Banc Of California, Inc. Q3 FY2021 Earnings Call

Hello and welcome to the Banc of California Analyst and Investor Conference call. Please note that today's event is being recorded. I would now like to hand the conference over to Jared Wolff. Mr. Wolff, please proceed.

Good morning, and welcome to Banc of California's Third Quarter Earnings Call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results. At the beginning of the year, we laid out our strategic objectives for 2021, which have been successfully executed and 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, accelerate our loan growth, further reduce our cost of deposits and increase our net interest margin, keep expense levels relatively stable, and realize more operating leverage as we build the balance sheet and execute on strategic opportunities that could increase earnings and enhance the value of our franchise. We take a lot of pride in being a company that delivers on the expectations we set and doing what we say we're going to do. We did that in 2020, and we're doing it again this year. Through the first 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 throughout the year, and we have 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 fourth quarter of 2020 to 8 basis points at the end of the third quarter of 2021, which has helped support our net interest margin during the year. We've been able to keep our expense levels relatively flat, which has resulted in substantial improvement in our efficiency ratio. 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 accelerated our improvement in profitability. Our third quarter results very clearly demonstrate the greater earnings power and improved profitability we have as a result of the progress we have made on all of these strategic objectives. We generated diluted earnings per share of $0.42, up from $0.34 in the prior quarter, including pretax pre-provision income of $30.7 million, an increase of 31% from the prior quarter. Our pretax pre-provision return on average assets totaled 1.5% for the third quarter, an increase of 30 basis points compared to the prior quarter. We had another strong quarter of business development activity as we continue to build Banc of California's reputation as the go-to bank for small and medium-sized businesses. While the emergence of the Delta variant slowed demand relative to Q2 as we expected, we still achieved solid new loan production of $864 million. This production, together with prior loan commitments, resulted in total loan fundings of $763 million in the third quarter, including $503 million of new fundings and $260 million of line advances, of which $178 million related to net warehouse line advances. Excluding PPP loans, which continue to be forgiven, our strong loan production resulted in 16% annualized loan growth in the third quarter despite payoffs and paydowns remaining at a very high level. We continue to see growth across all of our loan portfolios, including a pickup in the C&I portfolio, which increased 6.6% from the end of the prior quarter. The acceleration of growth in commercial loans reflects the continued progress of the talented bankers we have, the positive impact we are seeing from new additions to our banking team, and our success in effectively winning new relationships based on our expertise and ability to execute for clients. Our loan production was well balanced across industries and asset classes. We continue to see strength in 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 million in commitments and have visibility to continue growth in that sector. We believe this will be a sizable opportunity for us in the coming years. As projected, there will be billions of dollars invested in streaming production. We 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, surgery centers, and healthcare real estate also continues to expand, surpassing $330 million in commitments in the third quarter. Our production is also becoming more diversified from a geographic perspective. The bankers we've added in Northern California, the Central Coast, and the Central Valley have been very productive, and we are seeing their contributions positively impacting our level of loan growth. Importantly, we're able to fund this loan growth with continued strong inflows of low-cost deposits generated from our business development efforts across all areas of the bank. Over the past few years, we focused on getting the right people, the right products, and the right incentives in place to create a robust deposit gathering engine, and we continue to see the positive results from these efforts. During the third quarter, newly opened DDA accounts contributed $88.3 million of low-cost deposits, which produced our ninth consecutive quarter of DDA growth. Our strongest growth came in noninterest-bearing deposits, which increased more than 16% from the end of the prior quarter and represented approximately 32% of total deposits at the end of the third quarter. The further improvement in our deposit mix and pricing drove our cost of deposits down another 8 basis points to average just 15 basis points in the quarter. 