Q3 2021 Banc of California Inc Earnings Call
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The conference over to Jared Wolff Mr. Wolfe. Please go ahead.
Good morning, and welcome to Banc of California's third 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.
At.
The beginning of the year, we laid out our strategic objectives for 2021, which have successfully executed on would lead to profitable growth in the company and improved earnings power.
Our strategic objectives were to maintain strong asset quality and capital as we continue to manage through the pandemic.
Grow our earning assets and accelerate.
Accelerate our loan growth.
Further reduce our cost to deposits and increase our net interest margin.
Keep expense levels relatively stable they realize more operating leverage as we build the balance sheet.
And execute on strategic opportunities that could increase earnings and enhance the value of our franchise.
We take a.
A lot of pride in being a company that delivers on the expectations, we set and doing what we say we're going to do.
We did that in 2020, and we're doing it again this year.
Through the first nine months of 2021 we've executed very well and been able to achieve all of these strategic objectives.
Our asset quality and capital have remained.
Remained strong through the year.
We've experienced a very low level of loss in the loan portfolio.
On a year to date basis, our average earning assets have increased five 3%, while our period end total loans are up seven 4%, excluding PPP loans.
Our cost of deposits has declined from 29 basis points at the end of the fourth quarter.
28 basis points at the end of the third quarter of 2021.
Which has helped support our net interest margin during the year.
We've been able to keep our expense levels relatively flat, which has resulted in substantial improvement in our efficiency ratio.
And we were able to redeem our series D preferred stock early in the year.
And then complete.
The acquisition of Pacific Mercantile Bancorp earlier this week.
Of which accelerate our improvement in profitability.
Our third quarter results very clearly demonstrate the greater earnings power and improve profitability. We have as a result of the progress we have made on all of these strategic objectives.
We generated diluted earnings.
We're 42 cents up from 34 cents in the prior quarter, including pretax pre provision income of $30 7 million, an increase of 31% from the prior quarter.
Our pretax pre provision return on average assets totaled one 5% for the third quarter, an increase of 30 basis points compared to the prior quarter.
Per share we had another strong quarter of business development activity as we continue to build banc of California's reputation as the go to bank for small and medium sized businesses.
While the emergence of the Delta variant slow demand relative to Q2 as we expected.
We still achieved solid new loan production of $864 million.
This production.
Together with prior loan commitments.
Resulted in total loan fundings of $763 million in the third quarter.
<unk> $503 million of new fundings and $260 million of line advances.
Of which $178 million related to net warehouse funding advances.
Excluding PPP loans.
Which continue to be forgiven.
<unk>, our strong loan production resulted in 16% annualized loan growth in the third quarter.
Payoffs and Paydowns remaining at a very high level.
We continued to see growth across all of our loan portfolios, including a pick up in the C&I portfolio, which increased six 6% from the end of the prior quarter.
The acceleration of growth in commercial loans.
<unk> reflects the continued progress of the talented bankers we have.
The positive impact, we're seeing from new additions to our banking team and our success in effectively winning new relationships based on our expertise and ability to execute for clients.
Our loan production was well balanced across the industries and asset classes.
We continue.
Frankly in health care and bridge real estate lending and.
We also continue to see activity in entertainment finance.
Which specializes in financing the production of content and TV for streaming services.
We ended the quarter with over 75 million in commitments and have visibility to continued growth in that sector.
We believe this will be a sizable opportunity.
C stores in the coming years as its projected there will be billions of dollars invested in streaming production.
We built a very strong team that has extensive relationships in this industry and expertise in structuring these types of credits.
We believe will help us steadily increase our market share and grow this portfolio.
Our health care vertical which lends to health.
And your practices specialty hospitals and surgery centers and health care Real estate also continues to expand surpassing 330 million in commitments in the third quarter.
Our production is also becoming more diversified from a geographic perspective.
The bankers, we've added in northern California Central Coast.
Central.
There have been a very productive and we are seeing their contribution is positively impacting our level of loan growth.
Importantly, we were able to fund this loan growth with continued strong inflows of low cost deposits generated from our business development efforts across all areas of the bank.
Over the past few years.
Valley, you can start getting the right people the right products and the right incentives in place to create a robust deposit gathering engine.
And we continue to see the positive results from these efforts.
During the third quarter newly opened DDA accounts contributed $88 3 million of low cost deposits, which produce our ninth consecutive quarter of DDA growth.
With our strongest growth came in non interest bearing deposits, which increased more than 16% from the end of the prior quarter and represented approximately 32% of total deposits at the end of the third quarter.
The further improvement in our deposit mix.
And pricing.
Drove our cost of deposits down another eight basis points average just 15 basis points.
And as mentioned our quarter end spot rate on deposits was down to eight basis points, which should lead to another decline in our average cost of deposits in the fourth quarter.
