Banc of California, Inc. (BANC) Q1 2020 Earnings Report, Transcript and Summary

Hello and welcome to the Banc of California First Quarter Earnings Conference Call. [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 for these and the additional required information is available in the earnings press release. The referred presentation is available on the company’s Investor Relations website. Before we begin, we would like to direct everyone towards the company’s Safe Harbor statement on forward-looking statements included in both the earnings release and earnings presentation. I would like to turn the conference over to Mr. Jared Wolff, Banc of California’s President and Chief Executive Officer.

Good morning and welcome to Banc of California’s first quarter earnings call. Joining me on today’s call are Lynn Hopkins, our Chief Financial Officer who will talk in more detail about our quarterly results as well as Mike Smith, our Chief Accounting Officer and Bob Dyck, our Chief Credit Officer, who will all be available during Q&A. We recognize that the past couple of months have been challenging on many levels and we hope that in the coming months we will see a return to some semblance of normalcy. In the meantime, we are doing everything we can to support our employees, our clients and our communities. We hope that you, your families and your colleagues are healthy and doing well. While no one saw the pandemic coming, our decision to shrink and de-risk our balance sheet last year could not have come at a better time. As a result of these efforts, we enter this period of uncertainty with high levels of capital and a well-underwritten credit portfolio, predominantly secured by Southern California real estate with relatively low loan to values. From this position of strength, we look to support our clients and build upon our reputation as one of the premier, relationship-focused business banks in Southern California. As the potential for a domestic outbreak of the pandemic increased, we implemented our business continuity plan and also initiated an enhanced outreach program with our clients to identify early signs of stress in our portfolio. Our ongoing efforts have kept us in front of our clients to build dialogue and gather data about the local economy while providing assistance where needed to keep problems at bay. We decided early on to participate in the Payroll Protection Program, primarily to support our existing clients, but have also had success in using it to establish deposit relationships with new clients. As our materials report, we have been actively getting applications approved and funding loans on behalf of clients. We estimate these funds have helped protect well over 7,000 jobs in the communities we serve. We also have provided support to clients by granting loan deferments, when requested and supported by our borrowers. As of April 27, in our SFR portfolio, we had 122 active deferments on $123 million of principal balances or approximately 8% of the portfolio. With respect to our non-SFR portfolio, as of April 27, we had 68 active deferments on $257 million of principal balances or 6% of our non-SFR portfolio. As with our entire portfolio, we will continue to actively monitor and manage our lending relationships in a manner that supports our clients and protects the bank. None of this would have been possible without the full support of Banc of California’s more than 600 employees who have worked tirelessly to adapt to the rapidly changing environment and still service our clients’ financial needs. In early March, we implemented our business continuity plan, transitioned to a remote work environment, reduced branch hours and temporarily closed a few branches as we sought to balance employee and community safety with the financial needs of our clients. Our recent investments in technology, including videoconferencing tools we put in place early last year, made these changes much more manageable. To support our community, Banc of California partnered with Food Finders to provide over 300,000 meals to our most vulnerable neighbors in Southern California. We made a donation to the Los Angeles Fire Department, among others to help supply critical personal protective equipment to these first-responders. Despite the pandemic-related disruption, transformation of Banc of California into a relationship-focused business bank continues. We made progress on all of three of the objectives we have highlighted in the past that I believe are key to creating long-term franchise value for our shareholders. First of note, we grew non-interest-bearing deposits by $168 million, or 15% in the first quarter. The significant quarter-over-quarter growth also came with growth in average deposits, making it the fifth consecutive quarter in which our average non-interest bearing deposits increased. We have continued to reduce rates as relationship deposits replaced legacy transaction-oriented deposits, reducing our total cost of deposits by 16 basis points this quarter. Second, we have reduced our core expenses by $5 million or more than 10%. Third, we continued our repositioning of the balance sheet with further reductions in our non-core assets, which will be replaced in time with relationship-based loans and appropriate investments in our securities portfolio. I feel it’s important to highlight these accomplishments as the events of the past 2 months have shifted focus to the future and risk overshadowing the significant progress we have made and continue to make. As Lynn will explain, there was a fair amount of noise in this quarter’s results, but our core earnings were largely in line with Q4. In summary, the hard work of the past year to reposition the bank is taking shape and we entered this crisis with high levels of capital and a relatively conservative credit profile. We are moving forward with the vision that the relationship-based business bank we are building will create tremendous long-term value that will able to be unlocked when this crisis has passed. Now, I will hand it over to Lynn who will provide more color on our operational performance, then I will have some closing remarks before opening up the line for questions.

