerate our progress by about one year.
And does so by adding a $1 billion seasoned loan portfolio funded by significant base of non interest bearing deposits with good opportunities to expand our relationships and <unk>.
And as companies continue to grow and their financing needs increase.
We expect the addition of pack Merck's loan portfolio will also enable us to accelerate the shift and our loan mix toward business related loans and continue running off the legacy of some of our portfolio without it's serving as a material headwind to our overall growth.
With this transaction, we expect to add acquisitive growth to our accelerating organic growth.
With the goal of harnessing this powerful combination.
And the additional shareholder value going forward.
And of course, we welcome the terrific colleagues and pack Merck, who will be joining our company.
Now I'll hand, it over to Lynn, who will provide more color on our operational performance then I'll have some closing remarks before opening up the line for questions.
Thanks Darrin.
First as mentioned please refer to our investor deck, which can be found on our Investor Relations website, and they review our first quarter of perform it.
And I'll start by reviewing some of the highlights of our income statement and then we'll move to our balance sheet trends.
Unless otherwise indicated on prior period comparisons and with our fourth quarter of 2020.
Net income available to common stockholders and the first quarter was $7 $8 million or 15 cents per diluted share.
This compares to $17 $7 million of 35 cents per diluted share from the fourth quarter.
We had quite a few items and impacted the comparison of our net income between the first quarter of 2021 and the prior quarter.
And the first quarter of 2021 net income available to common stockholders.
And three $6 million and pre tax losses on investments and alternative energy partnerships on.
$4 million of pretax merger related costs, and indemnified professional fees net of recovery and.
And $324 million of series D preferred stock redemption expense.
These items were offset in part by a lower effective tax rate, resulting from two $1 million and two.
Benefits from the exercise of all of our previously issued stock appreciation right.
And contract and the prior quarter, we had pre tax gain on our index and alternative energy partnerships and <unk>.
$673000 and pretax net recoveries and I've been there.
And if I'm reading like expenses of $4 $2 million.
And backing out these items and each quarter.
Net of our normalized effective tax rate of 25 per cent to get a better sense of our core operating performance we.
We had adjusted net income available to common stockholders.
On slide $9 million or 25 cents per diluted share and the first quarter of 2021.
Parents of $13 $9 million on <unk>.
28 cents per diluted share and the fourth quarter of 2020.
Total revenue on the first quarter and decreased $6 $2 million compared to the prior quarter and <unk>.
Net interest income decreased by $3 $6 million and.
And non interest income decreased by $2 $6 million.
And net interest income decline reflected the impact of two fewer days and the current quarter.
Lower prepayment fees of $1 $6 million.
Lower interest income related to the status of non accrual loans of $737000.
And lower amortized the P. P P loans and fees of $197000 you'd of forgiveness activity.
And the prior quarter included net recoveries of foregone interest while the current quarter included net reimbursements and interest income.
The decrease in non interest income stemmed, mainly from lower settlements and insurance recoveries on historical legal matters and stuff.
Fourth quarter of 'twenty, and 'twenty, including $2.8 million of such income.
Our net interest margin of $3, one, 9% down 19 basis points from the prior quarter and.
26 basis point decrease and our overall, earning <expletive>et yield offset by seven basis point decrease and our cost of funds.
Are any of that you'll decreased to $3 seven and 8% due primarily to a lower average loan yield.
Our average loan yield decreased 28 basis point for point of three 1% during the first quarter due mostly to lower prepayment penalty fee from refinancing activity lower income related to loans placed on non accrual status.
And lowered P. P P fee amortization, even forgetting this activity and.
And the impact of these items are excluded.
And loan yield was down seven basis points to 1.17 per cent and the first quarter compared to 4.24% and the fourth quarter and.
Decrease and as part of our average loan yield is due primarily to a higher percentage of.
Lower yielding commercial and industrial loan balances and the impact of the pay offs and purchase activity and the MSR portfolio.
We ended the first quarter of a spot rate of 24 basis points of our all in cost of deposits.
Looking ahead, we expect our funding cost to continue to trend lower for the remainder of the year, albeit at a slower rate.
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.
Through the end of the year.
And $580 million of these deposits with a weighted average cost of about 1.56%.
We expect this reduction and higher cost balances and boost net interest income and supportive of charges and the back half of the year.
Non interest income decreased $2 $6 million to $4.4 million.
As a driver of our non interest income decline and the quarter was the lower legal settlements and insurance recoveries.
