Earnings Call Transcript - BANC Q2 2021

Operator, Operator

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. 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 Wolf, President and Chief Executive Officer. Please go ahead, sir.

Jared Wolf, President and Chief Executive Officer

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 at $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 high-quality credits. 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 steady 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 were $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. As we streamline the company and reduce operating expenses, we have consistently reinvested a portion of the cost savings into adding talented colleagues. Our initial hires supported an accelerated shift 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. 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. Our organic growth 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, which I discussed earlier, as well as technology that augments and enhances the client experience 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. 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 target 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 of 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. The relationship managers we will be adding will have more opportunity to expand their target markets to include larger commercial clients and have more resources and support to assist 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 and 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.

Lynn Hopkins, Chief Financial Officer

Thanks, Jared. As mentioned, please refer to our investor deck, which can be found on our Investor Relations website as you 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, 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, along with $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 was impacted by 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 a 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. 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 the 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.

Jared Wolf, President and Chief Executive Officer

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 variants, 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 poised 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 potentially expand our net interest margin in the coming quarters. We solved the redemption of our Series E preferred stock in our sights. As previously mentioned, we expect that to be a late 2021, early 2022 event subject to regulatory approval. 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. While we haven't modeled revenue synergies into our projections, we believe there will be a 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 a 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 a 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, 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, Operator

Today's first question comes from Timur Braziler with Wells Fargo. Please proceed.

Timur Braziler, Analyst

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

Jared Wolf, President and Chief Executive Officer

Let me have Lynn address that first.

Lynn Hopkins, Chief Financial Officer

The increase in the estimated cost savings is primarily due to our analysis of facility and employee costs during the integration and conversion process. It takes some time to fully refine this information. We believe that the majority of these savings will positively impact our bottom line, based on the visibility we currently have.

Timur Braziler, Analyst

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?

Lynn Hopkins, Chief Financial Officer

Sure, I'll start. For this quarter, the total loan fundings were around $200 million. Most of this amount was for single-family homes, with a smaller portion allocated to multifamily, which remains a challenging area to manage. I would estimate the split to be approximately $170 million for single-family residences and $30 million for multifamily. Regarding the yields from the single-family book, I'm not certain about the specifics, but I believe it is included in our overall yield. I'll need to provide more details about the yield we're currently experiencing, which is likely in the low 3 percent range.

Jared Wolf, President and Chief Executive Officer

Timur, to follow up on that, the average loan yield on the non-QM mortgages we are purchasing is quite appealing and fits our market well. We have a strong team on the warehouse side and valuable relationships that enable us to evaluate loans that are already secured while identifying high-quality loans to consider. The WACC on the loans we are acquiring typically exceeds 4.5%. To achieve the expected trade yield, several factors, including prepayment speed, come into play. We're buying them at a slight premium, but this is less than what we would generally encounter in the market due to our relationships. If prepayment speeds fluctuate, the yield may vary from our projections. Overall, our team is proficient in this area. Generally, our performance is likely in the upper 3s, which is below our SFR portfolio average but above our margin. This approach is beneficial for supporting our margin and maintaining our earning assets at an appropriate level. I was particularly impressed with our team's efforts during the quarter, generating over $900 million in production and achieving fundings in the mid-800s. This accomplishment is significant for a company of our size with a balance sheet of $6 billion in loans, reflecting a well-balanced production across all categories. The final figures are influenced heavily by prepayments, which are challenging to manage.

Lynn Hopkins, Chief Financial Officer

Jared, thanks for clarifying the SFR trade yields.

Timur Braziler, Analyst

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?

Jared Wolf, President and Chief Executive Officer

That's a good question. I'd say it's actually a mix of several factors. We did experience a dip; average balances in the second quarter were higher compared to end-of-period balances in the first quarter. Average balances and higher end-of-period balances were lower. We started to bring them back up in the second quarter. We have established some new relationships; we just approved one recently. We usually work with midsized mortgage bankers, not the very large ones, although we do have a few of those. Our team excels at managing within our comfort zone. We’ve always maintained that this won't be an oversized part of our company. It will be a healthy part, but not a significant one. It's a lever we can pull, and we feel comfortable with the current size, so I don't anticipate much growth. Our team has been doing a great job managing it. As our company grows, it can keep its same percentage, but we don't expect much growth from here.

