Earnings Call Transcript
Banc Of California, Inc. (BANC)
Earnings Call Transcript - BANC Q3 2020
Operator, Operator
Hello, and welcome to Banc of California’s Third Quarter Earnings Conference Call. All participants will be in listen-only mode. Today's call is being recorded and a copy of the recording will be available later today on the company's Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release. The referenced presentation is available on the company's Investor Relations website. Before we begin, we would like to direct everyone to the company's Safe Harbor statement on forward-looking statements, included in both the earnings release and the earnings presentation. I would like to now turn the conference over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.
Jared Wolff, CEO
Good morning, and welcome to Banc of California's third quarter earnings call. Joining me on today's call are Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results; as well as Mike Smith, our Chief Accounting Officer; and Bob Dyck, our Chief Credit Officer, who will all be available during Q&A. As noted on our earnings call for the second quarter, we expected our third quarter to demonstrate the earnings momentum we had been building toward, following nearly 18 months of restructuring. I'm pleased to report that we executed well and delivered strong operating and financial results that we anticipated in the third quarter. We will get into more detail later in the call, but here are just a few highlights of the positive results we generated on many fronts this quarter. We had significant improvement in our level of profitability, generating net income available to common shareholders of $12.1 million or $0.24 per share this quarter, and $19.4 million in pre-tax pre-provision income. Our net income benefited from a lower than normal tax rate which Lynn will detail later. Adjusted for a normalized 25% tax rate, net income available to common stockholders would still have been strong at $9.9 million or $0.20 per share. We were able to maintain a stable net interest margin due in large part to our continuing ability to improve our deposit base as we record our fifth consecutive quarter of DDA growth, while further lowering our cost of deposits. We've continued to reduce our cost structure without impacting our ability to service existing clients and bring in new business. And we're actively managing and monitoring our asset quality, with the majority of our deferred and non-SFR loans returning to the regular payment schedules, in the firm is dropping to just 5% of total loans at the end of the third quarter from 11% at the end of the second quarter. With the improvements seen in our deposit base, operating efficiencies and asset quality, our third quarter performance underscores many of the attractive characteristics of our franchise that we've been building, and that we expect will drive further improvement in our financial results going forward. We've kept a sharp focus on credit quality, closely monitoring our loan portfolio and actively reaching out to our clients. Our loan portfolio continues to hold up well, and our exposure to areas most impacted by the current crisis remains limited. With a well underwritten credit portfolio, predominantly secured by Southern California real estate with relatively low loan to values and strong debt service coverage ratios, we're seeing encouraging asset quality trends with limited loss exposure, a decline in problem loans and a significant reduction in loan deferrals. This trend contributed to a lower level of provision expense this quarter following our significant reserves built during the first half of the year, and the rapid decline in deferrals. In addition, our conservative approach continues to keep us very well capitalized with a high level of liquidity. Even with the progress we have made, we still have several opportunities to improve operating leverage to further enhance financial performance, many of which are timing dependent, and will benefit us in quarters to come. In the third quarter, the most notable progress came in the continued improvement in our deposit base, our mix of earning assets and our operating efficiencies, all of which led to a higher level of earnings and improved returns. Our total cost of deposits continues to decline, as we successfully expand existing client relationships, and bring new business customers to our service platform, which is further shifting the deposit base toward lower cost relationship-based deposits. Our total cost of deposits is 39 basis points at the end of the third quarter, down 20 basis points from the end of the prior quarter. At the same time, we've been able to effectively protect our average loan yield, as we have relatively limited exposure to repricing within our existing portfolio, given the level of fixed rates in hybrid loans, which are not scheduled to mature or reprice for at least two years. As a result, our average loan yield was relatively stable in the third quarter, declining just two basis points from the prior quarter. The lower deposit costs and relatively stable loan yields helped us to offset pressure on yields in the securities portfolio. We held our net interest margin steady at 3.09% for the quarter. We also continue to see the positive impact of our actions to reduce our cost structure. On an adjusted basis, our non-interest expense declined by more than $2 million from the prior quarter, resulting in further improvement in our efficiency ratio and our ratio of non-interest expense to total assets. Positive trends we're seeing in these key areas resulted in the strong earnings improvement this quarter. Simply put, despite the very challenging operating environment relative to 2019, we are now making more money with a smaller balance sheet. The financial performance this quarter is a result of the significant changes we have made and the type of customers that we bank, the talent we have added at all levels of our organization, and the strong execution on the strategies we have identified to enhance franchise value. And importantly, having solidified our foundation through the strategic actions we have taken over the last 18 months, we are very pleased we were able to deliver results that clearly demonstrate our improved earnings power. While the operating environment created by the pandemic remains challenging, we are seeing some encouraging signs within our markets and in the financial health and behavior of our customers. Most of our commercial borrowers that received a loan deferral have returned to the regular payment schedules and we have had very few require a second loan deferral. Loan deferments and forbearances increased by 53% from the end of the second quarter. Deferments are lower across the entire portfolio, with commercial deferments decreasing from $440 million to $145 million and SFR forbearances decreasing from $164 million to $138 million. Of these balances in September 30, the majority of the loans are on a second deferment or forbearance period. We're also beginning to see some clients utilize the liquidity they had built up in their deposit balances during the first half of the year to fund transaction and investment opportunities. For the most part, though, we were able to offset these deposit outflows through the acquisition of new clients and the expansion of existing relationships, which kept our deposit balances relatively stable. During the third quarter, newly opened DDA accounts contributed more than $340 million of low cost deposits. The deposit engine that we have built continues to produce strong results with contributions coming from all of our business units, private, and specialty banking, community and business banking and commercial real estate banking. Our lending teams are also gaining traction and we are bringing in new loan relationships to help offset the planned runoff in our single family portfolio. As a result, our total loan balances increased at an annualized rate of 4% during the quarter, while the mix in the portfolio continued to move in the desired direction. At September 30, loans to commercial customers increased to 78% of our total loans, up from 75% at the end of the prior quarter and 71% at this time a year ago. As I've said in the past, our goal is to show progress each quarter and keep moving the ball down the field in terms of improved operating leverage, quality deposit growth and higher earnings. We clearly did that this quarter and improved our franchise value in the process. Now I'll hand it over to Lynn, who’ll provide more color on our operational performance and then we'll have some closing remarks before opening up the line for questions.
