Banc of California Inc (BANC) Q2 2021 Earnings Call Transcript

Banc of California Inc  (NYSE: BANC) Q2 2021 earnings call dated Jul. 22, 2021.

Corporate Participants:

Jared Wolff — President and Chief Executive Officer

Lynn Hopkins — Executive Vice President and Chief Financial Officer

Analysts:

Timur Braziler — Wells Fargo — Analyst

Gary Tenner — D.A. Davidson — Analyst

Timothy Coffey — Janney — Analyst

Matthew Clark — Piper Sandler — Analyst

Jacquelynne Bohlen — KBW — Analyst

Presentation:

Operator

Good day, and welcome to the Bank of California Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Jared Wolff, President and Chief Executive Officer. Please go ahead, sir.

Jared Wolff — President and Chief Executive Officer

Good morning, and welcome to Banc of California’s second quarter earnings call. Joining me on today’s call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results.

With economic conditions improving in California and our business development activity continuing to increase, our second quarter results reflect the acceleration of our organic growth ahead of our pending acquisition of Pacific Mercantile Bancorp, which will add more than $1.3 billion in assets excluding PPP loans and further improve our level of profitability. In addition to generating significant organic balance sheet growth during the second quarter, we continued to execute well on other key initiatives including lowering our deposit costs, expanding our net interest margin and maintaining disciplined expense control, which helped to produce a strong quarter with earnings per share coming in at $0.34 and pre-tax pre-provision income coming in at $23.5 million.

While payoffs continued to represent a significant headwind, our strong loan production helped drive 15% annualized loan growth in the second quarter. As the California economy reopens, we are seeing more loan demand and more opportunities to compete for very high quality credits. With a differentiated experience that we are able to offer at Banc of California, we are successfully winning a high percentage of the relationships we are pursuing, while maintaining discipline in our underwriting and pricing, reflected in our loan yield holding steady at 4.3%.

In the second quarter, we funded $847 million of loans comprised of $533 million of new fundings and $314 million of line advances, including $227 million of net warehouse line advances. Excluding PPP and warehouse, our fundings for loans was $190 million higher than the first quarter and the average rate on new loan production was 15 basis points above the first quarter.

Through some of our strategic relationships, we are also supplementing our own loan production with strategic purchases of high quality single-family and multifamily loans that offer attractive risk adjusted yields in the current environment. In the near term, these loan purchases are good tool to help us profitably redeploy the liquidity we have built up through our continued strong deposit inflows, offset payoffs and keep us on track to achieve our targeted level of loan growth and profitability.

The success we are having in generating organic growth is partly a result of our success in attracting new talent to the bank. Over the past two years, we have made significant progress in building Banc of California’s reputation as an attractive destination for experienced commercial banking talent and as we streamline the company and reduce operating expenses, we have consistently reinvested a portion of the cost savings into adding talented colleagues. Our initial hire supported and accelerated our shift to relationship focused commercial bank. In each quarter, we look to add new talent that is further strengthening our loan production and deposit gathering capabilities and adding expertise that helps us build our franchise.

The new bankers we are adding also have enabled us to selectively expand and deepen our presence in key markets throughout California, including Los Angeles, San Diego, Central California, and Northern California. These are proven bankers with deep relationships in these markets that have been able to quickly build substantial new business pipelines and contribute to our growth in loans and deposits, even in markets where we don’t have branches. This is a result of hiring quality relationship bankers using targeted and efficient marketing and constantly refining our ability to process and execute on behalf of our clients.

As a result, we continue to expand our reputation and brand as the go-to-bank for the sectors we serve. In addition to loan growth, our business development efforts continue to generate strong inflows of non-interest bearing and low-cost interest checking deposits from new commercial relationships. During the second quarter, newly opened DDA accounts contributed $129.3 million of low cost deposits, which produced our 8th consecutive quarter of DDA growth. The deposit engine that we have built continues to produce strong results, particularly from our specialty and business banking unit this quarter.

As a result of our success in adding new commercial deposit relationships, we continue to see a positive shift in our deposit mix with non-interest bearing deposits increasing to 29% of total deposits and a further reduction in our cost of deposits, which declined 5 basis points, establish just 23 basis points in the quarter. This helped to drive an 8 basis point increase in our net interest margin. The value of the deposit base we have built should become clear as we head into a rising interest rate environment. Our improved deposit mix has increased our asset sensitivity and given the trends we are seeing in business development, we would expect further improvements in our deposit mix that will continue to increase our asset sensitivity in the future.

The organic growth we are generating continues to drive more operating leverage and an improvement in our efficiency ratio as we are effectively managing our expense levels. Importantly, we are keeping expenses in check, while increasing our investments in business development, as I discussed earlier, as well as technology that augment and enhance the client experience, both in terms of the technology platforms that we employ and the products and services that we offer.