We expect the customer service fees line item of Gerry had mentioned earlier.
Well the total from both quarters its fairly similar.
And a higher contribution of deposit service charges and the first quarter each of our new fee schedule, which offset a lower level of unfunded commitment fees recognized in the current quarter.
Our adjusted expenses decreased $2 $3 million and five per cent from the prior quarter due mostly to lower professional fees occupancy and equipment expenses and other expenses.
$700000 of merger related costs and stuff.
$121000 and indemnified professional fees during the first quarter.
The effective tax rates and the first quarter was $13 eight per cent compared to 24.1% per quarter.
Quarter of tax benefit, resulting from the exercise of all of our previously issued stock appreciation rights.
Going forward, we would expect our effective tax rate to be on the 25% of 27 per cent range.
Many quarters in 2020 one.
Turning to our balance sheet and total <expletive>ets increased by $56 million from the first quarter to $7 $9 billion.
We redeployed a portion of our excess liquidity into higher quality commercial and the redemption of our series B preferred stock and we continued to replace high cost of time deposits and brokered Cds with core deposits and the quarter.
And as we selectively add high quality, earning <expletive>ets and the future both in terms of loans and investment securities.
Continue to have the flexibility to add overnight and other wholesale funding if needed.
And they support our growth and on your <expletive>ets.
Our gross loans held for investment decreased by $134 million.
And two 3% during the first quarter.
And our growth and CRE, so far and SBA loans and more than offset by lower C&I multifamily and construction there and balances.
The $65 million increase and SBA loans and the quarter was due primarily to around two P. P. P loan origination.
Total of $132 million through the end of the first quarter.
And it's pretty first about 55 per cent of our P. P. P learn count.
Representing about 69 per cent of our remaining P. P. P learned dollars from the first round and the forgiveness process.
The $23 million increase and as the partner and balances stemming from non purchases, which outpaced pay offs in this portfolio and we.
And it's typically participated and the significant refinancing activity and given we no longer originate this <expletive>et cl<expletive> and how.
Deposits increased $56 million during the first quarter and our mix and average cost continue to improve thanks to our focused and Michigan.
Non interest bearing deposits represented 28 per cent of our total deposits at quarter end up from 26% at the end of the last quarter.
Demand deposits non interest bearing plus low cost interest checking increased by three per cent from the prior quarter, representing our seventh consecutive quarter of demand deposit growth.
And we remain very focused on to drive franchise value over.
Over the past year demand deposits increased to 62 per cent of total deposits.
And from 51%, reflecting the significant improvement, we've made and our deposit base.
This increase combined with the lower rate environment, and our proactive effort to reduce deposit costs and bringing new relationships drove our all in average cost of deposits down from 111 basis points and the first quarter of 2020 cause.
And the 28 basis points achieved and the first quarter of 2021.
Our securities portfolio increased by $39 million and as of quarter at one point to $7 billion.
And the fourth consecutive quarter tighter credit spreads and reduce the unrealized loss and our CLO portfolio, which was down to $3.6 million at quarter end.
The improvement and CLO pricing this quarter added eight cents tour and tangible book value per share relative to the prior quarter.
Our entire securities portfolio ended the quarter with a net unrealized gain of $7 $3 million.
Our credit quality remains strong and the first quarter, although some downgrades and the legacy of stuff our portfolio of resulted in an increase in non performing loans non.
And performing loans increased $19 $3 million to $55 $9 million and the first quarter. However.
However, about one third of this balance or $18 $1 million represented loans that are any current payment status and our cl<expletive>ified and nonperforming for other reasons.
Delinquent loans increased $29 $7 million and the first quarter to $61.3 million or one point of 6% of total loans driven largely by us at Bard loans as we work through the forbearance and deferral process with these consumer far away.
And under from members declined by $143 million two two percentage of total loans held for investment.
Down from 4% of at the end of the fourth quarter.
Let me turn of our provision for the quarter as discussed in the past our ACL methodology uses of nationally recognized third party model that includes many of <expletive>umptions based on our historical and peer of loss data are currently on portfolio and their economic forecast.
We saw improved economic forecasts and start 2021 which resulted in a lower impact on our allowance for credit losses.
Although we had an increase in non performing loans, given the low loan to values and low potential loss of downgrades do not drive of meaningful reserve requirement beyond what we have already built on it.
The result of the improving economic forecast and the high level of of allowance, we built in 2020, we recorded a modest negative provision for credit losses of $1 $1 million and the first quarter.