The growth we're seeing in our client roster is driving higher levels of both net interest income and noninterest income compared to the prior quarter, our revenue increased 7%.
In the quarter, while our noninterest expense declined as we continued to maintain disciplined expense control.
As a result, our adjusted efficiency ratio improved to 60% from 66% in the prior quarter.
And we believe we will continue to see improvements in this area as the infrastructure. We have in place can support a bank several billion dollars larger than our current size.
The infrastructure, we have built reflects our forward thinking approach to technology.
Along those lines.
We recently made a small investment in a fintech company called for Nexium.
Which is the BTB payments platform.
The investment in partnership with <unk> as part of our larger strategy to grow our capacity and capabilities in payments.
So that we can increasingly add value to our customers in this area in the years ahead, while also improving our other sources of noninterest income.
Our investment in Phoenix, He was part of a larger multi pronged strategy to ensure we remained tech forward in our operations and in terms of client facing technology and value added services, we will be.
Expanding on this in greater detail in future quarters.
Our improvement in operating leverage will be further accelerated now that Pacific Mercantile acquisition is closed.
We are very excited to welcome our new colleagues, who will be additive to the significant business development capabilities that we have already built and provide superlative service and operational expertise.
As we announced in connection with the closing of the merger. We're also thrilled to welcome a few new board members, whose talent and expertise will be particularly valuable to us as we continue to grow.
The integration is proceeding well.
The system system conversion is scheduled for mid November and.
And we continue to expect that most of the cost savings.
We will be realized by the end of this year.
This will put us in position to begin fully realizing the benefits of this transaction as we begin 2022.
Now I'll hand, it over to Lynn, who will provide more color on our operational performance.
Have some closing remarks before opening the line for questions.
Great. Thank you Darren.
First as mentioned please refer to our investor deck, which can be found on our Investor Relations website as I review, our third quarter performance.
I'll start by reviewing some of the highlights of our income statement and then we'll move onto our balance sheet trends.
Otherwise indicated all prior period comparisons are with the second quarter of 2021.
Net income available to common stockholders for the third quarter was 21 $4 million were 42 cents per diluted share. This compares to $17 3 million or 34 cents per diluted share for the second quarter of 2021.
We had a few items that impacted the comparisons of our net income.
Between the third quarter of 2021 and the prior quarter.
In the third quarter of 2021 net income available to common stockholders included $1 $8 million in pre tax gains on investments in alternative energy partnerships too.
$2 $2 million in pretax net recoveries are indemnified.
Professional fees and.
And $1 million of pretax merger related cost.
In the prior quarter on a pre tax basis, we had 829000 and gains on investments in alternative energy partnerships $1.3 million and net recoveries of indemnified professional fee.
Fees and $700000 of merger related costs.
When backing out these items in each quarter net of our normalized effective tax rate of 25% to get a better sense for our operating performance. We had adjusted net income available to common stockholders of $19 4 million or <unk> 38 cents per diluted.
Diluted share in the third quarter 2021, compared to $16 3 million or 32 cents per diluted share in the second quarter of 2021.
This $3 $1 million increase is attributed primarily to higher net interest income and our continued expense control measures and we as we leverage.
Our resources.
Total revenue in the third quarter increased $4 $5 million or 7% compared to the prior quarter, including the $3 $1 million increase in net interest income and a $1.3 million increase in non interest income.
Net interest income benefited from one additional day in the third.
Third quarter higher average interest, earning assets and a decrease in the cost of interest bearing liabilities, which altogether more than offset a decrease in interest earning asset yield.
The increase in noninterest income stemmed mainly from higher other income driven by an $841000 gain.
Leverage on a sale leaseback transaction of one of our branch locations are.
Our net interest margin was 3.28% up one basis point from the prior quarter as our overall interest, earning asset yield and our total cost of funds each decreased by eight basis points are.
Our earning asset yield decreased to three.
<unk> seven 3% due mostly to lower loan yields our average loan yield declined 12 basis points to 4.18% during the third quarter.
Due in part to lower prepayment penalty fees offset by higher P. P P fee amortization.
Our average cost of funds decreased.
Point basis points to 49 basis points due mostly to lowering our average cost of deposits by eight basis points to 15 basis points for the third quarter.
This decrease was due to the improvement in our funding mix and our continued efforts to reprice our funding sources into the current interest rate environment.
Eight because they mature.
Non interest bearing deposits averaged 30% of total average deposits in the third quarter compared to 28% in the prior quarter.
Also during the third quarter 428 million of higher cost deposits with a weighted average rate of 1.8.
<unk> sent repriced or matured.
This is reflected in our lower period end deposit spot rate and we expect to receive a full quarter's benefit in the fourth quarter.
Our adjusted expenses decreased $1 $2 million from the prior quarter due mostly to lower salaries and benefits of three.
Eight print $65000 gain on the sale of other real estate owned which is included in other expenses and lower net losses of equity investments also included in other expenses.