Our technology spending has increased over the past few years, but we’ve been able to fund that increased investment through our expense reductions and improved efficiencies in other areas. And as we gain scale through organic growth in the Pacific Mercantile acquisition, we have an even greater ability to increase our technology investment in the future, while still achieving the improvements we are targeting in our efficiency ratio.

In terms of the Pacific Mercantile acquisition, we continue to anticipate closing the transaction during the third quarter. The two organizations have been working well together and we’ve had a very productive few months in terms of integration planning. Within 30 days of announcing the transaction, we had made all of the personnel decisions for the combined organization. We’ve made all the necessary decisions regarding branch consolidations. And we have scheduled the system conversion for the end of the third quarter.

Based on the past few months of integration planning, we now feel that we have good visibility on cost savings at or above the 40% level compared to our initial 35% projection with almost all the cost savings expected to be realized by the end of 2021. Having spent considerable time together over the past few months, we are now even more excited about the opportunities that will be created from bringing our teams together and leveraging our collective strengths.

We’ve gotten a good sense for where we have opportunities to expand the existing Pac Merc relationships, particularly among some of the larger clients who are performing well and will require larger credit facilities to support their continued business growth and the relationship managers we will be adding will now have more opportunity to expand their target markets to include larger commercial clients and we have more resources and support to assist them in business development, which should be the higher levels of production.

At the time of the announcement, we were confident that this was going to be a very positive transaction for our franchise in terms of its impact on the size and composition of our balance sheet, our level of profitability, our business development capabilities, and our ability to generate organic loan growth in the future and as we’ve worked together to prepare for closing and integration, our level of confidence has only increased.

Now, I’ll hand it over to Lynn, who will provide more color on our operational performance. Then I’ll have some closing remarks before opening up the line for questions.

Lynn Hopkins — Executive Vice President and Chief Financial Officer

Thanks, Jared. As mentioned, please refer to our investor deck which can be found on our Investor Relations website as I review our second quarter performance. I’ll start by reviewing some of the highlights of our income statements and then we’ll move on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the first quarter of 2021.

Net income available to common stockholders for the second quarter was $17.3 million or $0.34 per diluted share. This compares to $7.8 million or $0.15 per diluted share for the first quarter of 2021. With the redemption of our Series D Preferred Stock this past March, the second quarter benefited from $1.4 million in lower preferred stock dividends. In addition, we had quite a few items that impacted the comparison of our net income between the second quarter of 2021 and the prior quarter.

In the second quarter 2021 net income available to common stockholders included $829,000 in pre-tax gains on investments in alternative energy partnership, $700,000 of pre-tax merger-related costs, and $1.3 million in pre-tax net recoveries of indemnified professional fees. In the prior quarter on a pre-tax basis, we had $3.6 million in losses on investments in alternative energy partnerships, $700,000 of merger-related costs, and $721,000 of indemnified professional fees net of recoveries, as well as $3.3 million in Series D Preferred Stock redemption expense.

These items were offset in part by a lower effective tax rate resulting from $2.1 million in tax benefits on the exercise of all of our previously issued stock appreciation rights. There was no similar tax benefit in the current quarter. When backing out these items in each quarter, net of our normalized effective tax rate of 25% to get a better sense of our core operating performance, we had adjusted net income available to common stockholders of $16.3 million or $0.32 per diluted share in the second quarter of 2021 compared to $12.9 million or $0.25 per diluted share in the first quarter of 2021. The $3.4 million increase is attributed to higher net interest income, lower provision for credit losses, and lower preferred stock dividends, offset by higher net losses on equity investments.

Total revenue in the second quarter increased $1.7 million compared to the prior quarter as net interest income increased by $1.9 million and non-interest income decreased by $211,000. Net interest income benefited from one additional day in the current quarter and the increase reflected average interest earning assets being comparable between periods, while posting a higher yield, and a decrease in the cost and volume of interest bearing liabilities, all of which contributed to an expanded net interest margin. The slight decrease in non-interest income stems mainly from lower servicing income and other income offset by higher customer service fees.

Our net interest margin was 3.27%, up 8 basis points from the prior quarter due to a 6 basis point decrease in our cost of funds and a 3 basis point increase in our overall earning asset yield. Our earning asset yield increased to 3.81%, due primarily to redeploying some of our excess liquidity into loans and securities, combined with a slightly higher yield on securities.

Our average loan yield remained steady at 4.3% during the second quarter due mostly to lower coupon rates from the impact of loans resetting and our current production, offset by higher prepayment fees from refinancing activity, higher income related to loans removed from non-accrual status and higher PPP fee amortization due to ongoing forgiveness activity.

When the impact from these items is excluded, our average loan yield was down 5 basis points to 4.12% in the second quarter compared to 4.17% in the first quarter. The decrease in this average loan yield was due primarily to a higher percentage of lower yielding SFR loan balances.