None of this provision release, our allowance for credit losses for the first quarter totaled $82 $7 million.
Kept our allowance to total loans coverage ratio unchanged at 1.43% excluding.
Excluding on P. P P loans and the ACL coverage ratio stood at 151% at March 31st and our allowance to total non performing loans coverage ratio also remains healthy at 142 per cent.
Our capital position remains strong with common equity tier one ratio of 11, 5% and is benefited from the strategic actions completed over the past several quarters.
And we are pleased to every deemed our series D preferred stock and we will continue to be prudent and strategic with the use of our capital and maximize benefits and stock holders and to build franchise value as.
As we mentioned on the call to discuss the acquisition of Pacific, Mike and Paul off Mall.
And I expect this transaction the impact of timing around the potential redemption of our series D preferred stock, which we continue to view as of late 2020, one or early 2020, two again subject to regulatory approval.
At this time I will turn the presentation back over to Jared.
Thank you Lynn.
We started off the year with another quarter of solid progress.
And as Linn noted in her comments, while Q1 was noisy with the legacy HBV expense redemption of the preferred and onetime transaction expenses.
On a normalized basis compared to Q4, it was a strong quarter with higher average loans and strong loan fundings and production.
Even if a loan volumes ended the quarter down on a net basis.
Since the announcement of our agreement with Pacific Mercantile everything has proceeded on schedule and we're making good progress on our integration planning and we continue to anticipate the deal closing during the third quarter.
Both organizations have responded very positively to the transaction and are excited to begin working together and leveraging the collective strengths of the combined company.
And once again, we look forward to welcoming the very talented colleagues of Pacific mercantile, who will be joining our company.
As we look ahead, we are increasingly confident about our expectation for a stronger second half of the year.
We're seeing more commercial clients developing plans to capitalize on the strengthening of economy and the anticipated impact of the stimulus package.
This is of resulting in a growing pipeline of high quality lending opportunities that should lead to well balance loan production across all <expletive>et cl<expletive>es and industries.
While the environment remains extremely competitive and refinancings will continue to drive run off and the legacy of Sofar portfolio.
Given the state of our pipeline and the more optimistic tone. We are hearing from our commercial clients. We are more confident and we were a few months ago that we will see a higher level of loan growth as we move through the year, <expletive>uming there are no setbacks to the economic recovery.
Our success this quarter as in prior quarters is a reflection of the tremendous talent, we have <expletive>embled at banc of California.
We announced last week another high quality addition to our team.
The addition of Alexs question, as our EVP and Chief Human Resources Officer.
Alex joins us from Union Bank, where he led HR for the last seven years for the Hunter and and $30 billion institution.
We are thrilled to have Alex joined our executive team and.
We continue to hire talent that has been where we are headed and can help us attract retain and develop the best colleagues and build the most attractive culture for our employees and clients delivering for our shareholders and communities.
Thank you for listening today I hope that you and your families are safe and healthy and I look forward to share 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 Sir well now begin the question and answer session.
To ask a question you May press Star then one on you touched on them. So if you're using a speaker phone. We ask you. Please pick up your handset before pressing of cheese.
Your question. Please press Star then two.
Today's first question comes from tumor and Brazil with Wells Fargo. Please go ahead.
Hi, good morning.
Good morning Tomorrow.
Maybe just starting on the loan growth on Jared I hear your comment on increased customer conversation and how that's kind of project our accelerated growth for the remainder of the year I'm guessing just what's your <expletive>umption around warehouse production and looking at the legacy FSFR portfolio of how much of a headwind.
I kind of be to ensure a long day.
Thank you. So we added a new table to our presentation, which you may have seen.
On the table breaks out our production of.
Along with our advances and fundings and then it shows net paydowns and payoffs.
And so it's easy to see that.
And as strong as the third and fourth quarter was.
There was heavy contribution from <unk>.
On warehouse.
And then the first quarter, we had actually stronger as I mentioned on my comments are our loan production and in terms of fundings, which was even stronger.
And then the negative impact was really from the net pay downs and warehouse.
We think that that will not be of headwind to achieving our goals for the year, obviously, <expletive>uming the economy stays and the direction, we all see of going.
And in terms of S F. Our pay downs, we've been supplementing it with purchases and so we netted the payoffs with purchases this quarter. So on a net basis. We were we were flat to a little bit up and and S of far so that's not going to be a headwind.
Okay, and then maybe looking at the past Merck deal and that's going to close later in the year.