In addition, and as previously mentioned, we incurred $1 million in merger related.
300 <unk>.
Had net recoveries of $2 2 million and indemnify professional fees and $1.8 million of gains on alternative energy partnership investments during the third quarter.
Yeah.
The effective tax rate for the third quarter was 27, 2% compared to $25 six.
<unk> costs for the second quarter.
Turning to our balance sheet, our total assets increased by $251 3 million in the third quarter to $8 3 billion.
Our gross loans held for investment increased by $243 million or four 1% during the third quarter.
Growth in C&I S F. Our warehouse and our CRE portfolios more than offset lower SBA construction and multifamily loan balances.
$72 million decrease in SBA loans in the quarter was due primarily to the P. P. P forgiveness process.
As.
At September 30th we had $116 5 million in P. P. P loans, consisting of $27 5 million from round, one and $88 9 million from round two.
The $106 million increase in the S F. Our portfolio stemmed from $249 million in loan purchases.
Is it simply offset payoffs and paydowns in this portfolio.
Deposits increased $337 million during the third quarter and as previously mentioned our mix and average cost continued to improve thanks to our success in adding new commercial deposit relationships and run off of higher cost time deposits.
Interest bearing deposits increased to 32% of our total deposits at quarter end up from 29% at the end of the second quarter.
Demand deposits noninterest bearing plus low cost interest checking increased by 7% from the prior quarter.
This represents our ninth quarter of demand deposit.
On the growth goal, we remain very focused on to drive franchise value.
We expect this favorable shift in our deposit mix to help support our net interest margin in the fourth quarter over.
Over the past year demand deposits increased to 66% of total deposits up from 58%, reflecting the significant improvement we have made.
<unk> as a base.
This increase combined with the lower rate environment, and our proactive efforts to reduce deposit costs and bring in new relationships drove our all in average cost of deposits down from 51 basis points in the third quarter of 2020 to the 15 basis points achieved in the third quarter of 2021.
Our debt securities portfolio decreased by $50 million to end the quarter at $1 3 billion.
L O portfolio declined by $35 million during the third quarter, because we are seeing an increase in payoffs, resulting from CLO resets.
Higher level of payoffs is accelerating reductions in the.
The portfolio, which is part of our longer term balance sheet management strategy.
For the sixth consecutive quarter, the unrealized loss in our CLO portfolio improved which was down to $2 5 million at the end of the quarter.
Overall, our entire securities portfolio ended the quarter with a net.
CLO realized gain of $15 5 million down from $20 9 million at the end of the second quarter, resulting in a reduction of our tangible book value per share of seven cents.
Our credit quality remains strong in the third quarter, and we saw positive trends in asset quality.
Nonperformer.
Nonperforming loans decreased $5 7 million to $45 6 million in the third quarter.
About 50% of this balance or $22 7 million represented loans that are in current payment status, but our classified nonperforming for other reasons.
Delinquent loans increased $10 1 million in.
On border to $45 1 million or 0.72% of total loans.
This increase was due to $24 9 million in additions offset by $12 4 million in loans.
Returning to accrual status and $2 3 million of other reductions due to pay downs and other resolutions.
Delinquent loans include FSFR loans of $19 1 million SBA loans of $14 9 million of which $10 6 million as guaranteed.
And $11 1 million of other loans.
During the second and third quarters, we repurchased $9 3 million in guaranteed SBA loans, which are included in the delinquent.
<unk> and nonperforming loan totals as of September 30th and our pending resolution with the SBA.
Let me turn to our provision for the quarter.
Although we had some provision requirement related to the growth in the loan portfolio. This was more than offset by net recoveries during the quarter positive asset quality metrics and trends.
Improving economic forecast used in our model.
As a result, we recorded a modest negative provision for credit losses of $1 1 million in the third quarter.
Net of this provision release, our allowance for credit losses for the third quarter totaled $78 8 million and our allowance to total loans.
<unk> coverage ratio stood at 1.26%.
Excluding our P. P P loans and warehouse loans, both of which have lower relative risk levels in our reserve methodology. The ACL coverage ratio stood at 1.62% at September 30th.
With the decrease in our nonperforming loans.
Loans, our ACL coverage to nonperforming loan ratio remained healthy at 173%.
Our capital position remains strong with a common equity tier one ratio of 10.89% and has benefited from the strategic actions completed over the past several quarters.
We.
To be prudent and strategic with the use of our capital to maximize benefits to shareholders and to continue building franchise value.
At this time I will turn the presentation back over to Jared.
Thank you Lynn.
I'll wrap up with a few comments about our outlooks.
Heading into the fourth quarter.
Our loan and deposit pipelines remained strong across all areas of the bank.
And we expect to see a continuation of the positive trends that are driving increased operating leverage and profitability.
Getting past the recent COVID-19 resurgence will be helpful for economic activity and loan demand.
