Q4 2021 Banc of California Inc Earnings Call
Talent to the company.
She has not only strengthened our business development capabilities, but also increase the breadth and depth of our presence across the state of California.
We laid the groundwork for our verticals in payments and tech while bolstering our capabilities in real estate health care media and entertainment Treasury management and other verticals.
And we continued to optimize our use of capital to increase earnings and enhance franchise value first with the redemption of our series D preferred stock and then with the acquisition of Pacific Mercantile Bank Corp.
We were able to do all of these things while managing through the continuing impact of the pandemic.
I want to thank all of our colleagues at Banc of California for their extraordinary efforts that enabled us to achieve all of these goals that we set for 2021.
During the fourth quarter, we completed our acquisition of Pacific Mercantile and integration has proceeded in line with our expectations.
The system conversion was completed in mid November by the end of the year, we had put in place all measures necessary to achieve our target of 40% cost savings, which should be fully realized by the end of Q1 2022.
Of course, we will continue to look for other opportunities, where we can enhance efficiencies and realize additional cost savings.
It is worth noting that the tangible book value dilution, we expected from the transaction has come in much better than previously announced and accordingly, our earn back will also occur much faster than originally anticipated.
Our fourth quarter earnings were impacted by the merger related costs and day, two provision expense for the Pacific Mercantile portfolio, which Lynne will discuss later in the call.
But the core performance of the business was very strong as.
As our adjusted pretax pre provision income increased by 18% from the third quarter.
Due to our continued organic growth.
And a partial quarter revenue contribution of Pacific mercantile with.
With the impact of the cost savings to be realized in a more meaningful way in 2022.
We ended the year with our largest quarter of new loan fundings and total loan fundings, which reflects our revenue growth engine the strength of our commercial banking team. We have built over the past few years and the initial impact of the bankers we added from the <unk> deal.
Our production continues to be broad based with good contributions across markets asset classes and industries.
We had total loan fundings of $906 million in the fourth quarter include.
Including $583 million of new fundings and $323 million of line advances of which only $80 million related to net warehouse line advances.
This represents an increase of 16% and new fundings and 19% in total loan fundings compared to the third quarter.
However, we also saw a substantial increase in loan payoffs and Paydowns, which were up by approximately 300 million from the prior quarter and impacted our level of organic net loan growth this quarter.
Our loan production engine remains strong and accordingly, we anticipate meaningful loan growth in 2022.
We also had another solid quarter in terms of bringing a new low cost deposit relationships.
During the fourth quarter, we opened more than $200 million in new noninterest bearing and low cost checking accounts.
We used a portion of the excess liquidity, we added from Pacific mercantile to reduce approximately $300 million of higher cost deposits, which further improved our mix of deposits.
With the continued improvement in our deposit base, resulting from our business development efforts and the acquisition of Pacific Mercantile. We finished the year with a spot rate cost of deposits of seven basis points.
A key driver of the improvement in our cost of deposits is our increasing mix of noninterest bearing deposits, which represented 37% of total deposits at year end up from 32% at the end of the third quarter.
Let me hand, it over to Lynn, who will provide more color on our financial performance then I'll have some closing remarks before opening the line for questions.
Thanks, Jared versus mentioned, please refer to our investor deck, which can be found on our Investor Relations website as I review, our fourth quarter performance.
On February viewing some of the highlights of our income statement and then we'll move onto our balance sheet trends unless otherwise indicated all prior period comparisons are with the third quarter of 2021.
With the impact of closing the Pacific Mercantile acquisition during the quarter net income available to common stockholders for the fourth quarter was $4 million or <unk> <unk> per diluted share down from $21 4 million or <unk> 42 per diluted share for the third quarter of 2021.
The fourth quarter results included on a pre tax basis, $13 5 million of merger related costs and $11 3 million of provision for credit losses related to the non purchased credit deteriorated loans and unfunded commitments.
Wired from <unk>.
Given the noise created from the Pacific Mercantile acquisition will focus on our adjusted pretax pre provision numbers this quarter, which are more reflective of our core performance.
