Earnings Call: Q3 2021

Oct 21, 2021

Hello, and welcome to the Banc of California Analyst and Investor Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Jared Wolfe. Mr. Wolfe, please go ahead. Good morning, and welcome to Banc of California's 3rd quarter earnings call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, We will talk in more detail about our quarterly results. At the beginning of the year, we laid out our strategic objectives for 2021, Which if successfully executed on, would lead to profitable growth in the company and improved earnings power. Our strategic objectives were to Maintain strong asset quality and capital as we continue to manage through the pandemic, grow our earning assets and accelerate our loan growth, Further reduce our cost of deposits and increase our net interest margin, keep expense levels relatively stable and realize more operating leverage as we build the balance sheet and execute on strategic opportunities that could increase earnings and enhance the value of our franchise. We take a lot of pride in being a company that delivers on the expectations we set and doing what we say we are going to do. We did that in 2020 And we're doing it again this year. Through the 1st 9 months of 2021, we have executed very well and been able to achieve all of these strategic objectives. Our asset quality and capital have remained strong through the year, and we've experienced a very low level of loss in the loan portfolio. On a year to date basis, our average earning assets have increased 5.3%, while our period end total loans are up 7.4%, excluding PPP loans. Our cost of deposits has declined from 29 basis points at the end of the Q4 of 2020 to 8 basis points at the end of the Q3 of 2021, which has helped support our net interest margin during the year. We've been able to keep our expense levels relatively flat, which has resulted in substantial improvement in our efficiency ratio. And we were able to redeem our Series D preferred stock early in the year and then complete the acquisition of Pacific Mercantile Bancorp earlier this week, both of which accelerate our improvement in profitability. Our 3rd quarter results very clearly demonstrate The greater earnings power and improved profitability we have as a result of the progress we have made on all of these strategic objectives. We generated diluted earnings per share of $0.42 up from $0.34 in the prior quarter, including pre tax pre provision income of 30,700,000 an increase of 31% from the prior quarter. Our pre tax pre provision return on average assets totaled 1.5% for the 3rd quarter, an increase of 30 basis points compared to the prior quarter. We had another strong quarter of business development activity As we continue to build Banc of California's reputation as the go to bank for small and medium sized businesses. While the emergence of the Delta variant Slow demand relative to Q2 as we expected, we still achieved solid new loan production of $864,000,000 This production, Together with prior loan commitments resulted in total loan fundings of $763,000,000 in the 3rd quarter, including $503,000,000 of new fundings $260,000,000 of line advances, of which $178,000,000 related to net warehouse line advances. Excluding PPP loans, which continue to be forgiven. Our strong loan production resulted in 16% annualized loan growth in the 3rd quarter, despite payoffs and paydowns remaining at a very high level. We continue to see growth across all of our loan portfolios, including a pickup in the C and I portfolio, which increased 6.6% from the end of the prior quarter. The acceleration of growth in commercial loans reflects the continued progress of the talented bankers we have, The positive impact we are seeing from new additions to our banking team and our success in effectively winning new relationships based on our expertise And ability to execute for clients. Our loan production was well balanced across the industries and asset classes. We continue to see strength in Healthcare and Bridge Real Estate Lending, and we also continue to see activity in Entertainment Finance, which specializes in financing the production of content and television for streaming services. We ended the quarter with over $75,000,000 in commitments and have visibility to continue growth in that sector. We believe this will be a sizable opportunity for us in the coming years. As is projected, there will be 1,000,000,000 of dollars invested in streaming production. We've built a very strong team that has extensive relationships in this industry And expertise in structuring these types of credits, which we believe will help us steadily increase our market share and grow this portfolio. Our healthcare vertical, which lends to healthcare practices, specialty hospitals and surgery centers and healthcare real estate, Also continues to expand, surpassing $330,000,000 in commitments in the Q3. Our production is also becoming more diversified from a geographic perspective. The bankers we've added in Northern California, the Central Coast and the Central Valley have been very productive and we are seeing their contributions positively impacting Our level of loan growth. Importantly, we are able to fund this loan growth with continued strong inflows of low cost deposits Generated from our business development efforts across all areas of the bank. Over the past few years, we focused on getting the right people, The right products and the right incentives in place to create a robust deposit gathering engine, and we continue to see the positive results from these efforts. During the Q3, newly opened DDA accounts contributed $88,300,000 of low cost deposits, which produced our 9th consecutive quarter of DDA growth. Our strongest growth came in non interest bearing deposits, which increased more than 16% from the