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spk04: Hello, and welcome to the Bank of California Analyst and Investor 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 touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I would now like to take the conference over to Jared Wolfe. Mr. Wolf, please go ahead.
spk03: Good morning, and welcome to Bank of California's third quarter earnings call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results. At the beginning of the year, we laid out our strategic objectives for 2021, which if successfully executed on, would lead to profitable growth in the company and improved earnings power. Our strategic objectives were to maintain strong asset quality and capital as we continue to manage through the pandemic, grow our earning assets and accelerate our loan growth, further reduce our cost of deposits and increase our net interest margin, keep expense levels relatively stable and realize more operating leverage as we build the balance sheet, and execute on strategic opportunities that could increase earnings and enhance the value of our franchise. We take a lot of pride in being a company that delivers on the expectations we set and doing what we say we're going to do. We did that in 2020, and we're doing it again this year. Through the first nine months of 2021, we have executed very well and been able to achieve all of these strategic objectives. Our asset quality and capital have remained strong through the year, and we've experienced a very low level of loss in the loan portfolio. On a year-to-date basis, our average earning assets have increased 5.3%, while our period and total loans are up 7.4%, excluding PPP loans. Our cost of deposits has declined from 29 basis points at the end of the fourth quarter of 2020 to eight basis points at the end of the third quarter of 2021, which has helped support our net interest margin during the year. We've been able to keep our expense levels relatively flat, which has resulted in substantial improvement in our efficiency ratio. and we were able to redeem our Series D preferred stock early in the year, and then complete the acquisition of Pacific Mercantile Bancorp earlier this week, both of which accelerate our improvement in profitability. Our third quarter results very clearly demonstrate the greater earnings power and improved profitability we have as a result of the progress we have made on all of these strategic objectives. We generated diluted earnings per share of 42 cents, up from 34 cents in the prior quarter, including pre-tax, pre-provision income of $30.7 million, an increase of 31% from the prior quarter. Our pre-tax, pre-provision return on average assets totaled 1.5% for the third quarter, an increase of 30 basis points compared to the prior quarter. We had another strong quarter of business development activity as we continue to build Bank of California's reputation as the go-to bank for small and medium-sized businesses. While the emergence of the Delta variant slowed demand relative to Q2 as we expected, we still achieved solid new loan production of $864 million. This production, together with prior loan commitments, resulted in total loan fundings of $763 million in the third quarter, including $503 million of new fundings and $260 million of line advances, of which $178 million related to net warehouse line advances. Excluding PPP loans, which continue to be forgiven. Our strong loan production resulted in 16% annualized loan growth in the third quarter, despite payoffs and paydowns remaining at a very high level. We continue to see growth across all of our loan portfolios, including a pickup in the C&I portfolio, which increased 6.6% from the end of the prior quarter. The acceleration of growth in commercial loans reflects the continued progress of the talented bankers we have, the positive impact we are seeing from new additions to our banking team, and our success in effectively winning new relationships based on our expertise and ability to execute for clients. Our loan production was well balanced across industries and asset classes. We continue to see strength in health care and bridge real estate lending, and we also continue to see activity in entertainment finance, which specializes in financing the production of content and television for streaming services. We ended the quarter with over $75 million in commitments, and have visibility to continue growth in that sector. We believe this will be a sizable opportunity for us in the coming years, as it's projected there will be billions of dollars invested in streaming production. We've built a very strong team that has extensive relationships in this industry and expertise in structuring these types of credits, which we believe will help us steadily increase our market share and grow this portfolio. Our healthcare vertical, which lends to healthcare practices, specialty hospitals and surgery centers, and healthcare real estate, also continues to expand, surpassing 330 million in commitments in the third quarter. Our production is also becoming more diversified from a geographic perspective. The bankers we've added in Northern California, the Central Coast, and the Central Valley have been very productive, and we are seeing their contributions positively impacting our level of loan growth. Importantly, we're able to fund this loan growth with continued strong inflows of low-cost deposits generated from our business development efforts across all areas of the bank. Over the past few years, we've focused on getting the right people, the right products, and the right incentives in place to create a robust deposit-gathering engine, and we continue to see the positive results from these efforts. During the third quarter, newly opened DDA accounts contributed $88.3 million of low-cost deposits, which produced