Thank you, Jared. First, as mentioned, please refer to our Investor Deck, which can be found on our Investor Relations website. We significantly revised our format this quarter to provide more granularity in certain areas including the new Current Expected Credit Losses Methodology, or CECL, our loan portfolio, and the CLO portfolio. The net loss available to common stockholders for the first quarter was $9.7 million, or negative $0.19 per share due to the impact of a $15.8 million provision for credit losses, combined with the impact of declining market interest rates and a $355 million decline in average interest earning assets. Pre-tax, pre-provision income was $7 million for the first quarter and adjusted pre-tax, pre-provision income was $10.6 million. Despite the volatility in market rates, our net interest margin was relatively stable at 2.97%, down 7 basis points from prior quarter. Let me begin with the CECL discussion to provide some context for the largest driver of this quarter’s net results. The first quarter results included the adoption of CECL and we recorded a $6.4 million increase in our allowance for credit losses on Day 1, which increased the allowance to $68.1 million and the allowance coverage ratio from 1.04% to 1.14%. Our Day 1 forecast scenarios included unemployment rates ranging from low to mid single-digits and near-term GDP growth of approximately 2% to 3%. As we turned to March 31, we evaluated the effects of the pandemic being felt throughout the entire economy and we recognized a provision for credit losses of $15.8 million resulting in a total allowance for credit losses of $82.1 million, or an allowance coverage ratio of 1.45%. This provision reflects the new CECL methodology using current economic forecasts and the estimated future impact of the COVID-19 pandemic on lifetime credit losses. Using the Moody’s model and forecasts published at the end of March, approximately $19 million of the provision for credit losses was attributed to the change in economic forecast since the beginning of the year and this was offset by a $5 million downward adjustment to account for changes in the portfolio. The forecasts used to inform our reserve levels generally indicated a recession, followed by a relatively quick return to the long-term trends. These forecasts included a sharp contraction in annualized GDP growth ranging from negative 13% to negative 26% and a sharp spike in near-term unemployment rates ranging from 8% to 13% before returning to moderate long-term trends. Our visibility at the end of the quarter indicated that local unemployment was heading higher and that the economic recovery would likely be slower. Accordingly, we incorporated qualitative factors to address an economic outlook that was worse than the late March forecasts used in the model. As Jared mentioned, our capital position is very strong with a CET1 ratio over 11% and has benefited from the strategic actions completed over the past several quarters. Prior to pausing our common stock buyback program on March 17, we repurchased approximately 828,000 shares of common stock for an aggregate amount of $12 million and we took the opportunity to repurchase par value $2.2 million in the aggregate of Series D and Series E preferred stock for a total purchase price of $1.6 million. Looking forward to June, our Series D preferred stock is redeemable and we are evaluating options regarding the redemption. 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, while protecting our very well capitalized position at a time when the economic outlook remains uncertain. Our balance sheet repositioning continued as we reduced total assets by $166 million to $7.7 billion. The largest driver was expected run-off of our legacy single-family residential portfolio. As you may remember, we stopped originating SFRs in the second quarter of 2019 consistent with our focus of being a relationship-focused business bank. Accordingly, we expect to see additional declines in this portfolio as we concentrate our efforts on originating core relationship-based loans. As noted in the past, we expect production to outpace pay-offs in the second half of the year, resulting in a relatively stable level of assets. With economic conditions having deteriorated and being mindful of credit quality, loan production will likely be less robust. However, we will look to add quality earning assets in the loan and/or investment portfolio to improve our level of interest income and earning assets going forward. This year, we will continue to build the foundation that will drive improved performance in 2021 and beyond. The investor presentation includes details about our loan portfolio and there are a few points worth making. First, we have limited exposure to the sectors that are most at risk from the pandemic, energy, hotels, restaurants, airlines and hospitality. Second, we have a well-diversified portfolio and an increasing focus on relationship-based commercial loans, which is supported by high-quality collateral, including residential real estate. Total loans held for investment at the end of the first quarter were $5.7 billion with an average 7 yield of 4.56%. Real estate loans, which include multifamily housing, CRE, construction and single-family totaled just under $4 billion, 88% of which had current LTVs of less than 70%. Our single-family portfolio totaled $1.5 billion, 80% of which have LTVs of less than 70%. The commercial real estate and multifamily portfolios, which totaled $2.3 billion have an average LTV of approximately 62%, are well-diversified and are mainly secured by California real estate. The C&I loan book totaled $1.6 billion with an average loan size of about $2 million, and like our other portfolios, has limited exposure to industries that have seen the greatest impact from the COVID-19 pandemic. Turning to asset quality, there are a few key takeaways. Overall, asset quality is strong, but the legacy SFR portfolio adds some noise so we show asset quality metrics for both the entire loan portfolio and for the portfolio, excluding SFR. Setting the SFRs aside, total delinquent loans would have been $13.6 million or 24 basis points and the non-performing loans would have been $32.1 million. As we have discussed before, the NPLs include a legacy $16.4 million Shared National Credit. The growth of delinquencies in SFR loans was expected given the dynamics in that portfolio. While the growth in delinquencies was considerable in the first quarter, we believe the risk of loss on the single-family portfolio is low given the conservative LTVs. However, due to consumer rules, single-family loans tend to take longer to work through and can temporarily elevate our total delinquent and non-performing loans. Our securities portfolio totaled $969 million at quarter end and had an average yield of 3.3% in the first quarter. 95% of this portfolio is AAA or AA rated securities with the remaining 5% in BBB corporate debt securities. About 64% of our total securities portfolio was comprised of investments in CLOs which due to the market dislocation during March ended the quarter with an unrealized pre-tax loss of $80 million, of which $64.8 million occurred during the quarter. In addition to our regular credit monitoring and quarter end, other-than-temporary impairment evaluation for our CLOs, we conducted additional stress testing analysis and continue to conclude the credit quality and cash flow will support the invested CLO balances. The additional stress testing analysis considered constant prepayment speeds ranging from zero to 20 and recovery rates ranging from 50% to 70% Our holdings include only AA and AAA CLOs, and the collateral underlying the CLOs is well diversified across many industries without concentration in any one sector, and specifically no significant exposure to industries which have been hardest hit in recent weeks due to the health crisis. That being said, the effects of recent market movements have touched the entire economy, so all industries have been adversely affected to some degree. Given our current view of the credit risk in the underlying collateral and the significant unrealized loss position of the CLOs, we will not look to exit the CLO’s at this time at a loss. However, should credit spreads improve and as CLOs run off in the normal course, we expect to continue to diversify out of our CLO concentration and we will continue to add non-CLO investments with appropriate levels of risk and yield. The volatility in the CLO credit spreads did have a negative impact on our tangible book value, specifically lowering it $45.7 million, or $0.91 per common share, as of quarter end due to the after-tax unrealized loss. In response to the unknown potential impact of the COVID-19 pandemic, we increased our on-balance sheet liquidity to 18% of total assets, up from 16% in the fourth quarter. This additional liquidity was used to purchase $147.4 million of corporate debt and government agency securities and increased cash balances by $62.5 million. We did not observe any significant credit line utilizations during the back half of March, and they continue to remain stable. We anticipate maintaining this liquidity until the longer-term impacts of the pandemic on the economy and to our operations become clearer. Deposits increased $136 million to $5.56 billion at the end of the quarter, with non-interest bearing deposits reaching $1.26 billion, nearly 23% of our total deposits. A summary of our current and historical deposit mix in the investor presentation highlights the progress we have been making in improving the composition of our deposits and bringing down their total cost over the past five quarters. Demand deposits increased from approximately 35% to nearly 51% of total deposits from the first quarter of 2019 to the first quarter of 2020 which when combined with the rate environment and our proactive efforts to lower deposit costs drove the all-in average cost of deposits down from 1.67% to 1.11% over the same time period. As we previously mentioned, we believe building a strong, truly low-cost deposit base is one of the most important things we can do to create franchise value. Overall, our progress is slightly ahead of plan due to the tremendous dedication of our team. As Jared mentioned, we have shown five consecutive quarters of growth in average non-interest bearing deposits, and our mix of non-interest bearing and DDA to total deposits is continuing to grow. We look forward to continued progress in this area, and having it be one of the hallmarks of Banc of California. Brokered CDs grew from 0 to $208.7 million in the first quarter as we took advantage of attractive pricing in that market to reduce some of our remaining higher-cost interest bearing deposits. FHLB advances decreased $217 million in the first quarter resulting in a stable amount of wholesale funding. Our net interest margin decreased 7 basis points to 2.97% for the linked quarters despite significant volatility in market rates and illustrates the progress we have made in managing our cost of deposits and asset mix. At the end of the quarter, our deposit cost spot rate reached 89 basis points, well-below the quarter average of 1.11%. We are seeing the benefits from our focused efforts to increased lower cost deposits as a portion of our total deposit portfolio, and expect further declines in the average and period end rates. Another area of focus for us has been managing expenses to match the size of our business. While there has been a fair amount of volatility in non-core expenses, which I am happy to address in the Q&A, core expenses decreased 21% over the last year to reach $43 million in the first quarter of this year and down $5 million from last quarter. While the core expense to average asset ratio is 15 basis points higher than it was a year ago, it’s important to remember how dramatically average assets have declined as we worked to run-off non-core assets and transform into a relationship-focused business bank. And lastly, I would like to comment that when we look at pre-tax pre-provision income and exclude the unrealized fair value adjustment on loans held-for-sale and a legal settlement that concluded an acquired bank’s legacy issue, we made approximately $13.1 million for the first quarter and this compares to $13.3 million for the prior quarter. Accordingly, our core underlying earnings when adjusted for these items are largely in line for the linked quarters. At this time, I will turn the presentation back over to Jared.

