Banc of California, Inc. (BANC) Q3 2019 Earnings Report, Transcript and Summary

Hello and welcome to Banc of California's Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Today's call is being recorded and a copy of the recording will be available later today on the company's Investor Relations' website. Today's presentation will also include non-GAAP measures, the reconciliation of which and additional required information is available in the earnings press release. The reference presentation is available on the company's Investor Relations website. Before we begin, we would like to direct everyone toward the company's Safe Harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would now like to turn the conference over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.

Good morning everyone. Welcome to Banc of California's third quarter 2019 earnings conference call. With me today is Banc of California's CFO, John Bogler, who will talk in more detail about our quarterly results shortly. We finished the quarter with a net loss to common stockholders of $22.7 million and a diluted loss per common share of $0.45. As you know the main reason for the quarterly net loss is we incurred a charge-off related to a $35 million line of credit originated by the bank in November of 2017 to a borrower purportedly the subject of a fraudulent scheme. The effects of this charge-off had a very clear impact on our quarterly earnings. Notwithstanding this event, our team continued to make significant progress during the quarter on our core strategic initiatives which we will discuss momentarily. Let me first address what we've done since learning of the fraud. In addition to evaluating the loan itself and ensuring we are taking the necessary steps to pursue recovery, I wanted to evaluate our existing portfolio to make sure there's nothing else we should be aware of now. Following this event, I directed an extensive review of all loan C&I relationships $5 million and above not secured by real estate. Through the use of internal audit and outside parties, we looked at loan, security, and collateral documentation for each credit and converting the existence of our collateral is held by a third-party outside of the bank. In addition, I also requested a review of the top 10 relationships in our warehouse lending group to confirm that we have appropriate documentation in place. While the reviews are not yet complete and we await final confirmations for certain loans, to-date we have not identified any other instances of fraud or concerns that the collateral held by third-parties does not exist or material concerns with our documentations. Turning to our overall business, I want to highlight some of the significant accomplishments this past quarter which are much more indicative of our overall performance and represent our ability to execute on our strategic plan. As you may recall we set forth three areas of focus for 2019; reducing our cost of deposits, lowering our quarterly operating expenses, and eliminating non-core assets. All of this is intended to create the foundation upon which we will grow in 2020. We view cost of deposits as one of the key litmus test for how we are executing on our plan. In Q3, we continue to make great progress and reduced our cost of deposits by 14 basis points. While lower rates have helped, our ability to generate non-interest-bearing deposits has been a key component as the mix of our deposit portfolio is most important for the long-term. This progress reflects the significant effort we have made internally to transform the bank into a relationship-focused business bank. In the third quarter, we saw non-interest-bearing deposits increased by 11% from the prior quarter to over $1.1 billion and they now comprise almost 20% of our total deposit portfolio. Additionally, we eliminated a significant amount of brokered deposits which now make up less than 2% of our deposit balances. We expect our brokered balances to move up and down like FHLB advances to bridge funding, but we anticipate running brokered and wholesale funding at reduced levels going forward as we continue to make progress on increasing our low-cost deposit base. On the asset side of our balance sheet, in the third quarter, we opportunistically exited lower coupon and longer duration mortgage-backed securities with the remainder to be sold in the fourth quarter. This will give us the opportunity to begin the process of building a more traditional and balanced securities portfolio, consistent with what you would expect at a community bank. It will take time to build, but will be more accretive to us long-term. We have significantly reduced CLO balances over the last year, and we'll look for opportunities to reduce those balances to the extent we can find a comparable yield and duration. As a result of our targeted efforts to eliminate non-core assets, we ended the third quarter at $8.6 billion with core assets playing a more prominent role in our profitability. Expenses were nearly flat and came in slightly below last quarter when adjusted for the gain on investments in alternative energy partnerships. This quarter was particularly good, given we viewed the second quarter's non-interest expense as potentially a low point for the year. John will talk in greater detail on overall expenses and operating expenses specifically. But at a high level, we remain focused on simplifying our operations and improving the client experience, which in both cases will help us manage expenses to an appropriate level based on the size and complexity of our business model. We continue to place an emphasis on hiring very talented and experienced professionals. This past quarter we brought on a trio of talented executives. John Sotoodeh to Head our Community & Banking Division; Hamid Hussain as Head of Commercial & Real Estate Banking; and Bob Dyck as Executive Vice President of Credit Administration. Bob will step into the Chief Credit Officer role when our current CCO, Kris Gagnon retires early next year. These talented executives along with the rest of our executive team are among the most accomplished bankers I have ever worked with. Our story and opportunity is incredibly compelling and we are highly focused on taking advantage of it. The entire team at Banc of California is very dedicated and talented. These leaders are reflective of the tremendous talent we have throughout our organization. With that, I'd like to now turn the call over to John to provide more detail on what was mostly a positive quarter for the bank. Then I'll come back to wrap it up before we take questions. Go ahead, John.