But our ability to continue generating profitable growth is not sold.
Totally reliant on improving economic conditions.
We are unique.
A number of catalysts unrelated to economic conditions that we believe will enable us to continue generating improvement in our financial performance.
First we will continue to benefit from deposit repricing.
We will get the full quarter benefit of nearly $428 million or higher.
Deposits that matured or reprice during the third quarter.
That should continue to drive down our cost of deposits and help us maintain or increase our net interest margin.
In addition, we.
I'll begin to run Pacific mercantile as interest bearing deposits through our program and pricing structure, which should reduce the cost of these deposits over the next several.
Quarters.
Second we hope to redeem our $98 7 million of series E preferred stock in the first part of 2022.
Which should increase our net income available to common stockholders.
As a reminder, that preferred stock is at 7% after tax coupon.
Third we will have the accretive benefits of the Pacific.
Higher cost can tell acquisition.
As I mentioned earlier, we expect to start 2022 with most of the cost savings in place, which will add to the improved leverage we will get from adding $1 5 billion in assets.
And fourth.
We continue to attract high quality banking talent to the company.
Our accelerating loan growth this.
This year is attributable to improved loan demand as well as the talent that we have at it.
Since I joined the company, we have made substantial changes in our commercial banking group and have been very successful in bringing in the type of bankers that fit our relationship oriented model.
We have highly talented professional bankers, who are adept at serving small and medium sized businesses.
<unk> and bringing over full banking relationships.
We're also now benefiting from our exclusive focus on California.
On a number of competing banks have shifted their focus to other markets.
We have become an attractive destination for bankers that we want to continue to capitalize on the deep relationships. They have built in California.
Bankers are seeing former colleagues if there is having a great deal of success at Banc of California, and understand that we can provide a similar opportunity for them.
Banc of California is a talent magnet.
And this has created strong hiring pipeline that should enable us to continue to add seasoned relationship bankers that can support our continued growth.
With these catalysts.
It's in place we believe that we are very well positioned to continue generating profitable growth.
Further improving our level of profitability.
Creating additional value for our shareholders.
Lastly, let me thank all of our bank in California colleagues, both legacy and those who recently joined from Civic mercantile.
Their dedication.
<unk> and hard work well.
We like to say that banking is a team sport and there is no question that our results are a reflection of the of their talent and collective contributions and what is a highly competitive market.
I'm proud of our team and all that we've accomplished together.
While we still have work to do.
I'm confident great things lie ahead.
Thank you for listening today, I look forward to sharing more about banc of California's progress in the coming quarters.
With that operator, let's go ahead now and open up the line for questions.
Yes. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speaker.
Your phone please pickup your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from TMR Brasilia with Wells Fargo.
Hi, good morning, Thanks for good morning question.
TB.
Starting with the loan growth another excellent quarter.
Across the board and specifically in the warehouse space.
Bucking the trends what we've seen is there's some other institutions maybe talk about the growth you saw there this quarter how much of it was from existing relationships versus bringing on new relationships and know that warehouse is kind.
That $1 5 billion level that has been discussed in the past maybe talk about the plans for growing warehouse going forward.
Sure.
Thank you so really pleased with the diversification of our loan production.
This quarter. It was another quarter that had a lot of balance to it and.
In our production volumes.
We showed growth in.
In all areas really one thing to point out about warehouses that.
It was relatively flat on an average basis from the end of the second quarter.
So we kept it flat most of the quarter and Youll see that in our average balance sheet, when we break it out or Lincoln share the numbers and it really only grew.
At the end of the quarter.
To address some customer needs.
C warehouse staying relatively flat, where it is give or take $100 million.
We have the ability to absorb it obviously with the.
With the <unk> acquisition and the larger balance sheet.
Team does a phenomenal job and it's not an easy thing to do to.
With the transaction volumes that we have in that group to kind of maintain balances on an average basis on a quarter.
Over quarter, but they did a really really good job and so we've given them a little bit more room, but we all understand that it's not going to be an outsized portion of our company and the production this quarter was well balanced Lynn.
I think you have some other numbers in terms of what we grew.
On a percentage basis outside of warehouse.
Yeah.
I appreciate the question and the comments so far so I think just maybe to add.
We ended the quarter at about 1 billion $3 45 and warehouse.
Our house will not disclose separately.
On average basis was about 1.38 billion for the quarter. So.
I'm kind of kept it flat and then it ticked up there at the end I think if you look at our other aspects of the portfolio. We obviously have P. P P forgiveness coming off.
At the same time, we have growth in our other portfolios. So I would just comment that our other C&I business.
Period end to period end up 26% it contributed 22, 20% of our growth.
And CRE is the other portfolio at 16% period end of period end.
And it represented 15% of our growth so seeing nice momentum in <unk>.
Other parts of the portfolio again, maybe hard to see when you kind of.
I see the numbers kind of lumped together.
