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Banc of California Inc (BANC)
Q3Â 2020 Earnings Call
Oct 22, 2020, 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 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 now like to turn the conference over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.
Jared Wolff -- President and Chief Executive Officer
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 have 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 details later in the call.
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 recorded 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 are actively managing and monitoring our asset quality with the majority of our deferred and non-SFR loans returning to the regular payment schedules and deferments 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 improvement 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 are 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 reserve build 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 hit 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 rate and 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 and 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 are seeing in these key areas resulted in a strong earnings improvement this quarter. Simply put, despite a 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 a 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.
Total deferments and forbearances decreased 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, at September 30, the majority of the loans are on a second deferment forbearance period.
We are 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 & 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 run-off 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 will provide more color on our operational performance, and then I'll have some closing remarks before opening up the line for questions.
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
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 of $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 the 1% increase in net interest income was offset by a decline in non-interest income. The decrease in non-interest income was due primarily to a gain on sale of 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, and the 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 two 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 nine months.
The change in the estimated life is to provide additional time to account for the government delay in processing forgiveness applications. As of October 16, about 25% of our PPP loan count, representing about 30% of our PPP loan dollar, 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 deposits 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 a weighted average rate 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.
Noninterest income decreased $1.6 million to $4 million. As I mentioned on our last call, the three-year earn out 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 contributor to the decline from 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 in the effective tax rate applied in the third quarter of 13%, we expect our fourth quarter effective tax rate 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 security, we have the flexibility to add overnight and other wholesale funding if needed to strategically support our growth in earning assets.
Our gross loans held for investment increased by $50 million during the third quarter, as the growth in C&I, CRE and multifamily loans more than offset ongoing run off of our legacy single-family residential portfolio. The investor presentation includes updated details on our loan portfolio.
The portfolio continues to be largely weighted toward real estate loans, which is 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 have 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 continued to improve as a result of our very focused initiatives. The activity included a $90 million decrease in brokered deposits, offset by a $59 million increase in noninterest bearing deposits and a $26 million increase in other interest-bearing deposits.
Noninterest-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 bringing new relationships, drove our all-in average cost of deposits down from 148 basis points a year ago to 51 basis points achieved this quarter.
Our 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 security. Majority of the BBB rated securities are subordinated bank debt investments.
In 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, continued to show resiliency in spite of the challenges created by the pandemic. We are pleased of the trends in our loan deferrals, as 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. A $5.8 million decrease is a net number and included $10.2 million of insured 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 nonperforming loans. These consisted one $16.1 million legacy shared national credit, a $9.1 million single-family residential mortgage loan 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, nonperforming single-family residential loans totaled $17.7 million and the remaining nonperforming loan totaled $14.3 million.
Based on our current discussions, we believe that it is likely a resolution would be reached during the fourth quarter on our largest non-performing loan with $16.1 million shared national credit without any additional reserve requirement. All things being equal, this will 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 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 includes 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 provision 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 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 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 have noted in prior quarters, when the environment is supportive, there remains opportunity to repurchase preferred stock with the cost of over 7% with our current capital or through other vehicles, such as the issuance of lower coupon tax deductible subordinated debt.
At this time, I will turn the presentation back over to Jared.
Jared Wolff -- President and Chief Executive Officer
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 on profitable growth mode, albeit tempered due to the pandemic and a slower economic environment. We are carefully managing credit and we'll 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 run off 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 significant amount of CDs maturing over the next six months. As always, our goal is to replace these deposits with lower cost DDAs. But even if we replace them with CDs we are issuing at current rates, it would drop the cost of these deposits by at least 100 basis point. 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 good investment for our company.
As we approach the end of 2020, we are very excited about what we have 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.
You're clearly seeing the results of our efforts in the quality and quantity of new client relationships that we're bringing to 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 market. 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.
Questions and Answers:
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Timur Braziler of Wells Fargo. Please go ahead.
Timur Braziler -- Wells Fargo -- Analyst
Hi, good morning.
Jared Wolff -- President and Chief Executive Officer
Good morning.
Timur Braziler -- Wells Fargo -- 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 4. Looking at the two remaining green marks there, the redemption of the preferred stock, we could start there. Is the conversation now just what's the best option to replace that 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 -- President and Chief Executive Officer
Well, good morning. It's nice to speak with you. We still intend to redeem our preferred stock and will likely find a way to do it issuing sub-debt. We do need regulatory approval to redeem preferred stock. And so, any action that we take is subject to regulatory approval. The Fed has made it clear that banks, they have -- my understanding is based on everything that I've read is that the Fed is not looking right now at allowing a whole bunch of banks to redeem capital. And so, we just are waiting for the right time. And when we think it's appropriate, we'll approach them and -- but we think that's something that we're likely to be able to do down the road.
