Banc of California, Inc. (BANC) Q2 2021 Earnings Report, Transcript and Summary

Good day, and welcome to the Banc of California's Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] after today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Jared Wolf, President and Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to Banc of California's second quarter earnings call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results. With economic conditions improving in California and our business development activity continuing to increase, our second quarter results reflect the acceleration of our organic growth ahead of our pending acquisition of Pacific Mercantile Bancorp, which will add more than $1.3 billion in assets, excluding PPP loans and further improve our level of profitability. In addition to generating significant organic balance sheet growth during the second quarter, we continue to execute well on other key initiatives, including lowering our deposit costs, expanding our net interest margin and maintaining disciplined expense control, which helped to produce a strong quarter with earnings per share coming in at $0.34 and pretax pre-provision income coming in to $23.5 million. While payoffs continued to represent a significant headwind. Our strong loan production helped drive 15% annualized loan growth in the second quarter. As the California economy reopens, we are seeing more loan demand and more opportunities to compete for very high-quality credits. And with the differentiated experience that we are able to offer at Banc of California, we are successfully winning a high percentage of the relationships we are pursuing while maintaining discipline in our underwriting and pricing, reflected in our loan yield holding study at 4.3%. In the second quarter, we funded $847 million of loans, comprised of $533 million of new fundings and $314 million of line advances including $227 million of net warehouse line advances. Excluding PPP and warehouse, our fundings for loans was $190 million higher than the first quarter, and the average rate on new loan production was 15 basis points above the first quarter. Through some of our strategic relationships, we are also supplementing our own loan production with strategic purchases of high-quality single-family and multifamily loans that offer attractive risk-adjusted yields in the current environment. In the near term, these loan purchases are a good tool to help us profitably redeploy the liquidity we have built up through our continued strong deposit inflows, offset payoffs and keep us on track to achieve our targeted level of loan growth and profitability. The success we are having in generating organic growth is partly a result of our success in attracting new talent to the bank. Over the past two years, we have made significant progress in building Banc of California's reputation as an attractive destination for experienced commercial banking talent. And as we streamline the company and reduced operating expenses, we have consistently reinvested a portion of the cost savings into adding talented colleagues. Our initial hires supported an accelerator ship to a relationship-focused commercial bank. In each quarter, we look to add new talent that is further strengthening our loan production and deposit gathering capabilities and adding expertise that helps us build our franchise. The new bankers we are adding also have enabled us to selectively expand and deepen our presence in key markets throughout California, including Los Angeles, San Diego, Central California and Northern California. These are proven bankers with deeper relationships in these markets that have been able to quickly build substantial new business pipelines and contribute to our growth in loans and deposits, even in markets where we don't have branches. This is a result of hiring quality relationship bankers, using targeted and efficient marketing and constantly refining our ability to process and execute on behalf of our clients. As a result, we continue to expand our reputation and brand as the go-to bank for the sectors we serve. In addition to loan growth, our business development efforts continue to generate strong inflows of noninterest-bearing and low-cost interest checking deposits from new commercial relationships. During the second quarter, newly opened DDA accounts contributed $129.3 million of low-cost deposits, which produced our eighth consecutive quarter of DDA growth. The deposit engine that we have built continues to produce strong results, particularly from our specialty and Business Banking unit this quarter. As a result of our success in adding new commercial deposit relationships, we continue to see a positive shift in our deposit mix with noninterest-bearing deposits increasing to 29% of total deposits and a further reduction in our cost of deposits, which declined 5 basis points to average just 23 basis points in the quarter. This helped to drive an 8 basis point increase in our net interest margin. The value of the deposit base we have built should become clear as we head into a rising interest rate environment. Our improved deposit mix has increased our asset sensitivity. And given the trends we are seeing in business development, we would expect further improvements in our deposit mix that will continue to increase our asset sensitivity in the future. The organic growth we are generating continues to drive more operating leverage and an improvement in our efficiency ratio, as we are effectively managing our expense levels. Importantly, we are keeping expenses in check while increasing our investments in business development, as I discussed earlier, as well as technology that augments and enhances the client experience both in terms of the technology platforms that we employ and the products and services that we offer. Our technology spending has increased over the past two years, but we've been able to fund that increased investment through our expense reductions and improved efficiencies in other areas. And as we gain scale through organic growth in the Pacific Mercantile acquisition, we had an even greater ability to increase our technology investment in the future while still achieving the improvements we are targeting in our efficiency ratio. In terms of the Pacific Mercantile acquisition, we continue to anticipate closing the transaction during the third quarter. The two organizations have been working well together, and we've had a very productive few months in terms of integration planning. Within 30 days of announcing the transaction, we had made all of the personnel decisions for the combined organization. We have made all the necessary decisions regarding branch consolidations, and we have scheduled the system conversion for the end of the third quarter. Based on the past few months of integration planning, we now feel that we have good visibility on cost savings at or above the 40% level compared to our initial 35% projection with almost all of the cost savings expected to be realized by the end of 2021. Having spent considerable time together over the past few months. We are now even more excited about the opportunities that will be created from bringing our teams together and leveraging our collective strengths. We've gotten a good sense for where we have opportunities to expand existing Pac-Merc relationships, particularly among some of the larger clients who are performing well and will require larger credit facilities to support their continued business growth. And the relationship managers we will be adding will now have more opportunity to expand their target markets to include larger commercial clients and have more resources and support to a system in business development, which should lead to higher levels of production. At the time of the announcement, we were confident that this was going to be a very positive transaction for our franchise. In terms of its impact on the size and composition of our balance sheet, our level of profitability, our business development capabilities and our ability to generate organic loan growth in the future. And as we work together to prepare for closing an integration, our level of confidence has only increased. Now I'll hand it over to Lynn, who will provide more color on our operational performance, then I'll have some closing remarks before opening up the line for questions.

