Banc of California, Inc.

Hello and welcome to Bank of California's third quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then 2. 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 of which and additional required information is available in the earnings press release. The reference presentation is available on the company's investor relations website. Before we begin, we would like to direct everyone toward 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 Wolf, Bank of California's President and Chief Executive Officer.

Good morning, everyone. Welcome to Bank of California's third quarter 2019 earnings conference call. With me today is Bank of California's CFO, John Bogler, who will talk in more detail about our quarterly results shortly. We finished the quarter with a net loss to common stockholders of $22.7 million and a diluted loss per common share of 45 cents. As you know, the main reason for the quarterly net loss is we incurred a charge-off related to a $35 million line of credit originated by the bank in November of 2017 that to a borrower purportedly the subject of a fraudulent scheme. The effects of this charge off had a very clear impact on our quarterly earnings. Notwithstanding this event, our team continued to make significant progress during the quarter on our core strategic initiatives, which we will discuss momentarily. Let me first address what we have done since learning of the fraud. In addition to evaluating the loan itself and ensuring we are taking the necessary steps to pursue recovery, I wanted to evaluate our existing portfolio to make sure there is nothing else we should be aware of now. Following this event, I directed an extensive review of all loan C&I relationships $5 million and above not secured by real estate. Through the use of internal audit and outside parties, we looked at loan, security, and collateral documentation for each credit and confirmed the existence of our collateral if held by a third party outside of the bank. I also requested a review of the top 10 relationships in our warehouse lending group to confirm that we have appropriate documentation in place. While the reviews are not yet complete and we await final confirmations for certain loans, to date we have not identified any other instances of fraud or concerns that the collateral held by third parties does not exist or material concerns with our documentation. Turning to our overall business, I want to highlight some of the significant accomplishments this past quarter which are much more indicative of our overall performance and represent our ability to execute on our strategic plan. As you may recall, we set forth three areas of focus for 2019, reducing our cost of deposits, lowering our quarterly operating expenses, and eliminating non-core assets. All of this is intended to create the foundation upon which we will grow in 2020. We view cost of deposits as one of the key litmus tests for how we're executing on our plan. In Q3, we continued to make great progress and reduce our cost of deposits by 14 basis points. While lower rates have helped, our ability to generate non-interest-bearing deposits has been a key component as the mix of our deposit portfolio is most important for the long term. This progress reflects the significant effort we have made internally to transform the bank into a relationship-focused business bank. In the third quarter, we saw non-interest-bearing deposits increase by 11% from the prior quarter to over $1.1 billion, and they now comprise almost 20% of our total deposit portfolio. Additionally, we eliminated a significant amount of broker deposits, which now make up less than 2% of our deposit balances. We expect our broker balances to move up and down, like FHLB advances, to bridge funding, but we anticipate running broker and wholesale funding at reduced levels going forward, as we continue to make progress on increasing our low-cost deposit base. On the asset side of our balance sheet, in the third quarter, we opportunistically exited lower coupon and longer duration mortgage-backed securities, with the remainder to be sold in the fourth quarter. This will give us the opportunity to begin the process of building a more traditional and balanced securities portfolio, consistent with what you would expect at a community bank. It will take time to build, but will be more creative to us long-term. We have significantly reduced CLO balances over the last year, and we'll look for opportunities to reduce those balances to the extent we can find comparable yield and duration. As a result of our targeted efforts to eliminate non-core assets, we ended the third quarter at $8.6 billion, with core assets playing a more prominent role in our profitability. Expenses were nearly flat, and came in slightly below last quarter when adjusted for the gain on investments in alternative energy partnerships. This quarter was particularly good given we viewed the second quarter's non-interest expense as potentially a low point for the year. John will talk in greater detail on overall expenses and operating expenses specifically, but at a high level, we remain focused on simplifying our operations and improving the client experience which in both cases will help us manage expenses to an appropriate level based on the size and complexity of our business model. We continue to place an emphasis on hiring very talented and experienced professionals. This past quarter, we brought on a trio of talented executives. John Statuta to head our Community and Business Banking Division, Hamid Hussain as Head of Commercial and Real Estate Banking, and Bob Dyke as Executive Vice President of Credit Administrations. Bob will step into the chief credit officer role when our current CCO, Chris Gagnon, retires early next year. These talented executives, along with the rest of our executive team, are among the most accomplished bankers I've ever worked with. Our story and opportunity is incredibly compelling, and we are highly focused on taking advantage of it. The entire team at Bank of California is very dedicated and talented. These leaders are reflective of the tremendous talent we have throughout our organization. With that, I'd like to now turn the call over to John to provide more detail on what was mostly a positive quarter for the bank. Then I'll come back to wrap it up before we take questions. Go ahead, John. Thank you, Jared.