Or is there any balance sheet items that are going to be accelerated prior to deal closing and just thinking in terms of look like on the.
The point of liquidity, maybe in advance of the deal or maybe accelerating some of the legacy of a rundown and the extent that you can priority of idea okay.
Lynne do you want to take that first.
Sure.
And you know and then right now, it's where I don't think that we've identified anything that would be accelerated them prior to the transaction, where we're working together and looking at it.
Yeah.
I think we like the <expletive>et cl<expletive>es and yeah well.
Oh got it closer to come and go close.
Yeah.
Okay and then last question from me just looking at the cause of credit profile and this quarter and.
And you provide more color as to what drove some of those migrations of the cl<expletive>ified and seems like a lot of those loans are still pay so I'm just wondering what drove some of that most of that.
Out of migration and then if you can provide the balance of the remaining legacy of default portfolio as well.
Yeah, Linda you want to look up the so far portfolio, what we're doing I think it's when you say the legacy I mean, we we we've consolidated into one portfolio of it's the whole portfolio now I think of it in the first quarter and Linda if I have it right. It's 1.25 billion.
Yeah. So yeah, let me just make a comment about that to start with we supplement and B you know, obviously, a lot of refinance activity last quarter and this quarter.
And we've been able to participate true strategic land purchases and.
And those have been about.
About $250 million between the two quarters. So if we wanted to talk about the legacy portfolio I think kiwi, which excludes of purchases from the most recent two quarters.
And I think when we refer to as our legacy portfolio. You know these of the these of the this is a portfolio that was around and the pandemic and we had the onset of the pandemic and we've worked through that.
And the forbearance and deferment and process and continue to do so.
On.
And they're.
And then not just of Sunset there.
Yeah and so.
And two more in terms of the migration of of of credit I mean, a big part of it was that so far and it's working with borrowers who are key.
Coming off of forbearance, and maybe should've been on deferment, where things go to the basketball and back of the loan instead of you know they need to come up with some big payment and we still have the flexibility to to migrate them.
There were some borrowers or just you know, they're well secured single family residences, where you know we're not worried about of loss content, but there for whatever reason not communicating or are we just need to and we're working through a third party servicer as I've mentioned before so it's some of the nuances of having a single family portfolio that's legacy.
But we again because of our as we mentioned.
And it relates to our reserve.
We didn't see and need to increase it by any means we just don't see as we go through all of these individual loans, we don't see if of loss content and any way requiring an increase and the reserve and in many cases you could argue that since our reserve went up on and X P. P P basis quarter over quarter Hugh.
You could argue that we maybe it's you know it's it's on the full side right now and we'll just have to see how loan growth goes during the year and are getting down to a more normalized kind of coverage ratio as the economy improves and and things are we have more visibility to what's going on and we wanted to be appropriately.
Appropriately conservative this quarter, we obviously of a model that we follow.
But we thought that the small reserve release.
<unk> was appropriate.
Yeah.
Okay. Thank you very much.
No problem and our next question the questioner of today question today comes from David Feaster with Raymond James. Please go ahead.
Hey, good morning, everybody one day.
David.
I just wanted to just I just wanted to follow up on the the growth discussion I guess, maybe how much of understanding that maybe the the warehouse is in.
And as much of a headwind I guess, maybe could you just give us some of the strategy as to how you get sort of a mid to high single digit organic growth run rate just given the.
But kind of a hole that we're starting out and and the first quarter and.
No just.
Talk about how our origination activity and and maybe where you're seeing the strength and how much loan purchases might play into that that guidance well loan purchases are primarily supplementing you know run off although if we see attractive loans that it makes sense, we'll take advantage of it I would point out.
That average loans were up.
So you can look at period ends on on average basis.
Earning <expletive>ets were up and the quarter and.
And so I think that's that's important to mention.
Our house I would say is you know.
We guided it to a higher level for the year, So I think theres some.
That's some bulk of that will come back and that can come on and were comfortable getting it up but as I said, we're not going to build of bank around it but I think there's some room to move and warehouse.
And then just generally I mean as you pointed out we just see strong pipelines right now I mean, they're just they're full and.
The economy is definitely improving we have people doing a great job, bringing and loans.
Across industries and <expletive>ets and we see we're optimistic about that right now.
Actually our pricing for new production was up which.
It was also.
Something we were pleased to see quarter over quarter and if you look at our margin. If you look at our NIM. It was down but if you compare it to you know I think the first quarter of the fourth quarter was a little bit exceptional if you look at our margin.