Okay. That's good color. Thank you for that and then maybe just.
Adding a little bit more detail to that so clearly <unk> had great success.
Hiring talent I'm, just wondering for the talent that you brought on kind of where are they as far as bringing over their books of business.
Is that well underway or is that still a pretty long runway for the talent that you brought on for what remaining loans. They can bring on from their prior institutions.
Actually tomorrow, we didn't answer one of your other questions, which is what percent of our business was from <unk>.
New talent versus.
Existing relationships I would say that it was pretty well split.
From the numbers that I've seen.
50 50.
<unk>.
We got a we have a lot of repeat business I mean whenever one of the things that we do is serve.
Active clients in their businesses, so, particularly on the real estate side they.
They are active in buying properties and they'll come back to us again, and say Hey, we've got another deal can we make it easy like you did at Ford did it for us last time.
And we're obviously happy to help serve them.
Yeah.
Our our new talent that's come over.
You know it takes a while to bring over.
The existing relationships that they have it's.
It's kind of on a on a needs basis. So I would assume that they still have I don't have a precise number for you I don't know that but I would suggest I would think that.
They obviously have room to go in terms of bringing.
<unk> new relationships to the bank that they may have served at other at other banks as those clients' needs arise.
But we rely on our one of the things that happens when talent comes over as they look at the scope of services that we have to offer.
And they're not just bringing over relationships that they have.
They're very good at Mark.
Our company and our services and solutions that we offer and so we look to them not to not to just bring over relationships that they have to go out and market and represent the bank and bring in new relationships that they can generate on an ongoing basis and I think they're doing that as well.
Okay, Great and then one last one for me just looking at.
<unk> expense base and I appreciate the comments around being able to grow a couple of billion more into the.
Into the expense base, that's already been created maybe provide a little bit more color with us obviously here with Pac Mark Youre, adding youre, adding some assets where that acquisition the expense base has been relatively.
At the <unk> remarkably for quite some time here, what's going to be kind of the next transition point and when do you start seeing the need to grow expenses as the business continues to grow.
Sure. Thanks, Timur, let me start thanks for recognizing that we have been able to Oh.
All of the expenses relatively flat as we work to leverage that operating base.
As we look forward and folding in Pacific Mercantile Operation I think we've indicated that we expect the cost saves can be 40, plus so we'll just put that in the 40% to 45%.
<unk> range so.
So I think we will have those expenses come in and it does give us the opportunity to leverage those further to grow.
Grow our assets, but I do think we'll have some step up just with gen.
General increases and then also ongoing investment in technology.
So maybe to put some numbers to it we've held our expense base relatively flat at 41% to $42 million a quarter.
I think at the 40% to 45% cost saves P. M. B had an expense run rate of about 35% to $36 million.
So on a quarterly.
Jesus that would be about a five to 6 million dollar expense add.
And then I think we'd be looking at some normal increases yet with personnel costs.
And then some piece that's an investment in technology would be additive to it. So that's I think how we're looking at right now.
Great. Thank you for that color.
Thank you and the next question comes from Matthew Clark with Piper Sandler.
Hey, good morning.
Morning.
Maybe just first one.
<unk>.
Your appetite for hiring more producers relative to.
Do you know what you might be getting from P. M D C.
The plan to just leverage kind of what they have in <unk>.
Retain them.
Yeah.
The best players on the field or do you feel like there is some opportunity to add some incremental.
Producers above and beyond that franchise.
Well, we got.
Some very talented people from Pwc and <unk>.
We're proud of.
Stuck with us and we know that theyre going to work well in our system and going to have the opportunity to produce.
Good results here not only on the front lines, but also the teams that support everybody on the on the back end, there's a lot of work that goes into.
Supporting this production that we've had and the growth and so we have telling me people across the board.
We are open for business in terms of hiring other bankers that we think can work well in our company.
It's a as competitive as the market is we are fortunate as I mentioned in my comments that we've had kind of in a fairly healthy pipeline of talent.
All of that wants to come over and and and.
Joined Banc of California, and so we're being very selective in terms of who we bring on.
This isn't the right place for everybody.
But we want to make sure we keep up our momentum I do not believe that we need to hire more people to keep up the momentum that we have.
I think that we have plenty of talent here.
And we can generate the opportunity the momentum that we and the earnings power that we know that we can with the teams that we have in place.
That said, if we found some people that we had some confidence in.
Or are they addressed a vertical where we wanted to continue to grow we would not.
Hiring.
Okay great.
And then just.
On your retention of CFR loans with what's your appetite going forward there.
Is your expectation that Youll continue to do some more of that and where do you feel like you can.
Top out in terms of the relative contribution.
We're really just trying to.
With the run off and it's since we have to buy it on a forward basis, we kind of try to model what the runoff is going to be.
And then go in and fill it.
It's hard to get it right.