As mentioned, we have continued to opportunistically shed non-core assets. Our total assets ended the third quarter at $8.6 billion, a $735 million decrease from the prior quarter. The change was driven by the $574 million multifamily securitization that mentioned on the last earnings call, which settled in August. Additionally, as part of our efforts to begin diversifying and building a more traditional securities book, we sold 371 million of mortgage-backed securities during the quarter, the majority of which occurred at quarter end. We still hold approximately 40 million of MBS and expect to sell the remainder of those during the fourth quarter. As a reminder, the MBS portfolio was long duration and low coupon. With the decline in the middle portion of the Treasury curve, we were presented with an opportunity to exit the position and begin the process of diversifying into less price-sensitive securities that provided better cash flow structure. The sale of the MBS resulted in a $5.8 million loss, inclusive of an other-than-temporary charge, and a loss on interest rate swaps used to partially mitigate the price fluctuations of the securities. The securities sold at the end of the quarter are shown as a receivable on the balance sheet, and we expect by the end of the year, the securities to total assets ratio will be approximately 10 to 15%. Held for investment loans decreased to $6.4 billion this quarter, due mainly to a $220 million net reduction in SFR and multifamily balances, driven by an increased level of loan payoffs. This was expected as we are focusing on more relationship-oriented loans that are less price sensitive. The loan portfolio mix of SFR and multifamily loans is 52% at quarter end, down from 59% at the end of the prior year, and we expect this mix to continue to decline to a more reasonable percentage component of the loan portfolio. Our net C&I balance has decreased by $162 million due to lower production for the quarter, the $35 million charge-off exiting one large relationship, lower utilization of revolving facilities, and other credit-related exits as we continue to prudently monitor our loan portfolio, ensuring potential credit risks are being managed actively and swiftly. Rounding out the changes in the loan portfolio, our CRE and construction balances increased by $54 million. The overall loan portfolio yield decreased five basis points to 4.75% during the quarter due to variable rate loans resetting and higher coupon commodity loans being refinanced to other institutions. The loan yield did see a benefit of four basis points due to a higher level of loan prepayment fees and accelerated discount from the repayment of purchase loans, in addition to the securitization of the low-coupon multifamily loans. However, the combination of higher prepayment fees and the multifamily securitization was not enough to offset the negative impacts of falling LIBOR. Currently, C&I balances are approximately 29% of our total HFI portfolio, and relatively flat compared with 30% last quarter. Going forward, we expect a mix of C&I loans to comprise 25 to 30% of the overall loan portfolio. Moving on to deposits, higher-cost brokered CDs decreased by $325 million, or 86%, to $54 million by quarter end. Additionally, higher-costing money market and savings accounts fell by $105 million and $19 million, respectively. Overall, our targeted efforts to lower our funding costs reduced average deposit costs by 14 basis points from Q2 to 1.48%. We further reduced our wholesale funding by $562 million in Q3, primarily due to applying the proceeds from the multifamily securitization toward paying down overnight FHLB advances. We expect our wholesale funding to progressively decline with alternative lower-cost funding and as we continue growing relationship-based lower-cost deposits. Core deposits, or non-broker deposits, now account for 98% of total deposits, up from 92% last quarter. Turning to the income statement, our net loss to common stockholders for the quarter was $22.7 million, or a loss of $0.45 per diluted common share. As Jared described earlier, the quarterly results were negatively impacted by the $35 million charge-off in the quarter, $5.8 million loss in the sale of mortgage-backed securities, and $5.1 million loss from the preferred stock redemption. The charge-off pushed up our historical loss factors used in our ALLL calculation, which added an additional $3 million to the quarterly provision expense. These outlying charges were partially offset by net non-core expense benefit items totaling $2.5 million. After adjusting for non-core items, along with the amortization expense associated with our solar tax equity program, our operating expenses for the third quarter were 46.7 million. Normalizing our tax rate to 20%, operating earnings from core operations were 19 cents per diluted common share for the third quarter. Reconciliations for this are located within today's earnings presentation. Average interest earning assets decreased from the prior quarter to 8.2 billion, with the average yield decreasing nine basis points to 4.50%. Since the CLO investments are indexed at three-month LIBOR and reset quarterly, the securities portfolio average yield decreased by 23 basis points to 3.60%. The CLO book largely reset at the end of July and is currently resetting lower again based on LIBOR rates from 90 days prior or about nine basis points from the quarter end level. The bank's net interest margin was flat to Q2 at 2.86%. This was mostly due to the effects of lower cost of deposits, LIBOR rate resetting in the securities portfolio, higher mix of wholesale funding, and a LIBOR-driven decline in loan yields. Net interest income decreased by $5.9 million from the prior quarter to $58.9 million. Loan interest income decreased by $8.9 million in Q3 due to a $746 million decrease in average portfolio balances, as well as a five basis point decline in the average yield. Interest income on securities declined by $2.4 million on lower average balances and a LIBOR rate reset previously mentioned. On the liability side, interest expense and deposits decreased by $5.8 million or by 20% on lower average balances and 11 basis point decline in the average cost of interest-bearing deposits. Interest expense on FHLB advances increased by 230,000 from the second quarter due mostly to a higher average balance, slightly offset by the average cost being five basis points lower from the prior quarter. The overall average cost of interest-bearing liabilities fell by six basis points to 2.03%. With respect to potential reductions in the Fed funds rate or other indices, our model interest rate risk position is slightly asset sensitive. The provision for loan losses in the quarter increased to $38.5 million and included a $35 million charge-off and the related additional $3 million provision described earlier. The A-triple-L coverage ratio of non-performing loans is 139%, while the overall A-triple-L ratio to health for investment loans is 99 basis points. Total non-interest expenses for the quarter were $43.3 million, which includes the previously discussed net non-core benefit of $2.5 million. Adjusting for non-core expenses, Q3 core operating expenses were $46.7 million, or 2.17% of average assets annualized. As we continue to align run rate expenses with our size and footprint, we expect to see near-term quarterly operating expenses remain below $50 million. Our capital position improved during the quarter mainly due to a reduced asset base. The common equity Tier 1 capital ratio was 10.3%, and Tier 1 risk-based capital totaled 14.31%. Tangible common equity increased to 7.8%, up from 6.57% one year ago. During Q3, we completed a partial tender offer for shares of the Series E and Series E preferred stock for an aggregate total consideration of $46 million, inclusive of premium and accrued dividends. We continue to maintain a fairly robust capital position, which provides us with flexibility to allocate and execute on capital strategies, which the Board deems appropriate. Lastly, let's move on to credit and asset quality metrics. Our non-performing asset ratio for the quarter was 52 basis points, up 21 basis points from the prior quarter. This is due mainly to a $14.5 million shared national credit which was reclassified to non-accrual late in the quarter. This SNCC continues to remain current on its payment status, and any subsequent payments received will be fully applied to reduce the loan amount. Total delinquent loans increased by $4.1 million, resulting in delinquent loans to total loan ratio of 88 basis points. The upturn was mainly driven by SFR loans. Since the end of the quarter, $8.7 million of delinquent loans have cleared and are now current. With that summary of our third quarter financials, I'll turn the call back over to Jared.