Thank you, Jared. As mentioned, we have continued to opportunistically shed non-core assets. Our total assets ended the third quarter at $8.6 billion, a $735 million decrease from the prior quarter. The change was driven by the $574 million multi-family securitization mentioned on the last earnings call, which settled in August. Additionally, as part of our efforts to begin diversifying and building a more traditional securities book, we sold $371 million of mortgage-backed securities during the quarter, the majority of which occurred at quarter end. We still hold approximately $40 million of MBS and expect to sell the remainder of those during the fourth quarter. As a reminder, the MBS portfolio was long duration and low coupon. With the decline in the middle portion of the treasury curve, we were presented with an opportunity to exit the position and begin the process of diversifying into less price-sensitive securities that provide better cash flow structure. The sale of the MBS resulted in a $5.8 million loss, inclusive of an other than temporary charge and a loss on interest rate swaps used to partially mitigate the price fluctuations of the securities. The securities sold at the end of the quarter are shown as receivable on the balance sheet, and we expect by the end of the year the securities to total assets ratio will be approximately 10% to 15%. Held-for-investment loans decreased to $6.4 billion this quarter, due mainly to a $220 million net reduction in SFR and multi-family balances, driven by an increased level of loan payoffs. This was expected as we are focusing on more relationship-oriented loans that are less price-sensitive. The loan portfolio mix of SFR and multi-family loans is 52% at quarter end, down from 59% at the end of the prior year, and we expect this mix to continue to decline to a more reasonable percentage component of the loan portfolio. Our net C&I balances decreased by $162 million, due to lower production for the quarter, the $35 million charge-off, exiting one large relationship, lower utilization of revolving facilities and other credit-related exits as we continue to prudently monitor our loan portfolio, ensuring potential credit risks are being managed actively and swiftly. Rounding out the changes in the loan portfolio, our CRE and construction balances increased by $54 million. The overall loan portfolio yield decreased five basis points to 4.75% during the quarter, due to variable rate loans resetting and higher coupon commodity loans being refinanced to other institutions. The loan yield did see a benefit of four basis points due to a higher level of loan prepayment fees and accelerated discount from the repayment of purchase loans, in addition to the securitization of the low coupon multi-family loans. However, the combination of a higher prepayment fees and the multi-family securitization, was not enough to offset the negative impacts of falling LIBOR. Currently, C&I balances are approximately 29% of our total HFI portfolio and relatively flat compared with 30% last quarter. Going forward, we expect the mix of C&I loans to comprise 25% to 30% of the overall loan portfolio. Moving on to the deposits. Higher cost brokered CDs decreased by $325 million, or 86% to $54 million by quarter end. Additionally, higher costing money market and savings accounts fell by $105 million, and $19 million respectively. Overall, our targeted efforts to lower our funding costs reduced average deposit costs by 14 basis points from Q2 to 1.48%. We further reduced our wholesale funding by $562 million in Q3, primarily due to applying the proceeds from the multi-family securitization toward paying down overnight FHLB advances. We expect our wholesale funding to progressively decline with alternative lower cost funding and as we continue growing relationship-based lower cost deposits. Core deposits or non-brokered deposits now account for 98% of total deposits, up from 92% last quarter. Turning to the income statement. Our net loss to common stockholders for the quarter was $22.7 million, or a loss of $0.45 per diluted common share. As Jared described earlier, the quarterly results were negatively impacted by $35 million charge-off in the quarter, $5.8 million loss in the sale of mortgage-backed securities and $5.1 million loss from the preferred stock redemption. The charge-off pushed up our historical loss factors used in our ALLL calculation, which add