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spk00: Hello and welcome to the Bank of California's fourth 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 telephone keypad. To withdraw your question, please press star then two. Today's call is being recorded, and a copy of the recording will be available later today on the company's investor relations website. Today's presentation will also include non-GAAP measures, the reconciliation for these, and additional required information is available in the earnings press release. The referenced presentation is available on the company's investor relations website. Before we begin, we would like to direct everyone to the company's safe harbor statement on forward-looking statements. included in both the earnings release and the earnings presentation. I would like to now turn the conference call over to Mr. Jared Wolf, Bank of California's President and Chief Executive Officer. Please go ahead.
spk04: Good morning, and welcome to Bank of California's fourth quarter earnings call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results. We ended 2020 with an exceptional quarter. one that demonstrates the potential of the franchise that we are building. We continue to execute well on all of the key initiatives that have led to our improved financial performance in recent quarters. And in the fourth quarter, we were able to add in the loan and earning asset growth that enhanced our profitability. As a result, we finished the year with a return on average assets north of 1.1% for the fourth quarter. On our last couple of earnings calls, we indicated that we expected to end the year with a larger balance sheet than the first half of the year to drive greater profitability. Our fourth quarter results reflected these efforts as we realized strong operating leverage and a significant increase in our pre-tax, pre-provision income, net income, and earnings per share. Looking back on 2020, we are proud that we delivered on the key objectives that we laid out for the year. We dramatically improved our deposit mix and reduced our cost of deposits. We maintained good stability in our net interest margin despite the dramatic decline in interest rates. We reduced expenses and increased our operating leverage. We shifted our loan portfolio more towards business-related relationship loans. We ramped up commercial loan production in the second half of the year to replace the runoff of the single-family loan portfolio and finished the year with a balance sheet that was just about even with the end of the prior year. We managed credit quality and improved our overall credit quality ratios despite the pandemic, no less, while still building up reserves. And we had several large wins that will accelerate our earnings growth going forward, including exiting the LAFC contract in a way that eliminates future payments, issuing sub-debt at attractive pricing, setting the table for preferred redemption that we hope to complete this year, restructuring expensive FHLB long-term borrowings, and obtaining sizable legal and insurance recoveries on old matters that contributed meaningfully to tangible book value. The result of these accomplishments is that we made significantly more money on a core basis in 2020 than we did in 2019, while operating with a smaller balance sheet for most of the year. And we were able to do it while dealing with the challenges presented by the COVID-19 pandemic and operating in a low rate, low growth environment. We closely evaluate our performance relative to other community and regional banks. And in many of these key areas, most notably reducing deposit costs, holding our loan yield, and improving our net interest margin. As laid out in our investor presentation, our relative performance since the beginning of 2019 has been among the best in the entire country. These results speak to our ability to execute on the strategies we have put in place to enhance the value of our franchise. We are consistently adding new commercial banking relationships with clients who are choosing Bank of California because they value our level of service and execution, not necessarily based on our pricing of loans and deposits. Our ability to effectively identify and cultivate these types of customer relationships and the value proposition we can offer them has been critical to our success in adding low cost transaction deposits and originating loans with attractive risk adjusted yields that support our net interest margin. We have also continued to optimize our operations to reduce expenses and enhance efficiencies with investment in technology to improve and provide exceptional banking experiences for our customers. In a year when the ability to serve clients digitally became even more critical to the financial services industry, we were able to leverage our technology platform effectively to not only drive increased efficiencies, but also to deliver more convenience and superior service to our customers at critical moments, like the rollout of the PPP program. It was a year of incredible progress, and I want to extend my gratitude to our entire organization for their dedication and hard work. I believe that together we have truly made Bank of California the go-to relationship-focused business bank in Southern California. And the positive reputation we have built is yielding more referrals every day and giving us more opportunities to add the type of high-quality deposit and lending relationships that will further enhance our growth and profitability in the future. Specific to our fourth quarter performance, we generated net income available to common shareholders of $17.7 million, or 35 cents per diluted share, and $29.6 million in pre-tax, pre-provision income. As I mentioned, one of the initiatives we had in 2020 was pursuing insurance recoveries for historical legal matters where we might not have received sufficient reimbursement from the insurance company or where we determined we should have seen a recovery through litigation. We successfully recovered approximately $2.8 million in the fourth quarter, which added to our earnings and growth in tangible book value during the quarter. We continue to work on behalf of shareholders to pursue recoveries on other matters, though the timing and resolution of such matters, of course, remains uncertain. Excluding these recoveries, we still had significant growth in earnings, which was driven by a number of factors. Most notably, we continued to drive down our funding costs with our total cost of deposits declining 15 basis points to 36 basis points for the fourth quarter and ending the year with a spot rate of 29 basis points. The lower deposit cost was primarily driven by the continued improvement in our deposit mix. We are sixth consecutive quarter of DDA growth, with strong inflows coming from both our traditional banking groups and our specialty deposit areas. The growth in DDA enabled us to reduce our balances of higher cost time deposits and other wholesale funding. The reduction in deposit costs, combined with good stability in our earning asset yields, helped drive a 29 basis point increase in our net interest margin to 3.38%. We continued to maintain good expense control, and our core expenses decreased 9 percent from the same quarter a year ago. And we saw positive trends across our asset quality metrics, with a 45 percent reduction in our non-performing loans to $36.6 million and a 29 percent decrease in loan deferrals to $202 million, as our credit team has been very successful in resolving problem loans at a pace that exceeds the amount of inflow. During the quarter, we resolved two of our largest non-performing loans with no additional reserves required for either loan. Given the positive trends in asset quality and the substantial allowance that we have built, we had just a small provision requirement in the fourth quarter. As I mentioned earlier, the most significant difference in our fourth quarter performance relative to earlier in 2020 was our level of earning asset growth. We added $773 million of newly originated loans in the fourth quarter, which was up 39 percent from the third quarter and which resulted in net loan growth of $220 million, as we are still seeing considerable runoff in certain legacy areas of the portfolio. Loan production is coming from both new relationships to the bank, as well as from expansion of existing relationships. Due to the good production we had in the fourth quarter in our targeted areas, loans to commercial customers increased to 79% of our total loans, up from 78% at the end of the prior quarter and 72% at the end of 2019. While many borrowers remain cautious and the environment is extremely competitive, we are still seeing good, high-quality opportunities throughout our markets, and our banking teams are doing an outstanding job of filling our pipeline and closing relationship loans. The pipeline remains healthy as we begin the new year, and the volume of opportunities that our bankers are generating allows us to select credits with attractive risk-adjusted yields and achieve the type of profitable growth that we are targeting. As a result of our pricing discipline, we are able to maintain good stability in our average loan yield throughout 2020, which ultimately helps to support the significant increase we saw in our net interest margin at the end of the year. Overall, we are pleased that despite a difficult environment, we were able to deliver on our key objectives for 2020 and deliver strong profitability that we will continue to build upon in 2021. Now, I'll hand it over to Lynn who will provide more color on our operational performance. And then I'll have some closing remarks before opening up the line for questions. Lynn.