Thank you, Lynn. As Lynn described, many of the transformative actions we have taken over the last few quarters have provided the company with the capacity to confront from a position of strength some of the more adverse conditions that have been projected. As I have previously described, we believe our high-touch, relationship-focused approach is filling a void in the market in Southern California. Our approach to relationship banking is one that clients are searching for and appreciate especially in times such as we are facing now. There is no better evidence of our progress in this area than in our growth of non-interest bearing and demand deposits. We believe that the development of a true low-cost deposit franchise, with a high percentage of non-interest bearing and relationship deposits, is among the most important things we can do to create long-term franchise value. Our proactive, targeted approach includes gathering more deposits from existing clients and bringing over operating accounts from new business clients. Our referral activity is high and everyday we are demonstrating to clients old and new the benefits and flexibility of having a true relationship-focused business bank as a financial partner. With this as the backdrop and given the uncertain economic outlook, our strategy for the upcoming few quarters is to continue to serve clients and add value. As we add value, we plan to deepen relationships with clients and continue reducing deposit costs by increasing relationship-based deposits one client at a time. We will likely see some expected run-off of loans in the near-term due to the low rate environment. However in the back half of the year, subject to economic conditions, we expect production to outpace run-off and combined with additions to our investment portfolio bring us to an overall flat balance sheet year-over-year. While we don’t expect the total balances to change much from December to December, we do think that the mix will be more favorable with a growing base of relationship-based loans and with fewer legacy brokered loans. Finally, we will continue to evaluate ways to optimize the use of our capital, ensuring we are enhancing franchise and stockholder value through our actions and our investments. We will continue to monitor the economic environment closely, making adjustments along the way as necessary. However, I am confident in our ability to continue executing on our strategic plan. We are now in the second year of our transformation and progress has taken hold. We are fortunate to have entered this economic period on firm footing, with robust capital, reasonable-sized allowance for credit losses, and a conservatively underwritten loan portfolio. Given the uncertainty of the depth and duration of the potential economic crisis, we are moving carefully on lending and managing credit very closely. However, our other initiatives continue to move forward as we expand deposit market share in our target markets and remix our balance sheet driving shareholder value. Thank you for listening today. Again, I hope that you and your families are safe and healthy and I look forward to sharing more about Banc of California’s progress in the coming quarters. With that, operator, let’s go ahead now and open up the line for questions.