an additional $3 million to the quarterly provision expense. These outlined charges were partially offset by net non-core expense benefit items totaling $2.5 million. After adjusting for noncore items along with the amortization expense associated with our solar tax equity program, our operating expenses for the third quarter were $46.7 million. Normalizing our tax rate to 20% operating earnings from core operations were $0.19 per diluted common share for the third quarter. Reconciliations for this are located within today's earnings presentation. Average interest-earning assets decreased from the prior quarter to $8.2 billion, with the average yield decreasing nine basis points to 4.50%. Since, the CLO investments are indexed to three-month LIBOR, and reset quarterly, the securities portfolio average yield decreased by 23 basis points to 3.60%. The CLO book largely reset at the end of July and is currently resetting lower again based on LIBOR rates from 90 days prior, or about nine basis points from the quarter end level. The bank's net interest margin was flat to Q2 at 2.86%. This is mostly due to the effects of lower cost of deposits, LIBOR rate resetting in the securities portfolio, higher mix of wholesale funding and a LIBOR-driven decline in loan yields. Net interest income decreased by $5.9 million from the prior quarter to $58.9 million. Loan interest income decreased by $8.9 million in Q3, due to a $746 million decrease in average portfolio balances as well as a five basis point decline in the average yield. Interest income on securities declined by $2.4 million on lower average balances and a LIBOR rate reset previously mentioned. On the liability side, interest expense from deposits decreased by $5.8 million, or by 20% on lower average balances and a 11 basis point decline in the average cost of interest-bearing deposits. Interest expense on FHLB advances increased by $230,000 from the second quarter, due mostly to a higher average balance slightly offset by the average cost being five basis points lower from the prior quarter. The overall average cost of interest-bearing liabilities fell by six basis points to 2.03%. With respect to potential reductions in the Fed funds rate or other indices, our modeled interest rate risk position is slightly asset-sensitive. The provision for loan losses in the quarter increased to $38.5 million and included $35 million charge-off and the related additional $3 million provision described earlier. The ALLL coverage ratio of non-performing loans is 139%, while the overall ALLL ratio to held-for-investment loans is 99 basis points. Total non-interest expenses for the quarter were $43.3 million, which included the previously discussed net non-core benefit of $2.5 million. Adjusting for non-core expenses, Q3 core operating expenses were $46.7 million, or 2.17% of average assets annualized. As we continue to align run rate expenses with our size and footprint, we expect to see near-term quarterly operating expenses remain below $50 million. Our capital position improved during the quarter mainly due to a reduced asset base. The Common Equity Tier 1 capital ratio was 10.3%. And Tier 1 risk-based capital totaled 14.31%. Tangible common equity increased to 7.8%, up from 6.57% one year ago. During Q3, we completed a partial tender offer for shares of the Series D and Series E preferred stock for an aggregate total consideration of $46 million, inclusive of premium and accrued dividend. We continue to maintain a fairly robust capital position, which provides us with flexibility to allocate, and execute on capital strategies, which the Board deems appropriate. Lastly, let's move on to credit and asset quality metrics. Our non-performing asset ratio for the quarter was 52 basis points, up 21 basis points from the prior quarter. This was due mainly to a $14.5 million Shared National Credit, which was reclassified to non-accrual late in the quarter. Though SNC continues to remain current on its payment status and any subsequent payments received will be fully applied to reduce the loan amount. Total delinquent loans increased by $4.1 million, resulting in delinquent loans to total loan ratio of 88 basis points. The upturn was mainly driven by SFR loans. Since the end of the quarter, $8.7 million of delinquent loans have cleared, and are now current. With that summary of our third quarter financials, I'll turn the call back over to Jared.