Thanks, Jared. As mentioned, please refer to our investor deck, which can be found on our Investor Relations website as they review our second quarter performance. I'll start by reviewing some of the highlights of our income statement and then we'll move on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the first quarter of 2021. Net income available to common stockholders for the second quarter was $17.3 million or $0.34 per diluted share. This compares to $7.8 million or $0.15 per diluted share for the first quarter of 2021. With the redemption of our Series D preferred stock this past March, the second quarter benefited from $1.4 million in lower preferred stock dividends. In addition, we had quite a few items that impacted the comparison of our net income between the second quarter of 2021 and the prior quarter. In the second quarter of 2021, net income available to common stockholders included $829,000 in pretax gains on investments in alternative energy partnerships, $700,000 of pretax merger-related costs and $1.3 million in pretax net recoveries of indemnified professional fees. In the prior quarter, on a pretax basis, we had $3.6 million in losses on investments in alternative energy partnerships, $700,000 of merger-related costs and $721,000 of indemnified professional fees, net of recovery, as well as $3.3 million in Series D preferred stock redemption expense. These items were offset in part by a lower effective tax rate resulting from $2.1 million in tax benefits on the exercise of all of our previously issued stock appreciation rights, there was no similar tax benefit in the current quarter. When backing out these items in each quarter, net of our normalized effective tax rate of 25% to get a better sense of our core operating performance, we had adjusted net income available to common stockholders of $16.3 million or $0.32 per diluted share in the second quarter of 2021 compared to $12.9 million or $0.25 per diluted share in the first quarter of 2021. The $3.4 million increase is attributed to higher net interest income, lower provision for credit losses and lower preferred stock dividends, offset by higher net losses on equity investments. Total revenue in the second quarter increased $1.7 million compared to the prior quarter as net interest income increased by $1.9 million and noninterest income decreased by $211,000. Net interest Income from one additional day in the current quarter, and the increase reflected average interest-bearing assets being comparable between periods while posting a higher yield and a decrease in the cost and volume of interest-bearing liabilities, all of which contributed to an expanded net interest margin. The slight decrease in noninterest income stemmed mainly from lower servicing income and other income offset by higher customer service fees. Our net interest margin was 3.27%, up 8 basis points from the prior quarter due to a 6 basis point decrease in our cost of funds and 3 basis point increase in our overall earning asset yield. Our earning asset yield increased to 3.81% due primarily to redeploying some of our excess liquidity into loans and securities combined with a slightly higher yield on securities. Our average loan yield remained steady at 4.3% during the second quarter due mostly to lower coupon rates from the impact of loans resetting and our current production offset by higher prepayment fees from refinancing activity, higher income related to loans removed from nonaccrual status and higher PPP fee amortization due to ongoing forgiveness activity. When the impact from these items is excluded, our average loan yield was down 5 basis points to 4.12% in the second quarter compared to 4.17% in the first quarter. The decrease in this average loan yield is due primarily to a higher percentage of lower-yielding SFR loan balances. We ended the second quarter with a spot rate of 20 basis points for our all-in cost of deposits. And as of July 20, our spot rate had dropped further to 17 basis points. Looking ahead, we expect our funding cost to continue to trend lower in the second half of the year, albeit at a slower rate. We have a few larger money market accounts and time deposits that should move down our cost of deposits once they reach the end of their agreed terms. In the second half of 2021, we have $510 million of these deposits with a weighted average cost of about 163 basis points. We expect this reduction in higher cost balances to boost net interest income and support our margin in the back half of the year. Our adjusted expenses increased $288,000 from the prior quarter due mostly to higher net losses on equity investments of $1.2 million which are included in other expenses, offset by lower salaries and employee benefit costs and lower professional fees once we exclude our net indemnified professional recoveries in the current quarter and professional fees from the last quarter. The effective tax rate for the second quarter was 25.6% compared to 13.8% for the first quarter due to a tax benefit resulting from the exercise of all of our previously issued stock appreciation rights in the first quarter. Going forward, we would expect our effective tax rate to be in the 25% to 