We ended the second quarter with a spot rate of 20 basis points for our all-in cost of deposits, and as of July 20th our spot rate had dropped further to 17 basis points. Looking ahead, we expect our funding costs to continue to trend lower in the second half of the year, albeit at a slower rate. We have a few larger money market accounts and time deposits that should move down our cost of deposits once they reach the end of their agreed terms. In the second half of 2021, we have $510 million of these deposits with a weighted average cost of about 163 basis points. We expect this reduction in higher cost balances to boost net interest income and support our margin in the back half of the year.

Our adjusted expenses increased $288,000 from the prior quarter due mostly to higher net losses on equity investments of $1.2 million, which are included in other expenses offset by lower salaries and employee benefit costs, and lower professional fees once we exclude our net indemnified professional recoveries in the current quarter and professional fees from the last quarter. The effective tax rate for the second quarter was 25.6% compared to 13.8% for the first quarter, due to a tax benefit resulting from the exercise of all of our previously issued stock appreciation rights in the first quarter. Going forward, we would expect our effective tax rate to be in the 25% to 27% range for the second half of 2021.

Turning to our balance sheet, our total assets increased by $94 million in the second quarter to $8 billion. We redeployed a portion of our excess liquidity in the high quality commercial loans and securities, which brought our cash and cash equivalents down by approximately $216 million from the end of the prior quarter. We also continued to replace high cost time deposits with core deposits. As we selectively add high quality earning assets in the future both in terms of loans and investment securities, we continue to have flexibility to add overnight and other wholesale fundings if needed to strategically support our growth in earning assets.

Our gross loans held for investment increased by $221 million or 3.8% during the second quarter, as a growth in warehouse, multifamily, CRE and SFR portfolio is more than offset lower C&I, SBA and construction loan balances. The $85 million decrease in SBA loans in the quarter was due primarily to the PPP forgiveness process. As of June 30th, we had $194 million in PPP loans remaining, consisting of $65 million from round 1 and $128 million from round 2. The $35 million increase in the SFR portfolio stems from loan purchases given that we are no longer originating this asset class in-house. The loan purchases more than offset payoffs in this portfolio and enabled us to utilize some of our excess liquidity to add high quality loans with low LTVs and attractive risk-adjusted yields.

Deposits increased $65 million during the second quarter, and our mix and average costs continued to improve, thanks to our success in adding new commercial deposit relationships. Non-interest bearing deposits increased to 29% of our total deposits at quarter end, up from 27.7% at the end of last quarter. Demand deposits, non-interest bearing, plus low-cost interest checking increased by 6% from the prior quarter, representing our 8th consecutive quarter of demand deposit growth, a goal we remain very focused on to drive franchise value.

Over the past year demand deposits increased to 65% of total deposits, up from 54%, reflecting the significant improvement we have made in our deposit base. This increase combined with the lower rate environment and our proactive efforts to reduce deposit costs and bringing new relationships drove our all-in average cost of deposits down from 71 basis points in the second quarter of 2020 to 23 basis points achieved in the second quarter of 2021.

Our securities portfolio increased by $82 million to end the quarter at $1.35 billion. During the second quarter, we primarily added municipal and agency securities with a weighted average rate of 2.31%. For the 5th consecutive quarter tighter credit spreads reduced the unrealized loss on our CLO portfolio, which was down to $3 million at quarter end. The improvement in CLO pricing this quarter added a penny to our tangible book value per share relative to the prior quarter.

The CLO portfolio declined by $100 million during the second quarter as we are seeing an increase in payoffs resulting from refinancing. The higher level of payoffs is accelerating our diversification out of the CLO portfolio, which is part of our longer term balance sheet management strategy. Our entire securities portfolio ended the quarter with a net unrealized gain of $20.9 million and the total change in unrealized net gains during the quarter added $0.19 to our tangible book value per share. Our credit quality remained strong in the second quarter and we saw positive trends in asset quality.

Non-performing loans decreased $4.6 million to $51.3 million in the second quarter, about 62% of this balance or $32 million represented loans that are in current payment status, but are classified non-performing for other reasons. Delinquent loans decreased $26.3 million in the second quarter to $35 million or 0.58% of total loans, driven largely by SFR loans paying off and migrating back to accrual status as we work through the forbearance and deferral process with our consumer borrowers. Our loan deferral numbers declined by $22 million to 1% of total loans held for investment, down from 2% at the end of the first quarter.

Let me turn to our provision for the quarter. Although we had some provision requirement related to growth in the loans portfolio, this was offset by the improvement in asset quality and the improving economic forecast utilized in our model. As a result, we recorded a modest negative provision for credit losses of $2.2 million in the second quarter. Net of this provision release, our allowance for credit losses for the second quarter totaled $79.7 million, which reduced our allowance to total loans coverage ratio to 1.33%.

Excluding our PPP loans and warehouse loans, both of which have lower relative risk levels in our reserve methodology, the ACL coverage ratio stood at 1.70% at June 30, but the decrease in our non-performing loans, our ACL coverage to NPL ratio remained healthy at 155%. Our capital position remains strong with a common equity Tier 1 ratio of 11.14% and has benefited from the strategic actions completed over the past several quarters. We continue to be prudent and strategic with the use of our capital, maximize benefits to shareholders and to build franchise value.