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 fourth quarter. The growth we are seeing in our client roster is driving higher levels of both net interest income and noninterest income. Compared to the prior quarter, our revenue increased 7%, while our noninterest expense declined as we continued to maintain disciplined expense control. As a result, our adjusted efficiency ratio improved to 60% from 66% in the prior quarter. We believe we will continue to see improvements in this area as the infrastructure we have in place can support a bank several billion dollars larger than our current size. The infrastructure we have built reflects our forward-thinking approach to technology. Along those lines, we recently made a small investment in a fintech company called Finexio, which is a B2B payments platform. The investment in partnership with Finexio is part of our larger strategy to grow our capacity and capabilities in payments so that we can increasingly add value to our customers in this area in the years ahead, while also improving our other sources of noninterest income. Our investment in Finexio is part of a larger multipronged 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 the Pacific Mercantile acquisition is closed. We are very excited to welcome our new colleagues who will be additive to the significant business development capabilities that we have already built and provide superlative service and operational expertise. As we announced in connection with the closing of the merger, we are 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 a 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 to review our third quarter performance. I'll start by reviewing some of the highlights of our income statement and then we'll move on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the second quarter of 2021. Net income available to common stockholders for the third quarter was $21.4 million or $0.42 per diluted share. This compares to $17.3 million or $0.34 per diluted share for the second quarter of 2021. We had a few items that impacted the comparisons of our net income between the third quarter of 2021 and the prior quarter. In the third quarter of 2021, net income available to common stockholders included $1.8 million in pretax gains on investments in alternative energy partnerships, $2.2 million in pretax net recoveries of indemnified professional fees, and $1 million of pretax merger-related costs. In the prior quarter, on a pretax basis, we had $829,000 in gains on investments in alternative energy partnerships, $1.3 million in net recoveries of indemnified professional fees, and $700,000 of merger-related costs. When backing out these items in each quarter, net of our normalized effective tax rate of 25%, to get a better sense of our operating performance, we had adjusted net income available to common stockholders of $19.4 million or $0.38 per diluted share in the third quarter of 2021 compared to $16.3 million or $0.32 per diluted share in the second quarter of 2021. This $3.1 million increase is attributed primarily to higher net interest income and our continued expense control measures as we leverage our resources. Total revenue in the third quarter increased $4.5 million or 7% compared to the prior quarter, including the $3.1 million increase in net interest income and a $1.3 million increase in noninterest income. Net interest income benefited from one additional day in the third quarter, higher average interest-earning assets, and a decrease in the cost of interest-bearing liabilities, which altogether more than offset a decrease in interest-earning asset yield. The increase in noninterest income stemmed mainly from higher other income, driven by an $841,000 gain on a sale leaseback transaction of one of our branch locations. Our net interest margin was 3.28%, up 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% during the third quarter due in part to lower prepayment penalty fees, offset by higher PPP fee amortization. Our average cost of funds decreased 8 basis points to 49 basis points due mostly to lowering our average cost of deposits by 8 basis points to 15 basis points for the third quarter. This decrease was due to the improvement of our funding mix and our continued efforts to reprice our funding sources into the current interest rate environment as they mature. Noninterest-bearing deposits averaged 30% of total average deposits in the third quarter compared to 28% in the prior quarter. Also during the third quarter, $428 million of higher-cost deposits with a weighted average rate of 1.88% repriced or matured. This is reflected in our lower period-end deposit spot rate, and we expect to receive a full quarter's benefit in the fourth quarter. Our adjusted expenses decreased $1.2 million from the prior quarter due mostly to lower salaries and benefits, a $365,000 gain on the sale of other real estate owned, which is included in other expenses, and lower net losses of equity investments, also included in other expenses. In addition, as previously mentioned, we incurred $1 million in merger-related costs, had net recoveries of $2.2 million in indemnified professional fees, and $1.8 million of gains on alternative energy partnership investments during the third quarter. The effective tax rate for the third quarter was 27.2% compared to 25.6% for the second quarter. Turning to our balance sheet. Our total assets increased by $251.3 million in the third quarter to $8.3 billion. Our gross loans held for investment increased by $243 million or 4.1% during the third quarter as growth in C&I, SFR, warehouse, and our CRE portfolios more than offset lower SBA construction and multifamily loan balances. The $72 million decrease in SBA loans in the quarter was due primarily to the PPP forgiveness process. As of September 30, we had $116.5 million in PPP loans consisting of $27.5 million from round 1 and $88.9 million from round 2. The $106 million increase in the SFR portfolio stemmed from $249 million in loan purchases, which offset payoffs and paydowns in this portfolio. Deposits increased $337 million during the third quarter. As previously mentioned, our mix and average cost continued to improve, thanks to our success in adding new commercial deposit relationships and runoff of higher-cost time deposits. Noninterest-bearing deposits increased to 32% of our total deposits at quarter-end, up from 29% at the end of the second quarter. Demand deposits, noninterest-bearing plus low-cost interest checking, increased by 7% from the prior quarter. This represents our ninth quarter of demand deposit growth, a goal we remain very focused on to drive franchise value. We expect this favorable shift in our deposit mix to help support our net interest margin in the fourth quarter. Over the past year, demand deposits increased to 66% of total deposits, up from 58%, reflecting the significant improvement we have made in our deposit base. This