[Operator Instructions] First question comes from Matthew Clark with Piper Sandler. Please go ahead.

Hey, good morning.

Good morning.

On the negative swing in the LCI from the CLOs, the $0.91 impact, credit spreads have come back in I believe since the Fed stepped in, I guess how much of that $0.91 do you think you got back if you were to take a snapshot of that portfolio here at the end of April?

Sure. Matthew, this is Lynn. You are right, credit spreads have tightened up since quarter end and we have been monitoring it closely. I think that the price of our CLO portfolio has improved just shy of about $11 million versus approximately $0.15 on our tangible book value per share improvement since quarter end.

Okay, great. And then on the expense savings, I think from reading the release or the deck, I can’t remember which one, but is sound like those $5 million of savings came pre-pandemic and I just wanted to get your updated thoughts on the expense outlook given what transpired here with the economic shock and what opportunities you might have to find additional savings with a smaller balance sheet?

Sure. I think that’s where we ended this quarter for our core operating expenses is approximately our run-rate. As we look forward, we have really been working hard to right-size the non-operating expenses relative to our operations as we go forward and so in that $44 million range.

One other thing I would add and try to remind people of this from time-to-time, we have a couple large anchors as we refer to them which includes an outsized expense in support of the naming rights for the LAFC deal as well as our FHLB long-term advances. Both of which might have made sense of the time they were done, but they are no longer consistent with kind of what we think we need going forward. So, we are trying to figure out ways to improve our cost in both of those areas and we hope to be able to figure it out over time, but those are – it’s just important to remind people that those are two things that are fairly outsized on our balance sheet.

And the spot rate on deposit costs came down pretty meaningfully here at the end of March, 89 basis points, just wanted to get your updated thoughts on some of the near-term margin outlook and as we progressed through the year here?

Sure. So the spot rate at the end of the quarter is also a reflection of the composition as we were able to increase non-interest bearing deposits is a bigger percentage right there at quarter end and our average non-interest bearing deposits was up quarter-over-quarter. I think as we look forward and given the dramatic drop in rate during the first quarter, we expected the net interest margin or rather the deposit pricing, we have more opportunity to lower that, probably more so than the decrease in earning assets. So it expected to stay opportunity the same or have the opportunity to come up with it.

Yes. Where our cost of deposits is continuing to drive down and we are going to get more benefit in the second quarter from the spot rate, obviously, that dropped and I don’t have the most current estimates, but I would expect it to be – continuing to drive down quite a bit now.

Okay. And then just on the PPP program, wanted to get your thoughts on how you are modeling it, is it – should we just assume that those balances come and go by the end of the third quarter and kind of an average origination fee of 3%, maybe you are earning something slightly less than that?

Exactly. I mean, we – look, we thought it was really important to participate in it, but we are working to build our bank around it. And this was an important thing to do to support clients and see if we could gather new relationships as well. We chose it to be a very high-tough model with our clients walking through the program, build relationships and we knew that, that would also translate into referrals. We thought of this of really setting ourselves up to be more of a PPO than an HMO and we talk about that a lot internally about what our models looks like. We were also concerned frankly about what the postmortem on this whole program would look like and how it would be written. I have seen this story before having done many FDIC assisted deals. This overall PPP is important, but it’s very short-lived, it’s non-recurring and we want to do it the right way. So I think as I look at it we have the most recent numbers I got is I think we have about $270 million plus of loans that could be funded it is all going to depend on eTran and if the funds run out but of those $270 million assuming they all fund we would expect are in just below 3% on it.

Okay, thank you.

Yes.

Our next question is from Jackie Bohlen from KBW. Please go ahead.

Hi, good morning everyone.

Good morning.

Morning. I want to touch on the new customer portion of PPP on and see number one if you have a break out between new versus existing customers in terms of applications and then more broad question what kind of products you are hoping to offer to those new customers and how deposit balances may have reacted as a result in April?