At this time, I will turn the presentation back over to Jared.

Jared Wolff — President and Chief Executive Officer

Thank you, Lynn. I’ll wrap up with a few comments about our outlook. We believe we are well-positioned to deliver a strong second half of the year with a number of catalysts in place that we expect to positively impact our growth and profitability. From a macro perspective, economic activity continues to build momentum as operating restrictions on businesses in California are rolled back in most counties.

Barring any setbacks resulting from the spread of new COVID-19 variants, it appears that our markets are positioned to experience economic expansion for the foreseeable future. So, the operating environment should be favorable and we are well-positioned to capitalize on the increasing loan demand that should result. With our banking teams doing an excellent job of developing high quality lending opportunities and the contributions we are getting from new bankers we have added over the past several months, our loan pipeline continues to grow and is at the highest level it’s been since I joined the bank in March 2019.

Based on the pipeline and the continued opportunities we have to offset runoff with strategic purchases of high quality loans, we continue to expect our full-year organic loan growth excluding PPP to be in the mid-to-upper single-digits. We should also continue to see further reductions in our deposit costs as some of our larger money market and time deposits mature and reprice. As Lynn mentioned, we have $510 million of deposits at a weighted average rate of 1.63% scheduled to mature in the second half of the year. The continued reduction in our deposit costs should help us protect and to potentially expand our net interest margin in the coming quarters.

We sell the redemption of our Series E Preferred Stock in our sites, and as previously mentioned, expect that to be a late 2021, early 2022 event subject to regulatory approval. And finally, we have the impact of the Pacific Mercantile Bancorp acquisition with all the cost savings projected to be realized by the end of 2021, we should quickly see the positive impact of this transaction on our level of profitability. And while we haven’t modeled revenue synergies into our projections, we believe there will be positive impact as we expand relationships with Pac Merc clients and provide our new colleagues with the ability to accelerate their business development efforts.

Pacific Mercantile will also provide us with deeper presence in Los Angeles market and our first exposure to the Inland Empire, which we believe will be a good source of growth for the company in the coming years. In addition to the over $1 billion in loans that we will add with this transaction, we will also add significant amount of unfunded loan commitments that represent another potential tailwind for future loan growth and in particular, expected growth in line utilization as the economy picks up.

For the remainder of the year, our top priority will be completing the Pacific Mercantile acquisition, executing well in the integration and realizing the projected synergies, and continuing to enhance our organic growth engine. I want to thank all of our dedicated and talented colleagues across Banc of California for the great work to deliver such a terrific quarter. Thank you for listening today. I look forward to sharing more about Banc of California’s progress in the coming quarters.

With that, operator, let’s go ahead now and open up the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Today’s first question comes from Timur Braziler with Wells Fargo. Please go ahead.

Timur Braziler — Wells Fargo — Analyst

Hi, good morning, everyone.

Jared Wolff — President and Chief Executive Officer

Good morning.

Lynn Hopkins — Executive Vice President and Chief Financial Officer

Good Morning.

Timur Braziler — Wells Fargo — Analyst

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

Jared Wolff — President and Chief Executive Officer

Let, Lynn, address that first.

Lynn Hopkins — Executive Vice President and Chief Financial Officer

Sure. Good morning, Timur. So the increase in the estimated cost saves stems mostly from looking at the facilities’ costs and employee costs, staff costs, as we’ve gone through the integration and conversion process. So it just takes a little bit of time to I think sharpen our into all of that. So that’s probably the majority of them. I think from where we sit now, we would expect the majority of those to drop to the bottom line with the visibility we have now.

Timur Braziler — Wells Fargo — Analyst

Okay, great. And then maybe looking at the loan purchases this quarter, can you quantify the dollar amount purchase, the mix between SFR and multifamily? And then as you look at the remix in the SFR book from a yield standpoint, maybe just talk through where current purchases are coming on from a yield standpoint versus where the existing SFR loans are rolling off.

Lynn Hopkins — Executive Vice President and Chief Financial Officer

Sure. Why don’t I start. And so for the purchases this quarter, it was approximately about $200 million in the total loan fundings and the majority are single-family. There is a small portion that was multifamily that continues to be a challenging asset class to get a hold of. So I would put the split at about $170 million SFR to $30 million multifamily. And with respect to the yields that we’re seeing coming in on the SFR book, I don’t have the stat. That is included I think in our overall yield. I have to come back to you on the yield that we’re seeing come through probably in the low-3s.

Jared Wolff — President and Chief Executive Officer

Yeah. Timur, just to follow up on that, I mean, the weighted average loan yield that we are buying these are non-QM mortgages. They are very attractive. They are in our market. We have a, I would say, unique source and that we have a tremendous team on the warehouse side and we have some good relationships that allow us to look into loans that were already secured by and look at high quality loans since they — to make sense to bring on and the whack on the loans that we are buying is well above 4.5% in general.