increase, combined with the lower rate environment and our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost of deposits down from 51 basis points in the third quarter of 2020 to 15 basis points achieved in the third quarter of 2021. Our securities portfolio decreased by $50 million to end the quarter at $1.3 billion. The CLO portfolio declined by $35 million during the third quarter, as we are seeing an increase in payoffs resulting from CLO resets. The higher level of payoffs is accelerating reductions in the CLO portfolio, which is part of our longer-term balance sheet management strategy. For the sixth consecutive quarter, the unrealized loss in our CLO portfolio improved, which was down to $2.5 million at the end of the quarter. Overall, our entire securities portfolio ended the quarter with a net unrealized gain of $15.5 million, down from $20.9 million at the end of the second quarter, resulting in a reduction of our tangible book value per share of $0.07. Our credit quality remained strong in the third quarter, and we saw positive trends in asset quality. Nonperforming loans decreased $5.7 million to $45.6 million in the third quarter. About 50% of this balance or $22.7 million represented loans that are in current payment status but are classified nonperforming for other reasons. Delinquent loans increased $10.1 million in the third quarter to $45.1 million or 0.72% of total loans. This increase was due to $24.9 million in additions, offset by $12.4 million in loans returning to accrual status and $2.3 million in other reductions due to paydowns and other resolutions. Delinquent loans include SFR loans of $19.1 million, SBA loans of $14.9 million, of which $10.6 million is guaranteed and $11.1 million of other loans. During the second and third quarters, we repurchased $9.3 million in guaranteed SBA loans, which are included in the delinquent and nonperforming loan totals as of September 30 and our pending resolution with the SBA. Let me turn to our provision for the quarter. Although we had some provision requirement related to the growth in the loan portfolio, this was more than offset by net recoveries during the quarter, positive asset quality metrics and trends, and the improving economic forecast used in our model. As a result, we recorded a modest negative provision for credit losses of $1.1 million in the third quarter. Net of this provision release, our allowance for credit losses for the third quarter totaled $78.8 million, and our allowance to total loans coverage ratio stood at 1.26%. Excluding our PPP loans and warehouse loans, both of which have lower relative risk levels in our reserve methodology, the ACL coverage ratio stood at 1.62% at September 30. With the decrease in our nonperforming loans, our ACL coverage to nonperforming 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 maximize benefits to shareholders and to continue building 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. Heading into the fourth quarter, our loan and deposit pipelines remain strong across all areas of the bank, and we expect to see a continuation of the positive trends that are driving increased operating leverage and profitability. Getting past the recent COVID resurgence will be helpful for economic activity and loan demand, but our ability to continue generating profitable growth is not solely reliant on improving economic conditions. We are unique. We have several catalysts, unrelated to economic conditions, that we believe will enable us to continue generating improvement in our financial performance. First, we will continue to benefit from deposit repricing. We will get the full quarter benefit of nearly $428 million of higher-cost deposits that matured or repriced during the third quarter. That should continue to drive down our cost of deposits and help us maintain or increase our net interest margin. In addition, we will begin to run Pacific Mercantile's interest-bearing deposits through our program and pricing structure, which should reduce the cost of these deposits over the next several quarters. Second, we hope to redeem our $98.7 million of Series E preferred stock in the first part of 2022, which should increase our net income available to common stockholders. As a reminder, that preferred stock has a 7% after-tax coupon. Third, we will have the accretive benefits of the Pacific Mercantile acquisition. As I mentioned earlier, we expect to start 2022 with most of the cost savings in place, which will add to the improved leverage we will get from adding $1.5 billion in assets. Fourth, we continue to attract high-quality banking talent to the company. Our accelerating loan growth this year is attributable to improved loan demand as well as the talent that we have added. Since I joined the company, we have made substantial changes in our commercial banking group and have been very successful in bringing in the type of bankers that fit our relationship-oriented model. We have highly talented professional bankers who are adept at serving small- and medium-sized businesses and bringing over full banking relationships. We are also 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 deeper relationships they have built in California. Bankers are seeing former colleagues of theirs having a great deal of success at Banc of California and understand that we can provide a similar opportunity for them. Banc of California is a talent magnet, and this has created a strong hiring pipeline that should enable us to continue to add seasoned relationship bankers who 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 Banc of California colleagues, both legacy and those who recently joined from Pacific Mercantile, for their dedication and hard work. We like to say that banking is a team sport, and there is no question that our results are a reflection of their talent and collective contributions in what is a highly competitive market. I'm proud of our team and all that we have accomplished together. 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.