Thank you, John. In the seven months I've been at the bank, we have made tremendous progress advancing our strategic priorities of transforming Bank of California's balance sheet and becoming a relationship-focused business bank. This past quarter, we undertook significant capital management activities and will continue to look for efficient and optimal strategies to deploy excess capital. Such a transformation is not easy, And the fact we have done so much in such a short period is a credit to the talented professionals here who come to work each and every day seeking to do better than the day before. We are doing all this while still serving and expanding our client base. We aim to be our client's most trusted banking partner by listening to their needs and working to develop solutions and ensure they are getting the exceptional service and execution for which Bank of California is known. We are currently working on numerous technology initiatives to continue to deliver and improve on the client experience. This month, we launched a new platform to onboard clients faster and will soon launch an upgrade to our core system that will improve system functionality for our business clients. By investing in technology, we're simplifying the way we do business with our clients and improving the way our clients access and interact with their accounts, with us, and their clients and vendors. This is all being driven through client feedback we've received and on which we are taking action. We are in the early phase of rolling out our investor real estate program, providing ready capital to sophisticated real estate investors in Southern California. We're also building on to our business banking program as well as our healthcare lending program. These are all initiatives with roots that are taking hold now and that we expect to show results in the coming quarters. Each of these initiatives is built around a need we see in the market that we believe we can respond to with our talented colleagues. We are building relationships by understanding our clients' needs and bringing solutions to address those needs. Looking ahead into the coming quarters, we will continue to execute on the three critical areas of our focus, which have the most bearing on our strategic success. I expect to see non-interest bearing deposits become a larger part of our overall deposit portfolio as we actively manage down our funding costs and build client relationships. The deposit incentives, which were introduced to our employees earlier this year, are centered on building relationships rather than just transactions and have shown impressive results. I'm excited to see what a few more quarters will bring. We've made incredible progress reducing our expenses to be more aligned with our size. We will continue to look opportunistically to improve expenses and our efficiency going forward. Additionally, our balance sheet has transformed over the last several quarters. Since the beginning of the year, we have exited over $2 billion of non-core assets, allowing us to exit higher-cost liabilities and building a foundation from which we can further grow our franchise value. I also expect we will continue finding ways to drive incremental value from our balance sheet through additional refinement and the thoughtful accumulation of high-quality assets. Over time, we expect to see CRE loans, which are comprised of commercial real estate, multifamily, and construction balances, moving closer to 70% to 75% of our total commercial loan portfolio, while C&I loans making up the remaining 25% to 30%. This will be due mostly to our initiatives to grow our portfolio of relationship real estate loans and the incremental business it is expected to generate for the bank. Overall, IC is very well positioned on both sides of the balance sheet. We expect to continue to make progress bringing in low-cost deposits and reducing our overall cost of funds, and on the asset side, We will continue working to remix our loan portfolio, replacing non-relationship loans that pay off with good-yielding relationship loans that bring deposits. We also expect our securities portfolio to start to fill out with more balance. In the short term, pure earnings may be lower as we build assets back up, but ROA should grow. Importantly, we have laid the foundation for the bank to create true franchise value going forward, generating relationship-based loans and deposits that in a way that is more traditional for a community bank and that deserves a higher valuation as we continue to execute on our strategy. As a whole, we made some very meaningful and significant strides in achieving our strategic goals this quarter. I'm very pleased with the direction we are heading and excited about the incredible work and progress we've made to get us to this point. We have a very talented team of colleagues who are successfully executing every day. Thank you for listening today. and I look forward to updating everyone on our full year progress during our next call in January. With that, let's go ahead and open up the line for questions.