spk02: Thanks, Jared. First, as mentioned, please refer to our investor deck, which can be found on our investor relations website as I review our fourth quarter performance. I will start by reviewing some of the highlights of our income statement before moving on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the third quarter of 2020. That income available to common stockholders for the fourth quarter was $17.7 million, or 35 cents per diluted share. Our adjusted pre-tax, pre-provision income was $24.5 million, an increase of $5.6 million from the prior quarter. This resulted in a return on average assets of 1.11%, and an adjusted return on average assets of 92 basis points. Total revenue increased $8.7 million, of 14.6% compared to the prior quarter as net interest income increased by $5.7 million and non-interest income rose by $3 million. The net interest income growth reflected the ongoing benefit from lower funding costs combined with the impact of a larger balance sheet. The increase in non-interest income stemmed mainly from higher settlements and insurance recoveries on past legal matters. We achieved a net interest margin of 3.38% of 29 basis points from the prior quarter due to both an increase in our overall earning asset yield and a decline in our cost of funds. Our cost of funds declined by 12 basis points to 70 basis points, despite having two months of carrying costs associated with our $85 million subordinated debt issuance. Our earning asset yield increased 18 basis points due to the combination of a higher total loan yield and an improved mix of interest-earning assets as we deployed excess liquidity into higher-yielding loans. The average yield on loans increased 12 basis points to 4.58 percent during the fourth quarter due to higher average commercial and industrial loans and higher prepayment fees from refinancing activity and accelerated accretion from PPP loan forgiveness. As Jared highlighted, Our average total cost of deposits fell 15 basis points to 36 basis points for the fourth quarter, as we successfully lowered our cost of interest bearing deposits by 19 basis points and increased our average non-interest bearing deposits by $91 million. We ended the year with a spot rate of 29 basis points for our all-in cost of deposits. Looking ahead, we expect our funding costs to continue to trend lower in 2021. albeit not as much as in 2020. With that said, we have a few larger money market accounts and time deposits that should move down our cost of deposits once they reach the end of their agreed terms. Over the next six months, we have $324 million of CDs and FHLB advances scheduled to mature with a weighted average cost of 1.3%, which should further reduce our cost of funds. With our cost of funds likely to continue declining and our balance sheet likely to attain modest growth, we see the potential for further net interest margin expansion over the course of 2021, excluding the impact of PPP-related income. Non-interest income increased $3 million to $7 million. While customer service fees increased by $455,000 and processing fees for credit facilities increased by nearly $300,000, The biggest driver of our non-interest income growth in the quarter was higher settlements and insurance recoveries of $2.4 million from several historical legal matters. The opportunities and timing of recovering such monies are not predictable, but we will continue to strategically pursue them. We continue to drive operating efficiencies as adjusted expenses of $44 million for the fourth quarter declined 9% from the same quarter last year. our adjusted expenses increased $3.4 million, or 8%, from the prior quarter, due mostly to higher incentive compensation related to our balance sheet growth and profitability. The effective tax rate for the fourth quarter was 24%, compared to 13% for the third quarter, and the effective tax rate for all of 2020 is approximately 12.5%. Turning to our balance sheet, our total assets increased by $139.2 million in the fourth quarter to $7.9 billion. We deployed a portion of our excess liquidity into high-quality commercial loans and we continue to replace high-cost deposits and brokered CDs with core deposits in the quarter. As we selectively add high-quality earning assets in the future, both in terms of loans and investment securities, We continue to have flexibility to add overnight and other wholesale funding, if needed, to strategically support our earning asset growth. Our gross loans held for investment increased by $220 million, or 3.9%, during the fourth quarter, as growth in C&I loans more than offset lower multifamily, CRE, and SBA balances. The CNI loan growth of $501 million in the quarter was primarily due to growth in mortgage warehouse lines. The $47 million decline in SBA loans in the quarter was primarily due to PPP loan forgiveness. As of year end, about 39% of our PPP loan count, representing about 56% of our remaining PPP loan dollars, were in the forgiveness process. We are actively working with our clients to help them through the forgiveness process and using the opportunity to deepen relationships and identify additional lending opportunities. In addition, we have already started participating in round two for PPP loans to support our existing and prospective clients. Deposits were relatively flat at $6.1 billion at year end, but our mix and costs continue to improve thanks to our focused initiatives. Our activity in the quarter included a $64 million decrease in brokerage CDs and a $65 million decline in non-brokered CDs. These decreases were substantially offset by a $63 million increase in low-cost checking and growth of $109 million in non-interest bearing deposits. Non-interest bearing deposits represented 26% of our total deposits at quarter end, up from 24% at the end of last quarter. Demand deposits non-interest bearing plus low-cost checking increased by 5% from the prior quarter, representing our sixth consecutive quarter of demand deposit growth, a goal we remain very focused on to drive franchise value. Over the past year, demand deposits increased to 60% of total deposits, up from 48%, reflecting the significant improvement we have made in our deposit base. This increase, combined with the lower interest rate environment in our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost of deposits down from 127 basis points from a year ago to 36 basis points achieved in the fourth quarter. Our securities portfolio was substantially unchanged at $1.2 billion. However, $16 million of CLOs were called, and for the third consecutive quarter, tighter credit spreads reduced the unrealized loss in our CLO portfolio to $9.7 million. The improvement in CLO pricing this quarter added 11 cents to our tangible book value per share relative to the prior quarter. Our entire securities portfolio ended the quarter with a net unrealized gain of $11 million. One of the highlights from the fourth quarter was our strong credit