Which we have on page 30 27 of the deck.
It was it was kind of below three then it got to 310 and the second quarter and the third quarter, so being at close to $3 20, and the first quarter.
I realize it's down from the fourth quarter, but there were some prepayments and other things on the in the in the fourth quarter that didn't really show up and the first quarter. So we're still expanding it.
And while it's hard to say that it's going to keep expanding at the rate of it.
Did we don't see that being a headwind to cause where you're really growing with this with the growth as you were talking about where is our interest income and you know earnings are going to come from and so I think our March and it's gonna help there too.
Got it that's that's helpful color and you took me right, where all of sudden next I noticed that the rates were higher and that's extremely encouraging and could you just talk about how pricing is trending and then maybe just on the margin any detail around the P. P. P. NII contribution of the quarter, how many net fees.
And the remaining and then just.
It sounds like.
And some core NIM expansion just given the the improved improvement on both sides of that go on I guess, but just any any puts and takes on the margin as well sure I'll, let Lynn collect information on P. P. P. So I'll go first I want to be careful not to predict margin expansion because.
I think it went down more than I would've thought relative to the fourth quarter of this quarter, but as Lynn and I look at it I don't see the room for it to go down as much. So I think it's likely going to be flat or going up given where things are going on so I want to be careful there not to say that it's going to expand but I just I'm, having a hard time seeing how it would drop given what we're.
And on deposits, we have the back half of the year has a big and as Lynn mentioned in her comments is a huge amount of deposits that of repricing and given that we were able to hold our loan yield.
You know, it's going to be about the pay offs and and that's gonna probably affect our margin a little bit more but I'm I'm optimistic there on pricing and terms of loans.
We are obviously you know we were building this bank around being a commercial bank that's relationship based and so on.
Our lenders know, what they're doing and we're getting paid for execution and structure and more than we are competing on.
Rate base deals that we can buy and the market.
We are trying to compete for quality deals, but now that we have more visibility to the future and the economy is looking more healthy.
Were.
You know, while we're always prioritizing quality and credit quality, we feel more comfortable structuring deals because we have visibility in terms of what's going on and you get paid for restructuring so across the board I would say that our production was.
It was pretty good and our yields were on new production was it was very very good and as I'm looking at my my little cheat sheet here and.
And almost every cl<expletive> it was you know.
It was a flatter up so.
It feels like we're going to be able to hold it David based on what we see now.
Okay, that's great.
I can and and let me and patterns on a bad related the P. P. P. I know it and has a little bit of noise. There I would say that the accelerated accretion between the two quarters depends on forgiveness and didn't have a significant impact I think on page nine and the presentation and we lay out the yields and buy.
And loan product and.
And then we also make a comment regarding sort of what does and you know the benefit of prepayment penalties and accelerated accretion kind of it.
No is <expletive>ociated with non accrual loans and me on more of that and Q4 compared to Q1 I think the bottom line is that core loan yield and.
And sort of what we're able to compete and find that.
And by and in the case of Ssrs.
And you know only went down about seven basis points.
So I would say generally and I think it's still a challenging there you know maybe there there'll be some pressure.
But then if we can keep up and have opportunity on the funding side, we see yet and you see that coming down kind of core loan yield came down about seven basis points. Our cost of funds also on deposits came down about seven basis points.
When you talk about P. P. P. Specifically, it's having a smaller contribution and say to overall earnings.
And then because as the volume is a little bit lower a and b.
And the period of time, they weren't amortizing and the P. P. P fees over is longer and based on the performance of the SBA and so on the forgiveness is taking longer right. So that's a smaller contribution.
And then if you were to remove of SBA, all together and looking at that page and Eva.
And see that our loan yield would actually go up and.
And because that product is yielding lower than our overall average loan yield and.
Relative to the first quarter.
And and I think our we talk about the fact that the SBA on P. P. P loans, and we were able to kind of $132 million from the first quarter.
I contribute and just some of our fee.
And kind of I would say that there is of remaining a $5.3 million.
And that will come in and.
And we set those up with an 18 month life.
And you know.
Quarter on to it.
And David on the on the on the production yield if we're talking about over a portfolio of but then when we talk about production yield I mentioned that went up and almost every cl<expletive>. So.
It went up and more of it actually went up a little bit of multifamily construction was flat and C&I was actually up.
SBA was well X P. P P was rough.