27% range for the second half of 2021. Turning to our balance sheet. Our total assets increased by $94 million in the second quarter to $8 billion. We redeployed a portion of our excess liquidity into high-quality commercial loans and securities, which brought our cash and cash equivalents down by approximately $216 million from the end of the prior quarter. We also continued to replace high-cost time deposits with core deposits as we selectively add high-quality earning assets in the future, both in terms of loans and investment, securities, we continue to have flexibility to add overnight and other wholesale funding, if needed, to strategically support our growth in earning assets. Our growth loans held for investment increased by $221 million or 3.8% during the second quarter as a growth in warehouse, multifamily, CRE and SFR portfolios more than offset lower C&I, SBA and construction loan balances. The $85 million decrease in SBA loans in the quarter was due primarily to the PPP forgiveness process. As of June 30, we had $194 million in PPP loans remaining consisting of $65 million from Round 1 and $128 million from Round 2. The $35 million increase in the SFR portfolio stemmed from loan purchases, given that we are no longer originating this asset class in-house. The loan purchases more than offset payoffs in this portfolio and enabled us to utilize some of our excess liquidity to add high-quality loans with low LTVs and attractive risk-adjusted yields. Deposits increased $65 million during the second quarter and our mix and average cost continued to improve, thanks to our success in adding new commercial deposit relationships. Noninterest-bearing deposits increased to 29% of our total deposits at quarter end, up from 27.7% at the end of last quarter. Demand deposits, noninterest-bearing plus low-cost interest checking, increased by 6% from the prior quarter, representing our eighth consecutive quarter of demand deposit growth, a goal we remain very focused on to drive franchise value. Over the past year, demand deposits increased to 65% of total deposits, up from 54%, reflecting the significant improvement we have made in our deposit base. This increase, combined with the lower rate environment and our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost of deposits down from 71 basis points in the second quarter of 2020 to 23 basis points achieved in the second quarter of 2021. Our securities portfolio increased by $82 million to end the quarter at $1.35 billion. During the second quarter, we primarily added municipal and agency securities with a weighted average rate of 2.31%. For the fifth consecutive quarter, tighter credit spreads reduced the unrealized loss on our CLO portfolio, which was down to $3 million at quarter end. The improvement in CLO pricing this quarter added $0.01 to our tangible book value per share relative to the prior quarter. The CLO portfolio declined by $100 million during the second quarter as we are seeing an increase in payoffs resulting from refinancing. The higher level of payoffs is accelerating our diversification out of the CLO portfolio which is part of our longer-term balance sheet management strategy. Our entire securities portfolio ended the quarter with a net unrealized gain of $20.9 million and the total change in unrealized net gains during the quarter added $0.19 to our tangible book value per share. Our credit quality remained strong in the second quarter, and we saw positive trends in asset quality. Nonperforming loans decreased $4.6 million to $51.3 million in the second quarter. About 62% of this balance or $32 million represented loans that are in current payment status but are classified nonperforming for other reasons. Delinquent loans decreased $26.3 million in the second quarter to $35 million or 0.58% of total loans driven largely by SFR loans paying off and migrating back to accrual status as we work through the forbearance and deferral process with our consumer borrowers. Our loan deferral numbers declined by $22 million to 1% of total loans held for investment, down from 2% at the end of the first quarter. Let me turn to our provision for the quarter. Although we had some provision requirement related to growth in the loan portfolio, this was offset by the improvement in asset quality and the improving economic forecast utilized in our model. As a result, we recorded a modest negative provision for credit losses of $2.2 million in the second quarter. Net of this provision release, our allowance for credit losses for the second quarter totaled $79.7 million, which reduced our allowance to total loans coverage ratio to 1.33%. Excluding our PPP loans and warehouse loans, both of which have lower relative risk levels in our reserve methodology. The ACL coverage ratio stood at 1.70% at June 30. With the decrease in our nonperforming loans, our ACL coverage to NPL ratio remained healthy at 155%. Our capital position remains strong with a common equity Tier 1 ratio of 11.14% and has benefited from the strategic actions completed over the past several quarters. We continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value. At this time, I will turn the presentation back over to Jared.