Alright, adjusted pretax pre provision net income totaled $32 6 million, an 18% increase compared to $27 6 million for the prior quarter.
This $5 million increase was due to higher net interest income of $10 1 million driven by higher average loans from both organic growth and acquired loans.
Set by lower noninterest income of 659000, and higher operating costs of $4 5 million as we included <unk> operations since the date of acquisition.
Our annualized adjusted pretax pre provision return on average assets.
<unk>, 4% to 139 basis points from the 134 basis points achieved in the third quarter.
Our net interest margin remained steady at 328% during the quarter.
As our overall asset yield decreased by seven basis points and our total cost of funds decreased by eight basis points are.
Our earning asset yield decreased to 366%.
Mostly to an increase in lower yielding other interest earning assets as a result of the level of cash balances acquired from Pacific Mercantile and then subsequently deployed in the quarter.
Our average loan yield increased two basis points to four 2% during the fourth quarter due in part to higher prepayment fees and a greater mix of commercial real estate multifamily and construction loans.
Our average cost of funds decreased eight basis points to 41 basis points due mostly to lowering our average cost of deposits by four basis points to 11 basis points for the fourth quarter and a reduction in other borrowings.
The decrease in our average cost of deposits reflected an increase in our mix of noninterest bearing deposits, which averaged 35% of total average deposits during the fourth quarter compared to 30% during the third quarter.
During the fourth quarter $330 million of high cost deposits with a weighted average rate of 53 basis points repriced or matured, including deposits acquired from Pacific Mercantile.
This is reflected in our lower period end deposit spot rate and we expect to receive a full quarter's benefit in the first quarter.
Our adjusted expenses increased $4 5 million from the prior quarter, due mostly to higher salary and benefits occupancy and equipment data processing and other expenses associated with adding Pacific mercantile operations. Since the October 18th acquisition date, followed by the system conversion in mid November .
In addition, we incurred $13 5 million in merger related costs and had 642000 in indemnified professional fees during the quarter.
The effective tax rate for the fourth quarter was 32, 4% compared to 27, 2% for the third quarter.
The increase in the effective tax rate during the fourth quarter was due mostly to the impacts of the Pacific Mercantile acquisition had on our annual effective tax rate and other permanent items, our annual effective tax rate is approximately 25%.
Turning to our balance sheet, our total assets increased by $1 1 billion in the fourth quarter to $9 4 billion and total equity increased by approximately $220 million.
In the Pacific Mercantile acquisition, we issued approximately 11 9 million shares increasing equity $222 million and we recorded goodwill and other intangible assets of $62 million.
At December 31, our tangible book value per common share was 13 88 down from $13 99 at the end of the third quarter.
The <unk> acquisition reduced our tangible book value per share by <unk> 10.
Which was less than we had previously estimated.
Gross loans held for investment increased by $1 billion or 16, 4% during the fourth quarter with growth across all lending categories attributable to the impact of the acquired Pacific mercantile loans and organic production.
Excluding the $905 million of loans added in the Pacific Mercantile acquisition and outstanding at year end loans increased by $117 million.
This growth included $696 million and production and $210 million in S. F. Our loan purchases offset by $789 million in payoffs paydowns and other reductions.
The overall activity increase the mix of commercial related loans to 79% of total loans.
From 77% at the end of the third quarter.
As of December 31, we had $123 million in PPP loans, consisting of $27 million from round, one and $96 million from round two.
Deposits increased $896 million during the fourth quarter due mostly to approximately $1 $1 billion of deposits added from the Pacific Mercantile acquisition and outstanding at year end.
All set by utilizing excess liquidity to fund outflows of higher cost deposits.
We acquired $479 million in cash and cash equivalents, which gave us the flexibility to exit higher costing deposits during the quarter.
Demand deposits noninterest bearing plus low cost interest checking increased by 20% from the prior quarter.
This represents our 10th consecutive quarter of demand deposit growth.
We remain very focused on to drive franchise value.