And then to get to the trade yield, we expect there’s a whole bunch of things that are implied there including the prepayment speed. And so we’re obviously buying them at a slight premium, but lower than what we would take in the market generally, because we’re using our relationships. And if our prepayment speeds are off then the yield is going to be higher or lower than what we’re projecting, but we, I think, our team is pretty good at this. And I’d say, in general, it probably is getting us in the upper 30s. It’s probably lower than our SFR portfolio overall, but it’s higher than our margin.

And so I think in general it’s supporting our margin and it’s just a good source for us to help maintain our earning assets at the right level. The amount of production that we put on in the quarter was, I was really, really pleased with what our team did to have $900 million plus of production in the quarter and have fundings in the mid-800s. This is pretty substantial for a company of our size and for balance sheet it was $6 million of loans. So, and it was really balanced. I mean, we actually put on for high levels of production in all categories and then what nets out is just a function of where the prepayments are, which is very hard to control.

Lynn Hopkins — Executive Vice President and Chief Financial Officer

Jared. Thanks for clarifying the SFR trade yields.

Jared Wolff — President and Chief Executive Officer

Yeah, no problem.

Timur Braziler — Wells Fargo — Analyst

Maybe just one more if I can on the warehouse balances, certainly a different trajectory from where we’ve seen some of the other peers of yours report second quarter results. I guess in the EOP growth, was that from increased relationships, is that from increased utilization or is that from really a dip in first quarter balances right at the end of the quarter and average balances that are really move as much as the period would suggest?

Jared Wolff — President and Chief Executive Officer

That’s a good question. I mean, I would say it’s actually a combination of all of those things, believe it or not. So we did have a dip. Average balances in the second quarter with higher, end of period balances, excuse me, in the first quarter, average balances were higher, end of period balances were lower. So we were bringing it back up in the second quarter. We have brought on some new relationships, just approved on the other day that are — we tend to bank, the mid-sized mortgage bankers, not the super large folks, although we have a few of those.

Our team is really exceptional at kind of managing within our comfort level. And we’ve always said, this is not going to be an outsized portion of our company. It’s going to be a healthy part, but not an outsized part something it’s a lever that we can pull. We feel comfortable with the size right now, and I don’t expect it to grow very much and our team has done a great job of managing it. As we grow as a company, it can maintain that same percentage, but we don’t see it growing much from here.

Timur Braziler — Wells Fargo — Analyst

Okay. Thank you for the questions. Nice quarter.

Jared Wolff — President and Chief Executive Officer

Thank you. Appreciate it.

Operator

And our next question today comes from Matthew Clark of Piper Sandler. Please go ahead. Hi, Matthew, is your line perhaps muted, sir. All right. It looks like. We will go to our next question and that comes from Gary Tenner of D.A. Davidson. Please go ahead.

Gary Tenner — D.A. Davidson — Analyst

Thanks. Good morning.

Jared Wolff — President and Chief Executive Officer

Good morning, Gary.

Gary Tenner — D.A. Davidson — Analyst

Hey. So, you’ve talked about the purchases in single-family and multifamily, and obviously that in warehouse drove the quarter sequentially from a loan growth perspective. Can you talk a little bit about kind of construction and the core C&I business. Obviously remains a bit of a challenge. Our construction and C&I, I think you had a couple of quarters of growth until this quarter. So maybe just talk about kind of what the trends were in the core C&I book here.

Jared Wolff — President and Chief Executive Officer

Well, it’s hard from my perspective, it’s kind of all blended. And so while it’s easy to say warehouse was $200 million net and that’s the growth. It’s all bucketed together in terms of the quarter in the production and we can’t control much of what pays off, and if something is paying off faster in one quarter and we happen to have a lever to pull, we’re going to use it. I would focus on the production side and the $900 million of production and the $800 million plus of fundings, which is very substantial, and our fund — and our pipelines are still strong.

C&I in the quarter, we had a lot of production. We just had payoffs. And it just happens, but very pleased with what we’re doing here. I don’t see any real headwinds on C&I more than I see than anything else. I mean, I think our pipelines are very strong. We’re prioritizing strong borrowers. Pac Merc, obviously has a good C&I engine, and we’re going to be adding their capabilities along with their ABL function which is they do more of it than we do, and they’ve got a really good team that we’re happy to bring on board.

So we continue to see C&I is something that we’re going to grow and focus on. It’s everything from service businesses and healthcare. We have a vertical and entertainment, as you know, doing streaming production, and then owner-occupied real estate, which is tends to be the low cost leader in that area, but we have the ability to do it as well.

Lynn Hopkins — Executive Vice President and Chief Financial Officer

And Jared, I would just add and looking at production numbers, the first quarter did include SBA production for round 2 of the PPP, so can only sit back and look at the numbers. I agree with your comment. It’s all the way across the board. And it’s hard to just say it’s purchases, and warehouse. When I exclude PPP. I would actually say our production for all the other core lines is up 68% quarter-over-quarter. So I think that contributed to it as well when you kind of pull those numbers apart. That’s helpful.