Lynn Hopkins, CFO
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 third quarter performance. I'll start by reviewing some of the highlights of our income statement before moving on to our balance sheet trends. Net income available to common stockholders for the third quarter was $12.1 million or $0.24 per diluted share. Our adjusted pre-tax pre-provision income was $18.9 million, an increase of $2.8 million from the prior quarter. As Jared mentioned, our net income benefited from a lower than normal effective tax rate, which I will detail later. Adjusted for an effective tax rate of 25%, net income would have still been strong at an estimated $9.9 million or $0.20 per diluted share. Total revenue declined $1 million, or 1.7% compared to the prior quarter, as a 1% increase in net interest income was offset by a decline in non-interest income. The decrease in non-interest income is due primarily to a gain on sale securities of $2 million in the prior quarter versus none in the third quarter. The $0.5 million increase in net interest income was due mainly to lower funding costs, more than offset by a decline in interest income. Our net interest margin of 3.09% was unchanged from the prior quarter, as a decline in our cost of funds was largely offset by our lower yield on average earning assets. Our earning asset yield declined 20 basis points, due primarily to our CLO portfolio repricing down into the current market, as well as the impact of temporary excess liquidity being held in lower yielding assets. The average yield on our $686 million CLO portfolio declined from 3.22% in the second quarter to 2.16% in the third quarter. However, with LIBOR beginning to stabilize, after the significant declines earlier this year, we anticipate limited repricing pressure on the CLO portfolio yield in the fourth quarter. Our average loan yield declined by just 2 basis points from the prior quarter, due in part to lower yields on SBA loans as we extended the estimated average life of our PPP loans to 12 months from 9 months. The change in the estimated life is to provide additional time to account for the government's delay in processing forgiveness applications. As of October 16, about 25% of our PPP loan count representing about 30% of our PPP loan dollars were in the forgiveness process. We are actively working with our clients to help them through the forgiveness process, and using the opportunity to deepen relationships and identify additional lending opportunities. We will continue to monitor our estimated life relative to the government's ability to manage the forgiveness process. As Jared highlighted our period end total cost of deposits fell 20 basis points to end the third quarter at 39 basis points. The average total cost of deposit for the quarter was 51 basis points, or 20 basis points below our second quarter average. Looking ahead, we have $541 million of CDs and FHLB advances maturing over the next six months with the weighted average rates of about 1.6%, which will further reduce our cost of funds. With our cost of funds likely to continue trending lower and considering our meaningful opportunities to deploy excess liquidity into loans, we see the potential for NIM expansion in the fourth quarter. Non-interest income decreased $1.6 million to $4 million. As I mentioned on our last call the three year earnout from the sale of the bank's mortgage banking division, which contributed average quarterly fee income of approximately $800,000, completed in the second quarter, which lowered our other income. In addition, the prior quarter included a gain on sale of securities of $2 million, while the current quarter included a gain of approximately $300,000 on the sale of $17.8 million of loans held for sale. We continue to drive operating efficiencies as core expenses declined to $40.7 million for the third quarter, a 13% decrease from the same quarter last year, and a $2.1 million or 5% decrease from the prior quarter. The most significant contributors to the declines in the last quarter were lower salaries and benefits expense, lower advertising expense, and lower legal settlements expense, the latter of which were included in other expenses. Based on our actual and projected level of earnings and tax differences for 2020, we've made a change in our estimated effective tax rate for the full-year to a negative tax rate ranging from approximately 10% to 15%. As a result of the change, the effective tax rate applied in the third quarter was 13%. We expect our fourth quarter effective tax rates to be approximately 25%. Turning to our balance sheet, our total assets decreased by $32 million in the third quarter to $7.74 billion. Towards the end of the third quarter we reduced a portion of our excess liquidity to repay maturing brokered deposits, and this temporarily reduced the size of our balance sheet. But as we selectively add high quality earning assets in the future, both in terms of loans and investment securities, we have the 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 $50 million during the third quarter as growth in C&I, CRE and multifamily loans more than offset ongoing runoff of our legacy single family residential portfolio. The investor presentation includes updated details on our loan portfolio. The portfolio continues to be largely weighted towards real estate loans which are supported by