Timur Braziler -- Wells Fargo -- Analyst
Okay. Would you take advantage of the attractiveness of the market now in issuing sub-debt maybe in advance of the redemption or would that be more of concurrent --?
Jared Wolff -- President and Chief Executive Officer
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 -- Wells Fargo -- Analyst
Okay, great. And then switching over to the CLO portfolio. 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 on that portfolio right now?
Jared Wolff -- President and Chief Executive Officer
Lynn, you want to address that?
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
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 market across all the securities. But the majority was related to the CLO portfolio and it has a remaining net unrealized loss of about $17 million.
Timur Braziler -- Wells Fargo -- Analyst
Okay. And --
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
And that's pre-tax. So, after tax it's a little bit lower.
Timur Braziler -- Wells Fargo -- 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 smelled off?
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
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 as a goal. But I think from a transition standpoint, we would be needing to look at what other alternative investments would be available to us, put them on a risk adjusted basis and see what kind of returns we could get. I think we'll be opportunistic there as well.
Timur Braziler -- Wells Fargo -- 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 balance is in resi. I know you made the comment that majority of what's remaining is second deferrals. Are the resi deferrals also on the second request or is that still apportioned six months that was originally granted?
Jared Wolff -- President and Chief Executive Officer
They're either in the second request. They're in second deferral or they're in the process of being reviewed. SFR, as we -- is managed by a third-party. It's serviced by third-party and it's a legacy, kind of, non-core portfolio for us. And the consumer rules being what they are, it's -- you've got to manage it, obviously, in a very different way. We're focused on it though. I mean, we're constantly having conversations with our servicer to get our arms around the portfolio. I think one thing that's really clear about the single-family loans is, unlike some other deferments, you can't expect people after three months, six months, whatever the initial deferment period was, just to come up with a huge lump sum of money and make whole bunch of payments.
And so, if they were out of a job, they don't have the money; or if they were on furlough, they don't have the money. And so, as it relates to single family, generally what happens is you take the missed payments and you put them at the end of the loan and you're going to get paid on them at a refire sale, and then they start making their new payments. They start kind of the new period going forward concurrent.
And so, we manage that a little bit differently than the rest of the portfolio. But I don't think there's a lot of loss content there. We're working really closely with our servicer. But yes, the answer to your question is most of those loans are either in second deferment or in the process of being reviewed for a second deferment.
There is a kind of a lag. It just depends on when it started, but most of them are moving to second. Bob Dyck, any comments there?
Robert Dyck -- Executive Vice President, Chief Credit Officer
No, Jared, I think that's very accurate representation. We have moved through most of the first deferral buckets, because as Jared said, they did not come on at once. And most of them have moved either into a second or under consideration.
Jared Wolff -- President and Chief Executive Officer
Thanks, Bob.
Timur Braziler -- Wells Fargo -- Analyst
Okay, that's great color. Nice quarter. I'll step back there. Thanks.
Jared Wolff -- President and Chief Executive Officer
Yes, thanks, Timur.
Operator
The next question comes from Matthew Clark of Piper Sandler. Please go ahead.
Matthew Clark -- Piper Sandler -- Analyst
Hey, good morning.
Jared Wolff -- President and Chief Executive Officer
Good morning, Matthew.
Matthew Clark -- Piper Sandler -- Analyst
Sorry if I missed it. I'm jogging between another two calls here. But the PPP related income this quarter and net interest income, do you happen to have that number off hand, so we can isolate core NIM?
Jared Wolff -- President and Chief Executive Officer
Sure. Lynn, do you have that by chance?
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
Sure. I believe it's $2.1 million is the fees that came through interest income this quarter. It positively impacted our net interest margin 11 basis points.
Matthew Clark -- Piper Sandler -- Analyst
Okay, got it. And then on the pipeline, both loans and deposits, can you give us an update there where you're seeing new business opportunities on the commercial side and again both on the deposit side as well?
Jared Wolff -- President and Chief Executive Officer
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 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 term loans, even some SBA opportunities as well.
It's pretty balanced, opportunities in healthcare, some 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 run off in terms of outstandings, so that we end flat or slightly up from the -- at 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 bringing 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.
And deposit flows continue to be strong. I expect that this quarter 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, and 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 got hurt a little bit by the CLOs repricing. 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 some loans at higher risk, but we're very selective about it. And so, I do see them NIM holding up. I think our deposit cost continue 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 -- Piper Sandler -- Analyst
Great. And then along those lines, did you happen to have the weighted average rate on new production this quarter?