We expect this favorable shift in our deposit mix to further support our net interest margin in the first quarter.
Over the past year demand deposits increased to 70% of total deposits.
Up from 60%, reflecting the improvement we have made in our deposit base.
This increase combined with our proactive efforts to reduce deposit costs and bring in new relationships drove our all in average cost of deposits down from 36 basis points in the fourth quarter of 2020 to.
The 11 basis points achieved in the fourth quarter of 2021.
We believe we are very well positioned to benefit from the coming cycle of rising interest rates.
Due to the transformation of the franchise to a relationship based banking model with higher percentages of noninterest bearing deposits and variable rate commercial loans are one year GAAP ratio, which compares the percentage of earning assets that are scheduled to mature or reprice within one year to the percentage of rate sensitive term liability.
These that are scheduled to reprice or mature within one year has steadily increased.
At the end of 2021 or one year GAAP ratio stood at 38% up from 7% at the end of 2019.
This is one measure of asset sensitivity and with a significant increase in this ratio we expect to see some expansion in our net interest margin as short term rates increase.
Our credit quality remains strong in the fourth quarter and we saw positive trends in most categories. Excluding the impact of the loans added from Pacific Mercantile.
Nonperforming loans increased $6 9 million to $52.6 million in the fourth quarter, including the addition of $21 6 million of loans acquired in the Pacific Mercantile acquisition.
That was largely offset by payoffs pay downs charge offs and sales.
The nonperforming loans acquired in the Pacific Mercantile acquisition included a $12 $8 million C&I loan and $5 $5 million in PPP loans, which were all known to us through our acquisition due diligence.
At December 31, 55% of nonperforming loans are either in a current payment status, but our classified nonperforming for other reasons.
Or are SBA loans guaranteed through the PPP or 70 programs.
Let me turn to our provision for the quarter.
The provision for credit losses was $11 3 million in the fourth quarter compared to a reversal of $1 1 million for the third quarter.
Our fourth quarter provision for credit losses included an $11 $3 million charge related to non purchased credit deteriorated loans and unfunded commitments added.
As of the Pacific Mercantile acquisition date.
In addition, we recorded no provision expense related to other loan portfolio and unfunded commitment activity during the quarter.
We determined that the impact of the quarter's net loan growth was offset by improving economic forecasts utilized in our model improved credit quality in our loan portfolio and lower unfunded commitments.
Our allowance for credit losses at the end of the fourth quarter totaled $98 2 million and our allowance to total loans coverage ratio stood at 135%.
The increase in the coverage ratio from 1% to 6% at the end of the third quarter is due to the general and specific reserves established for the acquired Pacific Mercantile loan portfolio.
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 one 7% at December 31.
Our ACL coverage to nonperforming loan ratio remained healthy at 187%.
Our capital position remains strong and has benefited from the strategic actions completed over the past several quarters.
We continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value.
At this time I will turn the presentation back over to Jared.
Thank you Lynn.
I'll wrap up with a few comments about our outlook for 2022.
With the banking talent, we've added and continue to add the.
The impact of the <unk> acquisition and the way our entire organization is executing at a very high level.
We believe we are extremely well positioned to deliver another strong year in 2022.
Particularly given the strength of the attractive, California markets in which we operate.
We have positioned this company to continue generating top line growth and the benefit from rising rates.
With interest rates expected to rise in 2022, we think we'll be in a good position to benefit from the improvements we've made in the composition of our balance sheet over the past few years that have made us more asset sensitive.
Building a superior deposit franchise has been our top priority and the robust deposit gathering engine. We have developed consistently brings in low cost deposits to fund our growth in earning assets.
We've seen the benefit of lower deposit costs over the past two years and as rates rise the value of the deposit base, we have built will become even more apparent.
At the end of 2021 noninterest bearing deposits increased to 37% of total deposits up.
Up from 15% when I joined the company in early 2019.
And we gave additional <unk> loan portfolio.
Percentage of variable rate loans has also increased.
Making us even more asset sensitive.