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

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] The first question will come from Matthew Clark of Piper Jaffray. Please go ahead.

Good morning.

Good morning.

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

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

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

Yeah. We can't get there fast enough, but we're trying to be smart about it. I think given all the movement in the quarter with it being flat was pretty good especially there's a lot of pressure out there right now on rates, it's very competitive. Our loan yield on new originations was 5.1%, which was above our portfolio yield of 4.75%. And so we're still generating loans above our portfolio, which is why when we remix, I expect that it's going to enhance -- protect or enhance our current yield. And then we're continuing to make move on the liability side and our deposit cost we expect it to continue to decline. We have a lot of maturing CDs in the fourth quarter, a significant number that we expect to re-price downward. And so that's about as much color as I can give you. It's hard to say exactly where it's going to move to, but we've said that 3% is somewhere we want to get to sooner rather than later and I think we're going to make progress this quarter.

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

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

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

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

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

Okay. Thank you.

The next question comes from Jackie Bohlen of KBW. Please go ahead.

Hi, good morning.

Welcome back Jackie.

Thank you. Good to be back. The Shared National Credit from the quarter is that the same when we discussed on the first quarter the leverage loan because I know that was a SNC as well with a PE sponsor?

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

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

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

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

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

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

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

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

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

Yes. So looking at those the optionality for doing preferred and whether we should do common looking at both of those things.

Okay. Great. Thank you.

Thank you.

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

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

You know Andrew, we've got a lot of initiatives that are still underway and we've got some technology that we talked about in the past it's coming online and that was described earlier for instance platforms that are being launched. And those will be launched over couple of quarters as we roll it out. So we'll start to see some expense savings that materialize from those efforts but we're continuing to look at opportunities to build out the front line. So I'm hesitant to give any sort of increased guidance around that, but I do feel comfortable that it will be below $50 million.

Okay. And then the added provision that was necessitated from the risk factors on the -- related to the fraud here. Is that going to adjust your effective provisioning going forward or is that all of it's captured here in this quarter?

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

Okay.

Andrew, let me go back and address the expense question as well.

Yeah, please.

And every quarter it seems like we find more stuff and so we're running close to 50% and then we find something and it drops down and we realized that's something we can take out. I think all of those surprises are pretty much done now. And so we had a really good quarter and I think that that is something that I think is sustainable. I say that knowing that if we find a great opportunity to spend on something that we thought would generated earnings we would do it. But I'm feeling pretty good about where we are, and obviously, there's a range there, but that's why John is kind of holding to the 50%, because stuffs come up each quarter where we said, hey, that's another opportunity, let's take advantage of that. And -- but we're going to continue to be opportunistic.

Got you. Thank you. I have covered all my other questions.

Thanks, Andrew.

The next question comes from Gary Tenner of D.A. Davidson. Please go ahead.

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

Yeah. It's roughly $600 million of the CDs that mature across the quarter. Again, it's at about 2.25% to 2.40% range. In the past, we've been retaining somewhere in the high teens, but with each passing month the rate on the maturing CDs is higher, so we don't know if we're going to be able to continue to retain at that high of a percentage. So the retention rate might start to drop down as we get into the higher rate CDs.

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

Yeah. The high teens.

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

All right. Good color. Thanks. The table in the press release with the new loan commitments noticed that the weighted average coupon of the C&I originations was down 70 basis points in the quarter. Was that driven mostly by the decline of LIBOR from second quarter over the course of the third quarter or is it something else there?

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

Okay. Great. And then last question for me. On Slide 16 in the slide deck, John I wonder if you could just run through the items that you've embedded there in terms of the non-interest income adjustments the total $1.7 million. I'm not sure, I'm seeing what all of them would be to get to that number?