our ninth consecutive quarter of DDA growth. Our strongest growth came in non-interest-bearing deposits, which increased more than 16% from the end of the prior quarter and represented approximately 32% of total deposits at the end of the third quarter. The further improvement in our deposit mix and pricing drove our cost of deposits down another eight basis points to average just 15 basis points in the quarter. And as mentioned, our quarter-end spot rate on deposits was down to eight basis points, which should lead to another decline in our average cost of deposits in the fourth quarter. The growth we are seeing in our client roster is driving higher levels of both net interest income and non-interest income. Compared to the prior quarter, our revenue increased 7%, while our non-interest expense declined as we continued to maintain disciplined expense control. As a result, our adjusted efficiency ratio improved to 60% from 66% in the prior quarter. And we believe we will continue to see improvements in this area, as the infrastructure we have in place can support a bank several billion dollars larger than our current size. The infrastructure we have built reflects our forward-thinking approach to technology. Along those lines, we recently made a small investment in a fintech company called Finexio, which is a B2B payments platform. The investment in partnership with Finexio is part of our larger strategy to grow our capacity and capabilities in payments so that we can increasingly add value to our customers in this area in the years ahead, while also improving our other sources of non-interest income. Our investment in FinExU is part of a larger, multi-pronged strategy to ensure we remain tech-forward in our operations and in terms of client-facing technology and value-added services. We will be expanding on this in greater detail in future quarters. Our improvement in operating leverage will be further accelerated now that Pacific Mercantile Acquisition is closed. We are very excited to welcome our new colleagues who will be additive to the significant business development capabilities that we have already built and provides superlative service and operational expertise. As we announced in connection with the closing of the merger, we're also thrilled to welcome a few new board members whose talent and expertise will be particularly valuable to us as we continue to grow. The integration is proceeding well. The system conversion is scheduled for mid-November, and we continue to expect that most of the cost savings will be realized by the end of this year. This will put us in position to begin fully realizing the benefits of this transaction as we begin 2022. Now I'll hand it over to Lynn, who will provide more color on our operational performance. Then I'll have some closing remarks before opening the line for questions.
spk00: Great. Thank you, Jared. First, as mentioned, please refer to our investor deck, which can be found on our investor relations website, as I review our third quarter performance. I'll start by reviewing some of the highlights of our income statement, and then we'll move on to our balance sheet trends. unless otherwise indicated, all prior period comparisons are with the second quarter of 2021. Net income available to common stockholders for the third quarter was $21.4 million or 42 cents per diluted share. This compares to 17.3 million or 34 cents per diluted share for the second quarter of 2021. We had a few items that impacted the comparisons of our net income between the third quarter of 2021 and the prior quarter. In the third quarter of 2021, net income available to common stockholders included $1.8 million in pre-tax gains on investments in alternative energy partnerships, $2.2 million in pre-tax net recoveries of indemnified professional fees, and $1 million of pre-tax merger-related costs. In the prior quarter, on a pre-tax basis, we had $829,000 in gains on investments in alternative energy partnerships, $1.3 million in net recoveries of indemnified professional fees, and $700,000 of merger-related costs. When backing out these items in each quarter, net of our normalized effective tax rate of 25% to get a better sense for our operating performance, we had adjusted net income available to common stockholders of $19.4 million or $0.38 per diluted share in the third quarter of 2021 compared to $16.3 million or $0.32 per diluted share in the second quarter of 2021. This $3.1 million increase is attributed primarily to higher net interest income and our continued expense control measures as we leverage our resources. Total revenue in the third quarter increased $4.5 million, or 7%, compared to the prior quarter, including the $3.1 million increase in net interest income and a $1.3 million increase in non-interest income. Net interest income benefited from one additional day in the third quarter, higher average interest earning assets, and a decrease in the cost of interest-bearing liabilities, which altogether more than offset a decrease in interest earning asset yields. The increase in non-interest income stemmed mainly from higher other income driven by an $841,000 gain on a sale-leaseback transaction of one of our branch locations. Our net interest margin was 3.28%, up one basis point from the prior quarter, as our overall interest-earning asset yield and our total cost of funds each decreased by eight basis points. Our earning asset yield decreased to 3.73%, due mostly to lower loan yields. Our average loan yield declined 12 basis points to 4.18% during the third quarter, due in part to lower prepayment penalty fees offset by higher PPP fee amortization. Our average cost of funds decreased 8 basis points to 49 basis points, due mostly to lowering our average cost of deposits by 8 basis points to 15 basis points for the third quarter. This decrease was