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Banc of California Inc (NYSE:BANC)
Q3 2019 Earnings Call
Oct 23, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to Banc of California's Third Quarter Earnings Conference Call. [Operator Instructions]

Today's presentation will also include non-GAAP measures. The reconciliation of which in additional required information is available in the earnings press release. The reference presentation is available on the company's Investor Relations website.

Before we begin, we would like to direct everyone toward the company's safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation.

I would now like to turn the conference over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.

Jared M. Wolff -- President and Chief Executive Officer

Good morning, everyone. Welcome to Banc of California's third quarter 2019 earnings conference call. With me today is Banc of California's CFO, John Bogler, who will talk in more detail about our quarterly results shortly.

We finished the quarter with a net loss to common stockholders of $22.7 million and a diluted loss per common share of $0.45. As you know, the main reason for the quarterly net loss is we incurred a charge-off related to a $35 million line of credit originated by the Bank in November of 2017 to a borrower purportedly the subject of a fraudulent scheme. The effects of this charge-off had a very clear impact on our quarterly earnings. Not withstanding this event, our team continued to make significant progress during the quarter on our core strategic initiatives, which we will discuss momentarily.

Let me first address what we have done to toning [Phonetic] of the fraud. In addition to evaluating the loan itself, and ensuring we are taking the necessary steps to pursue recovery, I wanted to evaluate our existing portfolio to make sure there is nothing else we should be aware of now. Following this event, I directed an extensive review of all loans, C&I relationships, $5 million and above not secured by real estate. Through the use of internal audit and outside parties, we looked at loan, security and collateral documentation for each credit, and confirmed the existence of our collateral if held by a third-party outside of the bank. In addition, I also requested a review of the top 10 relationships in our warehouse lending group, to confirm that we have appropriate documentation in place. While the reviews are not yet complete and we await final confirmations for certain loans, to-date we have not identified any other instances of fraud or concerns that the collateral held by third parties does not exist or material concerns without documentation.

Turning to our overall business. I want to highlight some of the significant accomplishments this past quarter, which are much more indicative of our overall performance. It represent our ability to execute on our strategic plan. As you may recall we set forth three areas of focus for 2019. Reducing our cost of deposits, lowering our quarterly operating expenses and eliminating non-core assets. All of this is intended to create the foundation upon which we will grow in 2020.

We view cost of deposits, is one of the key limits [Phonetic] test for how we are executing on our plan. In Q3, we continue to make great progress and reduce our cost of deposits by 14 basis points, while lower rates have helped our ability to generate noninterest bearing deposits has been a key component as the mix of our deposit portfolio is most important for the long-term. This progress reflects the significant effort we have made internally to transform the bank into a relationship focused business bank.

In the third quarter, we saw noninterest bearing deposits increased by 11% from the prior quarter to over $1.1 billion. And they now comprise almost 20% of our total deposit portfolio. Additionally, we eliminated a significant amount of broker deposits which now make up less than 2% of our deposit balances. We expect our broker balances to move up and down, like FHLB advances to bridge funding, but we anticipate running brokered and wholesale funding and reduced levels going forward, as we continue to make progress on increasing our low cost deposit base.

On the asset side of our balance sheet, in the third quarter we opportunistically exited lower coupon and longer duration mortgage-backed securities with the remainder to be sold in the fourth quarter. This will give us the opportunity to begin the process of building a more traditional and balanced securities portfolio consistent with what you would expect at a community bank. It will take time to build, but will be more accretive to us long-term. We have significantly reduced CLO balances over the last year and will look for opportunities to reduce those balances to the extent we can find comparable yield and duration. As a result of our targeted efforts to eliminate non-core assets, we ended the third quarter at $8.6 billion with core assets playing a more prominent role in our profitability.

Expenses were nearly flat and came in slightly below last quarter when adjusted for the gain on investments in alternative energy partnerships. This quarter was particularly good, given we viewed the second quarter's noninterest expense as potentially a low point for the year. John will talk in greater detail on overall expenses and operating expenses specifically, but at a high level, we remain focused on simplifying our operations and improving the client experience, which in both cases will help us manage expenses to an appropriate level based on the size and complexity of our business model.

We continue to place an emphasis on hiring very talented and experienced professionals. This last quarter, we brought on a trio of talented executives. John Sotoodeh, to head our Community & Business Banking Division, Hamid Hussain is Head of Commercial & Real Estate Banking and Bob Dyck is Executive Vice President of Credit Administration. Bob will step into the Chief Credit Officer role when our current CCO, Kris Gagnon retires early next year. These talented executives along with the rest of our executive team are among the most accomplished bankers I've ever worked with. Our story and opportunity is incredibly compelling, and we are highly focused on taking advantage of it. The entire team at Banc of California is very dedicated and talented. These leaders are reflective of the tremendous talent we have throughout our organization.

With that I'd like to now turn the call over to John to provide more detail on what was mostly a positive quarter for the bank. Then I'll come back to wrap it up before we take questions. Go ahead, John.

John A. Bogler -- Chief Financial Officer

Thank you Jared. As mentioned, we have continued to opportunistically shed non-core assets. Our total assets into the third quarter at $8.6 billion, a $735 million decrease from the prior quarter. The change was driven by the $574 million multifamily securitization mentioned on the last earnings call which settled in August. Additionally, as part of our efforts to begin diversifying and building a more traditional securities book, we sold $371 million of mortgage-backed securities during the quarter, the majority of which occurred at quarter end. We still hold approximately $40 million of MBS and expect to sell the remainder of those during the fourth quarter.