high quality collateral and underwritten with strong debt service coverage and low loan to value. We continue to closely monitor credits in all sectors within our portfolio, we’ve very limited exposure to the sectors that have been most impacted by the pandemic. Deposits were relatively flat at $6 billion at quarter end. But our mix and cost continues to improve as a result of our very focused initiatives. The activity included a $90 million decrease in brokerage deposits, offset by a $59 million increase in non-interest bearing deposits, and a $26 million increase in other interest bearing deposits. Non-interest-bearing deposits represented 24.1% of our total deposits at quarter end, up from 23% at the end of the last quarter. Demand deposits, non-interest-bearing, plus low cost interest checking increased by 8% from the prior quarter, representing our fifth consecutive quarter of DDA growth, a goal we remain very focused on to drive franchise value. Over the past year, demand deposits increased to 58% of total deposits, up from 45%, 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 a 148 basis points a year ago to 51 basis points achieved this quarter. The securities portfolio increased $70 million to $1.25 billion, driven mostly by security purchases of $48.5 million and lower net unrealized losses of $23.9 million. We ended the quarter with a slight net unrealized gain of $1.8 million. The composition of our portfolio at the end of the quarter was 88% in AAA and AA rated securities and the remaining 12% in BBB corporate securities. A majority of the BBB rated securities are subordinated bank debt investments. For the second consecutive quarter, tighter credit spreads reduced the unrealized loss in our CLO portfolio. The improvement in pricing this quarter added $0.25 to our tangible book value per share relative to the prior quarter. As the economy stabilizes and the CLO spreads continue to narrow, the improvement will contribute directly to our tangible book value. Next, a few comments on asset quality. Credit quality overall continues to show resiliency in spite of the challenges created by the pandemic. We are pleased by the trends in our loan deferrals that Jared highlighted earlier. Delinquent loans decreased $12.2 million in the third quarter to $83 million or 1.46% of total loans at September 30. Non-performing loans decreased $5.8 million to $66.9 million as of September 30, 2020. However, $31.5 million or 47% of this balance represented loans that are in current payment status but are classified non-performing for other reasons. The $5.8 million decrease is a net number and included $10.2 million of secured loans since last quarter, offset by $4.4 million of new non-accrual loans. The quarter end balance includes three large loan relationships totaling $34.9 million or 52% of our total non-performing loans. These consist of one, $16.1 million legacy shared national credit and $9.1 million single family residential mortgage loans with a loan to value ratio of 58% and a $9.6 million legacy relationship well secured by commercial real estate and single family residential properties with an average loan to value ratio of 51%. Aside from those three relationships, non-performing single family residential loans totaled $17.7 million and the remaining non-performing loans totaled $14.3 million. Based on our current discussions, we believe that it is likely a resolution will be reached during the fourth quarter on our largest non-performing loans to $16.1 million shared national credit without any additional reserve requirement. All things being equal, this would put us in a good position to once again show improved asset quality at the end of the year. Let me turn to our provision for the quarter briefly. As we've discussed in the past, our ACL methodology uses a nationally recognized third-party model that includes many assumptions based on our historical and peer loss data, our current loan portfolio and economic forecasts. Economic forecasts published by our model provider, which include numerous assumptions, have improved modestly since the second quarter. Accordingly, the forecast component of our ACL methodology did not drive additional provision expense in the third quarter. This, combined with the improved asset quality metrics and modest loan growth, resulted in our third quarter provisions for credit losses being just $1.1 million. Following the provision expense recorded in the third quarter, our total allowance for credit losses totaled $94.1 million, which represents an allowance to total loans coverage ratio of 1.66%. Excluding the PPP loans, which have a 100% government guarantee, the ACL coverage ratio was 1.74% at September 30, while the allowance to total non-performing loans coverage ratio was 141%. Our capital position remains strong with a common equity tier 1 ratio of 11.64% 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 build franchise value while protecting our very well-capitalized position at a time when the outlook remains uncertain. As we've noted in prior quarters when the environment is supportive, there remains an opportunity to repurchase preferred stocks with a cost of over 7% with our current capital, or through other vehicles, such as the issuance of lower coupon tax deductible coordinated debt. At this time, I will turn the presentation back over to Jared.