end of the prior quarter and represented approximately 32% of total deposits at the end of the Q3. The further improvement in our deposit mix and pricing drove our cost of deposits down another 8 basis Average just 15 basis points in the quarter. And as mentioned, our quarter end spot rate on deposits was down to 8 basis points, which should lead to another decline in our average cost of deposits in the 4th quarter. The growth we are seeing in our client roster is driving higher levels of both net interest income And non interest income. Compared to the prior quarter, our revenue increased 7%, while our non interest expense declined as we continue to maintain disciplined expense control. As a result, our adjusted efficiency ratio improved to 60% from 66% in the prior quarter. And we believe we will continue to see improvements in this area As the infrastructure we have in place can support a bank several $1,000,000,000 larger than our current size. The infrastructure we have built reflects our forward thinking approach to technology. Along those lines, we recently made a small investment in a FinTech company called Finexio, which is a B2B payments platform. The investment in partnership with Finexio is part of our larger strategy to grow our capacity and capabilities and payments, so that we can increasingly add value to our customers in this area in the years ahead, while also improving our other sources of non interest income. Our investment in Finnexu is part of a larger multi pronged strategy to ensure we remain tech forward in our operations And in terms of client facing technology and value added services, we will be expanding on this in greater detail in future quarters. Our improvement in operating leverage will be further accelerated now that Pacific Mercantile acquisition is closed. We are very excited to welcome our new colleagues We'll be additive to the significant business development capabilities that we have already built and provide superlative service and operational expertise. As we announced in connection with the closing of the merger, we're also thrilled to welcome a few new Board members whose talent and expertise will be particularly valuable to us As we continue to grow. The integration is proceeding well. The system conversion is scheduled for mid November And we continue to expect that most of the cost savings will be realized by the end of this year. This will put us in position to begin fully realizing the benefits of this transaction as we begin 2022. Now I'll hand it over to Lynn, who will provide more color on our operational performance. Then I'll have some closing remarks before opening the line for questions. Great. Thank you, Jared. First, as mentioned, please refer to our investor deck, which can be found on our Investor Relations website as I review our Q3 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 Q2 of 2021. Net income available to common stockholders for the Q3 Was $21,400,000 or $0.42 per diluted share. This compares to 17,300,000 Or $0.34 per diluted share for the Q2 of 2021. We had a few items that impacted the comparisons of our net income between the Q3 of 2021 and the prior quarter. In the Q3 of 2021, net income available to common stockholders Included $1,800,000 in pretax gains on investments in alternative energy partnerships, 2 $200,000 in pre tax net recoveries of indemnified professional fees and $1,000,000 of pre tax merger related costs. In the prior quarter, on a pre tax basis, we had $829,000 in gains on investments in alternative energy partnerships, $1,300,000 in net recoveries of indemnified professional fees and $700,000 of merger related costs. When backing out these items in each quarter, net of our normalized effective tax rate of 25% to get a better sense for our operating performance, We had adjusted net income available to common stockholders of $19,400,000 or $0.38 per diluted share in the Q3 of 2021 compared to $16,300,000 or $0.32 per diluted share in the Q2 of 2021. This $3,100,000 increase is attributed primarily to higher net interest income and our continued expense control measures as we leverage our resources. Total revenue in the 3rd quarter increased $4,500,000 or 7% compared to the prior quarter, including the $3,100,000 increase in net interest income and a $1,300,000 increase in non interest income. Net interest income benefited from 1 additional day in the 3rd quarter, higher average interest earning assets and a decrease in the cost of interest bearing liabilities, which altogether more than offset a decrease in interest earning asset yield. The increase in non interest income stemmed mainly from higher other income driven by an $841,000 gain on a sale leaseback transaction of 1 of our branch locations. Our net interest margin was 3.28 percent, up 1 basis point from the prior quarter, as our overall interest earning asset yield And our total cost of funds each decreased by 8 basis points. Our earning asset yield decreased to 3.73% Due mostly to lower loan yields, our average loan yield declined 12 basis points to 4.18 percent during the 3rd quarter, due in part to lower prepayment penalty fees, offset by higher PPP fee amortization. Our average cost of funds decreased 8 basis points to 49 basis points due mostly to lowering our average cost of deposits by 8 basis points to 15 basis points for the 3rd quarter. This decrease was due to the improvement of our funding mix And our continued efforts to reprice our funding sources into the current interest rate environment as they mature. Non interest bearing deposits averaged 30% of total average deposits in the 3rd quarter compared to 28% in the prior quarter. Also, during the Q3, $428,000,000 of higher cost deposits with a weighted average rate of 1.88 percent repriced or matured. This is reflected in our lower period