As a reminder, the MBS portfolio was long duration and low coupon. With the decline in the middle portion of the treasury curve, we were presented with an opportunity to exit the position and begin the process of diversifying into less price sensitive securities that provide a better cash flow structure. The sale of the MBS resulted in a $5.8 million loss inclusive of an other than temporary charge and a loss on interest rate swaps used to partially mitigate the price fluctuations of the securities. The securities sold at the end of the quarter are shown as receivable on the balance sheet and we expect by the end of the year the securities to total assets ratio will be approximately 10% to 15%. Held-for-investment loan decreased to $6.4 billion this quarter, due mainly to $220 million net reduction in SFR and multifamily balances, driven by an increased level of loan payoffs. This was expected as we are focusing on more relationship-oriented loans that are less price sensitive.

The loan portfolio mix of SFR and multifamily loans is 52% at quarter end, down from 59% at the end of the prior year, and we expect this mix to continue to decline to a more reasonable percentage component of the loan portfolio. Our net C&I balances decreased by $162 million due to lower production for the quarter. The $35 million charge-off, exiting one large relationship, lowered utilization of revolving facilities and other credit related exits as we continue to prudently monitor our loan portfolio, ensuring potential credit risk of being managed actively and swiftly.

Rounding out the changes in the loan portfolio, our CRE and construction balances increased by $54 million. The overall loan portfolio yield decreased 5 basis points to 4.75% during the quarter due to variable-rate loans resetting and higher coupon commodity loans being refinanced to other institutions. The loan yield did see a benefit of 4 basis points due to a higher level of loan prepayment fees and accelerated discount from the repayment of purchase loans, in addition to the securitization of the low coupon multifamily loans.

However, the combination of higher prepayment fees and the multifamily securitization was not enough to offset the negative impacts of falling LIBOR. Currently C&I balances are approximately 29% of our total HFI portfolio and relatively flat compared with 30% last quarter. Going forward, we expect the mix of C&I loans to comprise 25% to 30% of the overall loan portfolio.

Moving on to deposits. Higher cost brokered CDs decreased by $325 million or 86% to $54 million by quarter end. Additionally, higher costing money market and savings accounts fell by $105 million and $19 million respectively. Overall, our targeted efforts to lower our funding costs reduced average deposit cost by 14 basis points from Q2 to 1.48%. We further reduced our wholesale funding by $562 million in Q3 primarily due to applying the proceeds from the multifamily securitization toward paying down overnight FHLB advances. We expect our wholesale funding to progressively decline with alternative lower cost funding and as we continue growing relationship based lower cost deposits. Core deposits or non-broker deposits now account for 98% of total deposits, up from 92% last quarter.

Turning to the income statement. Our net loss to common stockholders for the quarter was $22.7 million or a loss of $0.45 per diluted common share. As Jared described earlier, the quarterly results were negatively impacted by $35 million charge-off in the quarter, $5.8 million loss in the sale of mortgage-backed securities and $5.1 million loss from the preferred stock redemption. The charge-off pushed up our historical loss factors used in our ALLL calculation, which add an additional $3 million to the quarterly provision expense. These outlying charges were partially offset by net non-core expense benefit items totaling $2.5 million. After adjusting for non-core items, along with the amortization expense associated with our solar tax equity program, our operating expenses for the third quarter were $46.7 million. Normalizing our tax rate to 20%, operating earnings from core operations were $0.19 per diluted common share for the third quarter. Reconciliations for this are located within today's earnings presentation.

Average interest earning assets decreased from the prior quarter to $8.2 billion with the average yield decreasing 9 basis points to 4.50%. Since the CLO investments are indexed at three-month LIBOR and reset quarterly, the securities portfolio average yield decreased by 23 basis points to 3.60%. The CLO book largely reset at the end of July and is currently resetting lower again based on LIBOR rates from 90 days prior or about 9 basis points from the quarter end level.

The bank's net interest margin was flat to Q2, at 2.86%. This is mostly due to the effects of lower cost of deposits, LIBOR rate resetting in the securities portfolio, higher mix of wholesale funding and a LIBOR driven decline in loan yields. Net interest income decreased by $5.9 million from the prior quarter to $58.9 million. Loan interest income decreased by $8.9 million in Q3 due to a $746 million decrease in average portfolio balances as well as a 5 basis point decline in the average yield. Interest income on securities declined by $2.4 million on lower average balances and the LIBOR rate reset previously mentioned.

On the liability side, interest expense and deposits decreased by $5.8 million or by 20% on lower average balances and 11 basis point decline in the average cost of interest bearing deposits. Interest expense on FHLB advances increased by $230,000 from the second quarter due mostly to a higher average balance, slightly offset by the average cost being 5 basis points lower from the prior quarter. The overall average cost of interest bearing liabilities fell by 6 basis points to 2.03%.

With respect to potential reductions in the Fed funds rate or other indices, our model interest rate risk position is slightly asset sensitive. The provision for loan losses in the quarter increased to $38.5 million and included $35 million charge-off and the related additional $3 million provision described earlier. The ALLL coverage ratio of nonperforming loans is 139% while the overall ALLL ratio to held-for-investment loans is 99 basis points.

Total non-interest expenses for the quarter were $43.3 million, which included the previously discussed net non-core benefit of $2.5 million. Adjusting for non-core expenses, Q3 core operating expenses were $46.7 million or 2.17% of average assets annualized. As we continue to align run rate expenses with our size and footprint, we expect to see near term quarterly operating expenses remain below $50 million.

Our capital position improved during the quarter, mainly due to a reduced asset base. The common equity Tier 1 capital ratio was 10.3% and Tier 1 risk-based capital totaled 14.31%. Tangible common equity increased to 7.8%, up from 6.57% one year ago. During Q3, we completed a partial tender offer for shares of the Series D and Series E preferred stock for an aggregate total consideration of $46 million, inclusive of premium and accrued dividends. We continue to maintain a fairly robust capital position, which provides us with flexibility to allocate and execute on capital strategies, which the Board deems appropriate.