quality performance. We resolved a couple of our largest MPAs during the quarter, leading to the 45% reduction in our non-performing loan balance. Our loan deferral numbers also declined by $81 million to 3% of total loans held for investment, down from 5% at the end of the third quarter. Delinquent loans decreased $51.4 million in the fourth quarter to $31.6 million, or 0.54% of total loans. Non-performing loans decreased $30.3 million to $36.6 million as of year end. However, $17.7 million, or 48% of this balance, represented loans that are in current payment status but are classified non-performing for other reasons. The $30.3 million decrease is a net number and included $35.8 million of loans resolved since the end of the last quarter. offset by $5.5 million of new non-accrual loans. Let me turn to our provision for the quarter. As we've discussed in the past, our ACL methodology uses a nationally recognized third-party model that includes many assumptions based on our historical and peer loss data, our current loan portfolio, and economic forecasts. We saw less volatility in economic forecasts during the second half of the year, which resulted in a lower impact on our allowance for credit losses. This combined with the improved asset quality metrics resulted in a fourth quarter provision for credit losses of just $1 million. Following the provision expense recorded in the fourth quarter, our total allowance for credit losses totaled $84.2 million, which represents an allowance to total loans coverage ratio of 1.43% or down 23 basis points from the third quarter. This decline reflects a number of factors, including our improved asset quality metrics, the charge-off of the specific reserve related to our largest non-performing loan that was resolved in the quarter, the mix of our loans, as much of our growth in the quarter occurred in our mortgage warehouse portfolio where historical loss experience is extremely low, and our view on how the current economic forecast will impact our specific portfolio. Excluding our PPP loans, the ACL coverage ratio stood at 1.48% at December 31st, while the allowance to total non-performing loans coverage ratio also remained healthy at 230%. Our capital position remains strong, with a common equity tier one ratio of 11.19%, and has benefited from the strategic actions completed over the past several quarters. We will continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value, while protecting our very well capitalized position at a time when the outlook, although improving, still remains uncertain. The successful subordinated debt raise of $85 million in the fourth quarter further positions the company to move forward on capital actions during 2021, subject to regulatory approval, that are expected to be accretive to earnings. At this time, I will turn the presentation back over to Jared. Jared?
spk04: Thank you, Lynn. As we begin 2021, we are still facing an uncertain environment. Our Southern California markets are still significantly impacted by COVID restrictions, although we haven't seen an impact on our credit quality or a new wave of deferral requests. And as our fourth quarter performance demonstrates, while we remain cautious around credit, there are still good lending opportunities available. The rollout of the vaccine is certainly positive news, but it's hard to predict the timing of when the operating environment will begin to normalize. So we will continue to operate in an appropriately conservative manner, maintaining high levels of capital, liquidity, and reserves. And the same characteristics of our loan portfolio that enabled us to maintain strong credit quality throughout 2020 remain in place and should enable us to be very well positioned from a defensive standpoint. Our goals and priorities for 2021 are similar to the goals we set and achieved in 2020. We expect to continue realizing positive operating leverage as we grow the balance sheet. To maintain the 1% plus return on average assets we achieved in the fourth quarter, we have to continue to enhance our funding base and grow the balance sheet to a size that matches our expense base. We expect to largely complete those goals during the first half of the year, which will put us on a sustainable path to consistently higher returns beginning in the second half of the year, subject, of course, to the operating environment and economic landscape. We feel the organization is at the right size now, and we don't need to make meaningful investments to drive near-term growth. We believe that we can generate balance sheet growth while keeping expenses flat to modestly higher this year. There's quite a bit of capacity to grow with our existing banking team, as the talent we have added over the past couple of quarters continues to build their books of business. We still have opportunities to lower our deposit costs, although not to the same degree as we did in 2020. The biggest opportunities in 2021 are centered around some larger time deposits that mature during the year. As these deposits reprice or run off, we will see further declines in our deposit costs. We'll continue to leverage technology to both increase efficiencies and enhance business development. And as Lynn mentioned, we'll look to take capital actions to optimize our capital in ways that will be accretive to earnings. Now that we have added the sub debt, we have started working on these actions and expect to make progress as we move through the year. These are our goals and priorities for 2021. The progress on these goals won't be linear. Historically, the first quarter isn't as strong as the fourth quarter due to seasonal expenses that have a greater impact early in the year. In sub-quarters this year, we might have progress on one or two goals, while others, we might make progress on all of them. But over the course of the year, we believe we can achieve all of our goals just as we did in 2020, which would result in a strong year of earnings growth and value creation for our shareholders. While I used the term profitable growth earlier, it's important to understand that our emphasis is really more on the profitable than the growth. We aren't interested in growing for growth's sake. We are focused on growing in a way that benefits the franchise over the long term. Our growth is being driven by adding full commercial banking relationships that generate attractive risk-adjusted credits, not transactional loans. This is the approach we've had since I joined the bank. It requires patience and discipline, but we believe this is the best way to truly enhance franchise value. And we will work hard to make 2021 another rewarding year for Bank of California shareholders. Thank you for listening today. I hope that you and your families are safe and healthy, and I look forward to sharing more about Bank of California's progress in the coming quarters. With that, Operator, let's go ahead now and open up the line for questions.