Jared Wolff -- President and Chief Executive Officer
Yes, I'll share what that is. Production yield for this quarter, it 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. 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. That was pretty good.
Matthew Clark -- Piper Sandler -- Analyst
Yes, OK. And then just on, I know you guys have been cutting costs for quite a while now. That run rate dropped even further here, just under $41 million adjusted. Overhead ratio around 2.1%. I assume we're kind of hitting a bottom here. But knowing a lot of other banks are announcing all these cost initiatives, just curious if you ever -- if you still think there might be some incremental opportunities?
Jared Wolff -- President and Chief Executive Officer
Lynn, you want to --?
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
Yes, sure. I'll jump in here. I think you worded it correctly. I think there is opportunity -- incremental opportunities. I think we continue to look at expenses and refine them and look for opportunities, whether it's operating efficiencies or leveraging technology, have it fit with our current objectives and operation.
So, I think there is probably some small opportunities that we're probably getting to where we need to have an expense base, so that when things return to maybe more normal operations, that we'll be able to sort of leverage it when things return back to normal.
Jared Wolff -- President and Chief Executive Officer
Yes, I think we're in pretty good spot right now, that we'll find incremental stuff. We're constantly looking at, or constantly evaluating everything, as I'm constantly sharing 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 that is the most efficient way to do things. So, we're constantly looking, but we've got to layer on more earning assets on top of our existing base to keep growing earnings. And I'm confident we can do that.
Matthew Clark -- Piper Sandler -- Analyst
Okay, thank you.
Jared Wolff -- President and Chief Executive Officer
Thanks, Matthew.
Operator
Next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Gary Tenner -- D.A. Davidson -- Analyst
Thanks. Good morning, folks.
Jared Wolff -- President and Chief Executive Officer
Good morning.
Gary Tenner -- D.A. Davidson -- 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 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 -- President and Chief Executive Officer
I think we do. It's hard to know which quarter we're going to hit it. But everything that I'm seeing suggest that we will. It's really about earning assets and putting them on. There is a tremendous amount of opportunity we have on the expense side, still, in terms of deposit costs. We have $500 million plus of CDs that are maturing, where we know we're going to be able to take out 100 basis points. We have some other mature -- we have some other deposits that are kind of time-based with some larger relationships that are going to repriced. Talked about the preferred stock and incremental benefit that can give us.
So, I think there is really a lot of leverage on -- still in the numbers on the expense side. And then in terms of putting on good earning assets, I believe that our teams can do that. And so, I see that achieving a 1% ROA on a normalized basis is something that we'll be able to do next year. Hard to know exactly, but we're certainly pushing really hard to try to get there.
The other thing is, just in terms of the pure fundamentals, our tangible book value is just going to continue to climb. We still are finding plenty of opportunity, things that were kind of missed in the past that that will be additive to our tangible book value. Not only are the CLOs going to continue to reprice as the economy improves and we're obviously making money that's going straight to tangible book value. But there is some legacy stuff that our teams have done an exceptional job of collecting on, whether they're reimbursements that the insurance company owed us that we didn't get, and things like that. But they've gone back and tried to find, where there is litigation that we finally are resolving where we're the plaintiff, where we're going to get some money back for things that maybe were charged off in the past.
So, all of those things are going to contribute to tangible book value, which we're going to contribute to a higher share price, in addition to the fact that we're going to be expanding our earnings. So, I'm optimistic about both of those things.
Gary Tenner -- D.A. Davidson -- Analyst
Great. Thanks for the thoughts there. And then just to clarify, I think you said that you expect period or year end loans to be flat year-over-year. Is that what I heard you say?
Jared Wolff -- President and Chief Executive Officer
Yes, I think we think about earning quality earning assets in terms of loans and investments, because we bought a bunch of bank sub debt and which was a good replacement for our investment portfolio earlier in the year. I think in terms of the combination of loans and investments should be flat to up at the end of the year relative to the end of the year last year. The variable there being cash, which at different points we run with higher or lower amount of cash.
Gary Tenner -- D.A. Davidson -- 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 -- President and Chief Executive Officer
No, loans might -- let's see. It's fourth quarter of '19 --
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
Let me --
Jared Wolff -- President and Chief Executive Officer
Yes, go ahead, Lynn.
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
No, let me make one comment. I think that we have some visibility into where we think there are growth opportunities. The one thing that -- the PPP loans, we only have about $260 million of those on our balance sheet at the end of the third quarter. We believe the forgiveness process maybe starting. So, we expect that there would be some decrease, actually, in that portfolio. I think that may somewhat drive the overall loan balance in addition to other growth in our loan portfolio.