Lastly, let's move on to credit and asset quality metrics. Our nonperforming asset ratio for the quarter was 52 basis points, up 21 basis points from the prior quarter. This is due mainly to a $14.5 million shared national credit, which was reclassified to nonaccrual late in the quarter. This continues to remain current on its payment status and any subsequent payments received will be fully applied to reduce the loan amount.

Total delinquent loans increased by $4.1 million, resulting in delinquent loans to total loan ratio of 88 basis points. The upturn was mainly driven by SFR loans. Since the end of the quarter $8.7 million of delinquent loans have cleared and are now current.

With that summary of our third quarter financials, I'll turn the call back over to Jared.

Jared M. Wolff -- President and Chief Executive Officer

Thank you, John. In the seven months I've been at the bank, we have made tremendous progress advancing our strategic priorities of transforming Banc of California's balance sheet and becoming a relationship-focused business bank. This past quarter we undertook significant capital management activities and we'll continue to look for efficient and optimal strategies to deploy excess capital. Such a transformation is not easy. And the fact we have done so much in such a short period is a credit to the talented professionals here, who come to work each and every day, seeking to do better than the day before. We are doing all this while still serving and expanding our client base. We aim to be our clients' most trusted banking partner by listening to their needs and working to develop solutions, and ensure they're getting the exceptional service and execution for which Banc of California is known.

We are currently working on numerous technology initiatives to continue to deliver and improve on the client experience. This month we launched a new platform to onboard clients faster, and we'll soon launch an upgrade to our core system that will improve system functionality for our business clients. By investing in technology, we are simplifying the way we do business with our clients and improving the way our clients access and interact with their accounts, with us, and their clients and vendors. This is all being driven through client feedback we've received and on which we are taking action.

We are in the early phase of rolling out our investor real estate program providing ready capital to sophisticated real estate investors in Southern California. We are also building on to our business banking program as well as our healthcare lending program. These are all initiatives with routes that are taking hold now and that we expect to show results in the coming quarters. Each of these initiatives is built around a need we see in the market, that we believe we can respond to with our talented colleagues. We are building relationships by understanding our clients' needs and bringing solutions to address those needs.

Looking ahead into the coming quarters, we will continue to execute on the three critical areas of our focus which have the most bearing on our strategic success. I expect to see noninterest bearing deposits become a larger part of our overall deposit portfolio as we actively manage down our funding costs and build client relationships.

The deposits incentives, which were introduced to our employees earlier this year are centered on building relationships, rather than just transactions and have shown impressive results. I'm excited to see what a few more quarters will bring.

We've made incredible progress reducing our expenses to be more aligned with our size. We will continue to look opportunistically to improve expenses and our efficiency going forward. Additionally, our balance sheet has transformed over the last several quarters. Just the beginning of the year we have exited over $2 billion of non-core assets, allowing us to exit higher cost liabilities and building a foundation from which we can further grow our franchise value. I also expect we will continue finding ways to drive incremental value from our balance sheet through additional refinement and the thoughtful accumulation of high-quality assets.

Over time, we expect to see CRE loans which are comprised of commercial real estate, multifamily and construction balances moving closer to 70% to 75% of our total commercial loan portfolio, while C&I loans, making up the remaining 25% to 30%. This will be due mostly to our initiatives to grow our portfolio of relationship real estate loans in the incremental business expected to generate for the bank.

Overall I see us very well positioned on both sides of the balance sheet. We expect to continue to make progress, bringing in low-cost deposits and reducing our overall cost of funds, and on the asset side, we will continue working to remix our loan portfolio, replacing non-relationship loans that pay-off with good yielding relationship loans that bring deposits. We also expect our securities portfolio to start to fill out with more balance.

In the short term pure earnings may be lower as we build assets back up, but ROA should grow. Importantly we have laid the foundation for the bank to create true franchise value going forward, generating relationship-based loans and deposits in a way that is more traditional for community bank and that deserves a higher valuation as we continue to execute on our strategy.

As a whole, we made some very meaningful and significant strides in achieving our strategic goals this quarter. I'm very pleased with the direction we are heading and excited about the incredible work in progress we've made to get us to this point. We have a very talented team of colleagues who are successfully executing every day. Thank you for listening today, and I look forward to updating everyone on our full-year progress during our next call in January.

With that, let's go ahead and open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question will come from Matthew Clark of Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray -- Analyst

Hi, good morning.

Jared M. Wolff -- President and Chief Executive Officer

Good morning.

Matthew Clark -- Piper Jaffray -- Analyst

Maybe we could start just on kind of the outlook on the size of the balance sheet, I mean brokered CDs again at 2% kind of bouncing around, I guess from here. But I guess how should we think about the overall size of the balance sheet as we get into next year? Do you feel like we can stabilize around that $8.4 billion or $8.5 billion level or you feel like it's going to go a little lower than that?

Jared M. Wolff -- President and Chief Executive Officer

I think right now we're pretty good. I mean it's hard to know exactly. But we ended the quarter at $8.6 billion. We have repayments and the pace of repayments is what's hardest to predict, but I expect that our loan generation will replace the pay-offs, and so we're probably remixing more than growing for now. And then we'll have to assess, the balance that we're looking to maintain is on the liability side. So we don't get into a position where our loan growth is so substantial that we put pressure on the liability side again. And I think we're doing a really good job of that. We're generating deposits in a way that can keep pace. So in the short-term, I expect us to remix and then over time, I expect that we're going to grow.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then maybe just on the NIM outlook, given a lot of the work you've done on both sides of the balance sheet. I would anticipate, we'd see some expansion from here. I guess, what are your thoughts on kind of the trajectory of the margin and assuming to get above 3%, but beyond that, any color would help.