Jared Wolff — President and Chief Executive Officer

Thanks, Lynn.

Gary Tenner — D.A. Davidson — Analyst

Okay. And just some kind of book keeping on PPP, can you give us the average PPP balances for the quarter, and the PPP revenues in the quarter?

Lynn Hopkins — Executive Vice President and Chief Financial Officer

The averages is — might take me a moment, but when we look at the revenue from the quarter, it’s approximately the same between first quarter and second quarter. I just flip to that page here. So in first quarter I think the fees that we brought through were about $1.9 million and in the second quarter is about $1.8 million, so not much difference between the two periods. And then from an average balance perspective I’ll pull those numbers. I have to get back to you.

Gary Tenner — D.A. Davidson — Analyst

Okay. Thank you.

Jared Wolff — President and Chief Executive Officer

Thanks, Gary.

Operator

[Operator Instructions] Today’s next question comes from Tim Coffey of Janney. Please go ahead.

Timothy Coffey — Janney — Analyst

Hey, good morning, everybody.

Jared Wolff — President and Chief Executive Officer

Good morning.

Timothy Coffey — Janney — Analyst

Hey. Well, I was curious what the prepayment dollars were in the quarter and interest income?

Lynn Hopkins — Executive Vice President and Chief Financial Officer

Right. So the — I think last quarter we pull those numbers apart. I think this quarter and we indicated that our loan yield included 18 basis points of sort of that prepayment, accelerated accretion and the non-accrual interest, whereas last quarter we only had about 13 basis points. So when I put all that together, it’s about $2.6 million. The majority is prepayments relative to last quarter. So last quarter I think the number is $1.9 million, this quarter about $2.6 million for those three numbers that we look at in order to get to our core loan yield. I would just add that our core loan yield when we pull those particular features out has held up well considering the continuing low interest rate environment. And I get to that that we’re looking at that we’re supporting our net interest margin.

Timothy Coffey — Janney — Analyst

Okay, that’s helpful. Thank you. And Jared just kind of philosophically about the loan to deposit ratio, if you do run-off of that — you will run off our $500 million in those high-cost deposits, I’m sure. That would normally put an upward bias on your loan to deposit ratio. Do you feel comfortable running higher than where it is right now?

Jared Wolff — President and Chief Executive Officer

We can run it 95% to 100%. I don’t want to run it too much past that. And I’m comfortable with the amount of volume that we’re able to bring on the deposit side relative to the deposits that we have running off. When we look at our at our CDs we’re retaining approximately 46% of the CDs that are maturing when we give them just our posted rate. It’s remarkable how much liquidity is out there and is willing to take duration, and we’ve actually been increasing our rates on duration CDs, extended maturity CDs for that reason is as we monitor it and see what the retention rate is.

We keep saying, well, maybe now is a good time to take three-year money at a really low rate. And our deposit costs are still going way, way down. So, I — Tim, I’m comfortable that we can absorb the maturity of the stuff that’s running off at the end of the year, without it really ballooning our loan to deposit ratio. And we also have Pac Merc coming in the next year. They’ve got some really strong — they’ve got a very strong deposit base, a strong base of non-interest bearing deposits and core operating companies that we hope to expand. And so between those two things our own engine there is I think will be fine.

Timothy Coffey — Janney — Analyst

Okay, all right.

Lynn Hopkins — Executive Vice President and Chief Financial Officer

And then I would just add one other point I think related to these particular deposits. I think, there is in addition to the retention on CDs I actually think there is an opportunity to simply reprice them into the current market, and we’re looking at that. So with them being priced at 163 basis points in the current rate environment, they could reprice and be retained. So they’re not necessarily all expected to run off. And then I clearly agree with the comments on loan to deposit ratio.

Jared Wolff — President and Chief Executive Officer

Yeah. On that point, so we — so of kind of our just kind of what I would say run of the mill CDs with clients that we’re not especially contracted, we’re seeing a 46% retention rate on just kind of taking our posted rate. We have some large balances of what we would call specialty deposits that are better time deposits that were contractually agreed on at specific rates for a specific maturity, and those are the ones that Lynn is talking about that we think that will either find new replacements for them or those deposits will might actually repriced at current rates, and we’ll be able to retain them. So just because they’re expensive doesn’t mean they’re all going away. They could reprice at current rates.

Timothy Coffey — Janney — Analyst

Yeah, no, that’s a good point. Thanks for adding that. And then the the redeeming the remaining preferred stock, what are some of the hurdles to doing that?

Jared Wolff — President and Chief Executive Officer

I don’t think we see any hurdles from a capital standpoint. We do need to go through the regulatory approval process like we did last time, and have to respect that process, but we didn’t see a lot of — there wasn’t any lack of visibility. The regulators were clear with us on what we need to demonstrate. And when we demonstrated that to them, we got approval and we expect the same process this time. Lynn, do you see any challenges on the Series E that we need to talk about.