Thank you. Ladies and gentlemen, we will now begin our question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will come from Matthew Clark of Piper Jaffray. Please go ahead.

Good morning. Good morning. Maybe we could start just on On the outlook on the size of the balance sheet, I mean, brokerage CD is down to 2%, kind of bouncing around, I guess, from here. But I guess how should we think about the overall size of the balance sheet as we get into next year? Do you feel like we can stabilize around that, you know, $8.4, $8.5 billion level, or do you feel like it's going to go a little lower than that?

No, I think right now we're pretty good. I mean, it's hard to know exactly, but, you know, we ended the quarter at $8.6 billion. We have repayments and the pace of repayments is what's hardest to predict. But I expect that our loan generation will replace the payoffs. And so we're probably remixing more than growing for now. And then we'll have to assess, you know, the balance that we're looking to maintain is on the liability side so we don't get into a position where our loan growth is so substantial that we put pressure on the liability side again. And I think we're doing a really good job of that. We're generating deposits in a way that can keep pace So, from the short term, I expect us to remix, and then over time, I expect that we're going to grow.

Okay. And then maybe just on the NIM outlook, given a lot of the work you've done on both sides of the balance sheet, I would anticipate we'd see some expansion from here. I guess, what are your thoughts on kind of the trajectory of the margin and – You know, I assume we can get above 3%, but beyond that, any color would help.

Yeah, you know, can't get there fast enough, but we're trying to be smart about it. You know, I think given all the movement in the quarter, with it being flat was pretty good, especially there's a lot of pressure out there right now on rates. It's very competitive. You know, our loan yield – on new originations was 5.1, which was above our portfolio yield of 475. And so we're still generating loans above our portfolio yield, which is why when we remix, I expect that, you know, it's going to enhance, it'll protect or enhance our current yield. And then we're continuing to make a move on the liability side. And our deposit costs, we expect to continue to decline. We have a lot of maturing CVs in the fourth quarter, a significant number. that we expect to reprice downward. And so that's about as much color as I can give you. You know, it's hard to say exactly where it's going to move to, but we've said that 3% is somewhere we want to get to sooner rather than later, and I think we're going to make progress this quarter.

As we've talked about in the past, our primary focus is really on driving down the cost of deposits and We had quite a bit of brokerage CD that ran off very late in the quarter, so we'll get the full benefit of that in the fourth quarter. And as Jared had mentioned, we've got a substantial amount of retail CDs that come due in the fourth quarter, and they carry rates that are between $2.25 and $2.40, and we'll reprice those down. We don't necessarily expect to retain all those, but they will be repriced down, and we will have some retention that will materialize out of that. So those are a couple of the drivers where we continue to see opportunities to drive down our cost of deposits.

Okay. And then maybe just on the SNCC that went into non-accrual, could you just give us some color in terms of the type of business or industry they're in and remind us how much in the way you have in SNCCs? And then maybe as a follow-up, just where your criticized classified stood at the end of the third quarter versus the second quarter?

Sure. So on this, Nick, you know, it's a $14.5 million relationship. It's a private equity-led deal in the apparel industry and retail. I think we're properly reserved on it, but it's a current pay loan. And so this was a circumstance where, you know, the regulators came in and, I guess, changed the rating on it for the lead bank. And therefore, you know, we were all forced to make the same adjustment, but we already had a reserve on it. And it is paying. And so, you know, it was nothing that we really had control over, which is why I hate shared national credits. I mean, I don't really like being in any of these. We have five relationships left, five shared national credits. And our total commitments are in the shared national credits. I'm looking at a sheet right now. approximately $47.5 million, so it's not a huge amount, but we're, you know, we'd like to exit them where we can. What was your second question, Matt?

Just on where your criticized classified stood at the end of the third quarter relative to the second.

Yeah, that's a component we totally don't disclose as part of the earnings. I would say that overall, though, we've seen improvement in the criticized classified for the quarter.

Okay, thank you. The next question comes from Jackie Bolin of KVW. Please go ahead.

Hi, good morning. Welcome back, Jackie. Thank you. Good to be back. The shared national credit from the quarter, is that the same one that we discussed on the first quarter, the leveraged loan? Because I know that was a SNCC as well with the PE sponsor.

Yes. We had three leverage loans. We have two left. And so this is one of the two that we have left. I don't remember which one. We had one that we got out of in the quarter. I told you guys I was trying to get rid of them. And one of them we actually were able to get out of. And so we have two left. This is one of them. It's a leverage loan. Yes.