end deposit spot rate, and we expect to receive a full quarter's benefit In the Q4, our adjusted expenses decreased $1,200,000 from the prior quarter due mostly to lower salaries and benefits, A $365,000 gain on the sale of other real estate owned, which is included in other expenses And lower net losses of equity investments also included in other expenses. In addition and as previously mentioned, we incurred $1,000,000 in merger related costs, had net recoveries of $2,200,000 in indemnified professional fees and $1,800,000 of gains on an alternative energy partnership investments during the 3rd quarter. The effective tax rate for the 3rd quarter was 27.2% compared to 25.6% for the 2nd quarter. Turning to our balance sheet. Our total assets increased by $251,300,000 in the 3rd quarter to $8,300,000,000 Our gross loans held for investment increased by $243,000,000 or 4.1 percent during the 3rd quarter, As growth in C and I, SFR, warehouse and our CRE portfolios more than offset lower SBA, Construction and multifamily loan balances. The $72,000,000 decrease in SBA loans in the quarter This was due primarily to the PPP forgiveness process. As of September 30, we had $116,500,000 And PPP loans consisting of $27,500,000 from round 1 $88,900,000 from round 2. The $106,000,000 increase in the SFR portfolio stemmed from $249,000,000 in loan purchases, which offset payoffs and paydowns in this portfolio. Deposits increased $337,000,000 during the Q3. And as previously mentioned, our mix and average costs continue to improve, thanks to our success in adding new commercial deposit relationships And run off of higher cost time deposits. Non interest bearing deposits increased to 32% of our total deposits at quarter end, Up from 29% at the end of the second quarter. Demand deposits, non interest bearing plus low cost interest checking Increased by 7% from the prior quarter. This represents our 9th quarter of demand deposit growth, a goal we remain very focused on to We expect this favorable shift in our deposit mix to help support our net interest margin in the 4th quarter. Over the past year, demand deposits increased to 66% of total deposits, up from 58%, reflecting the significant We have made in our deposit base. This increase combined with the lower rate environment and our proactive efforts to reduce deposit costs and bring in new relationships Drove our all in average cost of deposits down from 51 basis points in the Q3 of 2020 to the 15 basis points Our securities portfolio decreased by $50,000,000 to end the quarter at 1,300,000,000 The CLO portfolio declined by $35,000,000 during the Q3 as we are seeing an increase in payoffs resulting from CLO resets. A higher level of payoffs is accelerating reductions in the CLO portfolio, which is part of our longer term balance sheet management strategy. For the 6th consecutive quarter, the unrealized loss in our CLO portfolio improved, which was down to $2,500,000 at the end of the quarter. Overall, our entire securities portfolio ended the quarter with a net unrealized gain of $15,500,000 down from $20,900,000 at the end of the second quarter, resulting in a reduction of our tangible book value per share of $0.07 Our credit quality remained strong in the 3rd quarter and we saw positive trends in asset quality. Non performing loans decreased 5,700,000 to $45,600,000 in the 3rd quarter. About 50% of this balance or $22,700,000 Represented loans that are in current payment status, but are classified nonperforming for other reasons. Delinquent loans Increased $10,100,000 in the 3rd quarter to $45,100,000 or 0.72 percent of total loans. This increase was due to $24,900,000 in additions, offset by $12,400,000 in loans Returning to accrual status and $2,300,000 in other reductions due to paydowns and other resolutions. Delinquent loans include SFR loans of $19,100,000 SBA loans of $14,900,000 of which $10,600,000 is guaranteed And $11,100,000 of other loans. During the 2nd and third quarters, we repurchased $9,300,000 in guaranteed SBA loans, which are included in the delinquent and non performing loan totals as of September 30 and are pending resolution with the SBA. Let me turn to our provision for the quarter. Although we had some provision requirement related to the growth in the loan portfolio, This was more than offset by net recoveries during the quarter, positive asset quality metrics and trends and the improving economic forecast used in our model. As a result, we recorded a modest negative provision for credit losses of $1,100,000 in the 3rd quarter. Net of this provision release, our allowance for credit losses for the Q3 totaled $78,800,000 and our allowance To total loans, coverage ratio stood at 1.26%. Excluding our PPP loans and warehouse loans, Both of which have lower relative risk levels in our reserve methodology, the ACL coverage ratio stood at 1.62% at September 30. With the decrease in our non performing loans, our ACL coverage to non performing loan ratio remained healthy at 173%. Our capital position remains strong with a common equity Tier 1 ratio of 10.89% And has benefited from the strategic actions completed over the past several quarters. We will continue to be prudent and strategic with the use of our capital to 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. Heading into the 4th quarter, Our loan and deposit pipelines remain strong across all areas of the bank, and we expect to see a continuation of the positive trends They're driving increased operating leverage and profitability. Getting past the recent COVID resurgence will be helpful for economic activity and loan demand, But our ability to continue generating profitable growth is not solely reliant on improving economic conditions. We are unique We have a number of catalysts unrelated to economic conditions that we believe will enable us to continue generating improvement in our financial performance. 