due to the improvement of our funding mix and our continued efforts to reprice our funding sources into the current interest rate environment as they mature. Non-interest-bearing deposits averaged 30% of total average deposits in the third quarter compared to 28% in the prior quarter. Also, during the third quarter, 428 million of higher-cost deposits with a weighted average rate of 1.88% repriced, or matured. This is reflected in our lower period end deposit spot rate, and we expect to receive a full quarter's benefit in the fourth quarter. Our adjusted expenses decreased $1.2 million from the prior quarter due mostly to lower salaries and benefits, a $365,000 gain on the sale of other real estate owned, which is included in other expenses, and lower net losses of equity investments also included in other expenses. In addition, and as previously mentioned, we incurred $1 million in merger-related costs, had net recoveries of $2.2 million in indemnified professional fees, and $1.8 million of gains on alternative energy partnership investments during the third quarter. The effective tax rate for the third quarter was 27.2 percent compared to 25.6 percent for the second quarter. Turning to our balance sheet, our total assets increased by $251.3 million in the third quarter to $8.3 billion. Our gross loans held for investment increased by $243 million, or 4.1% during the third quarter, as growth in CNI, SFR, Warehouse, and our CRE portfolios more than offset lower SBA construction and multifamily loan balances. The $72 million decrease in SBA loans in the quarter was due primarily to the PPP forgiveness process. As of September 30th, we had $116.5 million in PPP loans consisting of $27.5 million from round one and $88.9 million from round two. The $106 million increase in the SFR portfolio stemmed from $249 million in loan purchases, which offset payoffs and paydowns in this portfolio. Deposits increased $337 million during the third quarter, and as previously mentioned, our mix and average costs continue to improve thanks to our success in adding new commercial deposit relationships and runoff of higher cost time deposits. Noninterest-bearing deposits increased to 32% of our total deposits at quarter end, up from 29% at the end of the second quarter. Demand deposits, noninterest-bearing plus low-cost interest checking, increased by 7% from the prior quarter. This represents our ninth quarter of demand deposit growth, a goal we remain very focused on to drive franchise value. We expect this favorable shift in our deposit mix to help support our net interest margin in the fourth quarter. Over the past year, demand deposits increased to 66% of total deposits, up from 58%, reflecting the significant improvement we have made in our deposit base. This increase, combined with the lower rate environment and our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost of deposits down from 51 basis points in the third quarter of 2020 to the 15 basis points achieved in the third quarter of 2021. Our securities portfolio decreased by 50 million to end the quarter at 1.3 billion. The CLO portfolio declined by 35 million during the third quarter, as we are seeing an increase in payoffs resulting from CLO resets. A higher level of payoffs is accelerating reductions in the CLO portfolio, which is part of our longer-term balance sheet management strategy. For the sixth consecutive quarter, the unrealized loss in our CLO portfolio improved, which was down to $2.5 million at the end of the quarter. Overall, our entire securities portfolio ended the quarter with a net unrealized gain of $15.5 million, down from $20.9 million at the end of the second quarter, resulting in a reduction of our tangible book value per share of seven cents. Our credit quality remained strong in the third quarter, and we saw positive trends in asset quality. Nonperforming loans decreased $5.7 million to $45.6 million in the third quarter. About 50% of this balance, or $22.7 million, represented loans that are in current payment status but are classified nonperforming for other reasons. Delinquent loans increased $10.1 million in the third quarter to $45.1 million, or 0.72% of total loans. This increase was due to $24.9 million in additions, offset by $12.4 million in loans, returning to accrual status, and $2.3 million in other reductions due to paydowns and other resolutions. Delinquent loans include SFR loans of $19.1 million, SBA loans of $14.9 million, of which $10.6 million is guaranteed. and $11.1 million of other loans. During the second and third quarters, we repurchased $9.3 million in guaranteed SBA loans, which are included in the delinquent and nonperforming loan totals as of September 30th, and are pending resolution with the SBA. Let me turn to our provision for the quarter. Although we had some provision requirement related to the growth in the loan portfolio, this was more than offset by net recoveries during the quarter, positive asset quality metrics and trends, and the improving economic forecast used in our model. As a result, we recorded a modest negative provision for credit losses of $1.1 million in the third quarter. Net of this provision release, our allowance for credit losses for the third quarter totaled $78.8 million, and our allowance to total loans coverage ratio stood at 1.26%. Excluding our PPP loans and warehouse loans, both of which have lower relative risk levels in our reserve methodology, the ACL coverage ratio stood at 1.62% at September 30th. With a decrease in our non-performing loans, our ACL coverage to non-performing loan ratio remained healthy at 173%. Our capital position remained strong with a common equity Tier 1 ratio of 10.89%, 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 continue building franchise value. At this time, I will turn the presentation back over to Jared.