Jared M. Wolff -- President and Chief Executive Officer

Yes. I can't get there fast enough, but we're trying to be smart about it. I think given all the movement in the quarter, with it being flat was pretty good. Especially, there is a lot of pressure out there right now on the rates. It's very competitive. Our loan yield, our new originations, was 5.1% which was above our portfolio yield of 4.75%. And so we're still generating loans above our portfolio yield, which is why we remix I expect that it's going to enhance -- protect or enhance our current yield and then we're continue to make move on the liability side in our deposit costs. We expect to continue it to decline. We have a lot of maturing CDs in the fourth quarter. A significant number that we expect to reprice downward. And so that's as much color as I can give you. It's hard to say exactly where it's going to move to but we've said that 3% or somewhere we want to get sooner rather than later. And I think we're going to make progress this quarter.

John A. Bogler -- Chief Financial Officer

As we've talked about in the past, our primary focus is really on driving down the cost of deposits, and we had quite a bit of brokered CD that ran out very late in the quarter. So, we'll get the full benefit of that in the fourth quarter and as Jared mentioned, we've got substantial amount of retail CDs that come due in the fourth quarter, and they carry rates that are between 2.25% and 2.40%, and we will reprice those down. We don't necessarily expect to retain all those, but they will be repriced down and we will have some retention that will materialize, out of that. So those are a couple of the drivers where we continue to see opportunities to drive down our cost of deposits.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then maybe just on the SNC [Phonetic] that went into non-accrual. Could you just give us some color in terms of the type of business or industry they're in and remind us how much in a way you have in SNC and then maybe as a follow-up, just where you're criticized classified stood at the end of the third quarter versus the second?

Jared M. Wolff -- President and Chief Executive Officer

Sure. So on the SNC, it's a $14.5 billion relationship. It's a private equity led deal in the apparel industry in retail. I think we are properly reserved on it, but it's a current pay loan, and so this was a circumstance where the regulators came in and I guess changed the rating on it for the lead bank, and therefore, we were all forced to make the same adjustment, but we already had a reserve on it and it is paying. And so it was nothing that we really had control over which is why I shared national credits, I mean, I don't really like being in any of these. We have five relationships left, five shared national credits, and our total commitments are in the shared national credits and looking at a sheet right now is approximately $47.5 million. So it's not a huge amount but -- we'd like to exit that when we can. What was your second question Matt?

Matthew Clark -- Piper Jaffray -- Analyst

Just on where you're criticized classified stood at the end of the third quarter relative to the second.

John A. Bogler -- Chief Financial Officer

That's a component we literally don't disclose as part of the earnings. I would say that overall though we've seen improvement in the criticized classified for the quarter.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. Thank you.

Operator

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

Jackie Bohlen -- KBW -- Analyst

Hi, good morning.

Jared M. Wolff -- President and Chief Executive Officer

Welcome back, Jackie.

Jackie Bohlen -- KBW -- Analyst

Thank you. It's good to be back. The shared national credit from the quarter, is that the same one that we discussed on the first quarter, the leverage loan, because I know that was a SNC as well with the BE [Phonetic] sponsor.

Jared M. Wolff -- President and Chief Executive Officer

We had three leverage loans. We have two left. And so this is one of the two that we have left. I don't remember which one. We had one that we got out of in the quarter, I told you guys, I was trying to get rid of them. And one of them we actually were able to get out of. And so we have two left. This is one of them. It's a leveraged loan, yes.

Jackie Bohlen -- KBW -- Analyst

Okay. Thank you. And then in terms of balance sheet changes. So it sounds like most of the large work has been done in terms of reshuffling things and going forward, it's going to be a gradual remix as opportunities provide themselves without significant decline in assets. Did I interpret that correctly?

John A. Bogler -- Chief Financial Officer

Yeah, I think that's right. I mean, we've made some really -- I think significant progress on some very specific objectives. You know on the expenses, on the deposit costs, we obviously have room to grow and then shedding kind of these non-core assets to create the foundation for the bank for [Indecipherable]. I'm really pleased with what we've done there. It's, obviously frustrating to have the noise that is kind of legacy that kind of distracts from that, but the progress was substantial and we're going to continue to execute on our plan. So I think we laid the foundation for growth going forward. We still have a couple of levers to pull.

Jared M. Wolff -- President and Chief Executive Officer

Holding our margin in a down rate environment was not that easy, but we've been originating loans above our portfolio yield. One thing I would say Jackie is, we can actually grow much faster and -- but I just -- I'm trying to keep the spigots turned at the right level, right now, as we get kind of our deposit infrastructure in place. If we grow too fast, we're going to kind of backward. So I need maybe another quarter, quarter-and-a-half to make sure that we don't turn the engines on too fast, but we're going to start growing here in a couple of quarters.

John A. Bogler -- Chief Financial Officer

Jack, I'd say, where we could see the pressure again what Jared said earlier is that, with the rate environment we could see increased repayments. We still have roughly $1 billion aid in single-family loans, and roughly $1.6 billion in multifamily. And so, those two categories could see some elevated repayments with the low rate environment. So that would build a little bit of pressure on us in terms of the overall balance sheet size.

Jared M. Wolff -- President and Chief Executive Officer

Yeah, I mean look, if the SFR goes, that's fine. I mean there is some stuff that's actually pretty good yielding and what we -- but we can -- I think we can replace it, the run-off. We can put our multifamily pretty fast, if we just drop our rates to the commodity levels, but we're holding rates higher than what the commodity pricing is, because we're asking for deposits and we're trying to do better relationship loans. But we can generate pretty fast, if we just turn the engine on. And so that's the balance we're holding to right now, and we're trying to do this in the right way for the long-term.