Okay. Okay. Thank you. And then in terms of balance sheet changes, so it sounds like most of the large work has been done in terms of reshuffling things. And going forward, it's going to be a gradual remix as opportunities provide themselves without significant decline in assets. Did I interpret that correctly?

Yeah, I think that's right. I mean, we've made some really, I think, significant progress on some very specific objectives, you know, on the expenses, on the deposit costs. We obviously have room to grow. And then shedding and kind of these non-core assets to create the foundation for the bank for growth going forward. I'm really pleased with what we've done there. It's obviously frustrating to have the noise that, you know, is kind of legacy that kind of distracts from that, but the progress was substantial, and we're going to continue to execute on our plan, so I think we laid the foundation for growth going forward. We still have a couple levers to pull. Holding our margin in a down-rate environment was not that easy, but we've been originating loans above our portfolio yield. And one thing I would say, Jackie, is we can actually grow much faster. But I just am trying to keep the spigots turned at the right level right now as we get kind of our deposit infrastructure in place. If we grow too fast, we're going to kind of end up backward worse. So I need maybe another quarter, quarter and a half to make sure that we don't turn the engines on too fast. But, you know, we're going to start growing here in a couple quarters.

Jack, I'd say where we could see the pressure, again, what Jared said earlier, is that with the rate environment, we could see increased repayments. We still have roughly $1.8 billion in single-family loans and roughly $1.6 billion in multifamily. And so those two categories could see some elevated repayments with the low-rate environment. So that would put a little bit of pressure on us in terms of the overall balance sheet size.

Yeah, I mean, look, if the SFR goes, that's fine. I mean, there's some stuff that's actually pretty good yielding and won't leave. But we can, I think we can replace it. The runoff we can put on multifamily pretty fast if we just drop our rates to the commodity levels, but we're holding rates higher than what the commodity pricing is, because we're asking for deposits, and we're trying to do better, better relationship loans. But we can we can generate them pretty fast if we just turn the engine on. And so that's the balance we're holding to right now. And we're trying to do this right the right way for the long term.

So your earlier comments when you said that you could grow faster if you wanted to and that you'll look to see more growth in future quarters and understanding you're managing the liability side as well, is that referring to the way that you're pricing your loans or is there something else that's mitigating some of your growth?

Two things. First is that we've just brought these teams and these new executives in place to lead the teams. We're making sure that we're putting out the right products and that they're priced the right way from a relationship standpoint. And we should be looking at a lot more deals than we actually do to bring in the right credits. And so that's the – I would say the patience and the discipline to do the right deals. And, you know, those pipelines are building up as we introduce our teams and as they get out into the markets. And so that's going to take time. On the multifamily side, again, we're trying to exercise discipline and do the right deals. I think it's a really important part of our portfolio. I think the fact that we can be a cradle-to-grave lender, do first-mile lending, as I've talked about in the past, which is acquisition and bridge and rehab on the front end, even light and full construction, and then do permanent financing on the end as a takeout is really, really competitive in the marketplace. There aren't a lot of lenders that are doing it and have the capacity to do that. And we can. And as I talk to more and more prospects and clients, they're They're very attracted to that. But we want to do it a certain way. We can always turn on the multifamily engine and let it run faster. Right now we're trying to run it at a pace that is appropriate for kind of how we're building up our deposit franchise. And I think a lot of that is rate focused. I mean, we can – to grow it right now without the front-end lending, it's more of a rate game. As we – bring on the front-end lending, the first model lending, it's less of a rate game because we're providing an option for those clients for permanent financing at the end of a project. And it's less rate sensitive. It's more about certainty. And so that's the balance. And, you know, it'll normalize in the coming quarters. But that's going to give you a sense of what it's like right now.

Okay. That's helpful. Thank you. And just one last one for me and then I'll step back. You mentioned capital actions. I can't recall if I wrote that down from the press release or prepared remarks. But when you talk about the flexibility you have for the future, does that refer to additional preferred redemptions as that becomes a possibility, or were there other items that you were looking to do?

All options are on the table, but certainly we are looking at the prep that becomes callable in June of next year. So we want to be in a position that if that's a decision of the board that we could call that series.

Yeah, so looking at both the optionality for doing preferred and whether we should do common, looking at both of those things.

Okay, great. Thank you.

Thank you.

The next question comes from Andrew Leach of Sandler O'Neill. Please go ahead.

Hey, guys. Good morning. I just want to circle back to your kind of expense outlook from here, saying stay below $50 million. You know, you have some initiatives that are planned. I guess how far below $50 million? I mean, is this 47 or so a decent run rate, or is this kind of the low for the quarter and it's going to build from here, or low for the year and it's going to build from here?

No, you know, Andrew, we've got a lot of initiatives that are still underway, and we've got some technology that we've talked about in the past that's coming online, and that was described earlier about some platforms that are being launched, and those will be launched over a couple quarters as we roll it out. So we'll start to see some expense savings that materialize from those efforts, but we'll continue to look at opportunities to build out the front line, so I'm hesitant to give any sort of increased guidance around that, but I do feel comfortable that will be below $50 million.