You don't really know till the end of the quarter, what was going to Ralph R. R.
Our payoff rate has slowed though.
It was an.
Place around the 40% range and I think now when is it the low thirties or the high twenty's.
And so we have the ability not quite yet.
Is it still in the mid thirties.
Yes.
Okay. So we're trying to.
You were buying stuff to really replace the runoff, but it has slowed a little bit.
Andrew a lot of remixed our portfolio, we're not trying to grow it per se, it's just hard to get it exactly on top of that number.
Matthew.
The religion.
We are mainly he may have stepped.
As we've torn so we'll move onto the next question, which is from David faster with Raymond James.
Hey, good morning, everybody.
Good morning, David.
You guys you talked about the strength that youre seeing in the health care vertical.
And in your prepared remarks, and obviously, we've got the warehouse vertical the multifamily segments.
The way from as well I'm, just curious whether you see any other opportunities to expand into some industry verticals or niches and whether you've got the personnel to do that today or are you interested in you do see some opportunity to hire some new producers to enter some new industry verticals.
Well the other vertical that I talked about in my prepared.
<unk> was in the entertainment side in streaming and we feel like that is a vertical we've just added some some folks in that vertical specifically.
To help.
Most of our growth there we have a terrific team in place that's very knowledgeable and seasoned.
And so we added some more folks to help us with that and.
That's an area that we see.
Remarks tremendous opportunity for growth, especially in the in the field, where we play and the size where we play.
I think there is an opportunity I think theres always.
You can always get distracted by looking at tons of new segments, and saying, Hey, let's add a little lets out about a year, let's antibody. There I think we have plenty of opportunity to grow.
In the areas that we're focused on now that's not to say that we wouldn't attacking new vertical.
There's one or two things that are interesting that we're looking at right now, but we're trying to be very careful we want to make sure that if we if we're going to put the energy into a new vertical that we can really.
It will have high impact that our company and it won't be just.
Row dabbling in it so we're trying to focus our energy around things that can be high impact.
Okay that makes sense and could you maybe just elaborate a bit on the <unk> investment.
<unk> said youre going to give more detail in the coming quarters, but.
Just curious.
Some of the implications from this it sounds like.
We're just just in investment that there might be a strategic partnership as well.
And that there could be some fee income opportunities, which would be terrific to help improve that fee income contribution just.
Curious if you could elaborate on that at all.
Yes, Im happy too so for next year was a really interesting company.
It's not it's a BTB payments platform and they they help manage they provide basically payment optimization services to small and medium size business. The product helps users efficiently manage their AP functions and the interface with the customers existing accounting software and then use machine learning to try to select the best payment vehicle, whether it's check or AC.
Or.
From a timing and cost perspective.
It's something where we're becoming a client for nexium.
And we also have the ability to use their product and white label. It provided us as a as a product for our clients. We believe that payments is the area where.
Businesses need.
Our.
That you're watching for new solutions and so we wanted to get out ahead of it if they're not going to get it from us theyre going to get it from somebody else and so we look at this as a as a really attractive tool that will be able to provide to our clients down the road on a white label basis. We also believe that theres the opportunity down the road for us to actually be the bank for Nexium and as they develop.
Our larger client clientele will basically be the rails for.
What their clients or are.
Pushing across their system. So its banking as a service, but in a platform not a BDC platform. Most of what we've looked at out there has really been b to C.
And we've been trying to focus our energy.
Developing areas, where we think that there's a larger PDP impact.
This is part of a larger multi pronged strategy for how were addressing this going forward and the services that we're gonna be providing this area both to address fee income and to provide services to our clients and so we'll be prepared to lay out more in the coming quarters, but this was kind of our first part of a multi pronged strategy that we've laid out.
G on internally.
Yeah, that's great that's exciting.
Thank you for that and then just last one just wanted to touch on your asset sensitivity and maybe get a sense of how you think about managing your leverage to rising rates more strategically at a high level, obviously, the increased contribution from warehouses and C&I.
I as well as the significant improvement that you guys had made in your deposit base is naturally made you more rate sensitive, but how do you think about managing that going forward.
Just curious your thoughts on that.
Lynn you want to take it.
Yes, let me start.
And definitely appreciate the question.
And given we've been in a low interest rate environment and there is yeah 10 years rising and then maybe there is some discussion of what rates might do here in the in the near term.
So we we are slightly asset sensitive.
Thank the loan portfolio and.
Our investment portfolio.
Question Joe.
And the amount of cash we have on our balance sheet has support that asset.
Sensitivity in addition to the large percentage of noninterest bearing deposits.
That we've accumulated.
With P M b, joining our balance sheet.
Well I think we become slightly more asset sensitive.
Portfolio, given the mix of their C&I and also their attractive deposit base.
I think that the pricing of our loans and gives us the flexibility to move up.
With with with rising rates and also.
I think with the P M b.
Balance.