Thank you, Lynn. I'll wrap up with a few comments about our outlook. We believe we are well positioned to deliver a strong second half of the year with a number of catalysts in place that we expect to positively impact our growth and profitability. From a macro perspective, economic activity continues to build momentum as operating restrictions on businesses in California are rolled back in most counties. Barring any setbacks resulting from the spread of new COVID-19 variance, it appears that our markets are positioned to experience economic expansion for the foreseeable future. So the operating environment should be favorable, and we are well positioned to capitalize on the increasing loan demand that should result. With our banking teams doing an excellent job of developing high-quality lending opportunities and the contributions we are getting from new bankers we have added over the past several months. Our loan pipeline continues to grow and is at the highest level it's been since I joined the bank in March of 2019. Based on the pipeline and the continued opportunities we have to offset runoff with strategic purchases of high-quality loans, we continue to expect our full year organic loan growth, excluding PPP, to be in the mid- to upper single digits. We should also continue to see further reductions in our deposit costs as some of our larger money market and time deposits mature and reprice. As Lynn mentioned, we have $510 million of deposits at a weighted average rate of 1.63% scheduled to mature in the second half of the year. The continued reduction in our deposit costs should help us protect and to potentially expand our net interest margin in the coming quarters. We solved the redemption of our Series E preferred stock in our sites. And as previously mentioned, expect that to be a late 2021, early 2022 event subject to regulatory approval. And finally, we have the impact of the Pacific Mercantile Bancorp acquisition. With all the cost savings projected to be realized by the end of 2021, we should quickly see the positive impact of this transaction on our level of profitability. And while we haven't modeled revenue synergies into our projections, we believe there will be positive impact as we expand relationships with Pac-Merc clients and provide our new colleagues with the ability to accelerate their business development efforts. Pacific Mercantile will also provide us with deeper presence in the Los Angeles market. And our first exposure to the inline hire, which we believe will be a good source of growth for the company in the coming years. In addition to the over $1 billion in loans that we will add with this transaction, we will also add significant amount of unfunded loan commitments that represent another potential tailwind for future loan growth and, in particular, expected growth in line utilization as the economy picks up. For the remainder of the year, our top priority will be completing the Pacific Mercantile acquisition, executing well on the integration and realizing the projected synergies and continuing to enhance our organic growth engine. I want to thank all of our dedicated and talented colleagues across Banc of California for the great work to deliver such a terrific quarter. Thank you for listening today. 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] Today's first question comes from Timur Braziler with Wells Fargo. Please go ahead.