Jared Wolff, CEO
Thank you, Lynn. Looking ahead, as long as we don't have any meaningful setbacks related to the pandemic, we are optimistic that we will be able to make additional progress on our key initiatives to deliver continued improvement in financial performance. As we mentioned on last quarter's call, having completed our restructuring, we are now in profitable growth mode, albeit temporarily due to the pandemic and a slower economic environment. We are carefully managing credit and will be prepared to grow more rapidly as the economy improves. But we believe there are still good opportunities to be had even in this more cautious environment. Moreover, we expect to continue to make progress on improving our deposit base and managing expenses, as we did in the third quarter. And as we emerge from the current crisis and commercial loan demand returns to a more normalized level, we expect continued growth in earning assets to drive additional operating leverage, higher earnings and greater returns for shareholders. We will likely continue to see significant runoff in our single family portfolio, but our loan pipeline is steadily building and as previously communicated, we expect the balance sheet in terms of loans and investments to end the year more or less flat with the year end 2019. Looking at other areas of our balance sheet, we believe we have other levers that we can eventually pull that will positively impact our financial performance and create additional value for our shareholders. CDs that will reprice, preferred stock that we may redeem and CLO values we expect to continue to return to a more stabilized level to positively impacting our tangible book value per share. To expand a bit more on these opportunities, as Lynn mentioned, we have a significant amount of CDs maturing over the next six months. As always, our goal is to replace these deposits with lower-cost CDs. But even if we replace them with CDs we're issuing at current rates, we will drop the cost of these deposits by at least 100 basis points. We expect to optimize our capital. When permissible, we expect to take advantage of the opportunity to redeem preferred stock. Subject to regulatory considerations, initiating a stock repurchase program will certainly be on the table for discussion as well, particularly as our common stock continues to trade at a level that we believe would be a good investment for our company. As we approach the end of 2020, we are very excited about what we've been able to achieve this year and the dramatic improvement we have made in the quality of our franchise. We are effectively managing through an unprecedented pandemic and have maintained good credit quality and capital strength, while continuing to provide an exceptional level of service to our customers during a challenging time. We've streamlined our operations and reduced expenses while continuing to invest in the right areas in terms of technology and talent, to help us build the foundation and culture of a deposit-focused institution. We are clearly seeing the results of our efforts in the quality and quantity of new client relationships that we're bringing into the bank on a daily basis. While the ongoing pandemic creates a level of near-term uncertainty, we believe that we are very well-positioned to generate earning asset growth, expand our net interest margin, realize additional operating leverage and deliver a higher level of earnings and returns for our shareholders as the economy strengthens. We have done so notwithstanding the environment and an improved economy will only accelerate that progress. I want to thank our Banc of California colleagues for their tremendous effort and tireless dedication during these challenging times. Banc of California has become the standout bank in our communities thanks to their hard work and execution. Banc of California is the go-to relationship-focused business bank in our markets. Our team is proving day-in and day-out to both existing and prospective clients that Banc of California has the people, products and services to deliver an exceptional banking experience. Thank you for listening today. I hope that you and your families are safe and healthy, and I look forward to sharing more about Banc of California's progress in the coming quarters. With that, operator, let's go ahead now and open up the lines for questions.
Operator, Operator
Thank you. The first question comes from Timur Braziler of Wells Fargo. Please go ahead.
Timur Braziler, Analyst
Hi, good morning.
Jared Wolff, CEO
Good morning.
Timur Braziler, Analyst
Maybe starting off where Jared left off, and looking at some of the remaining opportunities, you guys have done a good job in checking off a lot of the boxes that you outlined on slide four. Looking at the two remaining green marks there, the redemption of the preferred stock, we could start there. Is the conversation now is just what's the best option to replace it with or is there still a scenario on the table where you choose not to redeem that and keep that as part of the capital stack?
Jared Wolff, CEO
Good morning, it's a pleasure to talk with you. We still plan to redeem our preferred stock and are likely to do so by issuing subordinated debt. However, we require regulatory approval to proceed with the redemption. Any action we take will be subject to this approval. Based on my understanding, the Federal Reserve is currently not inclined to permit several banks to redeem their capital. Therefore, we are waiting for the right moment, and when we believe it's appropriate, we will engage with them. We are optimistic about our ability to accomplish this in the future.
Timur Braziler, Analyst
Okay, would you take advantage of the attractiveness of the market now and issuing sub-debt maybe in advance of the redemption, or would that be more of a concern?
Jared Wolff, CEO
I think we would look at that. I mean, it's really hard to time it perfectly. And so market conditions being what they are, we're constantly looking at what would be a good option. But I think it would be too hard to time it to try to do both at the same time. So we're going to be opportunistic.
Timur Braziler, Analyst
Okay, great, and then switching over to the CLO portfolio of the reduction in unrealized losses, that reduction of $23 million, was that entirely on the CLO book, and I guess what's the remaining negative mark in that portfolio right now?
Jared Wolff, CEO
Lynn, you want to address that?
Lynn Hopkins, CFO
Sure. So the improvement in the unrealized net loss in the portfolio that moved to a slight gain was not entirely due to the CLO portfolio. There was an improvement generally in the markets across all the securities, but the majority was related to CLO portfolio and it has the remaining net unrealized loss of about $17 million.
Timur Braziler, Analyst
Okay, and…
Lynn Hopkins, CFO
And that's pre-tax, so after tax, it's a little bit lower.
Timur Braziler, Analyst
Okay, thanks. So maybe looking out a little bit longer when more of that loss is recovered, can you just talk us through the transition out of that CLO book? Is that really as things mature, they just kind of replace with something else as a larger kind of broad sale on the table? Or is that going to be too detrimental to balance sheet levels where it is likely going to be piecemealed off?