<unk> see coming and they've built up some excess liquidity that will have an opportunity to deploy as rates move up so.
I think back on slide 30, you pretty far back in the deck, we put in some information about our earning assets.
Over 50% have the ability.
City to reprice within the next two years and I think there are some other details there so.
Yes.
Yeah, I'll, just add that I'm really really proud of our deposit moves and how our mix has changed and going from getting to 32% noninterest bearing obviously.
It was a hurdle that we were excited.
To achieve and with Pac Merck I think we put in our deck, we think on a pro forma basis, it's about 35%. So our next hurdle is 40% noninterest bearing which.
For me.
As a benchmark I'll be really really proud of and then we'll look to get to 45.
40% will be a quite a quite a threshold for us to cross.
And getting to eight basis points in terms of our cost of deposits a function not only of our.
Yeah.
A function of our mix, obviously, but also just kind of are serious efforts to focus on deposit costs and push them down and focus on.
Bring over clients that value relationship, so price and so getting to eight basis points.
<unk> was a big big part of the quarter.
Being more asset sensitive with Pac Merck means that we have probably the ability to go up a little longer in duration and loans, which can also help support some loan growth.
So we take income today as opposed to waiting for the future.
That makes a lot of sense and yes, the deposit the deposit remix.
It's been incredible so thanks, thanks for the color. Thank.
Thank you.
Thank you and the next question comes from Gary Tenner with D. A Davidson.
Thanks, Good morning.
Couple of questions. When I was hoping you could provide some PPP data for the quarter.
Average balances for the quarter in the amount of revenue attributable to <unk> for the quarter.
Sure.
Yes, I don't have the exact average four P. P. P. It is the majority of our <unk>.
Inside our SBA loans are back in the average balance sheet.
<unk>.
But I think we ended last quarter at $194 million and we ended the.
The third quarter at $116 million Alright, that's helpful.
And then as far as you know.
The whole yield I don't have.
Seats number, but I would just add that last quarter when when P. P. P loans pay off we get to accelerate the amortization of the fees.
That were deferred last quarter that number was around $650000 in this quarter. The number was more like 1.2 million.
So.
The SBA PPP loans have been forgiven or little bit faster this quarter relative to last quarter or so.
And that's mostly round two that's come through this quarter. So that's why we saw the bigger number.
Okay. Thank you.
And then just.
That is of the <unk>.
Merck deal talking about getting their deposit costs in line with your pricing.
How quickly could you do that would that be the case by January one maybe excluding time deposits or is there some longer contractual type rates that you have to wait on.
Well there is something called the magic of.
Of magic of merger accounting I wish I'll, let Lynn, which is fascinating to me because I can't I can't get this math at home, but apparently we can get it here. So Lynn how does it how does it work.
So I called the magic of purchase accounting, but Gary you did exclude the one bucket that it does in fact, which is the.
The Cds so those come in to the current.
<unk> interest rate environment kind of regardless of.
Under the terms, so we will get the benefit of that.
I would say in the fourth quarter.
And then.
For for other portions of the portfolio you know the rates are.
Our high percentage of.
Non interest bearing and then I think there.
Something that we will continue to work through and you know that may take them into the first quarter or so of next year.
The majority I would agree.
What are you.
We're not going to have it all done by the end of the fourth quarter I think it's going to take through through the end of the first quarter, maybe leaked into the second quarter, but we'll get a big part of it.
Hmm.
Alright, great. Thank you my other questions were answered.
Thanks, Gary.
Thank you and the next question comes from Tim Coffey with Janney.
Thanks, Good morning, everybody.
Good morning, Tim.
Karen and Lynn you've done a great job managing the excess liquidity on the balance sheet, not only quarter over quarter, but years.
Ours over years and I'm wondering are.
Are you have you feel.
I feel like you've pulled all the levers you can pull.
Larry done at Lynn Lynn what are we doing.
And I think the short answer is no because as Pacific mercantile comes into our balance sheet.
You know they had a higher proportion of our.
PPP loans relative to their balance sheets, so that liquid those have been forgiven that liquidity has come onto the balance sheet. So I think we actually have some more opportunity to deploy liquidity.
From what we gained through the acquisition.
If you look.
It just banc of California, Standalone I do think you know we need to just manage it as closely as possible deploy the liquidity in our securities portfolio.
During the quarter the securities portfolio came down about $50 million I'm the CLO.
Concentration in the dollar amount of the portfolio decreased which has been part of our plan to reduce the exposure, but the opportunity came along to then increase or deploy that liquidity into the loan portfolio. So if you think they'll continue to be some opportunities like that.
As a I.
It's a more CLO reset activity as well, so I think theres still a few things that.
It will be helpful in managing liquidity.
I would just add that.
Our our securities our Treasury team that reports to Lynn.
Has done a really good job of.
He's coming up with creative ways to deploy excess liquidity in certain programs when we might get.