1st, We will continue to benefit from deposit repricing. We will get the full quarter benefit of nearly $428,000,000 of higher cost deposits and matured or repriced during the Q3. That should continue to drive down our cost of deposits and help us maintain or increase our net interest margin. In addition, we will begin to run Pacific Mercantile's interest bearing deposits through our program and pricing structure, which should reduce the cost of these deposits over the next several quarters. 2nd, we hope to redeem our $98,700,000 of Series E preferred stock in the 1st part of 2022, which should increase our net income available to the common stockholders. As a reminder, that preferred stock is a 7% after tax coupon. 3rd, we will have the accretive benefits of the Pacific Mercantile acquisition. As I mentioned earlier, we expect to start 2022 with most of the cost savings in place, which will add to the improved leverage we will get from adding $1,500,000,000 in assets. And 4th, We continue to attract high quality banking talent to the company. Our accelerating loan growth this year is attributable to improved loan demand as well as the talent that we have added. Since I joined the company, we have made substantial changes in our Commercial Banking Group And have been very successful in bringing in the type of bankers that fit our relationship oriented model. We have highly talented professional bankers who are adept at serving small in medium sized businesses and bringing over full banking relationships. We are also now benefiting from our exclusive focus on California, At a time when a number of competing banks have shifted their focus to other markets. We have become an attractive destination for bankers that want to continue to capitalize On the deep relationships they have built in California. Bankers are seeing former colleagues of theirs having a great deal of success at Bank of California and understand that we can provide a similar opportunity for them. Banc of California is a talent magnet and this has created strong hiring pipeline that should enable us to Continue to add seasoned relationship bankers that can support our continued growth. With these catalysts in place, We believe that we are very well positioned to continue generating profitable growth, further improving our level of profitability and creating additional value for our shareholders. Lastly, let me thank all of our Bank of California colleagues, both legacy and those who recently joined from Pacific Mercantile for their dedication And hard work. We like to say that banking is a team sport and there is no question that our results are a reflection of their talent and collective contributions It is a highly competitive market. I'm proud of our team and all that we have accomplished together. And while we still have work to do, I'm confident great things lie ahead. Thank you for listening today. I look forward to sharing more about Banc of California's progress in the coming quarters. With that, operator, let's go ahead now and open up the line for questions. Yes. Thank you. At this time, we will begin the question and answer session. And the first question comes from Timur Braziler with Wells Fargo. Hi, good morning. Thanks for taking my question. Good morning. Maybe starting with the loan growth, another excellent quarter across the board and specifically in the warehouse space, Bucking the trends of what we've seen in some other institutions, maybe talk about the growth you saw there this quarter, how much of it was from existing relationships versus bringing on new relationships? And now that warehouse is kind of at that $1,500,000,000 level that has been discussed in the past, maybe talk about the plans for growing warehouse going forward? Sure. Thank you. So really pleased with the diversification of our loan production This quarter, it was another quarter that had a lot of balance to it. And our production volumes were we showed growth in all areas really. One thing to point out about warehouse is that it was relatively flat on an average basis from the end of the second quarter. So we kept it flat most of the quarter and you'll see that in our average balance sheet when we break it out or Lynn can share the numbers. And it really only grew at the end of the quarter To address some customer needs, we see warehouse staying relatively flat where it is, give or take $100,000,000 We have the ability to absorb it obviously with the PacMerck acquisition and the larger balance sheet. Our team does a phenomenal job and It's not an easy thing to do to with the transaction volumes that we have in that group to kind of maintain balances On an average basis, on a quarter over quarter, but they did a really, really good job. And so we've given them a little bit more room, But we all understand that it's not going to be an outsized portion of our company and the production this quarter was well balanced. Lynn, I think you have some other Numbers in terms of what we grew on a percentage basis outside of warehouse? Yes. I appreciate the question and the comments so far. So I think just maybe to add, we ended the quarter at about 1,003,000,003 45,000,000 and warehouse will not disclose separately, on average basis was about $1,380,000,000 for the quarter. So Kind of kept it flat and then it ticked up there at the end. I think if you look at other aspects of We obviously have PPP forgiveness coming off. At the same time, we have growth in our other portfolios. So I would just comment that, our other C and I business, period end to period end, up 26%. It contributed to 20% of our growth. And CRE is the other portfolio, 16% period end to period end, And it represented 15% of our growth. So seeing nice momentum in other parts