spk03: Thank you, Lynn. I'll wrap up with a few comments about our outlook. Heading into the fourth quarter, Our loan and deposit pipelines remain strong across all areas of the bank, and we expect to see a continuation of the positive trends that are driving increased operating leverage and profitability. Getting past the recent COVID resurgence will be helpful for economic activity and loan demand, but our ability to continue generating profitable growth is not solely reliant on improving economic conditions. We are unique. We have a number of catalysts unrelated to economic conditions that we believe will enable us to continue generating improvement in our financial performance. First, we will continue to benefit from deposit repricing. We will get the full quarter benefit of nearly $428 million of higher-cost deposits that matured or repriced during the third quarter. That should continue to drive down our cost of deposits and help us maintain or increase our net interest margin. In addition, we will begin to run Pacific Mercantile's interest-bearing deposits through our program and pricing structure, which should reduce the cost of these deposits over the next several quarters. Second, we hope to redeem our 98.7 million of Series E preferred stock in the first part of 2022, which should increase our net income available to common stockholders. As a reminder, that preferred stock is a 7% after-tax coupon. Third, we will have the accretive benefits of the Pacific Mercantile acquisition. As I mentioned earlier, we expect to start 2022 with most of the cost savings in place, which will add to the improved leverage we will get from adding $1.5 billion in assets. And fourth, we continue to attract high-quality banking talent to the company. Our accelerating loan growth this year is attributable to improved loan demand, as well as the talent that we have added. Since I joined the company, we have made substantial changes in our commercial banking group and have been very successful in bringing in the type of bankers that fit our relationship-oriented model. We have highly talented professional bankers who are adept at serving small and medium-sized businesses and bringing over full banking relationships. We are also now benefiting from our exclusive focus on California at a time when a number of competing banks have shifted their focus to other markets. We have become an attractive destination for bankers that want to continue to capitalize on the deep relationships they have built in California. Bankers are seeing former colleagues of theirs having a great deal of success at Bank of California. and understand that we can provide a similar opportunity for them. Bank of California is a talent magnet, and this has created a strong hiring pipeline that should enable us to continue to add seasoned relationship bankers that can support our continued growth. With these catalysts in place, we believe that we are very well positioned to continue generating profitable growth, further improving our level of profitability, and creating additional value for our shareholders. Lastly, let me thank all of our Bank of California colleagues, both legacy and those who recently joined from Pacific Mercantile, for their dedication and hard work. We like to say that banking is a team sport, and there is no question that our results are a reflection of their talent and collective contributions in what is a highly competitive market. I'm proud of our team and all that we have accomplished together, and while we still have work to do, I'm confident great things lie ahead. Thank you for listening today. I look forward to sharing more about Bank of California's progress in the coming quarters. With that, operator, let's go ahead now and open up the line for questions.
spk04: Yes, thank you. At this time, we will begin the 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. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Timor, Brazil. You're with Wells Fargo.
spk08: Hi, good morning. Thanks for your question. Good morning. Good morning. Maybe starting with the loan growth, another excellent quarter across the board and specifically in the warehouse space, bucking the trends of what we've seen in some other institutions. Maybe talk about the growth you saw there this quarter, how much of it was from existing relationships versus bringing on new relationships, And now that warehouse is kind of at that $1.5 billion level that has been discussed in the past. Maybe talk about the plans for growing warehouse going forward.
spk03: Sure. Thank you. So really pleased with the diversification of our loan production this quarter. It was another quarter that had a lot of balance to it. And our production volumes were, you know, we showed growth in all areas, really. One thing to point out about warehouse is that It was relatively flat on an average basis from the end of the second quarter. So we kept it flat most of the quarter, and you'll see that in our average balance sheet when we break it out or link and share the numbers. And it really only grew at the end of the quarter to address some customer needs. We see Warehouse staying relatively flat where it is, give or take $100 million. We have the ability to absorb it, obviously, with the PAC Merck acquisition and the larger balance sheet. Our team does a phenomenal job, and it's not an easy thing to do with the transaction volumes that we have in that group to kind of maintain balances on an average basis on a quarter over quarter, but they did a really, really good job. And so we've given them a little bit more room, but we all understand that it's not going to be an outsized portion of our company, and the production this quarter was well balanced. Lynn, I think you have some other numbers in terms of what we grew recently on a percentage basis outside of warehouse?
spk00: Yeah, I appreciate the question and the comments so far. So I think just maybe to add, you know, we ended the quarter at about $1.345 billion, and warehouse, while not disclosed separately, on average basis was about $1.38 billion for the quarter. So kind of kept it flat, and then it ticked up there at the end. I think if you look at Other aspects of the portfolio, we obviously have PPP forgiveness coming off. At the same time, we have growth in our other portfolios. So I would just comment that our other CNI business, period end to period end, up 26%. It contributed 20% of our growth. And CRE is the other portfolio, 16% period end to period end, and it represented 15% of our growth. So seeing nice momentum there. And other parts of the portfolio, again, may be hard to see when you kind of see the numbers kind of lumped together.