Jackie Bohlen -- KBW -- Analyst

So, when you -- your earlier comment, when you said that you could grow faster. If you wanted to in that you look to see more growth in future quarters and understanding you're managing the liability side as well, is that referring to the way that you're pricing your loans or is there something else that's mitigating some of your growth?

Jared M. Wolff -- President and Chief Executive Officer

Two things. First is that we've just brought these teams in these new executives in place to lead the teams. We're making sure that, we're putting out the right products, and that they are priced the right way from a relationship standpoint. And we should be looking in a lot more deals than we actually do to bring in the right credits. And so that's the -- I would say the patience and the discipline to do the right deals. And these pipelines are building up as we introduce our teams and if they get out into the markets. And so that's going to take time.

On the multifamily side, again we're trying to exercise discipline and do the right deals. I think it's a really important part of our portfolio. I think the fact that we can be a cradle to grave lender, do first mile lending as I've talked about in the past which is acquisition in bridge and rehab on the front end, even lighting full construction and then do permanent financing on the end is the take out. It's really, really competitive in the marketplace. There are a lot of lenders that are doing it and have the capacity to do that. And we can, and as I talk to more and more prospects and clients there, they are very attracted to that. But we want to do it a certain way, we can always turn on the multifamily engine and let it run faster. Right now we're trying to run it at a pace that is appropriate for kind of how we are building up our deposit franchise. And I think a lot of that is rate focused. I mean we can -- to grow it right now without the front end lending, it's more of a rate gain as we bring on the front end lending the first mile lending, it's less of a rate gain because we're providing an option for those clients for permanent financing at the end of a product, and it's less rate sensitive it's more about certainty. And so that's the balance and it will normalize in the coming quarters but that's going to give you a sense of what it's like right now.

Jackie Bohlen -- KBW -- Analyst

Okay, that's helpful. Thank you. And just one last one from me and then I'll step back. You mentioned capital actions, I can't recall LIBOR that dumped in the press release, your prepared remarks. But when you talk about the flexibility you have for the future. Does that refer to additional preferred redemptions as that becomes a possibility or were there other items that you were looking to do?

John A. Bogler -- Chief Financial Officer

All options are on the table, but certainly we are looking at the profit outcomes becomes callable in June of next year. So we will -- we want to be in a position that if that's the decision of the board that we could call the -- that series.

Jared M. Wolff -- President and Chief Executive Officer

Yes, so looking at both the optionality for doing preferred and whether we should do comment looking at both of those things.

Jackie Bohlen -- KBW -- Analyst

Okay, great. Thank you.

Jared M. Wolff -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Andrew Liesch of Sandler O'Neill. Please go ahead.

Andrew Liesch -- Sandler O'Neill -- Analyst

Hey guys, good morning. Just want to circle back to your kind of expense outlook from here saying stay below $50 million. You have some initiatives that are planned. Okay, I guess how far below $50 million, is this $47 million or so a decent run rate or is this kind of the low for the quarter and it's going to build from here or lot for the year and that's going to build from here?

John A. Bogler -- Chief Financial Officer

No, and we've got a lot of initiatives that are still under way, and we've got some technology that we've talked about in the past is coming online. And that was described earlier investments. Platforms that are being launched. And those will be launched over a couple of quarters as we roll it out. So we'll start to see some expense savings that materialize in those efforts. But we'll continue to look at opportunities to build out the front line, so I'm hesitant to give any sort of increased guidance around that, but I do feel comfortable that we'll be below $50 million.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. And then the added provision that was necessitated from the risk factors on the related to the fraud here. Is that going to adjust the effect provisioning going forward or is that all just captured here in this quarter?

John A. Bogler -- Chief Financial Officer

Yes, it effects the loss factors, so to the extent that we have changes in the loan balance within that loan type, it will affect the provisioning for whatever that net change in the loan balance is. But once we move to CCIL [Phonetic] next year, it won't be a component that will be isolated and called out as part of our provisioning. So it doesn't impact necessarily into our CCIL calculation.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay.

Jared M. Wolff -- President and Chief Executive Officer

Andrew, let me go back and address the expense question.

Andrew Liesch -- Sandler O'Neill -- Analyst

Yeah, please.

Jared M. Wolff -- President and Chief Executive Officer

Every quarter, it seems like we find more stuff. And so, we're running at -- we're running close to $50 million and then we find something and it drops down, and we realize that's something we can take out. I think all of those surprises are pretty much done now. And so I -- we had a really good quarter. And I think that is something that I think is sustainable. I say that, knowing that if we found a great opportunity to spend on something that we thought we would generate earnings we would do it. But I'm feeling pretty good about where we are, and obviously there is a range there, but that's why John is kind of holding it at $50 million because, stuffs come up each quarter where we've said, hey, that's another opportunity. Let's take advantage of that and -- but we're going to continue to be opportunistic.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. Thank you. You've covered all my other questions.

John A. Bogler -- Chief Financial Officer

Thanks, Andrew.

Operator

The next question comes from Gary Tenner of DA Davidson. Please go ahead.

Gary Tenner -- DA Davidson -- Analyst

Thanks. Good morning. John, just on your comments earlier on the CD maturities in the fourth quarter and the yields there, can you tell us what the dollar amount of CDs that are repricing and kind of what your rough delta would be on the stuff that you keep?

John A. Bogler -- Chief Financial Officer

Yeah, it's roughly $600 million of CDs that mature across the quarter. Again it's at about a 2.25% to 2.40% range. In the past we've been retaining somewhere in the high teens, but with each passing month the rate on the maturing CDs is higher. So we don't know if we're going to be able to continue to retain at that high level of percentage. So, the retention rate might start to drop down as we get into the higher rate CDs.