of the portfolio, again, maybe hard to see when you kind of See the numbers kind of lumped together. Okay. That's good color. Thank you for that. And then maybe just adding a little bit more detail to that. So clearly, you've had great success hiring talent. I'm just wondering for the talent that you brought on, kind of where are they As far as bringing over their books of business, is that well underway or is that still a pretty long runway for the talent that you brought on for what Remaining loans they can bring on from their prior institutions? Well, actually, Tamar, we didn't answer one of your other questions, which is what percent of our business was from New talent versus existing relationships. I would say it was pretty well split from the numbers that I've seen, fifty-fifty. We have a lot of repeat business. I mean, one of the things that we do is serve Active clients in their businesses, so particularly on the real estate side, they're active in buying properties and they'll come back to us again and say, hey, we got another deal. Can we Make it easy like you did it for us last time and we're obviously happy to help serve them. Our new talent that's come over, it takes a while to bring over the existing relationships that they have. It's kind of on a needs basis. So I would assume that they still have I don't have a precise number for you. I don't know that. But I would suggest I would think that They obviously have room to go in terms of bringing new relationships to the bank that they may have served at other banks as those clients' needs arise. But we rely on our one of the things that happens when talent comes over is they look at the scope of services that we have to offer. And they're not just bringing over Relationships that they have. They're very good at marketing our company and our services and solutions that we offer. And so We look to them not to just bring over relationships that they have, but to go out and market and represent the bank and bring in new relationships that they can generate on an ongoing basis, and I think they're doing that as Okay, great. And then one last one for me. Just looking at the expense base and appreciate the comments around Being able to grow a couple of 1,000,000,000 more into the expense base since it's already been created. If you provide a little bit more color with that, so obviously here with PACCAR, you're adding some assets with that acquisition and the expense base has been Relatively flat remarkably for quite some time here. What's going to be kind of the next transition point and when do you start seeing the need to grow So I think as we look forward in folding in Pacific Mercantile's operations, I think we've Indicated that we expect the cost saves to be 40% plus, so we'll just put that in the 40% to 45% Range. So I think we'll have those expenses come in. It does give us the opportunity to leverage those further to Grow our assets. But I do think we'll have some step up just with general increases and then also ongoing investment Technology. So maybe to put some numbers to it, we've held our expense base relatively flat at $41,000,000 to $42,000,000 a quarter. I think at the 40% to 45% cost saves, PMB had an expense run rate of about 35 $1,000,000 So on a quarterly basis, that would be about a $5,000,000 to $6,000,000 expense add. And then I think we would be looking at Some normal increases, be it with personnel costs, and then some piece that's an investment in technology would be additive to it. So that's I think how we're looking at it right now. Great. Thank you for that color. Thank you. And the next question comes from Matthew Clark with Piper Sandler. Hey, good morning. Good morning. Maybe just first one around your appetite for hiring more producers relative What you might be getting from PNBC? Is the plan to just leverage kind of what they have and retain The best players on the field or do you feel like there's some opportunity to add some incremental Producers above and beyond that franchise? Well, we got some very talented people from PMBC and we're proud of Who stuck with us and we know that they're going to work well in our system and going to have the opportunity to produce Good results here, not only on the front lines, but also the teams that support everybody on the back end. There's a lot of work that goes into Supporting this production that we've had and the growth and so we have talented people across the board. We are open for business in terms of hiring Other bankers that we think can work well in our company. It's a as competitive as the market is, we are fortunate, as I mentioned in my comments, that we've had Kind of in a fairly healthy pipeline of talent that wants to come over and join Banc of California. And so we're Being very selective in terms of who we bring on, this isn't the right place for everybody, but we want to make sure we keep up our momentum. I do not believe that we need to hire more people to keep up the momentum that we have. I think that we have plenty of talent here And we can generate the opportunity the momentum that we and the earnings power that we know that we can with the teams that we have in place. That said, if we found some people that we had some confidence in or they addressed a vertical where we wanted to continue to grow, we would not avoid hiring them. Okay, great. And then just on your retention of SFR loans, what's your appetite going forward there? Is the expectation that you'll continue to do some more of that? And where do you feel like you kind of top out in terms of the relative contribution? We're really just trying to deal with the runoff and it's since we have to buy it on a forward basis, we kind of Try to model what the runoff is going to be and then go in and fill it. It's hard to get it right Because you don't