Lynn Hopkins — Executive Vice President and Chief Financial Officer

I wouldn’t characterize them as challenges. I think, we have to recognize we’re coming through a pandemic. We have the opportunity to redeem Series D this year, which benefited our earnings for this year. And we are very focused on our PMB acquisition and the success of that and getting that integrated. So I think, it’s just a matter of the process and demonstrating all of these big milestones along the way.

Timothy Coffey — Janney — Analyst

Okay.

Jared Wolff — President and Chief Executive Officer

We feel good about our, yeah, that’s why our timing is fourth quarter or first quarter, it’s hard to know exactly, but I think that’s a fair kind of guide right now.

Timothy Coffey — Janney — Analyst

Yeah. I think so and I think it’s consistent with what you’ve been saying on the call too, but where the near-term focus is. Okay, great. Thank you. Those are my questions.

Jared Wolff — President and Chief Executive Officer

Yeah. Appreciate it, Tim. Thank you.

Lynn Hopkins — Executive Vice President and Chief Financial Officer

Thank you.

Operator

And our next question today 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

Welcome back, Matthew.

Lynn Hopkins — Executive Vice President and Chief Financial Officer

Good morning.

Matthew Clark — Piper Sandler — Analyst

Sorry, I was…

Jared Wolff — President and Chief Executive Officer

That’s all right, no problem.

Matthew Clark — Piper Sandler — Analyst

On the warehouse, and you may have touched on this in your prepared remarks, but the balances being up kind of going against the grain with what we’ve seen elsewhere. How much of that is increased utilization, how much of that is new relationships and what are your thoughts on kind of the sustainability of balances?

Jared Wolff — President and Chief Executive Officer

So a little bit is new clients, and some of it is increased utilization. So it’s a mixture of both. Last quarter our average balances were higher than end of period balances, and so this quarter it was kind of getting back up to kind of where the average has got to last quarter, maybe a little past that. We don’t see the percent of warehouse growing from this point, which means it could expand as we grow our company, but we don’t see it expanding much from where we are right now. We have several hundred million of low cost deposits associated with our balances. These are true relationships and our team is really strong at what they do. And so they’ve been able to manage the flows up and down as we’ve requested them.

It’s really just one lever that we have to pull among many, many levers. And as we expand with Pac Merc and with the other initiatives we have going on, it becomes a lower percentage of our overall balance sheet, but we’re comfortable with where it is right now, and our team has done a good job with that also because of who we bank which are mid-sized mortgage bankers and our rates tend to be higher than some of our peers. And the average usages, I would say, moderate, but there is a lot of volume right now and we want to be there for our clients. And so we’re helping them. But we recognize that they can flow out the way it flows in and that’s why I’m so pleased with our production engine this quarter. I mean, we had just to do $900 million of production on a $6 billion loan portfolio is pretty substantial and I think it speaks to the power of our growth engine and how well our teams are working together.

Matthew Clark — Piper Sandler — Analyst

Great. And then a related question just on the ACL, the reserve. I think previously talked about may be stabilizing around $130 million, you’re nearing that now SDP. What are your thoughts about maybe dipping below that given the increased contribution from the warehouse.

Jared Wolff — President and Chief Executive Officer

Well, we look at it without warehouse too, and I say as Lynn mentioned I think in her prepared remarks when you exclude that we’re like $175 million or something like that. I think, we’re going to continue to run our model. We feel comfortable with where it is now. If we continue to have loan growth, it probably stabilizes and there’s not a lot of provision releases going forward. I’d prefer not to release some. It’s just — our credit quality is really strong right now. And when you look at our peers, we’re a little bit above them, but I think we feel comfortable with where it is. Lynn, what do you think?

Lynn Hopkins — Executive Vice President and Chief Financial Officer

Yeah, I would agree with your comments, Jared. I don’t know if I’m, we’re quite ready to be saying that there is a lower number. I think being aware of I think the economic landscape, our positive credit quality trends, coming to your point, the portfolio mix it does matter, and we did have a higher level of warehouse balances at the end of June compared to the end of March. So, but I think we are comfortable with our current level and we’ll see how the economy unfolds.

Matthew Clark — Piper Sandler — Analyst

Okay. Yeah, it sounds like, it would come down below that, just given the $170 million ex-warehouse, but that’s. And then just on the, on the dividend, your earnings power continues to strengthen. Any updated thoughts around increasing the dividend here.

Jared Wolff — President and Chief Executive Officer

We are always looking at different ways to use our capital and that’s one of the things we can look at. Obviously we’re reinvesting in our growth. We’re hiring people. People have asked whether we want to do a share buyback or increase the dividend and I think all those things are on the table.

Matthew Clark — Piper Sandler — Analyst

Okay. Thank you.

Jared Wolff — President and Chief Executive Officer

Thanks, Matthew.

Operator

And ladies and gentlemen, our next question today comes from Jackie Bohlen of KBW. Please go ahead.