Gary Tenner -- DA Davidson -- Analyst

And you said you've been retaining in the high teens, is that what you said?

John A. Bogler -- Chief Financial Officer

Yes, the high teens.

Jared M. Wolff -- President and Chief Executive Officer

We've been selectively like -- we set pricing based on where we think we need retention to be, based on our other volumes coming in on other products. So we can price CDs to retain 100% or we can price them and say, this will probably generate 18% to 20% of retention and that's all we need. And if we get more, that's fine because we are happy with the price, and that's kind of the exercise we go through based on what assets we're generating or retaining each quarter. With this volume of CDs, it might be that we were going to retain more, if our assets are going to stay flat we'll figure that out based on our volume of asset generation. But I would expect that rates would be as John pointed out, when you're in the higher end of the range, you have the most sensitive price sensitive clients. And so they are going to go and shop that the most. So I think our ability to generate to retain a lot in a much lower rate will be tested. But we have other levers to pull to bring down our deposit costs and we're continuing to do that.

Gary Tenner -- DA Davidson -- Analyst

Good color. Thanks. The table in the press release with the new loan commitments, I noticed that the weighted average coupon of the C&I originations was down 70 basis points in the quarter. Was that driven mostly by the decline in LIBOR from second quarter over the course of the third quarter or its something else?

Jared M. Wolff -- President and Chief Executive Officer

So that's just kind of the competitive environment that we have right now on the new production. It's very competitive, and so we're just trying to bring on the best credit. So we're willing to bring on credits. If the credit quality is good and that credit quality is going to demand a lower rate and so I think that's probably best described as a drive toward quality. And also kind of affected by the rate environment. Obviously, we had some rate cuts in the quarter.

Gary Tenner -- DA Davidson -- Analyst

Okay. Great and then last question from me. On Slide 16 in the slide deck, John, I wonder if you could just run through the items that you've embedded there in terms of the noninterest income adjustments. That's all the $1.7 million. I'm not sure I'm seeing what all of them would be to get to that number?

Jared M. Wolff -- President and Chief Executive Officer

I mean you flip to the page here, which page again, please.

Gary Tenner -- DA Davidson -- Analyst

Slide 16.

Jared M. Wolff -- President and Chief Executive Officer

The earnings profile?

Gary Tenner -- DA Davidson -- Analyst

Yes, and the noninterest income adjusted of $1.7 million just what the items are that you've embedded in there?

John A. Bogler -- Chief Financial Officer

That is largely related to the securitization efforts that went on in the quarter. So there's just some adjustments around the gain on sale of the loan offset by some other factors. So, if you recall we had kind of a two-step process with the securitization. And so in the third quarter, we recognized a gain on the securitization and then there were some offsetting amounts to net it down to roughly that $1.7 million.

Gary Tenner -- DA Davidson -- Analyst

Okay. Thank you.

Operator

The next question comes from Timur Braziler of Wells Fargo Securities. Please go ahead.

Timur Braziler -- Wells Fargo Securities -- Analyst

Hi, Good morning.

Jared M. Wolff -- President and Chief Executive Officer

Good morning, Timur.

Timur Braziler -- Wells Fargo Securities -- Analyst

Maybe just circling back to the remaining shared national credits, any of those in retail or with the same lead bank?

Jared M. Wolff -- President and Chief Executive Officer

Is your question, whether or not any of the other shared national credits that we have led by the same party that's leaving the one that was downgraded.

Timur Braziler -- Wells Fargo Securities -- Analyst

Yes.

Jared M. Wolff -- President and Chief Executive Officer

No.

Timur Braziler -- Wells Fargo Securities -- Analyst

Okay. And industry-wise any of the remaining shared national credits in retail?

Jared M. Wolff -- President and Chief Executive Officer

It looks like there is, no, I don't think so.

Timur Braziler -- Wells Fargo Securities -- Analyst

And I just want to make sure I heard this right. So, the review that's taking place, so the $5 million plus loans not secured by real estate and the top 10 warehouse clients, I think it was mentioned that the reviews are not yet complete. Was that just for the warehouse portion of it or a review still ongoing for kind of all loan review?

Jared M. Wolff -- President and Chief Executive Officer

No. Let me address that. So it was important that we take the opportunity to review all loans not secured by real estate that were above a certain size. And so, I directed this review. It was extensive. It was 53 loans representing almost $540 million in commitments, about 35 relationships and with all the lending relationships $5 million and above not secured by real estate. We focused on security and collateral documentation, and confirmation to support the bank's collateral interest.

Our internal audit department led it and then we had a third-party, it was independent come in and review as actually, we had Protiviti come in and do that. And so we have not identified any other circumstances of apparent fraud for the credits review, nor we identified anything that would give us larger concerns over the existence of collateral held by the bank on our behalf of third parties. Its on a lot of those, but there are few. Obviously, we can't give assurances that our review is perfect. But we are still waiting for kind of the final results in terms of just people completing their work, and the final confirmations. But it's -- that's I would say is the validation of the work that we did ourselves as opposed to kind of in work at all.

And then the warehouse review was separate. And that was just something that we did. So the confirmations are really around these larger 53 loans representing the $540 million of commitments not secured by real estate.

Timur Braziler -- Wells Fargo Securities -- Analyst

Okay.

John A. Bogler -- Chief Financial Officer

Gary, to give you some more detail on the noninterest income adjustment. If you go to the income statement, there is kind of three lines that make up the majority of that. So there is an impairment loss, there is the loss on the sale of securities and then there is the gain on sale of loans.

Jared M. Wolff -- President and Chief Executive Officer

Hold on, you're going back to Gary's question.