Lynn Hopkins, CFO
Sure. So I think generally we recognize that we're working on a pretty low interest rate environment with a flat yield curve, to the extent that these are able to recover to their carrying costs, I think we would look to what other opportunities there are to transition out and to lower the concentration risk related to the CLOs on our balance sheet. That's something that we've talked about. It is a goal. But I think from a transition standpoint, we would need to look at what other alternative investments would be available to us kind of on a risk-adjusted basis and what kind of returns we could get. I think we'll be opportunistic there as well.
Timur Braziler, Analyst
Okay, great. And then one last one, if I could, just looking at the remaining level of deferrals, it seems like roughly half of that balances is in residential. I know you made the comment that the majority of what's remaining is second deferrals. Are the residential deferrals also on the second request, or is that still a portion six months that was originally granted?
Jared Wolff, CEO
No, they're either in the second deferral or in the process of being reviewed. The single-family residential portfolio, which is managed by a third party, is a legacy non-core asset for us. Given the current consumer rules, we need to manage this portfolio differently. We are actively engaged with our servicer to understand the situation better. It's important to note that for single-family loans, unlike other deferments, we can't expect people to make large back payments after the initial deferral period, especially if they have lost their job or are on furlough. Typically, the missed payments are added to the end of the loan, and then borrowers resume making regular payments at the beginning of the new period. We manage this aspect differently compared to the rest of our portfolio, but I believe there is no significant loss here. We are closely collaborating with our servicer, and to answer your question, most of those loans are either in the second deferral or under review for that process. There may be a delay depending on when they started, but most are progressing to the second deferral. Bob Dyck, do you have any comments on this?
Bob Dyck, Chief Credit Officer
No, Jared, I think that's a very accurate representation. We have moved through most of the first deferral buckets, because as Jared said, they didn't all come on at once. And most of them have moved either into a second or under consideration.
Timur Braziler, Analyst
Okay, that's great color. Nice quarter. I'll step back there. Thanks.
Bob Dyck, Chief Credit Officer
Yes, thanks Timur.
Operator, Operator
The next question comes from Matthew Clark of Piper Sandler. Please go ahead.
Matthew Clark, Analyst
Hey, good morning.
Jared Wolff, CEO
Good morning, Matthew.
Matthew Clark, Analyst
I'm sorry if I missed it. I'm managing two other calls right now. Do you have the PPP-related income and net interest income for this quarter? I'd like to isolate a core NIM.
Jared Wolff, CEO
Sure. Lynn you have that, I guess.
Lynn Hopkins, CFO
Sure. I believe it's $2.1 million is the fees that came to interest income this quarter. That positively impacted our net interest margin by 11 basis points.
Matthew Clark, Analyst
Okay. Got it. And then on the pipeline, both loans and deposits, can you give us an update there? Where are you seeing new business opportunities on the commercial side? And again, both on the deposit side as well?
Jared Wolff, CEO
Sure. So look, we had a great quarter and the pipelines are building as we thought that they would. We're seeing a lot of opportunities, continue to see opportunities in multifamily on the bridge side and, and on permanent financing. And we're taking opportunities there. We're seeing it throughout, all of our business units, in terms of good commercial opportunities for lending, lines of credit and in term loans, even some SBA opportunities as well. It's pretty balanced, opportunities in healthcare, opportunities in entertainment as things get back to normal. So we're looking across all of our business units to show production. We still believe that we're going to be able to end the quarter at a place where the production outpaces runoff in terms of outstanding. So, that we end flat or slightly up from the end of last year. And that will provide a really good platform, especially with our lower expense base to deliver really solid earnings next year and, keep improving quarter-over-quarter. On the deposit side, we're seeing the same thing. Even though we're starting to see some use of liquidity, as we mentioned, we're still bringing in a lot of new relationships and new deposits. And so while the balances from our existing client base are going to fluctuate, that's being offset by new relationships that we're bringing in and deposit flows continue to be strong. I expect that this quarter we will show positive DDA growth as we have the last five quarters which we're really, really proud of. Everybody in this company is very focused on delivering very, very high quality services and bringing new relationships in, in terms of loans and deposits and making sure that we have the most that we can from our existing clients. And we're actively managing that as well, as we're managing, looking very closely at credit. I want to go back to the NIM for a second. Matthew, I think the NIM, it got hurt a little bit by the CLOs re-pricing. But we are bringing on loans at good yields. And it's hard to know exactly where it's going to end up. Because I would say that in this environment, because we're focused on quality, we're likely to go after the highest quality loans, which may mean that we're going to protect, which may have a lower yield. I just think, given the visibility down the road in terms of the economy and credit, if we're going to bring on loans, and we're going to grow, we want to do the safest type of loans right now. That's not to say that we won't take someone's at higher risk. We're very selective about it. And so I do see the NIM holding up. I think our deposit costs continued to drive down. I was pleased with how well our loan yield on originations actually held up in the quarter. But it's hard to see kind of where things are going. But as of now, we believe that our NIM is going to hold and maybe expand a little bit. We still have so much room to go on the deposit side.
Matthew Clark, Analyst
Great. And then along those lines, did you happen to have the weighted average rate on new production this quarter?