Okay. And then the added provision that was necessitated from the risk factors related to the fraud here, is that going to affect provisioning going forward, or is that all just captured here in this quarter?

It affects the loss factor. So to the extent that we have changes in the loan balance within that loan type, it will affect the provisioning for whatever that net change in the loan balance is. But once we move to CECL next year, it won't be a component that will be isolated and called out as part of our provisioning. So it doesn't factor necessarily into our CECL calculation.

Andrew, let me go back and address the expense question as well. Yeah, please. Every quarter it seems like we find more stuff, and so we're running at a, you know, we're running close to 50, and then we find something, and it drops down, and we realize, oh, that's something we can take out. I think all of those surprises are pretty much done now. And so, you know, we had a really good quarter, and I think that that is something that I think is sustainable. I say that knowing that if we found a great opportunity to spend on something that we thought would generate earnings, we would do it. Go ahead. I'm feeling pretty good about where we are, and obviously there's a range there, but that's why John is kind of holding to the 50, because stuff's come up each quarter where we've said, hey, that's another opportunity. Let's take advantage of that. But we're going to continue to be opportunistic.

Gotcha. Thank you. You've covered all my other questions.

Thanks, Andrew. The next question comes from Gary Tennant of DA Davidson. Please go ahead.

Thanks. Good morning. John, just on your comments earlier on the CD maturities in fourth quarter and the yields there, can you tell us what the dollar amount of CDs that are re-pricing and kind of what your, you know, rough delta would be on the set that you keep?

Yeah, it's roughly 600 million of CDs that mature across the quarter. Again, it's at about a 225 to 240 range. In the past, we've been retaining somewhere in the high teens. But with each passing month, the rate on the maturing CDs is higher. So we don't know if we're going to be able to continue to retain at that high of a percentage. So the retention rate might start to drop down as we get into the higher rate CDs.

And you said you've been retaining in the high teens? Is that what you said?

Yes, the high teens.

Yeah, we've been selectively, like, you know, we set pricing based on where we think we need retention to be based on our other volumes coming in on other products. So, you know, we can price CDs to retain 100% or we can price them and say this will probably generate 18 to 20% of retention and that's all we need. And if we get more, that's fine because we're happy with the price. And that's kind of the exercise we go through based on what assets we're, you know, generating or retaining each quarter. With this volume of, you know, it might be that we're going to retain more if our assets are going to stay flat. We'll just have to figure that out based on our volume of asset generation. But I would expect that rates would be, as John pointed out, when you're in the higher end of the range, you have the most sensitive, price-sensitive clients. And so they are going to go and shop that the most. So I think our ability to generate, to retain a lot at a much lower rate will be tested but we have other levers to pull to bring down our deposit costs, and we're continuing to do that.

All right. Good call, and thanks. The table in the press release with the new loan commitments, you know, noticed that the weight average coupon of the C&I originations was down 70 basis points in the quarter. Was that driven mostly by the decline in LIBOR from second quarter over the course of the third quarter, or something else? Right ahead.

So that's just kind of the competitive environment that we have right now on the new production. It's very competitive, you know, and so we're just trying to bring on the best credit. So we're willing to bring on credits if the credit quality is good and that credit quality is going to demand a lower rate. And so I think that's probably best described as a drive toward quality. you know, and also kind of affected by the rate environment. Obviously, we had some rate cuts in the quarter.

Okay, great. And then last question for me. On slide 16 in the slide deck, John, I wonder if you could just run through the items that you've embedded there in terms of the non-interest income adjustments. That's all the 1.7 million. I'm not sure I'm seeing what all of them would be to get to that number. Let me flip to the page here, Gary.

Which page again, please?

Slide 16.

The earnings profile?

Yes. And the non-interest income adjustment of 1.7 million, just what the items are that you've embedded in there?

That is largely related to the securitization efforts that went on in the other quarter. So there's just some adjustments around the gain on sale of the loan. offset by some other factors. So if you recall, we had kind of a two-step process with the securitization, and so in the third quarter, we recognized the gain on the securitization, and then there were some offsetting amounts to net it down to roughly the $1.7 million. Okay. Thank you.

The next question comes from Timur Brasiler of Wells Fargo Securities. Please go ahead.

Hi, good morning.

Good morning, Timur.

Maybe just circling back to the remaining shared national credits, any of those in retail or with the same lead bank?

Is your question whether or not any of the other shared national credits that we have led by the same party that's leaving the one that was downgraded?

Yes. No. Okay. And industry-wise, any of the remaining shared national credits in retail?

It looks like there's – no, I don't think so.

And I just want to make sure I heard this right. So the review that's taking place of the $5 million plus loans not secured by real estate and the top 10 warehouse clients, I think it was mentioned that the reviews are not yet complete. Was that just for the warehouse portion of it or are reviews still ongoing for kind of all loan review?