Sure. So we are not going to break out new versus old whole bunch of reasons for that but I can give you some anecdotes about – I think the numbers will speak for themselves in, in terms of our continued growth in deposits and average deposits quarter over quarter in the categories that we really care about non-interest bearing and look off checking which combined added to TDA we are getting tons of calls the large banks play an important role in our society but this was not they won’t build for this and people who got stuck on 800 numbers they did not get calls back to configure where their applications were and we were getting active referrals from people that we know that we serve well saying hey so and so because we are hand holding people through the process we are getting active calls from people saying hey the way that you helped me could you help this person they are having a really hard time to bring over their balances to you if you can help them. And so obviously we want to serve our existing clients first and so capacity permitting we are helping new clients as well that being said the stories will not die they will live for a very long time people will remember how we treated them right now and what we did to help them secure these funds and at a time we have people calling as thanking us for keeping their life’s on the clean estimate I have is that our funds saved helping to see close to a 11,000 jobs and I am sure they are banks do a lot more than us we are comfortable with the way that we did it and really wanted to handle our client through this and not making a meaningful experience and relationship experience and not just kind of transact. So we even had special e-mails that we sent out to clients when they got their eTran number because that’s the moment where you know the funds reserve for you and so our client I just cannot stress enough how incredible our colleagues were doing this entire process I have never experienced anything like this in banking and I was I have been saying this is like building a car as you have to drive it and I am proud of the banking industry the way that the banks government the trade associations all came together to figure this out I am not sure how you could have done it any other way I am sure there will be criticisms of it but I am really proud of our teams our employees are incredible we have an incredibly talented resilient and dedicated group of colleagues who are making Banc of California stand out at a really important time like this and there have been working incredibly hard and so we are really I think motivated by inspired by what we are able to do help our clients that was a long answer to your question Jackie but at this time we are not going to break out the difference between clients and non-clients.

Okay. No, understood, and that was good background color. And with – when you think about the – directionally, the costs of your deposits assuming that other than the thought rate there is no number on that I do these new deposit accounts play into that or would that be an added benefit beyond what you are already thinking.

Well they are consistent with they are definitely accelerating our growth there is no question that we are making progress everyday in terms of bringing an operating account but we didn’t see the PPP program coming when we are budgeting at the beginning of the year. As aggressive as we thought we would be this is either going to help us get to our budget at a time when may be things looks slower or if things continue on the pace that we are on which are faster than we projected we are going to outpace our budget from a deposit stand point a lot of the hard work that we did last year in terms of transforming our culture around deposits and all the programs that we have put in place the special programs that we talked about our talking hold right now and we have teams everybody is speaking deposits in our company to become kind of the culture of our company and I truly believe that and we have talked about this when you look at what banking really is, it’s a license to gather deposits, it’s not a license to lend. There are a lot of non-bank lenders. So we can go buy loans, we can go get loans. There is a whole bunch of strategies to put on a whole bunch of loans. But our whole goal was to bring this company back into balance. The company started – when I joined the company we are completely out of balance. We had an expanding balance sheet that was – that couldn’t keep up on the deposit side. They were bringing on brokered loans and gathering expensive deposits and it just didn’t work. And so the whole idea was to bring it back into balance and then figure out a way to growth in there reasonably. And if you can grow your deposits faster than your loans, that’s pretty impressive. And so we are starting to get to a point right now where we are making the same amount of money on a smaller balance sheet, because we have controlled expenses. We are seeing tremendous progress with deposits. It won’t be that way forever, but we are taking advantage of it while we have the momentum. And then we are going to add loans that make sense for our company. And I realized people want us to start earning tons of money right now and now it’s not necessarily the right environment to have outsized loan growth. So we are going to be careful about it and we are going to take advantage of the environment to make sure that we are bringing in operating accounts that are really, additive for us. The deposit accounts that we are bringing in are all really low cost. And we have a couple of different groups in the company. We have a specialty deposit group that goes after institutional deposits and specialty deposits like bankruptcy trustee and things like that and other sort of institutional large kind of chunky deposits. We have our private banking team which is exceptional at what they do, very high-touch, gathers deposits from a whole different host – a whole host of sectors and then our community and business banking teams as well as our commercial and real estate teams are very seasoned in terms of bringing deposits. So it’s become really an enterprise role, but we have a lot of different buckets through which are gathering in the deposits.

Okay, great. Thank you for all the color. I will step back.

Thanks, Jackie.

Next question is from Timur Braziler of Wells Fargo. Please go ahead.

Hi, good morning.

Good morning.

Good morning.

Maybe just starting with a point of clarity, so if I understand this correctly, next quarter, we are still expecting some level of asset reduction as loans continue to runoff at a faster pace, but then in the back end of the year, the expectation is for production to offset runoff and actually see stabilizing asset base?

I am not sure, Timur and we see next quarter, I think you mean this quarter, I assume.

In the second quarter?

Yes. So I would say that in the first quarter, single-family met our expectations in terms of runoff and multifamily was a little slower than we thought. And then single-family kind of came to a halt. So – and then it might start picking up a little bit again, but we are starting to get a lot of momentum on the loan side in terms of loans that we have been seeking to do as opposed to just taking whatever it comes across the bow. So hard to say because we don’t know where the economy is going and we are going to be very careful, I would think of that. I am starting to hear that refinancings are picking up again. A couple of months ago or a month ago, people would think that refinancings wouldn’t happen, because how are you going to get something signed in person when we have all the shelter in place. So I think brokered – the refinancing of our brokered single-family portfolio will probably start to pickup and that’s where we are going to see, I think a most runoff. I think refinancing on multifamily is much harder right now because of the noise. We monitor our credit portfolio very carefully and so far things seem to be holding pretty well and I spent a lot of time on the phone with real estate folks in Southern California who are owners of multifamily real estate to understand what collections are and what rent collections are and it seems to be running in the low 90s which is pretty good and it’s running in the low 90s for B and a little bit higher for A. And it depends, but I think depending on who you are talking to, but on average, I’d say it’s in the low 90s. And so, so far things seem to be holding up and I think it’s going to be hard for people to refinance multi. So our projections on multifamily for what was going to refinance maybe slower than what we thought, but single-family may start to pickup again. So the answer is I am not sure, but we do expect to still end the balance of the year flat.