Maybe starting with Pac-Merc. It's good to see the cost saves projections being increased. I guess part one of the question is, where are those increased cost saves coming from? And then part two, in your commentary for reinvesting some of those cost saves into new hires. How will that materialize on the results? And I guess, what portion of the cost saves should we actually expect to drop to the bottom line?

Let me -- Lynn, address that first.

Sure. So the increase in the estimated cost saves stems mostly from looking at, I think, the facilities costs and employee costs, staff costs as we've gone through the integration and conversion process. So it just takes a little bit of time to, I think, sharpen our pencil on all of that. So that's probably the majority of them. I think from where we sit now, we would expect the majority of those to drop to the bottom line as we -- with the visibility we have now.

And then maybe looking at the loan purchases this quarter, can you quantify the dollar amount purchase, the mix between SFR and multifamily? And then as you look at the remix and the SFR book from a yield standpoint, maybe just talk through where current purchases are coming on from a yield standpoint versus where the existing SFR loans are rolling off?

Sure. Why don't I start. So for the purchases this quarter, it was approximately about $200 million in the total loan fundings. And the majority are single family. There's a small portion that was multifamily that continues to be a challenging asset class to get a hold of. So I would put the split at about $170 million SFR to 30 million multifamily. And with respect to the yields that we're seeing coming in on the SFR book, I don't have the -- that is included, I think, in our overall yield. I'll have to come back to you on the yield that we're seeing come through. It's probably in the low 3s.

It's -- Timur, just to follow up on that. I mean, the weighted average loan yield that we're buying, these are non-QM mortgages. They're very attractive. They're in our market. We have, I would say, a unique source in that we have a tremendous team on the warehouse side, and we have some good relationships that allow us to look into loans that were already secured by and look at high-quality loans and they -- do those make sense to bring on? And the WACC on the loans that we're buying is well above 4.5%, in general. And then to get to the trade yield and what we expect, there's a whole bunch of things that are implied there, including the prepayment speed. And so we're obviously buying them at a slight premium, but lower than what we would take in the market generally because we're using our relationships. And if our prepayment speeds are off, then the yield is going to be higher or lower than what we're projecting. But we -- I think our team is pretty good at this. And I'd say, in general, it probably is getting us in the upper 3s. It's probably lower than our SFR portfolio overall, but it's higher than our margin. And so I think in general, it's supporting our margin, and it's just a good source for us to help maintain our earning assets at the right level. The amount of production that we put on in the quarter was -- I was really, really pleased with what our team did to have $900 million plus of production in the quarter and have fundings in the mid-800s. This is pretty substantial for a company our size and for a balance sheet that was $6 billion of loans. So -- and it was really balanced. I mean we actually put on high levels of production in all categories. And then what nets out is just a function of where the prepayments are, which is very hard to control.

Jared, thanks for clarifying the SFR trade yields.

Yes, no problem.

Maybe just one more, if I can, on the warehouse balances. Certainly a different trajectory from where we've seen some of the other peers of yours report second quarter results. I guess in the EOP growth, was that from increased relationships? Is that from increased utilization? Or is that from really a dip in first quarter balances right at the end of the quarter and average balances didn't really move as much as end of period would suggest.

That's a good question. I mean I would say it's actually a combination of all of those things, believe it or not. So we did have a dip -- average balances in the second quarter were higher -- end-of-period balances, excuse me, in the first quarter. Average balances or higher end of period balances were lower. So we were bringing it back up in the second quarter. We have brought on some new relationships, just approved one the other day that are -- we tend to bank the midsized mortgage bankers, not the super large folks, although we have a few of those. Our team is really exceptional at kind of managing within our comfort level. And we've always said this is not going to be an outsized portion of our company. It's going to be a healthy part, but not an outsized part. Something it's a lever that we can pull. We feel comfortable with the size right now and I don't expect it to grow very much. And our team has done a great job of managing it. As we grow as a company, it can maintain its same percentage, but we don't see it growing much from here.

And our next question today comes from Matthew Clark, Piper Sandler. Please go ahead. Matthew, is your line perhaps muted, sir? All right. It looks like we will go to our next question, and that comes from Gary Tenner at D.A. Davidson. Please go ahead.

So you talked about the purchases in single-family, multifamily, and obviously, that in warehouse drove the quarter sequentially from a loan growth perspective. Can you talk a little bit about kind of the construction and the core C&I business, obviously, remains a bit of a challenge on construction and C&I, I think you had a couple of quarters of growth until this quarter. So maybe just talk about kind of what the trends were in the core C&I, both here