Roughly flat, maybe a little bit down, but there wasn't much of that and then sort of the big mover with CRE.
And you know we were really competitive on CRE loans, and our loan yield went down quite a bit we did some larger high quality credit loans, there that affected our yield.
I see that yields being on production in terms of of a little bit down, but it's a big growth area for us and we're competing on some super high quality credits and on.
I'm comfortable with that so on and overall basis as Lynn said our production yield.
Excluding PPP went up quarter over quarter.
But that's encouraging and definitely the exception of the rule.
Maybe just on the market for new hires and you're hiring pipeline with bone bonuses paid out and just kind of of buzz around what you guys are doing and the changes that you're making have you seen more of an opportunity to add talent and people wanting to join the organization.
Well, obviously with the addition of Alexs question you know when you get somebody who is coming from a large bank.
<unk> has a very senior job wants to come over here and help us build what we're building here we feel gratified.
Gratified by that and it's a reflection I think of of what we're doing.
There's a lot of excitement and term.
And what we're doing it and so this is a great place to be.
We're not having a problem finding talent, we have and incredible talent.
Talent team that brings on that recruits and finds great great folks worse, we're thrilled about the people that are gonna be joining us from from Pac work.
You know theres a lot of talent over there and so between the two of those were I think we're we're feeling good.
Yeah, that's great. Thanks.
We share it.
And of our next question today comes from Matthew Clark Piper Sandler. Please go ahead.
Hey, good morning.
On a minute.
Hey, maybe just first on the on the core margin I think.
It was around <unk>.
And 314 this quarter.
And new production yields being up a little bit I mean do you feel like this is the bottom and we can expand from here.
With additional relief on the funding side.
Yeah.
I'm going to say, what I said.
I don't see I was caught by the margin goes I think and when and I. Both saw the margin go down a little bit more than we expected this quarter, but I I don't we were talking about it. The other day, we were running some models and.
Neither of US right now expect it to go down that's.
That's not to say it won't.
But on a core basis I think we both think that theres more room on the upside and it's probably coming less from drop in deposit costs are.
And as much as it did in the past.
So it's really on a core basis.
Kind of come from the combination of holding our loan yield and dropping deposit costs as opposed to just deposit costs outpacing.
Uh huh.
Loan rates, dropping I think and loan rates might might stay relative to where they are we get the benefit of.
Of deposit costs going down.
What do you think Lynne.
Yeah. So I think I would say I would love to characterize this as being out of the new low watermark, but and do you think there are some things that remain a little bit unpredictable and I think the main thing that ended up being different this quarter than maybe expectation.
A significant decrease and the prepayment penalties you know we did have a substantial amount last quarter and we did have a lot of prepayments just not at the same level and so if we factor and you know that variability out and as you said looking at the core margin.
And think that the loan yield does have a little bit of pressure on it and mirror of balancing growth.
And again I can see on them, but we still have room to move on the on the funding side down so.
I think theres opportunity.
So and a challenging environment so.
Yeah.
That's where we're at right now where we're hesitant to say, it's not going to go down because you know I think we both believe that the best thing. We can do for this company is put on high quality, earning <expletive>ets and a few.
You know, it's a tradeoff and if if if if we find the volume that's going to grow earnings we want the flexibility to do that and not be held to wealth of margin suffered and so we're looking at whatever is going to drive earnings.
Within the box of credit quality, if that makes sense.
Yeah, Okay, and then just shifting gears to the pack Merck deal have you any of you guys.
Kind of re re looked at the cost savings potential interest at 35 per cent seems low to me given the overlap and.
And maybe just your updated thoughts on the potential savings there.
Do you want to take that first one.
Sure.
So you know I think that it is important that and when we were announcing and modeling that debt I think we had conservative and some cement absolutely achievable.
I think as we continue to look at it there's probably some more upside relative to that as we start to take a closer look at the operations and so and know that I'm willing to kind of trickle of number right now, but there is probably something north of 35 per cent.
36, one thank you.
Yeah.
No I look of it we think that there's opportunity there that will that will materialize and I think it will be and are better positioned to give kind of more guidance next quarter.
But it's going to be about 35 per cent.
Okay, great. Thank you.
Yes.
And our next question today comes from Tim Coffey of Janney. Please go ahead.
Thank you Martin everybody.
Tim.
Regardless of the AR.
The big chunk of deposits that Linda was talking about repricing and later this year do you have a targeted.