John A. Bogler -- Chief Financial Officer

He was asking about the reconciliation the $1.7 million.

Jared M. Wolff -- President and Chief Executive Officer

Okay, Timur do we -- did we answer your question, did we answer your question on the review?

Timur Braziler -- Wells Fargo Securities -- Analyst

Yeah. And then maybe just a corollary to that, looking at the linked-quarter decline in C&I balances and the remix of the loan portfolio to 20%, 25% C&I, 75% CRE, was any of that remix or the loans exited this quarter from the C&I book a result of this loan review?

Jared M. Wolff -- President and Chief Executive Officer

No, that wasn't the result of the loan review. One thing I should say about the funding matter and this charge-off that we had, is we actually filed the complaint in federal court yesterday against Chicago Title, which was the Title company, along with one of the other main creditors. So we jointly filed a complaint with one of the other main creditors that we're partnering with seeking $86 million in damages. We're jointly represented by two very prominent firms. And if you read the complaint, you'll understand how complicated and elaborate the scheme was to defraud creditors.

We are, and we'll continue to aggressively pursue recovery. Obviously we can't give any insurances in that regard, but I would say that the complaint speaks for itself. And so that's an example of the aggressive action we're taking to make sure that we do our best to recover here.

Timur Braziler -- Wells Fargo Securities -- Analyst

Okay that's the good color. And then just one more question from me. Just following up on Matt's question earlier. Looking at deposits and the trends there, good acceleration in the reduction of those cost of deposits. Should we expect continued acceleration and how fast those costs are brought down, I guess any color on that would be helpful.

Jared M. Wolff -- President and Chief Executive Officer

Yeah, well, certainly the rate environment is helping. Although our teams are working really, really hard right now to generate new relationships. So we're asking for more money from existing clients. And expanding our relationships with them, and that we're bringing in new accounts as well and new relationships on from businesses and bring over their business accounts and I thought we made great progress in the quarter. John, you have any thoughts on how quickly we're going to move, do you think that was 14 basis points was something...

John A. Bogler -- Chief Financial Officer

Yeah, so the the items I touched pace on earlier is going to contribute to the fourth quarter. We had again $325 million of brokered CDs that matured very late in the quarter and they carried around a 2.40% rate. So we're going to get a full quarter benefit of that. And then we'll have the retail CDs that mature that will spread across the quarter, so we don't get a full quarter. The other thing that I would start to look at is that we grew our noninterest bearing deposits by $114 million in the quarter, but the average balance was only up around $14 million to $15 million. So we should see some added benefit to the extent that it's noninterest bearing deposits stick throughout the quarter.

Timur Braziler -- Wells Fargo Securities -- Analyst

Okay. And John, do you have the spot rate at the end of the quarter for deposit costs?

John A. Bogler -- Chief Financial Officer

No, I don't have that. This year, we typically disclose that, let me look.

Timur Braziler -- Wells Fargo Securities -- Analyst

Okay, thank you.

Jared M. Wolff -- President and Chief Executive Officer

Thanks Timur.

Operator

The next question comes from Tim Coffey of Janney. Please go ahead.

Tim Coffey -- Janney -- Analyst

Great. Thanks. Good morning, gentlemen.

Jared M. Wolff -- President and Chief Executive Officer

Good morning.

Tim Coffey -- Janney -- Analyst

I look at the warehouse lending line, how much was it down in the quarter, and kind of what's the percentage of warehouse lending to total loans right now, and where would you like it to go?

Jared M. Wolff -- President and Chief Executive Officer

Well, I'd like the warehouse business. I think we do a really, really good job but then we have a terrific team in place. It needs to remain a reasonable percentage of our balance sheet and so given our size, we could grow much faster, but I think right now we have a soft internal cap of just under $1 billion and I think the last time I looked it was down to $880 million or something like that. John, I don't know if you have the quarter end number.

John A. Bogler -- Chief Financial Officer

That's in the ballpark.

Jared M. Wolff -- President and Chief Executive Officer

Yeah. But I expect that to expand this quarter.

Tim Coffey -- Janney -- Analyst

Okay. And then from the comments, just correct me if I'm wrong. It sounds like you're pretty much down with your securities portfolio repositioning and remixing, is that all right?

John A. Bogler -- Chief Financial Officer

No, I think we're in a kind of the early stages. So, at the very end of the quarter, we sold out a large portion of the agent CMBS, those are long-duration low coupon. And then we'll be remixing into securities that are much more traditional for a community bank of our size and complexity. And you said, we will be spread across a number of different investment security types, where we may still be a little bit on the high side, it's in our CLO portfolio. We're not necessarily looking to sell out of the CLOs any further. We do expect that they will be called over time and then over time, the size of the CLO portfolio will start to be something that's much more reasonable component of the overall securities book.

Tim Coffey -- Janney -- Analyst

Okay. And then rent control has come to the entire state of California. How is that going to impact your multifamily business?

Jared M. Wolff -- President and Chief Executive Officer

That's a good question. So rent control, first of all, it wasn't pure rent control, it's actually at launch with one of the largest developers in the state who had been up in Washington -- who had been up Sacramento. We're working with the Governor to make sure that this didn't go sideways. So they negotiated a percentage increase in annual percentage increase that I think the real estate industry felt was good enough to allow them to kind of continue to expand. I think for some of the weaker property owners, it's obviously going to delay the improvement of those properties. And it's going to kind of suppress values. But there is a path to increasing rents for units. They're just not going to be able to increase them as fast. You're going to have a harder time moving out occupants for existing properties. It doesn't change the cash flows. Hence we obviously underwrite on existing cash flows, not on projected cash flows for permanent multifamily. So those properties are still going to cash flow. They are still going to underwrite the way we had them coming in.