And the first question comes from Timur Braziler with Wells Fargo.

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 at 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 the $1.5 billion level that I discussed in the past, maybe talk about the plans for growing warehouse going forward.

Sure. Thank you. I'm 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 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. It really only grew at the end of the quarter to address some customer needs. We see warehouse staying relatively flat where it is, give or take, $100 million. We have the ability to absorb it, obviously, with the Pacific Mercantile acquisition and the larger balance sheet. Our team does a phenomenal job. It's not an easy thing to maintain balances on an average basis on a quarter-over-quarter basis, but they did a really good job. 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. 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. We ended the quarter at about $1.345 billion and warehouse will not disclose separately on an average basis was about $1.38 billion for the quarter. So we kind of kept it flat, and then it ticked up there at the end. If you look at other aspects of the portfolio, we obviously have PPP forgiveness coming off. At the same time, we have growth in our other portfolios. Our other C&I business period end to period end was up 26%. It contributed to 20% of our growth. CRE is the other portfolio, which was 16% period end to period end and represented 15% of our growth. So seeing nice momentum in other parts of the portfolio. It may be hard to see when you see the numbers kind of lumped together.

Okay. That's good color. 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 there 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, Timur, 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, 50-50. We have a lot of repeat business. One of the things that we do is serve active clients in their businesses, particularly on the real estate side. They come back to us and say, 'Hey, we've got another deal. Can we make it easy like you did it for us last time?' We're obviously happy to help serve them. Our new talent takes a while to bring over the existing relationships they have. It's on a need basis. I would think that they have room to bring in new relationships to the bank as those clients' needs arise. They look at the scope of services we offer and market our company and our services and solutions effectively to bring in new relationships that they can generate on an ongoing basis.

Okay. Great. And then one last one for me. Just looking at the expense base, and I appreciate the comments around being able to grow a couple of billion more into the expense base that's already been created. Maybe provide a little bit more color on that. With Pacific Mercantile, you're adding some assets with that acquisition and the expense base has been relatively flat remarkably for quite some time. What's going to be kind of the next transition point? When do you start seeing the need to grow expenses as the business continues to grow?