Well, it's hard -- from my perspective, it's kind of all blended. And so while it's easy to say, warehouse was $200 million net, and that's the growth. It's all bucketed together in terms of the quarter and the production, and we can't control much of what pays off and if something is paying off faster in 1 quarter and we happen to have a lever to pull, we're going to use it. I would focus on the production side and the $900 million of production and the $800 million plus of fundings, which is very substantial and our pipelines are still strong. C&I, in the quarter, we had a lot of production, we just had payoffs. And it just happens, but very pleased with what we're doing here. I don't see any real headwinds on C&I more than I see than anything else. I mean I think our pipelines are very strong. We're prioritizing strong borrowers. Pac-Merc, obviously, has a good C&I engine, and we're going to be adding their capabilities along with their ABL function, which is they do more than what we do. And they've got a really good team that we're happy to bring on board. So we continue to see C&I is something that we're going to grow and focus on. It's everything from service businesses and health care. We have a vertical and entertainment as you know, doing streaming production. And then owner-occupied real estate, which is -- tends to be the low-cost leader in that area, but we have the ability to do it as well.

Jared, I would just add in looking at production numbers, the first quarter did include SBA production for round 2 of the PPP. So kind of only step back and look at the numbers I agree with your comment. It's all the way across the board, and it's hard to just say it's purchases and warehouse. When I exclude PPP, I would actually say our production for all the other core lines is up 68% quarter-over-quarter. So I think that contributed to it as well when you kind of pull those numbers apart. If that's helpful.

And just some kind of keeping on PPP. Can you give us the average PPP balances for the quarter and the PPP revenue -- revenues in the quarter?

The averages is -- might take me a moment. But when we look at the revenue from the quarter, it's approximately the same between first quarter and second quarter. Let me stick to that page here. So in the first quarter, I think the fees that we brought through are about $1.9 million, and in the second quarter were about $1.8 million. So not much difference between the two periods. And then from an average balance perspective, I'll pull those numbers, and I have to get back to you.

[Operator Instructions] Today's next question comes from Tim Coffey with Janney. Please go ahead.

I was curious what the prepayment dollars were in the quarter in interest income?

Right. So the -- I think last quarter, we pulled those numbers apart. I think this quarter, we indicated that our loan yield included 18 basis points of -- sort of that prepayment accelerated accretion and the nonaccrual interest, whereas last quarter, we only had about 13 basis points. So when I put all of that together, it's about $2.6 million. The majority is prepayments relative to last quarter. So last quarter, I think the number is $1.9 million this quarter, about $2.6 million for those three numbers that we look at in order to get to our core loan yield. I would just add that our core loan yield when we pull those particular features out has held up well, considering the continuing low interest rate environment. And I guess that we're looking at that we're supporting our net interest margin.

And Jared, just kind of philosophically about the loan-to-deposit ratio. If you do run off that -- you will run off that $500 million in those high-cost deposits, I'm sure. That would normally put an upward bias on your loan-to-deposit ratio. Do you feel comfortable running it higher than where it is right now?

We can run at 95% to 100%. I don't want to run it too much past that. And I'm comfortable with the amount of volume that we're able to bring on, on the deposit side relative to the deposits that we have running off. When we look at our CDs, we're retaining approximately 46% of the CDs that were -- that are maturing when we give them just our posted rate. It's remarkable how much liquidity is out there and is willing to take duration. And we've actually been increasing our rates on duration CDs, extended maturity CDs for that reason is as we monitor it and see what the retention rate is. We keep saying, well, maybe now is a good time to take three-year money at a really low rate, and our deposit costs are still going way, way down. So Tim, I'm comfortable that we can absorb the maturity of the stuff that's running off at the end of the year without it really ballooning our loan-to-deposit ratio. We also have Pac-Marc come in the mix here. They've got some really strong -- they've got a very strong deposit base, a strong base of noninterest-bearing deposits. And core operating companies that we hope to expand. And so between those two things, our own engine and theirs, I think we'll be fine.

And then I would just add one other point, I think, related to these particular deposits. I think there's -- in addition to the retention on CDs, I actually think there's an opportunity to simply reprice them into the current markets, and we're looking at that. So with them being priced at 163 basis points and the current rate environment, they could reprice and be retained. So they're not necessarily all expected to run off. And then I clearly agree with the comments on loan-to-deposit ratio.