spk00: 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question comes from Timur Brasiler of Wells Fargo. Please go ahead.
spk08: Hi. Good morning, everybody. Good morning, Timur.
spk02: Good morning.
spk08: Maybe just starting on the balance sheet growth and looking at the loan growth this quarter, certainly pretty impressive, especially compared to some of the comments and the transitioning over the past couple of quarters.
spk07: I guess,
spk08: what drove that magnitude of the growth? I know it's coming from the warehouse business, but is that taking on new warehouse clients? Is this, uh, from increased utilization? And is there something that's more one time in nature that it all appeared in the fourth quarter or some semblance of the sustainable into 21?
spk04: Well, uh, yeah, we, we are certainly gratified by our loan production in the fourth quarter. It was, uh, It was distributed, though. Warehouse was the bulk of it, and it came from new relationships that we brought on. And as you know, we focus on mid and lower size mortgage brokers and not the huge guys, although we have some of those relationships as well. And we expect warehouse lending in terms of those balances to remain relatively flat for the year. So there's a lot of volume in terms of moving in and out, but we think the level at which we're at is about right. But we also had $230 million of growth in other areas. And when you compare that to our overall loan portfolio, it was 3.8% on a quarterly basis, but it was about 15% annualized. And then if you look at that $230 million across our loan portfolio excluding warehouse, it was closer to 5% or 4.7% or 18% annualized. So I think we had a good distribution of loans. We had a good inflow of CNI. As we look at this quarter, we're starting to see pretty good inflow of CRE on the bridge side right now. All of our teams are working really hard, and obviously we have the PPP that's in process right now. Early indications are that we're going to try to be somewhere where we were last time. We have about 500, almost 500 inquiries right now that are a little north of 100 million. Loan sizes are a little bit smaller, but there's obviously the $2 million max in the program this year for the second round.
spk08: Okay, that's helpful. Thank you. Maybe switching over to margins, I know, Lynn, you had mentioned that prepayment speeds helped and also higher link quarter PPP fees. Can you specify the link quarter increase in prepayment speeds and then the absolute dollars of PPP fees for the fourth quarter?
spk02: Sure, Tamar. I think I would start out by saying that, you know, each of the quarters have had some prepayment activity and PPP fees in them. And, you know, when I look at the trend quarter over quarter, I think we've done a really great job of keeping our loan margin relatively steady for the linked quarters based on our production. So appreciate that there's a little bit of these additional revenue items But the core, I'm going to say low in yield, is hanging in there about flat quarter over quarter. With respect to our PPP fees itself, I think it was just around $2 million. Sorry, I was trying to put my hands on my notes. For around $2.5 million for our PPP fees in the fourth quarter quarter. And, you know, the PPP fees, we have an estimated life of about a year. So we expect the majority of those to wrap up during the first quarter, especially as we launch into the second round of PPP.
spk08: Do you have the remaining? I'm sorry, go ahead. No, go ahead.
spk02: Yeah, the remaining amount? Yes. Yeah. So... From the first round with the fees that we had reported, there's about approximately $2 million.
spk08: Sorry, Jared, go ahead.
spk04: No, I was just going to say in terms of, you know, loan yields, as I look across our portfolio, it flipped a little bit, but it held up pretty well, certainly relative to the environment. The biggest stressors are really coming from the CNI side. I mean, it's highly, highly competitive right now. And we're doing everything we can to find the right loans that are giving us the appropriate risk-adjusted return for the service that we provide. And our teams are doing a fantastic job of doing it. We're trying to elevate every opportunity to a conversation and not kick it out on price alone so that we can figure out what could be done. But at some point, there's a line we're going to draw. And I would say in terms of looking at where loan yields are going, they're While there's some optimism out there that loan pricing is going to start rising, given where the tenure is going, it's still pretty competitive. Good news is that obviously our deposit changes have outpaced the changes on our loan yields, and also our loan yields have declined much, much slower than the market generally. So we're holding it pretty well.
spk08: Yeah, it's pretty impressive to have flat C&I yields at the level of you guys having that. But I'll step away for now. I'll let other people ask. Thank you. Thank you, Tamar.
spk00: Thank you. The next question comes from Matthew Clark of Piper Sandler. Please go ahead.
spk03: Hey, good morning. Good morning, Matthew.
spk00: Good morning.