Okay, that’s helpful. And then I just want to circle back on the C&I portfolio, there is a comment in the release that reduction in C&I was partly due to management reducing credit facilities in response to changed economic landscape. Was this proactively reducing lines? Was this largely driven by reductions in the shared national credit portfolio? I guess any color around that commentary would be helpful?

So, the shared national credit, we don’t have very many. That portfolio is what it is and we’re not doing anymore. I’ll let Lynn and Bob add any color that they might have but C&I is definitely lower due to reduction in credit line facilities and that was the other half of our reduction and we proactively shrunk certain credit lines on the warehouse side just in light of the market to make sure that we were taking more of a wait and see attitude and that contributed to our reduction. So, we obviously can flex that up at any time and there seems to be plenty of capacity right now and that market seems to be picking back up, which would be consistent with my comment about seeing refinancings in SFR. So that’s something that we can flex if we need to, but let me turn it over to Lynn or Bob Dyck if they have any other color here. We’re not sitting in the same room, so we’re looking at each other on Zoom and I think they can see the hand signal. So, if they have any other color?

I don’t have any additional color. It was that we did manage down the credit line as we saw the events of pandemic unfold and that was the other half of our decrease in our assets quarter-over-quarter or loans.

Okay. But those lines that you’re referring to are primarily on the warehouse product?

Yes.

Alright. Okay. And then one last one for me, just looking at the deferral information and then some of the more at-risk industries that’s provided on Slide 9, do you have the deferral balances for those specific industries? And then as we look kind of post quarter-end has the pace of deferral requests slowed or is it still fairly elevated?

So, we don’t have the breakout right now for where the deferrals are other than the way that we’ve broken out for you in terms of SFR and non-SFR. I expect that deferral request will increase. We had more requests for deferrals than active deferrals. So the way it works is, people come to us and say, hey, I am curious about a deferral. We explain what’s necessary to get one, which means they have to make a statement about their financial condition due to the pandemic and provide a little bit of information and then they get a deferral. More people did not inquired, but didn’t actually pursue the avenue. So there are – I think and I’ve heard this from others, we want to be careful in not grant more deferrals than we needed to just because people ask for it. I think there are a lot of people who would take advantage and get a deferment if they could. But we’re happy to give a deferment to our borrowers if they need it. We have no problem with that, if that’s what they need, we want to be there to support them and this – we believe this is temporary and help them get through it. So, a lot of borrowers did not take the second step to provide what was necessary for us to actually give them an active deferral. And so, in certain cases, I would expect the numbers to pick up. I mean, I don’t know why the second quarter isn’t going to be worse than the first quarter. I mean, GDP numbers came out this morning, they were, on an annualized basis, I think worse than people were projecting in terms of the decline. So, we think Q2 is going to be worse than Q1. And so I would expect deferrals to go up. I don’t know how long, how much in the aggregate, but we hope that this is temporary and obviously the amount and the depth and duration of the crisis will affect banks and nobody knows what that’s going to be at.

Okay. And are you actively going out to clients, letting them know that this deferral option is out there or is it solely when client reaches out to the bank that the process is initiated?

We are – well, yes and no. So, we – our program is to actively reach out to clients, talk to them, stay in front of them, and make sure that we know what’s going on in our portfolio. And if it looks like the client is struggling, he needs deferment, absolutely, that would be something that we would suggest. We don’t want to bring on a whole bunch of TDRs. So we got to work within the program and take advantage of the opportunity to give deferrals if appropriate, but most importantly, we’re just trying to stay in touch with our borrowers in a very active way and being proactive to make sure we’re on top of it and can see things coming before they get worse.

Understood. Thank you.

Thanks, Timur.

Next question comes from David Feaster of Raymond James. Please go ahead.

Hey, good morning, everybody.

Good morning.

Good morning.

I mean, just kind of, in light of the commentary that you were just talking about with the weaker economic data that’s been coming out, it sounds like you’ve already baked some of that into your provision model. I guess how do you think about potential future reserve builds in light of some of this weaker economic data though?

Well, let me – I think we took the opportunity in Q1 with the adoption of CECL to take a reserve we felt we could justify based on an outlook that is conservative. Our materials obviously detail some of the assumptions. Our portfolio, we think, is conservatively underwritten, and in theory, CECL is a reserve for the projected life of all loans currently on our balance sheet. As I mentioned, I mean I think the depth and duration of the crisis is going to dictate everything and that’s yet to be seen. David, I don’t know – I mean I know everybody wants to know do you have enough to avoid a provision in the second quarter. Nobody is yet run their model – their CECL model for the second quarter. So we kind of don’t know how it’s going to operate and it’s going to – in theory, it covers the lifetime of losses of the loans that are currently in our portfolio. And so any new loans we bring on our portfolio should be the change to CECL in Q2, absent any changes to our portfolio for what’s on there that it runs off. I think we’re all going to see how it works and I hope economic circumstances or not worse than we modeled. We did model more conservatively than kind of what the model was projecting as Lynn talked through in her comments. Lynn, do you have anything to add there?

No, I think those are generally, I think it’s difficult to say what the future state of the economy will be and whether its ultimate impact will be. I think we'll watch that unfold. Jared?