Yes. On that point, so of kind of our -- of our just kind of what I would say, run-of-the-mill CDs with clients that were not especially contracted. We're seeing a 46% retention rate on just kind of taking our posted rate. We have some large balances of what we would call specialty deposits that are that are time deposits that were contractually agreed on at specific rates for specific maturity. And those are the ones that Lynn's talking about that we think that will either find new replacements for them or those deposits will -- might actually reprice at current rates, and we'll be able to retain them. So just because they're expensive. It doesn't mean they're all going away. They could reprice at current rates.

Yes. No, that's a good point. And then the redeeming the remaining preferred stock, what are some of the hurdles to doing that?

I don't think we see any hurdles from a capital standpoint, we do need to go through the regulatory approval process like we did last time and have to respect that process. But we didn't see a lot of -- there wasn't any lack of visibility. We were -- the regulators were clear with us on what we needed to demonstrate. And when we demonstrated that to them, we got approval, and we expect the same process this time. Lynn, do you see any challenges on the Series E that we need to talk about?

I wouldn't characterize them as challenges. I think we have to recognize we're coming through a pandemic. We have the opportunity to redeem Series D this year, which benefited our earnings through this year. And we are very focused on our PMB acquisition and the success of that and getting that integrated. So I think it's just a matter of the process and demonstrating all of these, I think, milestones along the way.

We feel good about -- yes, that's why our timing is fourth quarter or first quarter. It's hard to know exactly, but I think that's a fair kind of guide right now.

Yes. I think it's consistent with what you've been saying on the call too, about where the near-term focus is. Okay. Great. Those are my questions.

And our next question today comes from Matthew Clark at Piper Sandler. Please go ahead.

On the warehouse and you may have touched on this in your prepared remarks, but the balance is being up kind of going against the grain with what we've seen elsewhere. How much of that is increased utilization? How much of that is your relationships? And what are your thoughts on kind of the sustainability of balances?

So a little bit -- a little bit is new clients, and some of it is increased utilization. So it's a mixture of both. Last quarter, our average balances were higher than end of period balances. And so this quarter, it was kind of getting back up to kind of where the averages got to last quarter, maybe a little past that. We don't see the percent of warehouse growing from this point, which means it could expand as we grew our company, but we don't see it expanding much from where we are right now. We have several hundred million of low-cost deposits associated with our balances. These are true relationships, and our team is really strong at what they do. And so they've been able to manage the flows up and down as we've requested them. It's really just one lever that we have to pull among many, many levers. And as we expand with Pac-Merc and with the other initiatives we have going on, it becomes a lower percentage of our overall balance sheet, but we're comfortable with where it is right now. And our team has done a good job with that also because of who we bank, which are midsized mortgage bankers and our rates tend to be higher than some of our peers. And the average usages. I would say moderate, but there is a lot of volume right now, and we want to be there for our clients. And so we're helping them. But we recognize that they can flow out the way it flows in. And that's why I was so pleased with our production engine this quarter. I mean we had just to do $900 million of production on a $6 billion loan portfolio is pretty substantial, and I think it speaks to the power of our growth engine and how well our teams are working together.

Great. And then a related question just on the ACL, the reserve. I think previously you talked about maybe stabilizing around 130. You're nearing that now ex-BP. What are your thoughts about maybe dipping below that given the increased contribution from the warehouse?

Well, we look at it without warehouse, too. And I -- as Lynn mentioned, I think, in her prepared remarks, when you exclude that, we're like $1.75 or something like that. I think we're going to continue to run our model. We feel comfortable with where it is now. If we continue to have loan growth, it probably stabilizes and there's not a lot of provision releases. Going forward, I'd prefer not to release some. It's just -- our credit quality is really strong right now. And when you look at our peers, we're a little bit above them, but I think we feel comfortable with where it is. Lynn, what do you think?

Yes, I would agree with your comments, Jared. I don't know if I'm -- we're quite ready to be saying that there's a lower number, I think being aware of -- I think, the economic landscape are positive credit quality trends. Kind of to your point, the portfolio mix does matter. And we did have a higher level of warehouse balances at the end of June compared to end of March. So -- but I think we are comfortable with our current level and see how the economy unfolds.

Yes, it sounds like it would come down below that, just given the 170 ex warehouse, but that's okay. And then just on the dividend, earnings power continues to strengthen. Any updated thoughts around increasing the dividend here?

We are always looking at different ways to use our capital, and that's one of the things we can look at. Obviously, we're reinvesting in our growth. We're hiring people. People have asked whether we want to do a share buyback or increase the dividend. And I think all those things are on the table.