spk03: Good morning. Your guidance on expenses being flat to up modestly this year, I just want to make sure we're using the right base in 2020. Is that about $170 million, $171 million in 2020? Okay.
spk02: On an adjusted basis, yeah. I think as I step back and look at it, 2020, we got out of the LASC agreement, so we had some elevated costs early in the year. And then I think our expense base normalized. As I look at the fourth quarter, I would expect our run rate to normalize down a little bit. We had a little bit more in the fourth quarter with the growth in the balance sheet and some year-end accruals that we cited in the release.
spk03: Okay, so flat to down off the fourth quarter then is the expectation?
spk02: Yeah.
spk03: Okay. And then just on the remaining deferrals that are left, can you just remind us what the maturity or expiration schedule looks like there?
spk04: We have a page in the deck on deferrals, and I might need to get you the detail afterwards.
spk03: Well, if it's in there, I can find it.
spk04: Take a look at the deck, and then if you have any questions. We don't have a chart that lays out kind of what month the deferrals went on. We have a couple loans in third deferral right now, but this is the last deferral that we're doing, and it's dwindling down. We also have the single family in there, which is a little bit longer. And so, but it's definitely coming down. And as we've talked about before, it's serviced by a third-party DMI. So in terms of the stuff that we service, it's coming down pretty dramatically. The single-family stuff is running off at a more measured pace. But, you know, we're not giving out any more deferrals for the stuff that we service.
spk03: Okay, great. And then, Lynn, just to follow up on the prepayment penalty income, can you just maybe quantify on a dollar basis, if you have it, what that was this quarter versus last?
spk02: You know, from a dollar perspective, don't have the dollars per se. I would just say that with the refinance activity, you know, we had some refinancing at the, or some decreases at the end of the fourth quarter, but we had it in the third quarter as well. So I think generally speaking, there's, Some portions, I think, in everyone's loan yields that have the prepayment. It's just the pricing of our loans. So, you know, I don't think we separate it out for just that. It's part of the loan pricing structure. So you've given up maybe some portion of the yield or you've added it in in order to get the prepayment. So it's, you know, doesn't really create any variance from quarter to quarter.
spk03: Okay. Okay, thank you.
spk04: Thanks, Matthew.
spk02: The one comment I would add, Matthew, is when you talk about our credit quality and our MPAs came down and we were able to resolve a couple of our large MPLs, one of them was a single-family residential loan. And in the process of placing it back on accrual status, we were able to recognize some additional interest income this quarter. And, you know, I'd put that around a half a million dollars. So that did add a few basis points to our net interest margin, which is kind of, you know, above and beyond. And as we resolve our non-performing assets, I wouldn't expect, you know, us to get necessarily those pops.
spk04: Yeah, we think that we can expand the margin. It's going to be tempered. I mean, it's not going to – obviously, we don't have – we have a lot of levers to pull, but I don't know that they're going to be as dramatic as we were able to accomplish earlier. But we still believe that we have some room to go, and we feel like we're operating in a fairly normal way right now. A lot of the heavy lifting, we're going to start reaping the benefits of it, and we're going to keep growing the balance sheet.
spk00: The next question comes from Gary Tenner of DA Davidson. Please go ahead.
spk06: Thanks. Good morning, guys. I just wanted to revisit the loan growth a little bit. You know, as you talked about, you know, really solid back half of the year, a lot of that driven by mortgage warehouse. But, you know, as you talk about the non-mortgage warehouse growth in the quarter, a little over $200 million, I mean, if you were to keep balances or mortgage warehouse balances flat from here, as you suggest, and grow at that pace, I would, you know, suggest somewhere in the, you know, at least low to mid-teens kind of loan growth year over year. Do you think that that's possible in 2021, given what you've put in place over the past year on the commercial side?
spk04: I don't know that I would look that high. I think the environment is such that we're going to be careful. And I think that that amount of, look, when we're starting with a really low base, it's easy to grow at a high rate. But overall, I think we're just going to be, you know, put on good loans. We do have runoff. And so while production might be a good number, the actual net growth probably won't be as high as you just indicated because of the runoff. And so, you know, we're doing things to hold the runoff to make sure that our production actually results in growth. But we do have a single family portfolio that's running off. We got some, you know, multifamily is obviously highly competitive. And so really proud of what our teams are doing to kind of fill the bucket and keep it at a good level and not have a hole in the bottom kind of draining it. So we're trying to keep the bucket reasonably full, but it's not going to be as high as that would implicate.
spk06: Okay. I wouldn't have thought growth would be quite at that level. I just want to get a better sense of where you were thinking about it.
spk04: Yeah. You know, look, based on what we're seeing right now, just a little bit more color if it's helpful. I mean, we've got some – We have a lot of great opportunities in warehouse and I will say that our team is exceptional. It's a, we're trying to be proactive for the opportunities that present themselves that are appropriately risk adjusted. So, you know, one quarter it might be like, you know what, warehouse is looking really good right now. Let's take advantage of the market and make sure that we bring that in and hold those balances because it's the right place and we're fortunate that we have such a high quality team in that In other quarters, it's going to be, God, bridge lending is really working well right now. And C&I is just looking too inexpensive. In other quarters, C&I is just looking strong. We have a lot of stuff. So we're trying to balance it, and we're pulling the right levers. It's not that we're going to build it all around one division or one type of loan. We want to have a balanced balance sheet that shows good C&I, good real estate. And mortgage is just one of those areas that we have the flexibility to play in. If there were loans... If there were loans that we thought were attractive to buy that were single-family, that were loans that we would have made on our own that have the right risk-adjusted yields that are in the non-QM space, we probably would do that. There are a couple things that we can do, you know, if we thought we could. There were the types of loans that we would do, and it was just to kind of support, you know, the runoff and try to keep it flat. Because at the end of the day, the growth really needs to come from relationships where we get deposits. And that's what's going to create the value going forward. But we're trying to be smart about it. So growth is going to be probably tempered, but it's going to be sufficient to achieve our profitability objectives.