Let me put the page here Gary. Which page again please?

Slide 16.

The earnings profile?

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

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

Okay. Thank you.

The next question comes from Timur Braziler of Wells Fargo Securities.

Hi, good morning.

Good morning Timur.

Maybe just circling back to the remaining Shared National Credits any of those -- in retail or with the same lead bank?

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

Yes.

No.

Okay. And industry wise any of the remaining Shared National Credits in retail?

Looks like there is – no, I don't think so.

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

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

Gary to give you some more detail on the non-interest income adjustment, if you go to the income statement there is kind of three lines that make up the majority of that so there's an impairment loss, there's the loss on the sale of securities and then there's the gain on sale of loans.

Hold on. You're going back to Gary's question?

He was asking about the reconciliation the $1.7 million.

Right. Okay. Timur did we answer your question on the review?

Yes. And then maybe just a corollary to that. Looking at the linked quarter decline in C&I balances and the remix of the loan portfolio to 20%, 25% C&I 75% CRE was any of that remix or the loans exited this quarter from the C&I book a result of this loan review?

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

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

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

Yeah. So the items that I touch based on earlier is going to contribute to the fourth quarter, we had again $325 million of brokerage CDs that matured very late in the quarter and they carried around a 2.40% rate, so we're going to get the full quarter benefit of that. And then, we'll have the retail CDs that mature and that will be spread across the quarter, so we don't get a full quarter. The other thing that, I would start to look at is that we grew our noninterest-bearing deposits by $114 million in the quarter, but the average balance was only up around $14 million, $15 million. So, we should see some added benefit to the extent that those noninterest-bearing deposits stick throughout the quarter.

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

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

Okay. Thank you.

Thank you, Timur.

The next question comes from Tim Coffey of Janney. Please go ahead.

Great. Thanks. Good morning, gentlemen.

Good morning.

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

Well, I like the warehouse business. I think we do a really, really good job. I think we have a perfect team in place. It needs to remain a reasonable percentage of our balance sheet. And so given our size, we could grow it much faster. But I think right now we have a soft internal cap of just under $1 billion. And I think the last time I looked it was down to $880 million or something like that. John, I don't know if you have the quarter end number?

It's in that ballpark.

Yeah. But I expect that to expand each quarter.

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

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

Okay. And then rent control is common to the entire state of California. How is that going to impact your multi-family business?

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

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

No, not yet. One of the reasons for that is -- and one of the reasons I like multi-family and I like infill construction is the housing issue in Southern California is very, very concrete. It's -- we have a big housing shortage. And these properties are very, very stable. And all the way through the sea end of the market they are very, very stable for workforce housing, for blue collar housing, and then for young professional housing, and even for older professional housing. It's very stable. The occupancy is very, very high and I don't see that changing because there just isn't enough new products coming on into the market.

All right. Do you track or can you provide the average age of the multi-family collateral in your portfolio?

I don't know if we have that.

Okay. And then how much of the construction book is to multi-family?

A big part of it probably half.

Yes, probably half and it has to be--

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

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

Thank you, Tim.

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

Good morning guys.

Good morning.

I wanted to just circle up on the de-emphasis on single-family loans. Just wondering how low could those balances go over time here?

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

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

Okay. And then, on the single-family delinquencies were those primarily Alt Doc loans or was there anything unique about the structure within those delinquencies?

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

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

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

On the CLO book, we're at approximately $750 million. And we're $1.2 billion. We're $735 million. I think I am comfortable with where we are. And we're comfortable with the credit. And we monitor it very closely. If there are alternative products to trade into to de-concentrate in CLOs, we would do that now is the time as we build out our securities portfolio and normalize it a little bit. But I'm not interested in getting out and just abandoning the good yield that we have on it, which is around 4%. So I think, we're comfortable holding that position unless there are some good alternatives. And we'll ladder our securities portfolio with other stuff now that we got out of the MBS.

All right, thank you very much.

Thank you.

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