spk08: Okay. That's good color. Thank you for that. And then maybe just adding a little bit more detail to that. So clearly you've had great success hiring talent. I'm just wondering for the talent that you've brought on, kind of where are they as far as bringing over their books of business? Is that well underway, or is that still a pretty long runway for the talent that you've brought on for what remaining loans they can bring on from their prior institutions?
spk03: Well, actually, Tamar, we didn't answer one of your other questions, which was what percent of our business was from new talent versus existing relationships. I would say it was pretty well split from the numbers that I've seen, 50-50. You know, we have a lot of repeat business, and one of the things that we do is serve active clients and their businesses, so particularly on the real estate side, they're active in buying properties, and they'll come back to us again and say, hey, we've got another deal. Can we make it easy like you did it for us last time? And we're obviously happy to help serve them. Our new talent that's come over, you know, it takes a while to bring over. you know, the existing relationships that they have. It's kind of on a needs basis. So I would assume that they still have, I don't have a precise number for you. I don't know that, but I would suggest, I would think that they obviously have room to go in terms of bringing new relationships to the bank that they may have served at other banks as those clients' needs arise. But we rely on our, one of the things that happens when talent comes over is they look at the scope of services that we have to offer And they're not just bringing over relationships that they have. They're very good at marketing our company and our services and solutions that we offer. And so we look to them not to just bring over relationships that they have, but to go out and market and represent the bank and bring in new relationships that they can generate on an ongoing basis. And I think they're doing that as well.
spk08: Okay, great. And then one last one for me, just looking at the expense base and appreciate the comments around being able to grow a couple billion more into the expense base that's already been created. Maybe provide a little bit more color with that. So obviously here with PACMARC, you're adding some assets with that acquisition. The expense base has been relatively flat, remarkably, for quite some time here. What's going to be kind of the next transition point, and when do you start seeing the need to grow expenses as the business continues to grow?
spk00: Sure. Thanks, Timur. Let me start. Thanks for recognizing that we have been able to hold expenses relatively flat as we've worked to leverage that operating base. So I think as we look forward in folding in Pacific Mercantile's operations, I think we've indicated that we expect the cost saves to be 40 plus. So we'll just put that in the 40 to 45% range. So I think we'll have those expenses come in. It does give us the opportunity to leverage those further to grow our assets. But I do think we'll have some step up just with general increases and then also ongoing investment in technology. So Maybe to put some numbers to it, we've held our expense base relatively flat at $41 to $42 million a quarter. I think at the 40 to 45% cost saves, PMB had an expense run rate of about $35 to $36 million. So on a quarterly basis, that would be about a $5 to $6 million expense add. And then I think we would be looking at some normal increases, be it with personnel costs And then some piece that's an investment in technology would be additive to it. So that's, I think, how we're looking at it right now.
spk08: Great. Thank you for that, caller.
spk04: Thank you. And the next question comes from Matthew Clark with Piper Sandler.
spk06: Hey, good morning. Good morning. Maybe just first one. around your appetite for hiring more producers relative to what you might be getting from PNBC? Is the plan to just leverage what they have and retain the best players on the field, or do you feel like there's some opportunity to add some incremental producers above and beyond that franchise?
spk03: Well, we got some very talented people from PMVC, and we're proud of who stuck with us, and we know that they're going to work well in our system and going to have the opportunity to produce good results here, not only on the front lines, but also the teams that support everybody on the back end. There's a lot of work that goes into supporting this production that we've had and the growth, and so we have talented people across the board. We are open for business in terms of hiring people. other bankers that we think can work well in our company. As competitive as the market is, we are fortunate, as I mentioned in my comments, that we've had kind of a fairly healthy pipeline of talent that wants to come over and join Bank of California. And so we're being very selective in terms of who we bring on. This isn't the right place for everybody, but we want to make sure we keep up our momentum. I do not believe that we need to hire more people to keep up the momentum that we have. I think that we have plenty of talent here and we can generate the momentum and the earnings power that we know that we can with the teams that we have in place. That said, if we found some people that we had some confidence in or they addressed a vertical where we wanted to continue to grow, we would not avoid hiring them.
spk06: Okay, great. And then just on your retention of SFR loans, what's your appetite going forward there? Is the expectation that you'll continue to do some more of that? And where do you feel like you kind of top out in terms of the relative contribution?
spk03: We're really just trying to deal with the runoff. And since we have to buy it on a forward basis, we kind of try to model what the runoff is going to be and then go and fill it. It's hard to get it right because, you know, you don't really know until the end of the quarter what was going to run off. Our – Our payoff rate has slowed, though. It was annualized around the 40% range, and I think now, Lynn, is it the low 30s or the high 20s?
spk00: Not quite yet.