Better than overnight rates on on funds in a very safe way and you know.
When they originally started this program. It was just like let's see if we can pick up nickels and dimes and just kind of make sure we're not leaving any money on the table and they've done a really good job much the.
That our legal team has.
He has done a superb job of going back after old invoices that were.
Basically written off because we didn't think we'd collect more for insurance from the insurance companies and then going back with the right legal strategy and saying Hey, we think that you actually Oh is this money and that money keeps coming into tangible book value every quarter and so on.
They've done a really really good job of.
And creative.
Okay, Great that's helpful.
And Jeremy I mean, you're clearly, making some some investments outside of it outside of the footprint.
And it sounds like you've got some pretty big plans for them I'm wondering how far away are you from opening branches in some of these new markets.
We wouldn't open branches until we had.
Footings that made sense and my footings, I mean, a combination of loans and deposits that were substantial enough to make a branch on its own profitable we.
We don't think we need to do it.
We're just not there.
The way that we serve clients in a pretty high touch way means that a branch doesn't you really need to be next door to serve their needs.
And so.
We have basically three buckets, we've got people up in the Bay area. We have people in the Central Valley and we have people kind of in the central coast and.
Theres probably.
At some point, we'll know it when we see it I guess is the best way to say it well we're looking to go while we have some substantial business.
So we're our teams up there will be saying, hey, we really need a branch to kind of roll. This out further and then we will listen to them and make it happen, but they're doing a really great job and most of the people that we've hired have worked for our colleagues before and so we're bringing over people that we have experience with and we know that they will be successful the way that we bank folks here.
Now.
Those are my questions. Thank you.
Thanks, Tim.
Thank you and once again as a reminder, please press Star then one if you would like to ask a question.
And the next question comes from Randy <unk> with Stephens.
Hey, good morning.
Good morning, Andrew.
Hi.
Jared I think I heard your guidance for <unk>.
Warehouse balances remaining essentially flat plus or minus $100 million or so.
Just as I as I think about mortgage volume across the industry potentially continuing to decline.
Do you think we ever get to a point where mortgage warehouse balances.
Be a headwind to your overall net growth or do you feel you have kind of ample room to expand relationships with new customers or existing customers in order to kind of offset any of that potential pressure.
Well a couple.
Couple of things one is while I agree that I expect I think everybody thinks that refinancing.
Nancy will probably decline.
As.
As rates move.
And that's kind of the well published information.
Other published information is that purchase dancing as supposed to rise.
So you know what percent of your of your fundings are purchases versus refinancings and I.
That's an important piece to look at.
We've been able to maintain warehouse as a contributor to our earnings without it being a headwind to us.
Or outsized driver for us so when I look at the pandemic is a perfect example.
When the pandemic hit we pulled back on all of our warehouse lines.
Significantly.
To make sure that the securitization market was there.
And we stayed with our customers we pulled back and then we kind of gradually leaked back into them.
So we've shown that we're able to flex it up and down.
From an earnings perspective, I'm watching all of our other business lines actually grow.
While we're.
Our house stays flat to slightly rising and so I expect over time Andrew.
Warehouse will continue to be an important contributor, but it will be on a on a percentage basis not as significant as some of our other businesses because our other businesses are expanding faster.
And so.
That's what we see over time I don't expect it to be.
A headwind the way that we're managing it and we're doing it very carefully.
Like I said I think we maybe get to a 100 million more.
As a percentage of our company that will be lower than it was before the <unk> acquisition. So we're trying to be thoughtful about how we kind of let everything else grow and balance it what we don't want to do is at the time when.
That business is working well pull.
Pull it back and necessarily but we're comfortable with the size that we have and I think again, our other businesses are growing pretty fast and we're trying to let those businesses continue to run their warehouses kind of there is a steady contributor.
Okay.
Alright, great. That's good color I appreciate it.
With the pack Mark deal.
Now closed I think you have about $33 million or so remaining on our prior buyback authorization is there any kind of increased appetite on the on the buyback right now or or or potential capital actions in the near term more focused on the redemption of the remaining preferred.
We believe that the best use of our capital most immediately.
Absent finding some other great opportunity is too.
Redeemed the preferred and we will go through the proper regulatory channels to get that done we're optimistic that we could do something.
First half of 2022.
And we still think that that's the.
The best use of our capital right now so we haven't really looked at our buyback.
In light of the opportunity that we have still to do the preferred that's not to say that you'll look if I, if our stock doesn't move to the right level.
Then a buyback will make sense.
It'll it'll just be too cheap.
But let's see where our stock goes in.
And we see the preferred out there as a good opportunity.
Understood. Okay. Thanks for taking my questions.
Yeah of course, thank you.
Kim.
Thank you and that concludes both the question and answer session as well as the call itself. Thank you. So much for attending today's presentation. You may now disconnect your lines.
Okay.