No, let me address that. So it was important that we take the opportunity to review you know, all loans not secured by real estate that were above a certain size. And so I directed this review. It was extensive. It was 53 loans representing almost $540 million in commitments, about 35 relationships, and it was all the lending relationships $5 million and above not secured by real estate. We focused on security and collateral documentation and confirmation to support the bank's collateral interest. Our internal audit department led it And then we had a third party that was independent, you know, come in and review. It was actually we had Pertivity come in and do that. And so we have not identified any other circumstances of apparent fraud for the credits review, nor have we identified anything that would give us large concerns over the existence of collateral held by the bank on our behalf of third parties. There aren't a lot of those, but there are a few. Obviously, we can't give assurances that, you know, our review was perfect, but We're still waiting for kind of the final results in terms of just people completing their work and the final confirmations. But that, I would say, is the validation of the work that we did ourselves as opposed to kind of any work at all. And then the warehouse review was separate, and that was just something that we did. So the confirmations were really around these larger 53 loans representing the 540 million of commitments not secured by real estate.

Gary, to give you some more detail on the non-interest income adjustment, if you go to the income statement, there's kind of three lines that make up the majority of that. So there's an impairment loss, there's the loss on the sale of securities, and then there's the gain on sale of loans. Hold on. You were going back to Gary's question? He was asking about the reconciliation. Right. The $1.7 million. Okay.

Timur, do we answer your question on the... On the review? Yeah.

Yeah, and then maybe just a corollary to that. Looking at the link order decline in C&I balances and, you know, the remix of the loan portfolio to 20%, 25% C&I, 75% CRE, was any of that remix or the loans exited this quarter from the C&I book a result of this loan reveal?

No, that's – That wasn't the result of the loan review. You know, one thing I should say about the Kim funding matter and this charge off that we had is we actually filed a complaint in federal court yesterday against Chicago Title, which was the title company, along with one of the other main creditors. So we jointly filed a complaint with one of the other main creditors that we're partnering with seeking $86 million in damages. We're jointly represented by two very prominent firms. And if you read the complaint, you will understand, you know, how complicated and elaborate the scheme was to defraud creditors. We are and will continue to aggressively, you know, pursue recovery. Obviously, we can't give any insurances in that regard, but I would say that, you know, the complaint speaks for itself. And so that's an example of, you know, the aggressive action we're taking to make sure that we do our best to recover here.

Okay, that's a good color. And just one more question for me, following up on Matt's question earlier, looking at deposits and the trends there, good acceleration and the reduction of the cost of deposits. Should we expect continued acceleration in how fast those costs are brought down? I guess any color on that would be helpful.

Yeah, well, certainly the rain environment is helping, although our teams are working really, really hard right now to generate new relationships. So we're asking for more money from existing clients and expanding our relationships with them. And then we're bringing in new accounts as well and new relationships from businesses and bringing over their business accounts. And I thought we made great progress in the quarter. John, do you have any thoughts on how quickly we're going to move? Do you think that was 14 basis points was something that

Yeah, so the items I touched base on earlier is going to contribute to the fourth quarter. We had, again, 325 million of brokered CDs that matured very late in the quarter, and they carried around a 240 rate, so we're going to get a full quarter benefit of that. And then we'll have the retail CDs that mature. Now, that will be spread across the quarter, so we don't get a full quarter. The other thing that I would start to look at – is that we grew our noninterest-bearing deposits by 114 million in the quarter, but the average balance was only up around 14, 15 million. So we should see some added benefit to the extent that those noninterest-bearing deposits stick throughout the quarter.

Okay. And, John, do you have the spot rate at the end of the quarter for deposit costs?

No, I don't have that. I'm not sure we typically disclose that. Let me look.

Thank you.

Thanks, Timur.

The next question comes from Tim Coffey of Janney. Please go ahead. Great. Thanks, Mark, gentlemen. Morning.

As we look at the warehouse lending line, how much was it down in the quarter, and kind of what's the percentage of warehouse lending to total loans right now, and where would you like it to go?

Well, I like the warehouse business. I think we do a really, really good job with it. We have a terrific team in place. It needs to remain a, you know, reasonable percentage of our balance sheet. And so given our size, you know, we could grow much faster. But I think right now we have a soft internal cap of, you know, just under a billion. And I think the last time I looked it was down to 880 or something like that. John, I don't know if you have the quarter end number. Yeah, but I expect that to expand this quarter.

Okay. And then from the comments, this corrects me if I'm wrong, it sounds like you're pretty much done with your securities portfolio repositioning and remixing. Is that about right?

No, I think we're in kind of the early stages. So at the very end of the quarter, we sold out a large portion of the agency MBS. Those are long-duration low coupon. And then we'll be remixing into securities that are much more traditional for a community bank of our size and complexity. And so we'll be spread across a number of different investment security types. Where we may still be a little bit on the high side is in our CLO portfolio. We're not necessarily looking to sell out of the CLOs any further. We do expect that they will be called over time, and then over time, the size of the CLO portfolio will start to be something that's a much more reasonable component of the overall securities book.

Okay. And then rent control has come to the entire state of California. How is that going to impact your multifamily business?