spk06: Okay, thanks for that, Jared. And then just to revisit the question on kind of the expense outlook, Lynn, I think you said kind of fourth quarter, $39 million or so would be the right number. But that included like $4 million recovery or so in terms of professional fees or legal fees. I know there was some higher comp expense as well. So where's the balance in there?
spk02: Sure. You know, I think it's helpful to look well the way to the very end of the release where we go ahead and adjust out the indemnified legal costs that we've been tracking period over period and to take out our alternative energy partnership investments, the gain and loss, and the timing difference there as well. You know, when you look quarter to quarter, we were up about $3.4 million. And as I said, a portion of it was in compensation. You know, as we turn the page to 2021, you know, expect, you know, a few increases in some categories that continue to achieve some other efficiencies that we've identified. So, you know, if you look at the whole year, adjusted for no longer being in the LAFC contract, you know, I think it gets you back down to, I think, the $170 million number that was mentioned earlier is, you know, I think a reasonable expectation on how we're running things.
spk06: Okay, thank you for that. And then, Jared, just give me your comments regarding capital and that you've already started to put things into action, I think, is what you said on the capital front. Assuming regulatory approval, should we be thinking about the March 15th redemption date for at least part of the preferred?
spk04: Or do you think it goes beyond that? I'd prefer not to comment on that just because I think what we've said is that we're moving on that. There's a couple things that have to happen. We're optimistic we can get it done, but it's one of those things that's going to happen when it happens, and I wish we could predict when, but just out of respect for the process, I think we're just going to let people know when we have approval as opposed to predicting when it's going to be here.
spk06: Okay, fair enough. Thank you. Thank you.
spk00: The next question comes from David Feaster of Raymond James. Please go ahead.
spk05: Hey, good morning, everybody. Good morning, David. Good morning. I just wanted to, you know, talk on the payoffs and paydowns, especially in the multifamily side. It sounds like things are pretty competitive there. Just curious, how much of that's strategic, or is this truly just a competitive issue, and, you know, rates and terms are just getting kind of thin, and just maybe some commentary on the competitive landscape for loans more broadly. Okay.
spk04: Sure. So the multifamily refinancing space is highly competitive right now. We do our best to save the relationships when we learn that they are, you know, being shopped. We try to get out ahead of it, of course, but it's sometimes hard to do that because what you don't want to do is take your existing loans and, you know, reprice them downward when they weren't even thinking about moving. A lot of our loans have prepays on them. But the environment is so competitive that they can absorb the prepay with lower rates depending on when they last financed. And so that's how competitive it is. So we have, you know, I think our five-year, you know, mini-perms are somewhere in the middle of the pack. And we monitor our competition very closely and try to stay there. But at some point, the question is, what are alternative uses for our competitors? you know, for loans? And, you know, is it too cheap? Because we could just deploy money everywhere. When you're sitting close to 100% loan or deposit, you obviously need to be careful where you're putting your money. If we were down at, you know, 80% loan or deposit, we would be putting money wherever it could that it made sense to keep the balance sheet at the right level. So, look, we're trying to save them. It's not strategic. There's nothing strategic about having loans go out right now on the multifamily side, other than, you know, it's just too, uh, the rates are too low.
spk05: Okay. Yeah, that makes sense. And that's what I thought, but I just wanted to check and then, you know, look, the deposit growth that you guys have been able to post is phenomenal. And the, the pace of the remap, the remix of the deposit is, is really impressive. And it sounds like, you know, this based on the strategy, I mean, you've got accelerating loan growth compared to, I think a lot of peers. Do you think you can keep the pace of deposit growth in line with loan growth? Are you comfortable operating here in the upper 90s loan to deposit ratio or potentially go back north of that? Just curious your thoughts on deposit and funding growth going forward.
spk04: There's a massive amount of liquidity in the market. You monitor more banks than I do, but it seems like most banks are benefiting from the environment. and there's a lot of liquidity. So we're a beneficiary of that, although we're obviously looking to remix. And one of the ways that we've done it is by very focused efforts around who we want to bank on the deposit side. So we have a terrific specialty deposits team that sits within our private bank that goes after very large relationships. We just brought on a team for property management HOA. We had been active in the fiduciary and bankruptcy trustee area, and our teams are and looking at larger deposit clients that need specialty services. They need banks that know how to set up accounts for them quickly and manage relationships that have multiple accounts associated with them. It could be for M&A. It could be for things where there's just more hand-holding on the deposit side. And we have a great back office that works on that. And then our frontline teams are very focused on who's rate sensitive and who's not and kind of migrating away from rate sensitive clients and migrating toward business relationships where there's really no expectation of yield because they're operating accounts. And we believe that we can continue to grow in that area, and meaningfully so. And we've obviously been placing energy there for two years. And so we're reaping the benefits of that now. I think that our deposit flows can keep up with our loan growth. And so we're going to run around between 95% to 100% loan to deposit. It could be a little above 100%, but I don't see that right now. I actually see our deposit flows really supporting our loan growth. Loan growth on a net basis is not going to be astronomical just because of the runoff. But I think it's going to be good enough for us to achieve our profitability objectives, and we're going to keep moving the needle there.