really know until the end of the quarter what was going to ramp. Our payoff rate has slowed though. It was annualized around the 40% range. And I think now, Lynn, is it the low 30s or the high 20s? And so we have the ability Not quite yet. Is it still in the mid-30s? Yes. Okay. So we're trying to we're buying stuff to really replace the runoff, But it has slowed a little bit, as we've kind of remixed our portfolio. We're not trying to grow it per se. It's just hard to get it exactly on top of the number. Matthew? We will lose you. We may have stepped away from his phone. So we'll move on to the next question, which is from David Foster with Raymond James. Hey, good morning everybody. Good morning. Good morning, David. You guys you talked about the strength that you're seeing in the healthcare vertical And in your prepared remarks, and obviously we've got the warehouse vertical, the multifamily segments as well. I'm just curious, Are you seeing any other opportunities to expand into some industry verticals or niches? And whether you've got the personnel to do that today? Or are you interested in See some opportunity to hire some new producers to enter some new industry verticals? Well, the other vertical that I talked about in my prepared remarks was In the entertainment side and streaming. And we feel like that is a vertical. We've just added some folks in that vertical specifically to help bolster our growth there. We have a terrific team in place that's very knowledgeable and seasoned. And so we added some more folks to help us with that. And that's an area that we see Tremendous opportunity for growth, especially in the field where we play and the size where we play. I think there is an opportunity I think there is always you can always get distracted by looking at tons of new segments and saying, hey, let's add a little Let's add a body here, let's add a body there. I think we have plenty of opportunity to grow in the areas that we're focused on now. That's not to say that we wouldn't attack a new vertical. There's 1 or 2 things that are interesting that we're looking at right now, but we're trying to be very careful. We want to make sure that if we're going to put the energy into a new vertical That we can really it will have high impact at our company and it won't be just we're just dabbling in it. So we're trying to focus our energy around things that can Be high impact. Okay. That makes sense. And could you maybe just elaborate a bit on the Finexia investment? You Said you're going to give more detail in the coming quarters. But just curious some of the implications from this, it sounds like it's not just an investment that there might be a strategic Partnership as well and that there could be some fee income opportunities which would be terrific to help improve that fee income contribution. Just Curious, if you could elaborate on that at all? Yes, I'm happy to. So, Finexio is A really interesting company. It's a B2B payments platform and they help manage They provide basically payment optimization services to small and medium sized business. The product helps users efficiently manage their AP functions And they interface with the customer's existing accounting software and then use machine learning to try to select the best payment vehicle, whether it's check or ACH or wire From a timing and cost perspective, it's something we're becoming a client of Fonexio And we also have the ability to use their product and white label it to provide it as a product for our clients. We believe that payments is the area where Businesses need are looking for new solutions. And so we wanted to get out ahead of it. If they're not going to get it from us, they're going to get it from somebody else. And so We look at this as a really attractive tool that we'll be able to provide to our clients down the road on a white label basis. We also believe that there's the opportunity down the road for us to actually be the bank for Fonexio. And as they develop a larger clientele, We'll basically be the rails for what their clients are pushing across their system. So it's banking as a service, but in a B2B platform, not a B2C platform. Most of what we've looked at out there has really been B2C and we've been trying to Focus our energy on areas where we think that there's a larger B2B impact. This is part of a larger multi pronged strategy for how we're addressing this going forward and the service We're going to be providing this area, both to address fee income and to provide services to our clients. And so we'll be prepared to lay out more in the coming quarters. But this was kind of our first Part of the multipronged strategy that we've laid out internally. Yes, that's great. That's exciting. Thank you for that. And then just last one, just Wanted to touch on your asset sensitivity and maybe get a sense of how you think about managing your leverage to rising rates more strategically At a high level, obviously, the increased contribution from warehouse and C and I as well as the significant improvement that you guys have made in your deposit base Naturally made you more rate sensitive, but how do you think about managing that going forward? Just curious your thoughts on that. Lynn, you want to take it? Yes, yes. Let me start. So definitely appreciate the question, Given we've been in a low interest rate environment and there's 10 years rising and then maybe there's some discussion of what rates might do here In the near term. So we are slightly asset sensitive. I think the loan portfolio and Our investment portfolio and the amount of cash we have on our balance sheet has supports that asset Sensitivity in addition to the large percentage of non interest bearing deposits that we've accumulated. With PMB joining our balance sheet, I think we've become slightly more asset