Jared Wolff, CEO
Yes, not sure what that is. Production yield for this quarter was around 4%, weighted average. Last quarter, it's hard to see because it was lower because of all the PPP loans that came on.
Matthew Clark, Analyst
Yeah.
Jared Wolff, CEO
And I don't have it broken out without that in front of me. But it was around 4%, which, blended across everything that we're doing, I thought was pretty good.
Matthew Clark, Analyst
I know you have been reducing costs for some time now, and the run rate has decreased even further, sitting just below $41 million with an adjusted overhead ratio of around 2.1%. I assume we are nearing a bottom in this area. However, with many other banks announcing various cost initiatives, I'm curious if you believe there might be additional opportunities for further reductions.
Jared Wolff, CEO
Lynn, you want to?
Lynn Hopkins, CFO
Yes, I believe you stated it correctly. There are additional opportunities available. We are consistently reviewing and refining our expenses, seeking areas for improvement, whether through operational efficiencies or by utilizing technology that aligns with our goals and operations. Therefore, I think there are some minor opportunities we are approaching, and we need to establish a solid expense base so that when we return to more typical operations, we can take advantage of it.
Jared Wolff, CEO
I think we're at a pretty good spot right now. We'll find incremental stuff. We're constantly looking, are constantly evaluating everything, as I've shared with our team, and our team is constantly looking at just because we've done something a certain way in the past doesn't mean we should be doing it that way in the future. And is that the most efficient way to do things. So we're constantly looking and we got to layer on our earning assets on top of our existing base to keep growing earnings. And I'm confident we can do that.
Matthew Clark, Analyst
Okay, thank you.
Jared Wolff, CEO
Thanks, Matthew.
Operator, Operator
Next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Gary Tenner, Analyst
Thanks. Good morning, folks.
Jared Wolff, CEO
Good morning.
Gary Tenner, Analyst
Hey, real strong quarter. I was curious about as you're thinking about 2021, we've talked about kind of the journey to 1% ROA as sort of an interim term target or goal, 81 basis points this quarter, I think, but with a lower tax rate and pretty low provision. So just kind of as you're thinking about 2021, is the path to that ROA level still in front of you, do you think for next year?
Jared Wolff, CEO
I believe we do. It's difficult to predict which quarter we'll achieve it, but all indications point to success. It's primarily about increasing earning assets. We have significant opportunities to reduce expenses, particularly in deposit costs. Over $500 million in CDs are maturing, allowing us to lower rates by 100 basis points. Additionally, several other deposits tied to larger relationships are set to re-price. I've mentioned the potential benefits from preferred stock. There's considerable room for improvement on the expense front, and I am confident our teams can increase earning assets. I see achieving a 1% return on assets on a normalized basis as feasible for next year. While the exact timing is uncertain, we are working diligently towards that goal. Fundamentally, our tangible book value will continue to rise. We are uncovering opportunities that were overlooked in the past, which will enhance our tangible assets. The CLOs will re-price as the economic landscape improves, directly boosting our tangible value. Moreover, our teams have excelled in recovering funds from overlooked reimbursements and resolving legacy litigation, which will also enhance our tangible book value and, consequently, our share price. Thus, I am optimistic about both tangible book value growth and earnings expansion.
Gary Tenner, Analyst
Great, thanks for your thoughts there. To clarify, I believe you mentioned that you expect year-end loans to be flat year-over-year, is that correct?
Jared Wolff, CEO
Yes, we focus on high-quality earning assets. In terms of loans and investments, we acquired a significant amount of bank subordinated debt, which was a good addition to our investment portfolio earlier this year. I believe that the combination of loans and investments should be stable or slightly increase by the end of the year compared to the end of last year, with cash levels varying as we operate with different amounts at different times.
Gary Tenner, Analyst
Okay, so it sounds like though, actually, if I was to isolate loans, because of where we are right now, versus the end of '19, loans will be lower. But the overall combination of loans and investments, you're saying likely up?
Jared Wolff, CEO
Loans might go ahead, Lynn.
Lynn Hopkins, CFO
I would like to make a comment. We have some clarity regarding potential growth opportunities. Currently, we have approximately $260 million in PPP loans on our balance sheet at the end of the third quarter. We believe the forgiveness process is beginning, which may lead to a reduction in that portfolio. This could impact our overall loan balance, along with other growth in our loan portfolio. Pinpointing that number is somewhat beyond our control and depends on the governmental agency to facilitate the process.
Jared Wolff, CEO
We are most focused on obviously, putting on high quality loans. And then where we have the ability, putting on high quality investments, and between the two of those earning enough to continue this company earning more and more each quarter. And so if we find really high-quality investments that have a great duration and proper duration and integrate yield, then obviously, we're going to put those on as well. But we want to get this company to the right place from an earning asset perspective to make sure that we keep earning well going forward.
Gary Tenner, Analyst
Thank you.
Operator, Operator
The next question comes from David Feaster of Raymond James. Please go ahead.
David Feaster, Analyst
Hey, good morning, everybody.
Jared Wolff, CEO
Good morning, David.