That's a good question. So... Rent control, first of all, it wasn't pure rent control. It was actually at lunch with one of the largest developers in the state who had been up in Sacramento working with the governor to make sure that this didn't go sideways. So they negotiated a percentage increase, an annual percentage increase that I think the real estate industry felt was good enough to allow them to kind of continue to expand. I think for some of the weaker property owners, it's obviously going to delay the improvement of those properties and it's going to kind of suppress values. But there is a path to increasing rents for, you know, for units. They're just not going to be able to increase them as fast. You're going to have a harder time moving out occupants. For existing properties, you know, it doesn't change the cash flows. And we obviously underwrite on existing cash flows, not on, you know, projected cash flows. for permanent multifamily. So those properties are still going to cash flow. They're still going to underwrite the way we had them coming in. I think the real question is on the takeout, are you going to have those loans for longer than you expected, or are they going to take out – it might, in fact, hold the portfolio a little bit longer to the extent that people have a harder time refinancing. But I think it's probably going to have a bigger effect on – the valuations of properties going forward. You're going to have to find some larger property owners to have the capital to improve properties that need to be improved because they're not going to be able to do it based on, you know, getting cash flows faster.

Right. And have you in the market started to see higher cap rates?

No, not yet.

Okay.

One of the reasons for that is And one of the reasons I like, you know, multifamily and I like infill construction is the housing issue in Southern California is very, very concrete. We have a big housing shortage, and these properties are very, very stable. And, you know, all the way through the sea end of the market, they are very, very stable for workforce housing, for blue-collar housing, and then for, you know, young professional housing and even for For older professional housing, it's very stable. The occupancy is very, very high, and I don't see that changing because there just isn't enough new product coming on into the market.

Do you track or can you provide the average age of the multifamily collateral in your portfolio?

I don't know if we have that.

Okay. And then how much of the construction book is to multifamily?

a big part of it.

Probably half. Yeah, probably half.

We have we have a single family right now, we're going to be doing a lot more of it going forward. I mean, a lot of our, our construction right now is single family. But what we expect to do going forward is, is, you know, infill construction for for housing. And that's, that's multifamily. And, you know, dense demographic areas to sponsors that that do this for a living. And so we will work with the best sponsors to do this. That's what I've done in my previous banks and have relationships with some of the best developers in the space.

Okay. All right. Those are all my questions. Thank you very much.

Thanks, Tim.

The next question comes from Steve Moss of B. Riley FBR. Please go ahead.

Good morning, guys. Morning. I wanted to just circle up on the emphasis on single-family loans. Just wondering, you know, how low could those balances go over time here?

Well, you know, if we sold them, they could go to zero. I think that they're paying off right now at a decent clip, which is giving us headroom to, you know, put on good relationship loans. But I don't know how – there's some alt-doc loans that probably are going to have a hard time refining, which is fine because they're at a higher coupon. Hard to predict. You know, I don't – it's not a relationship business. We don't have any deposits with it. It was generated – in a brokered fashion. So for me, it's one of the levers we can pull. To the extent that there's predictability to it and any of these loans that, you know, wouldn't otherwise refi, we could always sell. But a lot of them are just kind of refining out and we're using it to remix our portfolio. But it's hard to predict how fast it's going to run off. It's not a product category that we're actively originating.

We will do it as more of an accommodation to certain of our clients, but it's not a product that we're looking to originate.

Okay. And Then on the single-family delinquencies, were those primarily all stock loans or was there anything unique about the structure within those delinquencies?

No. And, you know, it's interesting. There's a lot of people that pay late in SFRs, but they just, you know, their current pay, but they pay late and that's just the way they run it. You know, I don't know if this is really a leading indicator of the economy, but I thought it was important that we lay this out to show that this is really not part of our portfolio. You know, we're not seeing delinquencies rise across the board, and you can see in our presentation on page six that we laid out where the delinquencies are coming from. In fact, they're stable to declining throughout the rest of our portfolio, and they're very, very low, as you can see. But, you know, as a percent of our delinquencies thus far is the largest.

Okay. And then... My last question, just on the CLO portfolio, were there purchases this quarter? It looks like the book yield reported this quarter versus last quarter didn't change.

No, there were no purchases during the quarter. We had some sales that occurred in the second quarter, but nothing in the third quarter.

You know, on the CLO book, we're at approximately 750, and, you know, at one point we're at 2 billion. I'm – we're 735, I think. I'm comfortable with where we are, and we're comfortable with the credit. We monitor it very closely. If there are alternative products to trade into to deconcentrate in CLOs, we would do that. Now's the time, as we build out our securities portfolio and normalize it a little bit. But I'm not interested in getting out and just, you know, abandoning the good yield that we have on it, which is around four. I think we're comfortable holding that position unless there are some good alternatives, and we'll ladder our securities portfolio with other stuff now that we got out of the MPS.

All right. Thank you very much.

Thank you. Thank you. Ladies and gentlemen, this does conclude the question and answer session and the teleconference. You may disconnect your lines at this time, and thank you for your participation.