sensitive given The mix of their C and I and also their attractive deposit base. I think that the pricing of our loans gives us the flexibility to move up with rising rates. And also, I think with the PMB Balance sheet coming in, they've built up some excess liquidity that we'll have an opportunity to deploy as rates move up. So I think back on Slide 30, pretty far back in the deck, we put in some information about our earning assets. Over 50% have the ability to reprice within the next 2 years. And I think there's some other details there. So anything else I can add there? Yes. I'll just add that I'm really, really proud of our deposit moves And how our mix has changed and going from getting to 32% non interest bearing obviously was a hurdle that we were excited to achieve. And with PACMerck, I think we put in our deck, we think on a pro form a basis, it's about 35%. So our next hurdle is 40% non interest bearing, which For me, is a benchmark I'll be really, really proud of and then we'll look to get to 45. But 40% will be quite a threshold for us to cross. And getting to 8 basis points in terms of our cost of deposits, a function not only of our A function of our mix obviously, but also just kind of our serious efforts to focus on deposit costs and push them down and focus Bringing over clients that value relationships, so price. And so getting to 8 basis points was a big part of the quarter. Being more asset sensitive with PACCARC means that we have probably the ability to go up a little longer in duration in loans, which can also help support some loan growth. So we take income today as opposed to waiting for the future. That makes a lot of sense. And yes, the deposit remix has been Incredible. So thanks for the color. Thank you. Thank you. And the next question comes from Gary Tenner with D. A. Davidson. Thanks. Good morning. I had a couple of questions. Lynn, I was hoping you could provide some PPP data for the quarter, average balances for the quarter and the amount of revenue attributable to PPP for the quarter? Sure. I don't have the exact average for PPP. It is the majority of our it's inside our SBA loans back in the average balance sheet. But I think we ended last Quarter at $194,000,000 and we ended the 3rd quarter at $116,000,000 if that's helpful. And then as far as the whole yield, I don't have that number, but I would just To add that last quarter when PPP loans pay off, we get to accelerate the amortization of the fees that were deferred. Last quarter, that number was around $650,000 and this quarter, the number It's more like $1,200,000 So the SBA PPP loans have been forgiven a little bit Faster this quarter relative to last quarter. So that's and that's mostly round 2 that's come through this quarter. So that's why we saw the bigger number. Okay. Thank you. And then just in terms of the PACCARB deal, talked about getting their deposit costs in line with your pricing. How quickly could you do that? Would that be the case by January 1, maybe excluding time deposits? Or is there some longer contractual Type rates that you have to wait on? Well, there's something called the magic of merger accounting, I'm Michelle Lettlin, which is Fascinating to me, but I can't get this math at home, but apparently we can get it here. So Lynn, how does it work? Yes. So I called the magic of purchase accounting, but Gary, you did exclude the one bucket that it does affect, which is the CDs. So those come into the current interest rate environment kind of regardless of the term. So we'll get the benefit of that, I would say in the Q4. And then For other portions of the portfolio, the rates are high percentage of Non interest bearing. And then I think there's some that we will continue to work through and that may take into the Q1 or so of next year. That's the majority of it. We're not going to have it all done by the end of the Q4. I think it's going to take Through the end of the Q1, maybe leak into the Q2, but we'll get a big part of it done. Okay. Thank you. No other questions were answered. Thanks, Gary. Thank you. And the next question comes from Tim Coffey with Janney. Thanks. Good morning, everybody. Good morning, Tim. Jared and Lynn, you've done a great job managing the excess liquidity on the balance sheet, not only quarter over quarter, but years Over the years. And I'm wondering, are you feel like you've pulled all the levers you can pull? Lynn, what are we doing? I think the short answer is no, because as Pacific Mercantile comes into our balance sheet. They had a higher proportion of PPP loans relative to their balance sheet. So The balance sheet, so that liquid those have been forgiven, that liquidity has come onto the balance sheet. So I think we actually have some more opportunity to deploy liquidity From what we gained through the acquisition, if you're looking at just Bank of California Standalone, I do think we need to just manage it as closely as possible, deploy the liquidity into our securities portfolio. During the quarter, securities portfolio came down about $50,000,000 The CLO concentration and the dollar amount of Portfolio decreased, which has been part of our plan to reduce the exposure, but the opportunity came along to then Increase or deploy that liquidity into the loan portfolio. So we do think there will continue to be some opportunities like that As I think we see some more CLO reset activity as well. So I think there's still a few things that I will be helpful in managing liquidity. Okay. I would just add that our securities, our Treasury team that reports to Lynn has done a really good job of coming up with creative ways to deploy excess liquidity in certain programs where we might get Better than overnight rates on funds in a very safe way. And when they originally started this program, It was just like let's see if we