spk03: Is it still in the mid-30s?
spk00: Yes.
spk03: Okay. So we're buying stuff to really replace the runoff, but it has slowed a little bit as we've kind of remixed our portfolio. We're not trying to grow it, per se. It's just hard to get it exactly on top of the numbers. Matthew? Did we lose you?
spk04: He may have stepped away from his phone, so we'll move on to the next question, which is from David Faster with Raymond James.
spk07: Hey, good morning, everybody. Good morning. Good morning, David. You guys, you talked about the strength that you're seeing in the healthcare vertical and your prepared remarks, and obviously we've got the warehouse vertical, the multifamily segments as well. I'm just curious about whether you see any other opportunities to expand into some industry verticals or niches, and whether you've got the personnel to do that today, or are you interested in, you know, see some opportunity to hire some new producers to enter some new industry verticals?
spk03: Well, the other vertical that I talked about in my prepared remarks was in the entertainment side and streaming. And we feel like that is a vertical. We've just added some folks in that vertical specifically. to help bolster our growth there. We have a terrific team in place that's very knowledgeable and seasoned, and so we added some more folks to help us with that. And that's an area that we see tremendous opportunity for growth, especially in the field where we play and the size where we play. You know, I think there's an opportunity – I think there's always – You can always get distracted by looking at tons of new segments and saying, hey, let's add a body here, let's add a body there. I think we have plenty of opportunity to grow in the areas that we're focused on now. That's not to say that we wouldn't attack a new vertical. There's one or two things that are interesting that we're looking at right now, but we're trying to be very careful. We want to make sure that if we're going to put the energy into a new vertical, that we can really – it'll have high impact at our company, and it won't be just – We're just dabbling in it. So we're trying to focus our energy around things that can be high impact. Okay.
spk07: That makes sense. And could you maybe just elaborate a bit on the Phynexia investment? You said you're going to give more detail in the coming quarters. But just curious, some of the implications from this, it sounds like it's not just an investment, that there might be a strategic partnership as well. and that there could be some fee income opportunities, which would be terrific to help, you know, improve that fee income contribution. Just curious, you know, if you could elaborate on that at all.
spk03: Yeah, I'm happy to. So Finexio is a really interesting company. It's a B2B payments platform, and they help manage – they provide basically payment optimization services to small and medium-sized business. The product helps users efficiently manage their AP functions efficiently. and they interface with the customer's existing accounting software and then use machine learning to try to select the best payment vehicle, whether it's check or ACH or wire, from a timing and cost perspective. It's something where we're becoming a client of Finexio, and we also have the ability to use their product and white label it to provide it as a product for our clients. We believe that payments is the area where businesses are looking for new solutions. And so we wanted to get out ahead of it. If they're not going to get it from us, they're going to get it from somebody else. And so we look at this as a really attractive tool that we'll be able to provide to our clients down the road on a white label basis. We also believe that there's the opportunity down the road for us to actually be the bank for Phynexia. And as they develop a larger clientele, we'll basically be the rails for what their clients are pushing across their system. So it's banking as a service, but in a B2B platform, not a B2C platform. Most of what we've looked at out there has really been B2C. And we've been trying to focus our energy on areas where we think that there's a larger B2B impact. This is part of a larger multi-pronged strategy for how we're addressing this going forward and the services that we're going to be providing this area, both to address fee income and to provide services to our clients. And so we'll be prepared to lay out more in the coming quarters. But this was kind of our first part of the multi-pronged strategy that we've laid out internally.
spk07: Oh, that's great. Yeah, that's great. That's exciting. Thank you for that. And then just this last one, just wanted to touch on your asset sensitivity and maybe get a sense of how you think about managing your leverage to rising rates more strategically, you know, at a high level. Obviously, the increased contribution from warehouse and CNI, as well as the significant improvement that you guys have made in your deposit base, naturally made you more rate sensitive. But how do you think about managing that going forward? Just curious your thoughts on that.
spk03: Lynn, you want to take it?
spk00: Yep, yep. Let me start. So definitely appreciate the question given we've been in a low interest rate environment and there's, you know, 10 years rising and then maybe there's some discussion of what rates might do here in the near term. So we are slightly asset sensitive. I think the loan portfolio and our investment portfolio are and the amount of cash we have on our balance sheet supports that asset sensitivity in addition to a large percentage of non-interest-bearing deposits that we've accumulated. With PMB joining our balance sheet, I think we've become slightly more asset sensitive given the mix of their CNI and also their attractive deposit base. I think that the pricing of our loans gives us the flexibility to move up with rising rates. And also, I think with the PMB balance sheet coming in, they've built up some excess liquidity that we'll have an opportunity to deploy as rates move up. So I think back on slide 30, pretty far back in the deck, we put in some information about our earning assets. Over 50% have the ability to reprice within the next two years. I think there's some other details there.