Operator, Operator

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.

Gary Tenner, Analyst

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, it 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 the trends were in core C&I, both here?

Jared Wolf, President and Chief Executive Officer

It's kind of all blended from my perspective. 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. If something is paying off faster in one 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. It just happens. I'm 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. 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. They have a really good team that we're happy to bring on board. We continue to see C&I as something that we're going to grow and focus on. It's everything from service businesses and healthcare. We have a vertical in entertainment, as you know, doing streaming production. Additionally, owner-occupied real estate tends to be the low-cost leader in that area, but we have the ability to do it as well.

Lynn Hopkins, Chief Financial Officer

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

Gary Tenner, Analyst

Can you provide the average PPP balances and the PPP revenues for the quarter?

Lynn Hopkins, Chief Financial Officer

The average might take me a moment. When we look at the revenue from the quarter, it’s approximately the same between the first and second quarters. So in the first quarter, the fees were about $1.9 million, and in the second quarter, they were about $1.8 million. There isn't much difference between the two periods. From an average balance perspective, I'll pull those numbers and get back to you.

Operator, Operator

Today's next question comes from Tim Coffey with Janney. Please go ahead.

Tim Coffey, Analyst

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

Lynn Hopkins, Chief Financial Officer

Right. Last quarter, we pulled those numbers apart. I think this quarter, we indicated that our loan yield included 18 basis points of accelerated accretion and nonaccrual interest, whereas last quarter, we only had about 13 basis points. When I put all of that together, it's about $2.6 million. The majority is prepayments relative to last quarter. Last quarter, I think the number was $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. Our core loan yield, when we pull those particular features out, has held up well, considering the continuing low interest rate environment, supporting our net interest margin.

Tim Coffey, Analyst

Jared, conceptually speaking about the loan-to-deposit ratio, if you let go of the $500 million in high-cost deposits, that would typically increase your loan-to-deposit ratio. Are you comfortable with the possibility of raising it beyond its current level?

Jared Wolf, President and Chief Executive Officer

We can operate at 95% to 100%, but I don't want to exceed that too much. I'm satisfied with the volume we can handle on the deposit side compared to the outflows we’re experiencing. Regarding our CDs, we are retaining about 46% of the ones that are maturing by simply offering our posted rate. There is a significant amount of liquidity available that is open to longer durations. As a result, we have been raising our rates on longer-term CDs because we are tracking the retention rate. We keep thinking that now might be a good time to invest in three-year money at a low rate, and our deposit costs continue to decrease. I'm confident that we can manage the maturing deposits at the end of the year without causing our loan-to-deposit ratio to rise too sharply. Additionally, with Pac-Merc joining us, they bring a solid deposit base and a strong amount of noninterest-bearing deposits, as well as core operating companies we aim to grow. Between our operations and theirs, I believe we will be in a good position.

Lynn Hopkins, Chief Financial Officer

I would also like to mention one more thing regarding these specific deposits. Beyond the retention on CDs, I believe there is an opportunity to reprice them according to the current market conditions, and we are exploring that. With the current pricing at 163 basis points, they have the potential to be repriced while still being retained. Therefore, they are not all expected to run off. I completely agree with the remarks about the loan-to-deposit ratio.

Jared Wolf, President and Chief Executive Officer

Yes. Regarding our standard CDs with clients that weren't specifically contracted, we're seeing a 46% retention rate based on our posted rate. We also have substantial balances of what we refer to as specialty deposits, which are time deposits with contractually agreed rates for specific maturities. These are the deposits Lynn mentioned, and we believe we can either find replacements for them or they may reprice at current rates, allowing us to retain them. Just because they are costly doesn't mean they will all leave; some may adapt to the current rates.

Tim Coffey, Analyst

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

Jared Wolf, President and Chief Executive Officer

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. There wasn't any lack of visibility. The regulators were clear with us on what we needed to demonstrate. 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?

Lynn Hopkins, Chief Financial Officer

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. We are very focused on our PMB acquisition and the success of that and getting that integrated. I think it's just a matter of the process and demonstrating all of these milestones along the way.

Jared Wolf, President and Chief Executive Officer

We feel good about that, which is why our timing is either the fourth quarter or the first quarter. It's hard to know exactly, but I think that's a fair guideline right now.

Tim Coffey, Analyst

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.

Operator, Operator

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.