David Feaster, Analyst
I just wanted to kind of follow-up on that earning asset topic. You guys have done a great job on the growth front. First of all, I guess, how much of the C&I was up this quarter, just curious how much of that was warehouse and what you're seeing on there? And then I guess as we look out to 2021, as the run-off of single family kind of abate somewhat and you continue to be that go to business bank, as you alluded to, are you thinking about loan growth as we head into next year?
Jared Wolff, CEO
Well, let me take the second part first. I don't think we broke out what's warehouse versus other parts of C&I. So I don't think we have that in our publicly disclosed stuff that, like I said before, it was pretty balanced. I mean, we had production across all of our business units. And we feel good about it. Hard to predict in terms of next year. If you're trying to figure out kind of how the balance sheet is going to grow. I mean, it’s really economy dependent. There's no reason why we would be growing slower than the economy. And certainly not slower than our peers. If the economy holds up in this environment, specifically we're taking a relatively conservative approach, and trying to go after the highest quality credits, because we feel we need the visibility to make good decisions, not knowing how long this pandemic is going to last. And so we're sticking to what we know and doing it well and trying to lend to the strongest borrowers. That's not to say we aren't looking at everything, we are. But I think our pipelines are building. I really have a lot of confidence in our teams that have come here. They're working really hard to bring in new relationships and mine existing relationships. So David, I don't have a number that I'm throwing out there in terms of production for next year. But I know that we need to put on the highest level of earning assets that we can on our existing expense base to march toward and past a 1% ROA. And so if assuming the economy gets better, and provisioning returns to normal levels, I think that's what's going to happen.
David Feaster, Analyst
Okay.
Lynn Hopkins, CFO
I would just add one comment, I think in the investor materials, we do provide some additional detail related to our C&I portfolio. So I think that's in both the second quarter and the third quarter. And you can see, I think the finance and insurance sector within our C&I portfolio. So the majority of the C&I growth is centered in the finance and insurance part of our portfolio, which includes our warehouse credit lines.
David Feaster, Analyst
Okay, that makes sense.
Jared Wolff, CEO
I would say that regarding our warehouse, we haven't structured our company around it. We’ve mentioned that it will be a suitable part of our growth strategy. From a CECL perspective, it's advantageous due to its short duration. We have never experienced a loss in that portfolio, and our team is quite experienced. Additionally, we achieve above-average yields by focusing on midsized mortgage bankers rather than the largest ones. We also have several hundred million in very low-cost deposits, below 10 basis points, generated from that portfolio. This is due to our lending to institutions that maintain positive relationships with us. Overall, it's well balanced, but we keep it within a certain size to prevent it from dominating our portfolio.
David Feaster, Analyst
Okay. And then just kind of following-up on that a bit. I mean the path to margin expansion is pretty clear, right? I mean, through the positive pricing, you're getting good yields. The CLOs aren't a headwind. I guess, as you think forward, kind of where do you think the margin expands back to like, kind of what's your target for where we should get that then back to, based on the earnings power of your franchise?
Jared Wolff, CEO
Yes, that's a great question. Currently, we are structuring the company to be somewhat sensitive to liabilities. We are focused on reducing our deposit costs by attracting non-interest-bearing deposits and low-cost checking accounts from businesses that primarily seek services rather than yields. As a result, this deposit base will not reprice quickly when interest rates increase, certainly not as rapidly as interest rates themselves will rise. We're also implementing floors on all the loans we are originating today, which we believe will enable us to benefit significantly in a rising rate environment. This will allow us to take advantage of opportunities more on the upside than the downside. As for where our margin might go, it will depend on how swiftly rates change. However, I don't see any reason why our margin wouldn't improve. We may need to explore some scenarios in relation to current interest rates. Lynn, do you have any thoughts on this?
Lynn Hopkins, CFO
I believe that's a solid summary. It would be challenging to provide a specific number. We're operating in the same interest rate environment and aim to capitalize on opportunities to enhance the mix and costs of deposits through our business initiatives. As Jared pointed out, the loan pricing and structure are crucial. In a rising rate environment, we anticipate stronger earnings growth, which would aid in net interest margin expansion. Overall, I feel we are in a favorable position to see improvements.
David Feaster, Analyst
That's for sure. So okay, I appreciate that. And then just last one, so on the $89 million you guys have done a great job on the deferral front. Of the $89 million in CRE deferrals that are remaining, just curious whether there's any concentrations in there. Was there any trends that you noticed in there? And then I guess, as the second deferrals expire, how do you think about a potential third round for those borrowers that might need additional relief? Or would you rather just kind of put it on non-accrual or TDR at that point, and go ahead and work it out?
Jared Wolff, CEO
Let me start by addressing that and turn it over to Bob and Lynn. When we consider putting a loan on deferral, particularly for a second deferral, we are actively evaluating whether that loan requires a change in its risk rating as well. We do not approach this passively; we are assessing the loans to understand any potential losses and ensuring our risk ratings are appropriate. This process is not simply checking in every few months. At the same time, we are providing our clients with options, as we are fundamentally a secured recourse lender. We analyze our borrowers’ financial statements and the collateral they possess, and if they have a viable path to recovery, particularly given the pandemic’s impact on their situation, we collaborate with them. There is no reason we shouldn’t do this. We are following the guidelines in place and doing everything we can to support our borrowers during this period while also protecting our interests and striving for efficient resolutions. We have primarily offered three-month deferments and have been monitoring these on a quarterly basis, rather than extending them for longer periods. I’ll let Bob provide any additional insights regarding our deferment strategy.