So, to pinpoint that number, I think there is -- that's a little bit beyond our control. As I mentioned in my comments, we're dependent on the governmental agency to help move that to the process.
Jared Wolff -- President and Chief Executive Officer
We're 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 the proper duration and a great yield, then obviously we're going to put those on as well. But we want to get this company to the right place from earning asset perspective to make sure that we keep earning well going forward.
Gary Tenner -- D.A. Davidson -- Analyst
Thank you.
Jared Wolff -- President and Chief Executive Officer
Yes.
Operator
The next question comes from David Feaster of Raymond James. Please go ahead.
David Feaster -- Raymond James -- Analyst
Hey. Good morning, everybody.
Jared Wolff -- President and Chief Executive Officer
Good morning, David.
David Feaster -- Raymond James -- 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 solidly this quarter. Just curious how much of that was warehouse and what you're seeing on there?
And then I guess just as we look out to 2021, like as the run-off of single family kind of abates somewhat and you continue to be that go-to business bank, as you alluded to, how do you think about loan growth as we head into next year?
Jared Wolff -- President and Chief Executive Officer
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. But like I said before, it was pretty balanced. I mean, we have -- 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 is 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 out for 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're looking at -- we aren't looking at everything, we are. And -- 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 mining 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 pass 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.
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
Let me just add one comment. I think in the investor materials, we do provide some additional detail related to our C&I portfolio. And 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 -- Raymond James -- Analyst
Got it. Okay. That makes -- that's helpful.
Jared Wolff -- President and Chief Executive Officer
And I would say regarding warehouse, we haven't built our company around it. And we've said that we're going to make it a appropriate portion of our growth. But I -- it's very favorable from a CECL perspective, in that it's a very short duration. We've never had a loss in that portfolio and our team is very experienced, and I'd say that we get above average yields because we focus on mid-size mortgage bankers as opposed to the largest folks, and we have several $100 million of very low cost deposits, below 10 basis points, that come out of that portfolio. It's because we're lending to institutions that have the deposit relationships with us. So, it's very balanced. But we keep it within a size range, so that doesn't become kind of -- take over our portfolio.
David Feaster -- Raymond James -- Analyst
Okay. And then just kind of following up on that a bit. I mean, you -- the path to margin expansion is pretty clear, right? I mean, through deposit repricing you get good yields, 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 NIM back to, based on the earnings power of your franchise?
Jared Wolff -- President and Chief Executive Officer
Yes, it's a good question. So, the way that we're trying to set the company up right now is to feel somewhat liability-sensitive, because we're obviously emphasizing the ability to drive down our deposit costs, but because we're putting on non-interest bearing deposits and low-cost checking from businesses that really neither have really much expectation of yield because they're very service-focused. That deposit base will not reprice when rates move back up. Certainly not as fast as interest rates are going to move.
So, we're -- and we're putting floors on all the loans that we're originating today. And so, we expect to participate heavily in a rising rate environment. And we'll be able to take opportunity more so on the upside than the downside.
So, in terms of where our margin would go to, it's a function of how quickly rates move. But in any -- I don't know why our margin wouldn't. So, I think we'd have to play with some scenarios, David, of where are interest rates relative today.
Lynn, I don't know if you have any comments on that.
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
No, I think that's a good summary. And I think it would be difficult to pay a number, I think. We're working with the same interest rate environment and we'll take advantage of the opportunities to improve the mix and cost of deposits through our business initiatives. And then as Jared mentioned, I think the loan pricing and the loan structure is important. And then, obviously, in a rising rate environment, we'd expect stronger earnings growth, which would help with NIM expansion as well. But all things being equal, I think we're still on a good position there have some improvement there.
David Feaster -- Raymond James -- Analyst
That's for sure. So, OK, 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 you -- 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 -- President and Chief Executive Officer
Well, let me address that first and open up to Bob and Lynn. So, when we look at putting a loan on deferral and we're looking at second deferral, because we are actively looking at whether or not that loan needs to be risk rate changed as well. So, it's not a blind -- OK, it's on deferral; let's leave everything as is. We're actively looking at the loans and making sure that we're aware of any loss content to the extent that we can see it and making sure that our risk ratings are appropriate.
So, it's not just kind of a -- let's check it, let's look at it again in another couple of months.
That being said, we're also giving our clients, if they have a path, and we're fundamentally a secured recourse lender. So, we're looking at our borrowers, looking at their statements. We're looking at what collateral they have. If they have a path to recovery, and fundamentally it's been the pandemic that has kept them where they are, then we're working with them. And I don't think there's any reason we shouldn't. The rules are there for a reason, and we're doing everything we can to help our borrowers in this time while still holding their -- holding the ground and making sure that we're not being taken advantage of and that we're working through things as quickly as possible -- as quickly as possible.