Magnitude and mind or something that you can share with us because there seems to be a big difference between where those deposits are priced versus where your spot rate was at the end of the quarter Yeah sure.
Yeah, let me.
So.
And so those you there was a number of those deposits are included.
And our spot rate.
And we have estimated that and the impact of those deposits coming in to the current rate environment.
If we were to retain them all and what we think are reasonable market rates and I would have a positive effect of about.
Eight basis points.
So you know.
So those deposits and had fixed rate contracts and we are fulfilling those and once they mature.
We will bring them into the right now and we'll be able to find them and the current rate environment.
I think that we have of low per cent of wholesale deposits right now and so there may be a transition period.
And we work through that but and otherwise.
Otherwise I think we'll be bringing those into the.
Current deposit rates I mean, we of we have $580 million.
That are going to mature through the end of the year.
With a weighted average cost of.
156.
At this point.
Right and that's on that eight basis point I'm. Sorry go ahead, yeah that debt well I think the eight basis points reflects what would happen if they we kept them all and they re priced right and that's all of them and effect.
That's about right yeah, our of spot rate at the end of the quarter. So I mean.
There's a whole bunch of scenarios here one is do we need or are we going to need the money.
Mhm, and where rates are going to be done but.
I think.
We can <expletive>ume that you know if you just took it down to our to our spot right now you know of.
28, 28, 24 basis points, you're cutting out of 125 basis points.
Off of 580 million Bucks.
Alright, okay.
And then what's a true where do you think that what's the direction of the loan and deposit ratio from here.
Well I think excluding excluding obviously a merger with with Pac Merck.
I think that it's probably.
Flat to slightly rising and I think we're comfortable.
Letting it go up.
And we're not going to get to 110 per 610 per cent, but I I think as we trend towards you know high Ninety's and and 100 and we're comfortable with that I. Just it just feels like we have a lot of volume to put on and the liquidity and the market is starting to be used there. There is a lot of liquidity and the market and where we're benefiting from that but.
It looks like loan volume, just kind of outpaced kind of deposit growth a little bit.
Going forward, but you know what we'll obviously take take the higher deposits if if they come in and we're certainly not stopping on that but I don't think we have a problem letting of rise a little bit when I was just looking for the the the end of the I don't know if you have and in front of you the.
The loan to deposit ratio at the end of the quarter.
I'm, sorry, but I think right on 93, and 94% and Jim.
And I think that's been you know and then mid to high 90 and.
Would be probably reasonable based on the idea that we'd be able to participate on.
Per single family portfolio with the activity that's going there again early purchasing things that were that we would be willing to of originated if we were doing that in house.
With the expected activity and the warehouse portfolio.
And so that coming up and then and that's modest deposit growth so that would put us somewhere in the mid to high 90 and then.
Okay.
And then just this is my math correct.
The preferred.
On the dividend expense next quarter, and it's going to be somewhere around $1 seven $1 8 million.
Excellent map.
Okay Alright.
Okay.
Those are all my questions and thank you.
Thanks, Tim.
And our next question comes from Gary Tenner of D. A Davidson. Please go ahead.
Thanks, Good morning.
And Gary Shimon and just wanted to ask good morning, just finished a couple of follow ups on kind of of loan segments make sure I understand kind of of the current thinking on the single family portfolio should we think about the one and a quarter billion as kind of the near term level you want to maintain and so there is greater momentum and the rest of the portfolio of mortgage.
Run off or the offset run off or just for a longer period of time is this kind of a maintenance level.
I think it's likely.
I don't look on $100 million on either side of it is it's you know it's it's fine.
From.
There, there's some good loans out there and.
And you know if there are yielding pretty good debt or non QM net debt, we actually like that are and our market. We can look at the property. We can look at the borrower and say there's no reason, we shouldn't buy that loan and that is a really high quality loans and now that we've done all of the work to what one of the things that happened as we did all the work to figure out.
How do we stemmed the flow of this portfolio and we ended up becoming a really strong.
And having a deep understanding of what's out there and so I think we want to use that knowledge to benefit our shareholders and to have high quality. So I don't really want to peg it at a number and it's not the area that we're looking to grow per se, but I would say 100 million on neither side is probably comfort comfortable for us.
Okay, but in either case time as the rest of the portfolio grows the percentage of just kind of that's correct that's correct.
Sorry, I can't quite agree.
No no I agree with I agree with your comment and you know kind of Jared point, you know kind of a plus or minus.
And the portfolios had about a 30%.