Bob Dyck, Chief Credit Officer
Jared, you’re absolutely right. Our philosophy and practice focus on three-month periods. This allows us the opportunity to examine the borrowers and their fundamentals, and I believe the term you used is very fitting. We're assessing them to find a path to recovery. To address your question, David, if we reach a point where a third deferment is needed, it will only be considered if we continue to see improvement and progress toward recovery. Otherwise, if it seems unlikely that we will get there, it’s better to address the problem promptly.
Jared Wolff, CEO
Regarding the commercial real estate sector, I pay close attention to retail. In our presentation, we provide a detailed breakdown of our CRE portfolio, highlighting our concentrations and risk levels across various categories, including office, retail, multifamily, and hospitality, with minimal exposure to high-risk areas. Retail is a key focus for me. Our top 25 retail borrowers account for approximately 68% of our retail exposure. As I noted last quarter, we are closely evaluating this group, categorizing our relationships as red, yellow, or green. We have a significantly higher number in the green category compared to last quarter, and I'm pleased with this progress. Most of our retail exposure is in pharmacy and grocery-anchored shopping centers with financially stable borrowers, which we are monitoring closely. This is the area of CRE concentration I find most concerning. Our office portfolio remains stable, and we have very limited hospitality exposure.
David Feaster, Analyst
Okay, thank you very much.
Jared Wolff, CEO
Yeah, no problem, David.
Operator, Operator
And next question comes from Steve Moss of B. Riley. Please go ahead.
Steve Moss, Analyst
Good morning. Most of my questions have been asked and answered. I have a small one regarding how we should consider the size of the securities portfolio in relation to earning assets as we think about the long-term balance sheet mix, particularly since we want to grow loans.
Jared Wolff, CEO
Lynn, what's the target that we've talked about there?
Lynn Hopkins, CFO
Let me discuss that for a moment. There has been significant liquidity in the marketplace. Generally speaking, cash and securities probably make up a larger percentage than in the past. As liquidity normalizes, I anticipate that securities and cash will trend back down to around 10% to 15%, instead of remaining above 15%. Since part of our portfolio contains concentrated CLOs and includes triple B rated corporate debt, I believe it will likely stay closer to the 15% mark rather than decreasing further, given our own balance sheet liquidity.
Steve Moss, Analyst
Okay, great. I'm sorry, go ahead, Lynn.
Lynn Hopkins, CFO
No, go ahead.
Steve Moss, Analyst
Okay. I just wanted to ask about the provision and how we should think about expenses moving forward. It seems the economy is improving, so should we consider that provisions in future periods might correlate with charge-offs? I’m curious about your thoughts on this.
Lynn Hopkins, CFO
I think, with the adoption of CECL, I wish it was just as simple as you have a charge-off, and then you get to fill the bucket again. We are going through a robust process, taking a look at the portfolio, the macroeconomic variables that drive the models, what does the forecast look like. Fortunately, for us this quarter, I think, not only do we have our positive asset quality trends, but also the positive economic forecasts. We did have the modest loan growth, which we did factor into, and is reflected in the provision, but the provision is also a function of the mix of the loan portfolio. And some of the loan products have higher if you will, coverage ratios than others. So if I was to look forward, as the economy improves, I think we do have to remain cautious to the fact that we all recognize that the damage from the pandemic may have been not realized quite yet, and may be pushed into 2021. So to the extent that we're participating in loan growth, I would expect that there would be some provisions and then we would have to address what the charge-offs are. But even in the absence of charge-offs, I think we still could expect some expense as we grow loans.
Jared Wolff, CEO
Yes, I think everybody's getting comfortable with CECL and it's a little bit, models are still getting tweaked. It tends to have a lot of power these days, it seems if you're using Moody's. I think that the pandemic is a huge variable here. And when people get back to work. We are not back to work in Los Angeles, in terms of people being in an office environment. There are parts of Orange County which are, there are parts of San Diego, but LA fundamentally is still working remotely. And that's going to happen through the end of the year, most likely. And a lot of schools aren't back yet. And I think that the longer this lasts without a major stimulus bill, I think the economy is probably going to suffer. And we obviously would get hit like everybody else. I think, based on the makeup of our portfolio, we're going to get hit pretty late because we're 67% secured by residential real estate. And that has held up very, very well in this pandemic and other difficult times. But there'll be a lot of stuff to get to before us, but if it lasts long enough, we will too. Hopefully that's not the case. And hopefully more stimulus will be coming here if we don't have a vaccine.
Steve Moss, Analyst
All right. Thank you very much. I appreciate that.
Jared Wolff, CEO
Thank you, Steve.
Operator, Operator
Thank you. Ladies and gentlemen, this does conclude today's Q&A session and teleconference. You may disconnect your lines at this time and thank you for your participation.