In terms of -- we've been really giving three-month deferments, not kind of monitoring it every three months. So, we're not doing longer deferments. I'll let Bob answer if there is anything I'm not aware of. But generally, we've been doing three-month deferrals.
Bob, any color there on our deferment strategy? And I'll talk too about CRE.
Robert Dyck -- Executive Vice President, Chief Credit Officer
You're absolutely right. Three months is our philosophy and our practice. That gives us an opportunity to, as you indicated, examine the borrowers and their fundamentals. And the phrase that you used, I think, is the most appropriate. We're looking at them to determine a path to recovery, yes. But David, to answer your question, if we get to a need for a third, it's going to be only considered if we do continue to see improvement and movement down that path to recovery. Otherwise, if it doesn't look like we're going to get there, it's better to deal with that problem right away.
Jared Wolff -- President and Chief Executive Officer
And then on the CRE, I do look at retail on Page 20 of our deck. We have a breakout of what's in CRE and where we have concentration and what the risks are and whether it's office retail, multifamily, hospitality. We have very low exposure, as you know, to the high-risk area. So, retail is an where I have a lot of focus.
Our top-25 retail borrowers represent about 68% of our retail exposure. As I mentioned last quarter, we are looking very carefully at that group. We went through every relationship and marked it red, yellow and green. We have far more in the green category than we did last quarter. And so, the migration of that group is moving along as we hoped it would. And so, I feel good about it. Most of it is pharmacy and grocery-anchored shopping centers that are with well-heeled borrowers. And so, we're monitoring that very closely.
But that's really kind of the CRE concentration that I would be most concerned about. Our office is holding up. And as you know, we have very little hospitality.
David Feaster -- Raymond James -- Analyst
Okay. Thank you very much.
Jared Wolff -- President and Chief Executive Officer
Yes, no problem, David.
Operator
[Operator Instructions] The next question comes from Steve Moss of B. Riley. Please go ahead.
Steve Moss -- B. Riley -- Analyst
Good morning.
Jared Wolff -- President and Chief Executive Officer
Good morning, Steve.
Steve Moss -- B. Riley -- Analyst
Most of my questions have been -- Jared, most of question have been asked and answered here. A small one, just as we think about the balance sheet mix longer term, I mean, obviously you want to grow loans. I was just kind of curious how do we think about how large the securities portfolio should be relative to earning assets?
Jared Wolff -- President and Chief Executive Officer
Lynn, what's the target that we've talked about there?
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
So, yes, let me talk about that for a moment. There has been a lot of liquidity in the marketplace. So, I think that, generally speaking, cash and securities have had probably a larger percentage than historically. So, I think as liquidity is to normalize, I would look for securities and cash to trend back down to between, call it, 10% to 15% versus being above 15%, given that a portion of our portfolio does have the concentration of the CLOs, and then we did invest in the BBB rated corporate debt is in that portfolio as well. I think it would probably be closer to the 15% versus driving down lower, since it is our on-balance sheet liquidity.
Steve Moss -- B. Riley -- Analyst
Okay. Great [Speech Overlap]. I'm sorry. Go ahead, Lynn.
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
No, go ahead.
Steve Moss -- B. Riley -- Analyst
Okay. And I guess just maybe one just on provision here. How should we think about expense going forward? Obviously, the economy seems to be heading in the right way. So, should we just think about provision perhaps in future periods relatively matching charge-offs, kind of curious as to any thoughts you may have there?
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
Sure. 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 -- and the provision is also a function of the mix of the loan portfolio and some of the loan product has 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 for 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 provision, 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 -- President and Chief Executive Officer
Yes, I think everybody is getting comfortable with CECL and it's a little bit -- models are still getting tweaked. Mark Zandi 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're 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 -- B. Riley -- Analyst
All right. Thank you very much. I appreciate that.
Jared Wolff -- President and Chief Executive Officer
Thank you, Steve.
Operator
[Operator Closing Remarks]
Duration: 61 minutes
Call participants:
Jared Wolff -- President and Chief Executive Officer
Lynn Hopkins -- Executive Vice President and Chief Financial Officer
Robert Dyck -- Executive Vice President, Chief Credit Officer
Timur Braziler -- Wells Fargo -- Analyst
Matthew Clark -- Piper Sandler -- Analyst
Gary Tenner -- D.A. Davidson -- Analyst
David Feaster -- Raymond James -- Analyst
Steve Moss -- B. Riley -- Analyst