Sure. Thanks, Timur. Let me start. Thanks for recognizing that we have been able to hold expenses relatively flat as we work to leverage that operating base. As we look forward and fold in Pacific Mercantile's operations, I think we've indicated that we expect the cost savings to be 40% plus. We'll just put that in the 40% to 45% range. We'll have those expenses come in. It does give us the opportunity to leverage those further to grow our assets. We will have some step-up with general increases and ongoing investment in technology. To put some numbers to it, we've held our expense base relatively flat at $41 million to $42 million a quarter. I think with the 40% to 45% cost savings, PMB had an expense run rate of about $35 million to $36 million. On a quarterly basis, that would be about a $5 million to $6 million expense add. We would be looking at some normal increases, be it with personnel costs and also some piece that's an investment in technology would be additive.

And the next question comes from Matthew Clark with Piper Sandler.

Maybe just first one around your appetite for hiring more producers relative to what you might be getting from PMBC? Is the plan to leverage what they have and retain the best players in 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 Pacific Mercantile, and we're proud of those who stuck with us, knowing they will work well in our system. There’s a lot of work that goes into supporting this production. We have talented people across the board. We are open for business in terms of hiring other bankers who fit well in our company. It’s as competitive as the market is. We are fortunate to have a fairly healthy pipeline of talent that wants to come over and join Banc of California. We are being selective in terms of who we bring on. I do not believe that we need to hire more people to maintain the momentum that we have. I think we have plenty of talent here to generate the opportunity and earnings power we know we can with our existing teams. That said, if we find confident people that address a vertical where we want 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 more of that? Where do you feel you kind of top out in terms of the relative contribution?

We're really just trying to deal with the runoff. Since we have to buy it on a forward basis, we model what the runoff is going to be and then go and fill it. Our payoff rate has slowed though. It was about 40%, and I think it’s now in the low 30s or the high 20s. We have the ability to adjust our purchasing according to what we need.

Not quite yet.

Okay, so we're trying to buy stuff to replace the runoff. It’s been a challenge to get it exactly right as we remix our portfolio. We're not trying to grow it per se; it's a matter of accurately matching the numbers.

And the next question comes from David Feaster with Raymond James.

You talked about the strength that you're seeing in the healthcare vertical and in your prepared remarks. I’m curious whether you see any other opportunities to expand into some industry verticals or niches? Do you have the personnel to do that today? Or are you interested in seeing some opportunities to hire some new producers to enter new industry verticals?

The other vertical I mentioned in my remarks was in the entertainment side and streaming. We feel like that is an area where we just added some folks specifically to bolster our growth there. We have a terrific team that is knowledgeable and seasoned. We see tremendous opportunity for growth, especially in the field where we play. We believe there is always an opportunity to explore other segments; however, we are trying to be careful to ensure that any new vertical we pursue can have a high impact on our company.

Could you elaborate a bit on the Finexio investment? You mentioned there will be more detail in the coming quarters. I'm curious about the implications of this investment and the potential strategic partnership and fee income opportunities.

Finexio is a really interesting company; it's a B2B payments platform that helps manage payment optimization services to small and medium-sized businesses. The product allows users to efficiently manage their accounts payable functions and interface with existing accounting software. They use machine learning to select the best payment vehicle from a timing and cost perspective. We're becoming a client of Finexio while also having the potential to white label their product for our clients. We believe payments is an area where businesses are looking for new solutions, and we want to be at the forefront of that. This is part of a larger multipronged strategy to address fee income and enhance the services we provide. We're excited to provide more detail in the coming quarters.

Just wanted to touch on your asset sensitivity and how you think about managing your leverage to rising rates more strategically at a high level.

Lynn, do you want to take it?

Yes. I appreciate the question. We are slightly asset sensitive. The loan portfolio and our investment portfolio and cash on our balance sheet support that sensitivity in addition to a large percentage of noninterest-bearing deposits we've accumulated. With PMB joining our balance sheet, we become slightly more asset sensitive given the mix of their C&I and the attractive deposit base. The pricing of our loans gives us flexibility to move with rising rates, and PMB's excess liquidity will be deployed as rates rise. Over 50% of our earning assets can reprice within the next two years.