I think the real question is on the take out, are you going to have those loans for longer than you expected or are they going to take out, it might in fact hold the portfolio a little bit longer to the extent that people have a harder time refinancing. But I think it's probably going to have a bigger effect on the valuations of properties going forward you're going to have to find some larger property owners to have the capital to improve properties that need to be improved, because they're not going to be able to do it based on getting cash flows faster.

Tim Coffey -- Janney -- Analyst

Right and have you in the market started to seen -- see higher cap rates?

Jared M. Wolff -- President and Chief Executive Officer

No, not yet.

Tim Coffey -- Janney -- Analyst

Okay. I mean its...

Jared M. Wolff -- President and Chief Executive Officer

One of the reasons for that is -- and one of the reasons I like multifamily and I'd like infra construction is the housing issue in Southern California is very, very concrete. It's -- we have a big housing shortage, and these properties are very, very stable. And all the way through the end of the market. They are very, very stable for workforce housing for blue-collar housing and then for young professional housing and even for older professional housing, it's very stable. The occupancy is is very, very high. And I don't see that changing because there just isn't enough new product coming on into the market.

Tim Coffey -- Janney -- Analyst

Do you track, or can you provide the average age of the multifamily collateral in your portfolio?

Jared M. Wolff -- President and Chief Executive Officer

I don't know if we have that.

Tim Coffey -- Janney -- Analyst

Okay. And then how much of the construction book is to multifamily?

Jared M. Wolff -- President and Chief Executive Officer

A big part of that, probably half.

John A. Bogler -- Chief Financial Officer

Yeah, probably half. We have...

Jared M. Wolff -- President and Chief Executive Officer

We have the single-family right now, we're going to be doing a lot more of it going forward. I mean a lot of our construction right now is single-family. But what we expect to do going forward is infill construction for housing, and that's multifamily. And dense demographic areas to sponsors that do this for a living. And so, we will work with the best sponsors to do this. That's what I've done in my previous banks and have relationships with some of the best offers in the space.

Tim Coffey -- Janney -- Analyst

Okay. Those are all my questions. Thank you very much.

Jared M. Wolff -- President and Chief Executive Officer

Thanks Tim.

Operator

That's a the next question comes from Steve Moss of B. Riley, FBR. Please go ahead.

Steve Moss -- B Riley, FBR -- Analyst

Hi, good morning guys.

Jared M. Wolff -- President and Chief Executive Officer

Good morning.

Steve Moss -- B Riley, FBR -- Analyst

I wanted to just circle up on the de-emphasis on single-family loans, just wondering how low could those balances go over time here?

Jared M. Wolff -- President and Chief Executive Officer

Well, if we sold them they could go to zero. I think that they're paying off right now at a decent clip, which is giving us headroom to put on good relationship loans. But I don't know how -- that there is some all doc loans that probably going to have a hard time refine, which is fine. Because they are in a higher coupon, hard to predict. I don't -- it's not a relationship business. We don't have any deposits with it. It was generated in a brokered fashion. So for me, it's one of the levers we can pull to the extent that there's predictability to it. I mean any of these loans that wouldn't otherwise refi we could always sell, but a lot of them are just kind of refining out or we're using it to remix our portfolio, but it's hard to predict how fast it's going to run off.

John A. Bogler -- Chief Financial Officer

It's not a product category that we are actively originating. We will do it as more of an accommodation to certain of our clients, but it's not a product that we're looking to originate.

Steve Moss -- B Riley, FBR -- Analyst

Okay. And then on the single-family delinquencies, were those primarily all doc loans or was there anything unique about the structure within those delinquencies?

Jared M. Wolff -- President and Chief Executive Officer

No. And it's interesting. There is a lot of people that pay late in SFRs but they just their current pay but they pay late and that's just the way they run it. I don't know if this is really a leading indicator of the economy, but I thought it was important that we laid this out to show that this is really not part of our portfolio. We're not seeing delinquencies rise across the board. And you can see in our presentation on Page 6 that we laid out where the delinquencies are coming from. In fact, they are stable to declining throughout the rest of our portfolio and they're very, very low as you can see, but as a percent of our delinquencies SFR is the largest.

Steve Moss -- B Riley, FBR -- Analyst

Okay. And then my last question is just on the CLO portfolio. Were there purchases this quarter? It looks like the book yield reported this quarter versus last quarter didn't change.

John A. Bogler -- Chief Financial Officer

No, there were no purchases during the quarter. We had some sales that occurred in the second quarter. But nothing in the third quarter.

Jared M. Wolff -- President and Chief Executive Officer

On the CLO book, we're at approximately $750 milllion and we're at $1.02 [Phonetic] billion. I'm -- we were at $735 million and I'm comfortable with where we are. We're comfortable with the credit, we monitor it very closely. If there are alternative products to trade into, we concentrate in CLOs, we would do that. Now it's the time as we build out our securities portfolio and normalize it a little bit, but I'm not interested in getting out and just abandoning the good yield that we have on it, which is around 4%. So I think we're comfortable holding that position unless there are some good alternatives and we will ladder our securities portfolio with other stuff now that we got out of the MBS.

Steve Moss -- B Riley, FBR -- Analyst

All right, thank you very much.

Jared M. Wolff -- President and Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Jared M. Wolff -- President and Chief Executive Officer

John A. Bogler -- Chief Financial Officer

Matthew Clark -- Piper Jaffray -- Analyst

Jackie Bohlen -- KBW -- Analyst

Andrew Liesch -- Sandler O'Neill -- Analyst

Gary Tenner -- DA Davidson -- Analyst

Timur Braziler -- Wells Fargo Securities -- Analyst

Tim Coffey -- Janney -- Analyst

Steve Moss -- B Riley, FBR -- Analyst

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