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

Just wanted to touch base on Slide 8. And it's in reference to another question, too, because I know you discussed the specialty deposits and how -- that's where some of those higher cost balances are going to potentially fluctuate later in the year. But I noticed that there was a nice uptick in those balances between 1Q and 2Q. And so I was just wondering what the driver was of that.

So that bucket is our specialty in Business Banking unit. It's kind of where we put our -- but they're growing noninterest-bearing and low-cost checking balances. And so we had a big uptick in our -- I think it was 6% in DDA growth, which allowed us to absorb runoff in CDs and money market. They're just going after operating accounts, like everybody else in our company. And then that's in terms of our business banking unit and our real estate unit, our community banking unit. And then in terms of specialty, we do have some elephant-hunting capabilities in -- on the fiduciary side, property management, bankruptcy trustee and other similar specialty deposits. And I don't want to get into it too much because it's a little bit of the specialty niche that we have. But we have an excellent team that works hard to bring in those clients. And we are good at it because we're good on the back end in terms of the technology and support and we're good on the front end and understanding the special needs that they have to serve them well. And we're really blessed to have such a great team.

Okay. Great. So it sounds like just -- I know you had a lot of great core growth in the quarter and a little bit was centered in there and just shows the teams continuing to bring on new relationships to the bank. Is that the right way to think about it?

Yes, it is broken out between -- it's a huge amount of it is new relationships to the bank. We look pretty -- on a very granular level where the growth is coming from. Is it just money that's sitting in existing accounts and people are building up their own liquidity? Or are we bringing new relationships in and new accounts, and it's largely driven by new accounts.

And then one -- just one other one for me. When I think about the market and the competitive pressures that I've been reading about just in local news sources, I'm just curious where you stand in terms of your current employee base relative to full employment or kind of wherever you'd like to be on that scale -- just open positions and how the pace of recruitment for that is going?

Well, really good question. And California just announced this morning that I think it was LA County that the unemployment rate went down. Unemployment is sitting at about 10.4%. We have not had a problem hiring the people that we've been seeking. It's a testament, I think, to kind of the buzz that we have around our company and the publicity that we've gotten in our markets. And we have a very talented recruiting team that is out beating the streets and bringing -- telling the story and bringing people over. I think we have a pretty cohesive message too in terms of what we're doing. So people are very clear when they come here, what we're doing. We're at about 600 employees now. There's about 100-or-so coming over from Pac-Merc, so we'll be at 700. There are some key positions in terms of relationship people that we are looking to fill where we're just seeing continued growth. And so we are looking to hire and add on the relationship manager side. To do that, if you're going to bring in a lot more relationships, you need to have the right gearing ratio and make sure you're bringing in the right support people so that you don't overwhelm the people that are here, supporting more and more while you're bringing in new relationships. So we look at that pretty carefully and try to balance that. But I wouldn't say that there are any key executive positions or anything like that we need to bring in right now. And I don't -- I feel that we're properly staffed. That said, where we are hiring is specifically on the relationship side, when we can find high-quality people that can bring over good relationships as we've done in a couple of markets, like we hired somebody up in the Central Valley who's just done a great job bringing in new relationships and hired somebody in San Francisco as well. Those are people that used to work for people that work here. So these are people that we knew. We knew the quality of what they would do. They were interested in working for us, and we knew the type of thing that they would bring in and they show immediate results. And so we're going to continue doing that when we know that there are high-quality people out there that are looking to join us. We're going to continue to do that. But I wouldn't say that we have -- where we need to add 10% or anything like that. We're going to get some really great talent from Pac-Merc. And so we know that. And kind of any time we're looking to hire somebody, we ask the question is that body -- is that seeking to be filled with somebody from Pac-Merc and should we hold off. I hope that answered your question, Jackie.

Yes, it does. And it sounds like you have a good internal referral system in terms of employment, right?

Yes, it's really good. I mean, we're -- there's here and there. There's things that say, "Hey, we should look for somebody here or that." And there's always -- we canvass our team first and say, "Who do we know before we just go to the streets and try to find somebody that we don't know." We try to figure out is there something specific that we know.

And ladies and gentlemen, this concludes today's question-and-answer session and today's conference. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.