spk05: Okay. Okay. And then last one for me, I mean, the asset quality improvement has been really good. Obviously, your portfolio is a lower risk portfolio, especially in light of the growth in warehouse. And, you know, the economic outlooks, hopefully, we're going to be improving. I'm just curious how you think about reserves and provisioning going forward. And I guess in light of the portfolio you have, what do you think is more of a normalized reserve ratio for you?
spk04: Well, I'll start and let Lynn jump in, but I think we're kind of there now. I mean, I think we're at a pretty good coverage ratio, and yeah, like you, I mean, the sky looks sunny, you know, the prospect of more stimulus, the economy seems to be holding up. All those things have a positive outlook associated with them right now, and And yeah, there's some noise around taxes and some other things. But overall, I think the economy is, you know, we have more positive outlook for the economy today than we've had in the last six months, especially with the stimulus prospects. So for that reason, I think provisioning will be appropriate, but it might not have been as heavy as people anticipated. And because we don't have a big consumer portfolio outside of SFR, which is healthy, you know, we don't have the same volatility there as some of the larger and other banks are experiencing. Lynn, what do you think about provision levels? We didn't rehearse this, so she might give you a different answer.
spk02: No, I think probably more of the same there. I think we're all talking about the fact that given these are unprecedented times that potentially the impact of the pandemic could be delayed and We don't know that, so don't necessarily see large provision releases. Appreciate maybe there's a bit of that going on. So to the extent that there's modest loan growth, I think there's an opportunity for provision levels to, as Jared said, be appropriate, but probably not the levels we saw in 2020. And And I think that we'll have more clarity, you know, midway through the year.
spk04: I don't know why we would, you know, obviously we follow a model. And, you know, we plug it in and, you know, you toggle the economic forecast and you toggle all the things you're supposed to toggle based on your portfolio. But I think our team has done a good job of just being realistic and not too optimistic, not too pessimistic, just realistic. And the outputs have seemed right to me. And so this feels right for the environment that we're in. And, you know, I haven't seen anything that suggests huge releases yet. Okay.
spk08: All right. That's helpful. Thanks, everybody.
spk04: Thanks, David.
spk00: The next question comes from Tim Coffey of JANI. Please go ahead.
spk07: Thanks. Morning, everybody. Morning.
spk09: Good morning.
spk07: Jared, as we look at, say, this zero in on customer service fees, and given the work you've done in the last two years of growing the deposit base and new accounts and new customers and the origination of activity we're seeing on the loan side, would it be unreasonable to expect that that line item might increase from where you ended 4Q at?
spk04: I missed the beginning of what you said, Tim. Which line item were you referring to?
spk07: Customer service fees.
spk04: Okay. You know, we have a, I'm glad you brought that up. So we have an initiative that we launched at the end of last year. We'd been working on for a while and it kind of kicked off and the last year beginning this year to really focus on, on it's a fee initiative. You know, we did a huge survey of, you know, where do we stand relative to, um, our peers, you know, to the extent you can get the data, where do we think we're low? Where do we think we're high and how do we generate more fees? I think overall, on the customer service fees, it's never going to be a massive driver for us, fee income overall, based on the way we're set up today. But I think Lynn and I both believe that we have some fruit to gather there and that we're going to be growing that line this year. We need to figure out a way to drive more fee income, and I think that's going to have to come from other sources. and maybe there's an opportunity for a business line that will drive more fee income, and that's something that I'm looking at right now in terms of thinking about how could we do that without getting into detail there. But in terms of specifically customer service fees, we do have an initiative in place. Our team did a great job of culling the universe and figuring out where we needed to improve, and that's been deployed. It was deployed. We rolled that out at the beginning of this year, so we should start seeing the benefit of that.
spk07: In terms of new business lines, are you adverse to doing an SBA business? More so than you already are?
spk04: Other than I've been pretty clear on, you know, how I feel about SBA, I'm not. So I think what you're asking is, you know, would we do kind of a gain on sale business? Is that what you're saying? Yeah. So I don't see loans that we want to sell today, given what we're trying to do with our balance sheet. And then in terms of SBA specifically, I'm certainly open to it. We don't have that engine running today. enough to be able to do that, but I wouldn't be opposed to it in the future. One of the things I think, you know, I think I've mentioned this before about SBA. In the past, you know, with the number of banks that I've been associated with with acquisitions, I've seen every bank claim that they do SBA differently and they're better at it than everybody else. And at the end of the day, it was all the same stuff. People make loans that they shouldn't make because they're supported by a government guarantee and somehow they talk themselves into it. And then when the economy goes bad, You're left with a big number of loans with an overall portfolio of small dollar balance, and it's a really big pain to work it out because you've got to follow all the government rules. And I remember that. And so the last thing you want to do is end up with the unguaranteed portion. I mean, that's like the worst of all scenarios. So I think there are some banks that are probably doing a great job at it. I think it can be done, and I'm certainly open to it. I mean, there's a couple of our peers and banks in our community that are doing it well. But I don't think we have the engine today to do it right. And I think the right place to be in SBA today is on the real estate side, and people get hurt more on the non-real estate SBA loans. And so that's the engine that we're trying to build up. We're not there yet, but hopefully we can build it.
spk07: Okay. All right. That's a great color. Thank you. And this is a circle back on the shared national credit. So last time I checked, You had four shared national credits, total balance less than $50 million, excluding the one that you just got out of the bank this past quarter. Does those numbers still sound right?
spk04: Yeah. I have my credit portfolio sheet. I've got to take a look. But other than the one, that sounds right, yeah.