We try to be conservative, David. We try to take the opportunity to enter CECL and the rules that permitted it to be aggressive with the reserve that was supportable, given our – we do think we have a fairly conservative credit portfolio and we’ll see where this goes. We don’t want to do this every quarter if we don’t have to.

Yes. Things seemingly change on a daily basis. So that’s a fair answer. And just in light of the continued core deposit growth that you highlighted, I guess, where do you think is the best opportunity to deploy those deposits? Sounds like the appetite for new loan growth is limited, just how – would you use those to fund PPP loans? I mean, I guess, just – what are your thoughts on deploying those deposits?

No, no. There is good lending to do. There is good lending to do with relationship borrowers that are really good actors in this sort of environment. So, Bob Dyck, our Chief Credit Officer is on the phone. We were together at Pac West and in the downturn, we had tons of opportunity to lend to seasoned real estate investors, who were taking out distressed properties and knew how to handle them, fix them up and turn them into something better. And give it a little bit of time, but there is going to be a lot of lending to do. Second of all, our existing borrowers may have good projects that they’re still active on that we’re going to help them with. Everything isn’t shut down and there is a current delta between the bid and ask for on the real estate side for a lot of projects, but – so I think transactions in real estate are probably slowing to a certain extent, while that bid and ask narrow, but there are bridge projects to do to help people improve property that they have. And in the meantime, I think there is good opportunities on the investment side with yields that are above our investment portfolio – above our loan yields that have appropriate risk, but as long as if we don’t get too wide in any of our buckets. We have – obviously, we have an investment portfolio we are building back up. Finally, it looks like the market’s cooperating in terms of giving us some options. And so, we’re going to look to deploy funds there in a reasonable way, but we’re not – we have certain kind of buckets and I can let Lynn talk about what we have there. Lynn, if you want to jump in on anything that we’re looking to do on the investment side.

Yes, sorry, I think the sound was on mute, I apologize. The – on the investment side, yes, we’ve been looking at opportunities there, obviously, in lower interest rate environment, the yields have been a little bit lower. We have looked to some corporates, which is primarily bank-subordinated debentures that have come into the market lately. Those have been yielding or yield opportunities around 4.5%, primarily one of the investments we have looked at and then just other agency government securities as well. So those are about $150 million that we mentioned in the materials that we purchased.

Okay.

I think on the warehouse side – in the warehouse side as things ramp up, we have an opportunity there to take advantage in two ways: one, not only to support that market as it continues and we do that in a very conservative way. But second of all, the underlying secured – the underlying loans that we are financing, they are available for us to purchase at a discount. And so we can look to buy those loans if we have visibility into them, which is what I was mentioning earlier. I mean, we can buy loans at any time. I mean, that’s not the hard part of banking. The hard part of banking is building a true culture and relationships and loans that people that keep coming back to you time after time for high-quality loans. And so we are very focused on doing that. That being said, we are mindful of the fact that we are getting to a balance sheet size that we want to have the right amount of earning assets to support the expense base, which we can only take down so far. And so knowing that, we will put on the assets, we will put in the assets that make sense and make sure that we build this back up. This year is about managing credit and managing – getting out of this crisis and setting up our company in the right way for the future and I think we are well positioned so that next year is going to be a pretty good year. I mean I am very, very pleased with how things are going on the deposit side. And like I said, it will last forever. So we are going to keep taking advantage of it and hopefully it will – we will be able to keep this momentum up for quite some time and continue building. We are getting a great reputation in our market. Our teams have just done a remarkable job of being out there and getting a following in a way that we want.

Terrific. That’s great color. One more from me, I just want to talk on the preferred redemption. It sounds like you are interested in potentially redeeming the Series D. I guess how do you balance the desire to hoard capital at this point given the uncertainty with opportunistically redeeming this – that series?

Lynn, you want to take that?

Yes, sure. I can start. I think first and foremost, we are starting with extremely high capital position given the balance sheet had come down in size left us with a lot of excess capital as I can say that. So – and to balance sort of the preservation of capital during uncertain times against our ability I think to look at the redemption of the preferred stock, we are looking at it closely. It’s obviously very expensive relative to current market conditions. So, if there is an opportunity potentially to bring it down with our current capital or to refinance it with potentially other debt such as sub-debt, we are looking at both of those. So we are definitely balancing it, but I think we are starting from a position of a lot of capital as we head into this crisis.

That’s helpful. Thank you.

Does that answer your question, David?

Yes. That’s perfect.

To give you enough color, okay.

Next question is from Gary Tenner of D.A. Davidson. Please go ahead.

Thanks. Good morning.

Good morning, Gary.

Couple of questions. Good morning. In terms of the PPP, I think David may have started asking this question, but in terms of funding it, you are going to fund that do you think with your on balance sheet liquidity or are you going to utilize the liquidity facility, how are you thinking about that?

Yes, we are fine from given our kind of the way that we decide to approach the program and not be all things to everybody and just kind of focus on doing in a pretty high-touch way. We don’t have an outsized position in it. So we are comfortable funding it with our own liquidity. Lynn, any color there?

Yes, I mean, having said that, I think it depends on the ebbs and flows of our liquidity and where we looked into the program, we are prepared to participate and use it if appropriate, but I think that we do have sufficient levels of liquidity based on how we chose to participate in the PPP program.

Yes. It’s – I guess, Gary, Lynn is right to the extent that we know as of today we are like looking around $270 million. I guess if all of a sudden, we had a balloon or the program has extended and we are doing a couple of hundred million more, we obviously would look to potentially use the program.