Pay offs occurring and so you know while we are keeping pace you know I think there is some variation.
On either side, you know what what's available that were willing to purchase that we understand and we think there's some good product.
Product out there, but then you know how does that compare to what we're seeing and the refi activity.
And not pegging on a number and to understand and so side and.
Yeah.
And Gary I would say that to the extent that multifamily, which stayed relatively flat quarter over quarter went down a little bit.
And we're still putting on high quality bridge multifamily, but the permanent multifamily.
Got highly highly competitive I mean, it was and they've in some cases, it was below 3% and we weren't competing there and.
So if I saw it if we had to pay offs, there I mean and.
Single family was available and it was safer and we could stem the.
The run off of you know I would have done that too and so.
As opposed to being aggressive and and C&I are some places where there was a lot less visibility and the market as I mentioned and you know, we're try and keep earning <expletive>ets of at <unk>.
And on an average basis at the right level. So.
There's the potential for multifamily there as well where the secondary market has not is not as liquid as it is for for for single family, but.
That looks like it slowed down the multifamily trading it looks like it has slowed down quite a bit and.
And our activity there has been pretty good so and I know, what we have coming up this quarter. So I don't see that as being a contributor but it could.
Okay. Thanks, and then.
Just I think you have the multi or excuse me the mortgage warehouse balances embedded and kind of a larger line item within C&I could you tell us or tell us what the actual just mortgage warehouse balances work order on.
Sure.
Uh huh.
And then do you have the yep.
They're just kind of on $1 $1 billion.
So and the back of that.
First of all of that.
And at the end of the year they were at 1.3.
And 1.3 and four.
They were close to them.
One 3 billion and so there and the majority of back on page 20 of tier and so a summary of our C&I portfolio, The finance group and the one point.
Two $2 billion and this represents a C&I represents about $1 1 billion of that total.
Weyerhaeuser and I wasn't sure if any of them.
And really that was yeah.
Okay.
Great and my other questions.
Sure.
I mean, we've said that if.
If we get to a 1.4.
You know, it's not does not crazy.
But you know we're not going on we're not gonna get drunk on it so we're keeping up with them.
On a range of comfort and it depends on what else is flowing.
Okay, Great My other questions were answered.
Thanks, Gary.
And our next question comes from Jackie Bohlen with J P. A W. Please go ahead.
Hi, Good morning, good morning, Jack I'm sorry.
On this on your discussion with them with Gary, but I, just wanted to get and some additional color the multifamily and it sounds like that market has stabilized and I know that you know there was a lot of rate pressures that drove some of the run offs and the fourth quarter and you're you're just not seeing that anymore.
And I, it's not to say it won't come back, but we really didn't see it and the fourth quarter and the first quarter as much as we did in prior quarters. It looks like it's stabilized for whatever reason.
And rates stabilized and are.
The first quarter for us.
It's still a highly competitive market.
But that's what we saw on the first quarter.
Okay.
And then just one last one from me and everything else has already been asked and answered, but you know in terms of and I realize this isn't probably of challenging thing to predict but just in terms of day investments and alternative energy partnerships on it.
Is there anything left in there that could drive that kind of of magnitude again going forward.
And you're talking about the the expense of the charge that we incurred in the first of all yeah. Yeah, Yeah, Yeah, So and Jackie I didn't write them GAAP, where there and I think if you go back and look over and.
Historically like county and for that.
And the way the accounting works is we take our first quarter write down of our charge them too I think market to market effectively and then we then recognize of games over that the remaining corners, so and debit and the first quarter.
And then we said and see.
Hey.
Moderate gains are the rest of the accounting periods in 2020 one.
Oh, okay.
And then forgive my ignorance on this but I recall that historically and this predates you without it you used to have or at least I think it does because it's kind of blend and.
It used to have a big impact on taxes, but I don't think that's the case and the quarter am I correct on that debt that was all on Sars driven.
Yes, you're correct, so the our investments and alternative energy partnerships and she's a tax benefit and the quarter of the investment is made.
And all of the subsequent of counting them as above the line and there is not necessarily of tax benefits.
And taxes and Youre correct to be.
On the lower effective tax rate was due to the stock appreciation rights tax benefit.
And we got to recognize this quarter.
Okay, great. Thank you sorry don't deal with those all of that much on.
That's all I had.
No problem. Thank you Jackie.
And ladies and gentlemen. This concludes today's question and answer session and today's conference call and Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Yeah.
Yeah.
Okay.