spk03: I'll just add that I'm really, really proud of our deposit moves and how our mix has changed. Going from getting to 32% non-interest-bearing, obviously, was a hurdle that we were excited to achieve. With PAC-MERC, I think we put in our deck, we think on a pro forma basis, it's about 35%. Our next hurdle is 40% non-interest-bearing, which you know, for me is a benchmark I'll be really, really proud of. And, you know, then we'll look to get to 45. But 40% will be quite a threshold for us to cross. And getting to eight basis points in terms of our cost of deposits, you know, a function not only of our, a function of our mix, obviously, but also just kind of our serious efforts to focus on deposit costs and push them down and focus on, you know, bringing over clients that value relationships of price. And so getting to eight basis points was a big part of the quarter. Being more asset sensitive with PACMARC means that we have probably the ability to go up a little longer in duration in loans, which can also help support some loan growth. So we take income today as opposed to waiting for the future.
spk07: That makes a lot of sense. And, yeah, the deposit remix has been incredible. So thanks for the color.
spk04: Thank you. Thank you. And the next question comes from Gary Tanner with D.A. Davidson.
spk02: Gary Tanner Thanks, good morning. I had a couple of questions. Lynn, I was hoping you could provide some PPP data for the quarter, average balances for the quarter, and the amount of revenue attributable to PPP for the quarter.
spk00: Lynn Williams Sure. I don't have the exact average for PPP. It is the majority of our insider SBA loans back in the average balance sheet. But I think we ended last quarter at $194 million, and we ended the third quarter at $116 million, if that's helpful. And then as far as, you know, The whole yield, I don't have that number, but I would just add that last quarter when PPP loans pay off we get to accelerate the amortization of the fees that were deferred. Last quarter that number was around $650,000 and this quarter the number was more like $1.2 million. The SBA PPP loans have been forgiven a little bit faster this quarter relative to last quarter. And that's mostly round two that's come through this quarter. So that's why we saw the bigger number.
spk02: Okay, thank you. And then just in terms of the PACMERC deal, you know, talked about getting their deposit costs in line with your pricing. How quickly could he do that? Would that be the case by January 1, maybe excluding time deposits, or is there some longer contractual type rates that you have to wait on?
spk03: Well, there's something called the magic of merger accounting. I wish I'll let Lynn, which is fascinating to me, because I can't get this math at home, but apparently we can get it here. So, Lynn, how does it work?
spk00: Yeah, so I called the magic of purchase accounting. But Gary, you did exclude the one bucket that it does affect, which is the CDs. So those come into the current interest rate environment kind of regardless of the terms. So we'll get the benefit of that, I would say, in the fourth quarter. And then for other portions of the portfolio, the rates are a high percentage of non-interest bearing and then I think there's some that we will continue to work through and that may take into the first quarter or so of next year. That's the majority I would say.
spk03: We're not going to have it all done by the end of the fourth quarter. I think it's going to take through the end of the first quarter and maybe leak into the second quarter. But we'll get a big part of it done.
spk02: Thank you. Any other questions? We're answered.
spk03: Thanks, Carrie.
spk04: Thank you. And the next question comes from Tim Coffey with Janney.
spk01: Thanks. Morning, everybody.
spk03: Morning, Tim.
spk01: Jared and Lynn, you've done a great job managing the excess liquidity on the balance sheet, not only quarter over quarter, but years over years. And I'm wondering, do you feel like you've pulled all the levers you can pull?
spk03: Lynn, what are we doing?
spk00: I think the short answer is no, because as Pacific Mercantile comes into our balance sheet, you know, they had a higher proportion of PPP loans relative to their balance sheet. So those have been forgiven. That liquidity has come onto the balance sheet. So I think we actually have some more opportunity to deploy liquidity from what we gained through the acquisition. If you're looking at just Bank of California standalone, I do think we need to just manage it as closely as possible, deploy the liquidity into our securities portfolio. During the quarter, the securities portfolio came down about $50 million. The CLO concentration and the dollar amount of the portfolio decreased, which has been part of our plan to reduce the exposure, but the opportunity came along to then increase or deploy that liquidity into the loan portfolio. So I do think there'll continue to be some opportunities like that, as I think we see some more CLO reset activity as well. So I think there's still a few things that will be helpful in managing the liquidity.