Jacquelynne Bohlen — KBW — Analyst

Hi, good morning.

Jared Wolff — President and Chief Executive Officer

Good morning, Jackie.

Jacquelynne Bohlen — KBW — Analyst

I just wanted touch based on Slide 8, and it’s in reference to another question to you, because I know you discussed the specialty deposits and how that’s where some of those higher cost balances are going to potentially fluctuate later in the year, but I noticed that there was a nice uptick in those balances between 1Q and 2Q. And so I was just wondering what the driver was of that?

Jared Wolff — President and Chief Executive Officer

So that bucket is our specialty in business banking unit. It’s kind of where we put our — but they’re growing non-interest-bearing and low cost checking balances. And so we had a big uptick in our — I think it was 6% in DDA growth, which had allowed us to absorb run off in CDs and and money market. They’re just going after operating accounts like everybody else in our company. And then that’s in terms of our business banking unit, and our real estate unit and our community banking unit.

And then in terms of specialty, we do have some elephant hunting capabilities in on the fiduciary side, property management, bankruptcy trustee and other similar specialty deposits, and I don’t want to get into a too much because it’s a little bit of of the specialty niche that we have, but we have an excellent team that is — that works hard to bring in those clients, and we are good at it, because we’re good on the back-end in terms of the technology and support, and we are good on the front end, and understanding the special needs that they have to serve them well. And we’re really, really blessed to have such a great team.

Jacquelynne Bohlen — KBW — Analyst

Okay, great. So it sounds like just — I know you had a lot of great core growth in the quarter and a lot of it was centered in there and just shows the team is continuing to bring on new relationships to the bank, what is the right way to think about it?

Jared Wolff — President and Chief Executive Officer

Yeah. It is broken out between. It’s a huge amount of it is new relationships to the bank. We look pretty — on a very granular level where the growth is coming from, is it just money that’s sitting in existing accounts and people are building up their own liquidity or are we bringing new relationships in, in new accounts and it’s largely driven by new accounts.

Jacquelynne Bohlen — KBW — Analyst

Okay, thank you. That’s helpful. And then when — just one other one for me. When I think about the market and the competitive pressures that I’ve been reading about just in local news sources, I’m just curious where you stand in terms of your current employee base relative to full employment to kind of where you would like to be on that scale, just open positions and how the pace of recruitment for that is going?

Jared Wolff — President and Chief Executive Officer

Well, really good question. And California has announced this morning that I think it was LA County that the unemployment rate went down. Unemployment is sitting at about 10.4%. We have not had a problem hiring the people that we’ve been seeking. It’s a testament I think to kind of the buzz that we have around our company, and the publicity that we’ve gotten in our markets and we have a very talented recruiting team that is out in the streets and bringing — telling the story and bringing people over. I think we have a pretty cohesive message too in terms of what we’re doing. So people are very clear when they come here what we’re doing. We’re at about 600 employees now. There’s about 100 or so coming over from Pac Merc. So we’ll be at 700.

There are some key positions in terms of relationship people that we are looking to fill where we’re just seeing continued growth. And so we are looking to hire and add on the relationship manager side. To do that if you’re going to bring in a lot more relationships, you need to have the right gearing ratio and make sure you’re bringing in the right support people, so that you don’t overwhelm the people that are here supporting more and more, while you’re bringing in new relationships. So we look at that pretty carefully and try to balance that. But I wouldn’t say that there are any key executive positions or anything like that we need to bring in right now and I don’t — I feel that we’re properly staffed.

That said, where we are hiring is specifically on the relationship side where we can find high quality people that can bring over good relationships as we’ve done in a couple of markets like we hired somebody up in the Central Valley who has just done a great job bringing in new relationships and hired somebody in San Francisco as well. Those are people that used to work for people that worked here. So these are people that we knew. We knew the quality of what they would do. They were interested in working for us and we knew the type of thing that they would bring in and they’ve shown immediate results.

And so we’re going to continue doing that when we know that there are high quality people out there that are looking to join us. We’re going to continue to do that. But I wouldn’t say that we have — we need to add 10% or anything like that. We’re going to get some really great talent from Pac Merc and so we know that and kind of any time we’re looking to hire somebody. We ask the question is that seat going to be filled with somebody from Pac Merc and should we hold off. I hope that answers your question, Jackie.

Jacquelynne Bohlen — KBW — Analyst

Yeah, yeah, it does. And it sounds like you have a good internal referral system in terms of employment, right?

Jared Wolff — President and Chief Executive Officer

Yeah, it’s really good. I mean, I — we’re — there is here and there in these things. I say, hey, maybe we should look for somebody here or there. And there is always — we canvas our team first and say who do we know before we just go to the streets and try to find somebody that we don’t know. We try to figure out is there somebody specific that we know, yeah.

Jacquelynne Bohlen — KBW — Analyst

Okay, great. Thanks, Jared. Thank you.

Jared Wolff — President and Chief Executive Officer

Thank you, Jackie.

Operator

[Operator Closing Remarks]