spk07: And is the strategy unchanged where they're going to be just kind of allowed to kind of resolve themselves?
spk04: Yes. There was one that we were in that, as I said, I'm not looking to get into new ones, but there was one that we were in that had just performed so well, and it was safe, and it was good yield, and we just kind of re-upped it in terms of participating because we were already in it, but we're not looking to gather any new ones. Obviously, on an exception basis, if something made a lot of sense, we would do it, but for the most part, I just think they're not the way that we're going to grow the balance sheet overall. We're not going to go out and buy a whole bunch of them.
spk07: Yeah. Okay. No, that makes sense. All right. Those are my questions. I appreciate the time.
spk04: Thank you so much. Yeah, of course.
spk00: Thank you. The next question comes from Jackie Bolin of KBW. Please go ahead. Hi, good morning.
spk04: Morning, Jackie.
spk01: I just wanted to touch on the balance sheet a little bit. I know we've discussed it quite a bit, but just thinking about, you know, weighing its size versus its profitability and thinking about it in the context of, you know, very recent stimulus and then the potential for new, you know, how these discussions, you know, what kind of discussions are you having, I guess, on the potential for further inflows from that stimulus, but managing the size of the balance sheet so that you're able to protect its profitability?
spk04: So starting with PPP, I mean, it wasn't huge for us. We did $270 million the first time, right? And so relative to our balance sheet, it just didn't do much. It didn't mean a lot to us from a liquidity standpoint. We were there to primarily serve our clients. We did about 75% existing clients and about 25% new relationships. And for the second round, we're obviously reaching back out to all of our clients, seeing who needs help either for the first time or the second time. And then we're reaching out to all the ones that we talked to that maybe didn't do it through us and seeing if we could help them. So I think we're going to see a similar size program this time around. It's not going to be something, maybe a little. We have some technology that we deployed this time that is helping us and it's making it a little bit smoother. So I think we would have the capacity to do a lot more. But I also think the market demand is a lot lower. I mean, we're not seeing the same amount of demand as we did the first time around. And the in-calls are modest, and we're doing a lot of outbound calling, whereas last time it was just, you know, the phones were ringing off the hook, and we were trying to prioritize our clients and give them a great experience in the process. So, Lynn, do you see it differently?
spk02: With respect to PPP, no, I think that's what we're seeing.
spk04: Jackie, was that the focus of your question, or were you speaking about things outside of that?
spk01: I mean, it was part of it. It's partly PPP and then other maybe deposit inflows that you may be getting because of stimulus. And I realize that to the extent that those are coming in, it's also enabling you to reduce other higher cost pieces of funding.
spk04: That's exactly right. To the extent that those deposits are, we think that they're sticky and they're the right relationship deposits, it's allowing us to offload much sooner and other deposits that we might have modestly been moving out. So it affects the rate at which we reprice our CDs, for example. We're moving down our CDs at a pretty good clip, especially our expensive ones, and we're happy to have anybody who's a taker at the prices we want to offer, but there's a science to how quickly do you drop those rates on the ones that just matured because how much do you want to let go? And we can accelerate that and drop our deposit costs faster to the extent that we're having a lot of success on kind of origination of relationship deposits, whether they come because of stimulus or not. I think we will see a buildup of liquidity because of the stimulus. You know, you got to be careful because it can flow out and then, you know, you relied on it. So we got to look at that, but we don't know what it's going to look like yet. Right now, it just seems like the economy is just, you know, flush of liquidity. You know, I was reading an article about how savings rates, you know, savings accounts really haven't gone down and and households are really holding on to their savings.
spk02: Yeah, I would add, Jackie, kind of to your point. There is a lot of liquidity in the market right now. I think what we observed over the fourth quarter was maybe reaching some level of equilibrium, meaning that I think there was more clarity on what part was to be viewed as temporary and what was going to be staying around. So I think there was an opportunity to improve our earning asset mix by lowering the levels of, let's say, excess liquidity, and that benefited the margin. I think as we turn into 2021, the PPP program has reinitiated. The forgiveness is also coming through. I think that helps with liquidity flows, but I do think we're seeing elevated levels of liquidity again. And as we've talked about, I think, in length here, looking to deploy them into earning assets. But to the extent that that's moderated, I think we might see a little bit of additional liquidity on balance sheets in the first quarter. Great.
spk00: Thank you both very much for the call.
spk04: Thanks, Jackie.
spk00: The next question comes from Steve Moss of B. Reilly Securities. Please go ahead.
spk09: Good morning.
spk00: Morning, Steve.
spk09: Morning, Jared. So most of my questions have been answered here. I guess just one little thing here in terms of the HOA deposit business, especially deposits you guys are getting into, kind of how big do you see that business growing here going forward?
spk04: You know, I'm hesitant to make a prediction about it. We have kind of our own internal models of what we're looking for, but it's part of our overall expected deposit growth. um, for the year. I mean, I don't, I think our goals are to continue to move non-interest bearing to, you know, you got to get it to 30% before we get it to 35, moving it as fast as we did over the year. I was pretty pleased with that, but I think, you know, we're going to make progress this year and driving non-interest bearing closer to 30%. It's hard to do when you're growing the denominator as well, but, uh, we're going to keep moving it down the field and it's part of that number.
spk02: I would just add, and I think equally as important as just literally the diversification within the deposit business itself. Yep. Just help me.
spk09: Got you. All right. Well, thank you very much. Good to see the margin of extension here this quarter.
spk04: Okay. Thanks.
spk00: Thank you. This concludes our question and answer session. Ladies and gentlemen, this does also conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
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