spk03: I would just add that, you know, our Our securities, our treasury team that reports to Lynn has done a really good job of coming up with creative ways to deploy excess liquidity in certain programs where we might get better than overnight rates on funds in a very safe way. And, you know, when they originally started this program, it was just like, let's see if we can pick up nickels and dimes and just kind of make sure we're not leaving any money on the table. And they've done a really good job, much the way that our legal team has done a superb job of going back after old invoices that were basically written off because we didn't think we'd collect more from the insurance companies, then going back with the right legal strategy and saying, hey, we think that you actually owe us this money. And that money keeps coming into tangible value every quarter. And so our teams have done a really, really good job of being creative.
spk01: Okay, great. That's helpful. And, Jared, you're clearly making some investments outside of the footprint, and it sounds like you've got some pretty big plans for them. I'm wondering, how far away are you from opening branches in some of these new markets?
spk03: We wouldn't open branches until we had footings that made sense. By footings, I mean a combination of loans and deposits that were substantial enough to make a branch on its own profitable. We don't think we need to do it. The way that we serve clients in a pretty high-touch way means that a branch doesn't really need to be next door to serve their needs. We have basically three buckets. We've got people up in the Bay Area, we have people in the Central Valley, and we have people kind of in the Central Coast. At some point, we'll know it when we see it, I guess is the best way to say it. We'll look and we go, wow, we have some substantial business now. Our teams up there will be saying, hey, we really need a branch to kind of roll this out further, and then we'll listen to them and make it happen. But they're doing a really great job, and most of the people that we've hired have worked for our colleagues before. And so we're bringing over people that we have experience with, and we know that they will be successful the way that we bank folks here.
spk01: Good. Great. Those are my questions. Thank you.
spk03: Thanks, Tim.
spk04: Thank you. And once again, as a reminder, please press star then 1 if you would like to ask a question. And the next question comes from Andrew Terrell with Stevens.
spk05: Hey, good morning.
spk03: Good morning, Andrew.
spk05: Jared, I think I heard your guidance for warehouse balances remaining essentially flat, plus or minus $100 million or so. I guess just as I think about mortgage volume across the industry potentially continuing to decline, do you think we ever get to a point where mortgage warehouse balances could be a headwind to your overall net growth, or do you feel you have ample room to expand relationships with new customers or existing customers in order to kind of offset any of that potential pressure?
spk03: Well, a couple things. One is, while I agree that I expect, I think everybody thinks that refinancings will probably decline as, you know, as rates move. And that's kind of the well-published information. The other published information is that, you know, purchase financing is supposed to rise. So, you know, what percent of your of your fundings are purchases versus refinancing. And I think that's an important piece to look at. We've been able to maintain Warehouse as a contributor to our earnings without it being a headwind to us or an outsized driver for us. So when I look at the pandemic as a perfect example, when the pandemic hit, we pulled back on all of our Warehouse lines significantly to make sure that the securitization market was there. And we stayed with our customers, we pulled back, and then we kind of gradually leaked back into them. And so we've shown that we're able to flex it up and down. From an earnings perspective, I'm watching all of our other business lines actually grow while Warehouse stays flat to slightly rising. And so I expect over time, Andrew, that Warehouse will continue to be an important contributor, but it will be on a percentage basis not as significant as some of our other businesses because our other businesses are expanding faster. And so that's what we see over time. I don't expect it to be a headwind the way that we're managing it, and we're doing it very carefully. Like I said, I think we maybe get to $100 million more as a percentage of our company that will be lower than it was before the Packmark acquisition. So we're trying to be thoughtful about how we kind of let everything else grow and balance it. What we don't want to do is at a time when that business is working well, pull it back unnecessarily, but we're comfortable with the size that we have. And I think, again, our other businesses are growing pretty fast, and we're trying to let those businesses continue to run, and Warehouse is kind of there as a steady contributor.
spk05: Great. That's good color. I appreciate it. With the PACMARC deal now closed, I think you have about $33 million or so remaining on a prior buyback authorization. Is there any kind of increased appetite on the buyback right now, or are potential kind of capital actions in the near term more focused on the redemption of the remaining preferred?
spk03: We believe that the best use of our capital most immediately, absent finding some other great opportunity, is to redeem the preferred. And we'll go through the proper regulatory channels to get that done. We're optimistic that we could do something in the first half of 2022. And we still think that that's the best use of our capital right now. So we hadn't really looked at a buyback in light of the opportunity that we have still to do the preferred. That's not to say that, you know, look, if our stock doesn't move to the right level, then a buyback will make sense because, you know, it'll just be too cheap. But let's see where our stock goes and we see the preferred out there as a good opportunity.
spk05: Understood. Okay. Thanks for taking my questions.
spk03: Yeah, of course. Thank you.
spk04: Thank you. Thank you. And that concludes both the question and answer session as well as the call itself. Thank you so much for attending today's presentation.
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