can pick up nickels and dimes and just kind of make sure we're not leaving any money on the table. They've done a really good job, much the way that our legal team Has done a superb job of going back after old invoices that were basically written off because we didn't think we'd collect more from the insurance companies than going back With the right legal strategy and saying, hey, we think that you actually owe us this money. And that money keeps coming into tangible book value every quarter. And so Our teams have done a really, really good job of being creative. Okay, great. That's helpful. And Jared, I mean, you're clearly making Some investments outside of the footprint and it sounds like you've got some pretty big plans for them. I'm wondering how far away are you from opening branches We wouldn't open branches until we had footings that made sense. And by footings, I mean a combination of loans and deposits That were substantial enough to make a branch on its own profitable. We don't think we need to do it. We're just not The way that we serve clients in a pretty high touch way means that a branch doesn't really need to be next door to serve their needs. And so We have basically 3 buckets. We've got people up in the Bay Area. We have people in the Central Valley And we have people kind of in the Central Coast. And there's probably At some point, we'll know it when we see it, I guess, is the best way to say it. We'll look and we go, wow, we have some substantial business now, where our teams up there will be saying, hey, we really need a branch to kind of Roll this out further and then we'll listen to them and make it happen. But they're doing a really great job. And most of the people that we've hired have worked for our colleagues before. And So we're bringing over people that we have experience with and we know that they will be successful the way that we bank folks here. Okay. Those are my questions. Thank you. Thanks, Tim. Thank And the next question comes from Andrew Terrell with Stephens. Hey, good morning. Good morning, Andrew. Good morning, Andrew. Jared, I think I heard your guidance for warehouse balances remaining Essentially flat plus or minus $100,000,000 or so. I guess just as I think about mortgage volume across the industry potentially Continuing to decline. Do you think we ever get to a point where mortgage warehouse balances could be a headwind to your overall Net growth or do you feel you have kind of ample room to expand relationships with new customers or existing customers in order Kind of offset any of that potential pressure? Well, a couple of things. One is, while I agree that I expect I think everybody thinks that refinancings will probably decline as rates move And that's kind of the well published information. The other published information is that purchase financing is supposed to rise. So what percent of your fundings are purchases versus refinancings? And I think that's an important piece to look at. We've been able to maintain warehouse as a contributor to our earnings without it being a headwind to us or Yes, an outsized driver for us. So when I look at the pandemic as a perfect example, when the pandemic hit, we pulled back on all of our significantly to make sure that the securitization market was there. And we stayed with our customers, we pulled back and then we kind of gradually leaked back into them. And so we've shown that we're able to flex it up and down. From an earnings perspective, I'm watching all of our other business lines actually grow, while warehouse stays flat to slightly rising. And so I expect over time, Andrew, that warehouse will continue to be an important contributor, but it will be on a percentage basis, Not as significant as some of our other businesses because our other businesses are expanding faster. And so that's what we see over time. I don't expect it to be a headwind the way that we're managing it And we're doing it very carefully. Like I said, I think we maybe get to $100,000,000 more As a percentage of our company that will be lower than it was before the PacWorth acquisition. So we're trying to be thoughtful about how we kind of Let everything else grow and balance it. What we don't want to do is at a time when that business is working well, pull it back unnecessarily, but we're comfortable with the size that we have. And I think, again, our other businesses are growing pretty fast and we're trying to let those businesses continue to run and warehouse is kind of there as a steady contributor. Great. That's good color. I appreciate it. With the Pac Mart deal Now closed, I think you have about $33,000,000 or so remaining on a prior buyback authorization. Is there any kind of increased Appetite on the buyback right now or are potential kind of capital actions in the near term more focused on the redemption of the remaining preferred? We believe that the best use of our capital most immediately, absent finding some other great opportunity is to Redeem the preferred and we'll go through the proper regulatory channels to get that done. We're optimistic that we could do something in the first half of twenty twenty two. And we still think that that's the best use of our capital right now. So we hadn't really looked at a buyback in light of the opportunity that we have still to do the preferred. That's not to say that Look, if our stock doesn't move to the right level, then a buyback will make sense, because it'll just be too cheap. But let's see where our stock goes and we see the preferred out there as a good opportunity. Understood. Okay. Thanks for taking my questions. Yes, of course. Thank you. Thank you. Thank you. And that concludes both the question and answer session as well as the call itself. Thank you so much for attending today's presentation. You may now disconnect your lines.