I'm really proud of our deposit moves and how our mix has changed. Achieving 32% noninterest-bearing deposits was a big deal. With PMB, pro forma wise, we're approaching 35%. Our next hurdle is to reach 40% noninterest-bearing deposits, which will be a significant milestone. Lowering our cost of deposits to 8 basis points was also a highlight, driven by both our mix and efforts to reduce deposit costs while attracting clients who value relationships.

And the next question comes from Gary Tenner with D.A. Davidson.

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 in our SBA loans back in the average balance sheet. But I think we ended last quarter at $194 million and ended the third quarter at $116 million. As far as the yield goes, last quarter, when PPP loans pay off, we get to accelerate the amortization of deferred fees. Last quarter, that was around $650,000, and this quarter, the number was more like $1.2 million. The SBA PPP loans have been forgiven faster this quarter relative to last quarter, mostly in round 2.

In terms of the Pac Merc deal, you talked about getting their deposit costs in line with your pricing. How quickly could you do that?

There's something called the magic of merger accounting. Lynn, can you explain?

Yes. You excluded one bucket, which is the CDs. Those will come into the current interest rate environment regardless of the terms. So we'll get that benefit in the fourth quarter. For other portfolio portions, there’s a high percentage of noninterest-bearing deposits, and we will continue to work through those. That may extend into the first quarter or so of next year.

We will not have everything done by the end of the fourth quarter. It will take through the end of the first quarter and possibly into the second quarter.

And the next question comes from Tim Coffey with Janney.

Jared and Lynn, you've done a great job managing the excess liquidity on the balance sheet, not only quarter-over-quarter but year-over-year. Do you feel like you've pulled all the levers you can pull?

Lynn, what are we doing?

The short answer is no because as Pacific Mercantile joins our balance sheet, they had a higher proportion of PPP loans relative to their balance sheet. Those have been forgiven, and that liquidity has come onto our balance sheet. We have some more opportunity to deploy liquidity from what we gained through the acquisition. Our securities portfolio has decreased by about $50 million. The CLO concentration and dollar amount of the portfolio decreased, which is part of our plan to reduce exposure.

Our treasury team has done a really good job coming up with creative ways to deploy excess liquidity in certain programs to achieve better than overnight rates on funds in a safe manner. Much like our legal team, they've done superbly well in pursuing old invoices we thought we couldn't collect from insurance companies. We're seeing tangible book value contributions from that every quarter.

That's helpful. Jared, you're making investments outside of the footprint. How far away are you from opening branches in these new markets?

We wouldn't open branches until we had significant footings that would make a branch profitable. We are currently focusing on three regions – the Bay Area, Central Valley, and Central Coast. We'll know when the right time is to open based on substantial business growth from our teams in those areas. Our teams are doing a great job, and most of the people we've hired have worked for our colleagues before. This means we're bringing over people who we know will be successful.

The next question comes from Andrew Terrell with Stephens.

Jared, I think I heard your guidance for warehouse balances remaining essentially flat, plus or minus $100 million or so. Do you think we ever get to a point where mortgage warehouse balances could be a headwind to your overall net growth?

While I agree that refinancings may decline and that's well-known, purchase financing is expected to rise. We have been able to maintain warehouse as a contributor without it being a headwind or an outsized driver. I expect that while warehouse remains steady, it will contribute less percentage-wise as our other business lines grow faster. We're managing it carefully; I do not anticipate it becoming a headwind the way we've structured everything.

With the Pac Merc deal closed, you have about $33 million remaining on prior buyback authorization. Is there any increased appetite for buyback right now? Or are potential capital actions more focused on redeeming the remaining preferred?

We believe the best use of our capital, most immediately, is to redeem the preferred. We will follow the proper regulatory channels to make that happen. We're optimistic that we could do something in the first half of 2022. That's our current focus rather than pursuing buybacks.

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.