Okay, great. And then in terms of the CLO portfolio, just wanted to clarify, I thought it said in the press release about average yield was 3.60% and then I thought in the slide deck, it said 3.40%. So, could you confirm which was the right yield for the quarter?

Sure.

Let me look at that. I believe it’s 3.40%.

Okay, great. And then on the re-pricing, is that an April 1 re-pricing date for that portfolio or is it – what – when is the re-pricing date?

It’s towards the middle of April.

Middle of April, okay. Great. My questions were answered. Thank you.

Thanks, Gary.

Next question is from Tim Coffey of Janney. Please go ahead.

Thank you. Good morning.

Good morning, Tim.

Jared, can you remind us how big that brokered residential mortgage book is?

Yes, I think it’s a billion...

$1.04 billion.

Yes.

Okay. What percentage do you expect to kind of refi in the next quarter or this quarter?

I don’t know. I – it’s – I really don’t know. It’s hard to tell.

Okay. How many of those borrowers in that book have a deposit relationship with the bank?

Very, very few. Almost none.

Okay.

It’s pure – I mean, we did some for clients, but the vast majority of them were highly brokered, which is why as a business we just put it down and said, look, let’s not – let’s not compete with First Republic on really, really cheap loans with no relationships.

Sure. Okay. And the borrowers of the book, I mean, are they in your footprint?

Yes. They’re heavily Southern California, and I think we have a slide on that, but they’re not only California, but they’re heavily California. The loan to values are good. So, it’s not a risky portfolio, but it’s going to run with some volatility like a consumer portfolio do. I mean, if you followed any other banks that have the large consumer portfolios, much larger portion of their reserves were tied to consumer portfolios like credit cards and things like that, because of the volatility. We think this is safe, but we don’t think we are going to have meaningful principal losses, but the consumer rules are just tough and it takes a while to work out of the stuff if you have an issue.

Great. And it doesn’t seem to fit your strategy either.

That’s right.

And then in the deck on Page 9, we are discussing the commercial real estate multifamily portfolio from an LTV perspective. I was wondering what is in that other category?

We’ll pull that up here and provide some color on it. We have the detail. So just give us a few seconds, we’ll pull it up.

Sure.

Any other – Lynn or Mike, I don’t know if you have any answer to this CLO question?

Yes. Well, on the CRE and multifamily, I think at one point, we had it in there, it was just a lot of very small percentages. So, it didn’t stand out. So, sorry, I do not have that in my fingertips.

77 loans. We’ll pull it up. So maybe we can answer the next question, and then we’ll pull it up in the background.

Sure. That sounds great. Thank you.

Thank you.

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

Good morning.

Good morning.

I wanted to – I want to dig in on the CLO portfolio, just in terms of the credit exposure here. Just wondering if any of the bonds have – if any of the structures have breached their CCC limits? And if you have any color around what percentage of those portfolios are under review for downgrade?

I can start here. So Steve, we are looking at those. I don’t have the percentage that breached the CCC. We’re continuing to monitor that. We did a lot of work during the latter half of March to stress the portfolio mentioned that we looked at prepayment assumptions with constant rates between 0% and 20% and we looked at loss severities, 40% to 50% and stressed it with some lifetime default. So I mean we are monitoring whether they are breaching their CCC and how the cash flows might change or alter as we move forward, but we continue to conclude with the credit quality and the cash flows are going to support the principal balances that we have invested.

Okay. And then just wondering in terms of do you have any percentage, any idea what is under review for downgrade from perhaps, let’s say the B category?

Steve, I don’t have it in front of me. I am sorry.

Okay, that’s okay.

Steve, hold on. So we did our own stress tests on this portfolio. We have AA and AAA. So the portfolio, our deck laid out the assumptions that we use to stress tests. The estimates are that the underlying portfolio would need to incur losses north of 20% before we would ever touch $1 of loss on our principal. So we monitor the stuff very closely everyday. I don’t have the detail when a C is downgraded to when a B is, but we think we are very well secured. And that there isn’t going to be, based on what we see today based on the assumptions that we used and we had independent groups do it and come back to us and came up with about same results. That’s why we feel like the portfolio is fundamentally sound. As I have always said, it’s an outsized position. We would absolutely look to diversify out of it and keep concentrating that portfolio and look for other yields and other securities. Right now, with the credit spreads where they are, we are not going to take a loss on it when we fundamentally feel like the principal is safe, but given narrower spreads and the ability to get out, we would absolutely diversify into something else.

Okay, that’s helpful. And then in terms of just the – do you have a schedule of maturities, I think $30 million matured this quarter, just wondering if there is any expectation around what potential reductions would be for the second quarter?

I don’t know if it’s maturities is actually what we would have a schedule of. So the asset managers are managing the CLO book inside the trust. So they take their – they actively manage and there it becomes refinance opportunity.

Okay.

We don’t have visibility, it’s about you are correct came off in the quarter, but they did not participate in when they refinanced it. And then I just wanted to come back to on your comment, as far as we know, they are all AA and AAA rated, we are not aware of any downgrades, any lower ratings, the CLOs that we have.

No, as you are referring to the underlying bonds within the CLO, okay.

Right, right.

Okay, great. Thank you very much.

This concludes our question-and-answer session. Conference is now over. Thank you for attending today’s presentation. You may now disconnect.