Could provide yet another catalyst for earnings growth and improve returns as our net interest margin benefits from the higher level of asset sensitivity, we expect in a rising rate environment.
As we enter 2022, we're focused on fully realizing the synergies from the <unk> acquisition, including opportunities to expand our relationships with our new clients that have larger financing needs to support their growing businesses.
Additionally, in 2022, we will be accelerating investment in technology.
Is the greater scale, we have following the <unk> deal enables us to increase our investments while still realizing improved operating leverage.
Our goal is to be the hub of the financial services ecosystem for our clients.
And we want to be able to make innovative solutions available to them either directly through our own platform or through partnerships with fintech companies like our recent investment in <unk>, a BTB payments platform.
Technology roadmap that we are developing is designed to elevate the client experience.
And ensure that we meet all of our clients' banking needs in a rapidly evolving marketplace.
Finally.
We will continue to be very focused on optimizing our use of capital.
As we've previously indicated subject to regulatory approval, we would like to redeem our series a preferred stock that is a 7% after tax coupon sometime during the first half of this year.
Which would increase our net income available to common stockholders.
Following that redemption, we will continue to be opportunistic and evaluate other ways to optimize our return on capital for shareholders.
In closing, we believe we have significant levers to pull in 2022 and anticipate top line growth.
Expanding operating leverage growth in our verticals.
Investment in our core systems and technology.
And continued optimization of our capital.
As always our Northstar remains creating true franchise value for shareholders in 2022 as well as the years ahead.
As always thank you for listening.
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.
We will now begin the question and answer session.
I ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
So withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
Okay.
Our first question will come from from Europe , Brazil, <unk> of Wells Fargo. Please go ahead.
Hi, good morning.
Good morning.
Maybe starting Jared on your last point, there about technology investments.
You could talk us through some of the types of projects you are looking or capabilities, you're looking to add on here.
Beginning in 'twenty, two or I guess building on in 'twenty, two and then as we look at the 40% expected cost saves from Dnb, how should we be thinking about how much of that flows through to the bottom line versus gets reinvested back into the business.
Sure.
Well, thanks, really really pleased with the quarter and as we've said before we.
We continue to move the ball down the field and that's our goal our progress.
Sometimes it's firing on all cylinders sometimes.
Just a few objectives, but this quarter felt like we did a lot the ability to.
Acquire close an acquisition and integrated in the same quarter in close at all towards the end of the quarter, which was pretty remarkable and I'm really particularly proud of our team for doing that so we want to lead off and say thanks to all the California. Thank you, California colleagues.
Who helped us do that.
There's a couple of areas, where we think investment is critical to remain as and as I said in my comments.
The hub of our clients' financial services ecosystem, we know that we can't do everything.
But we think we can give them access to a lot of things and so we will be making decisions on what we want to own or invest in like for next year.
Or what we think we might just find need to find a partner to bolt on to provide that solution for our clients.
The first thing Thats critical for us to be able to do this and stay ahead of our clients is to make sure that we can perform digitally.
And so we're looking at optimizing and improving our.
And to end loan origination system right now we're in the final stages of selecting a partner and we expect that that's something that we're going to be rolling out by.
By mid this year.
To be able to provide a digital end to end solution for our clients.
It also has to do with how we think about our view of the clients what can we see in terms of the <unk>.
Do our colleagues here at Banc of California, having a view of our client that's optimal to allow them to serve our clients.
So we want to make sure that we can give them all the tools necessary to make sure that we understand what our relationships look like and how we can serve them better. It's a very holistic strategy that we're looking at we're looking at it from the beginning of a client lifecycle through how we serve our client going forward and it also has to do with what services, we offer to our clients we talked about for next year, which.
As a.
It's a BTB payments platform, but it's also an optimization program for receivables and payables for clients and how they optimize their cash flow.
So we're in the middle of White labeling this product and rolling it out for our clients.
And so these are a number of things that we're thinking about there's kind of more to come here and we'll be talking about it more as we roll it out I don't like.
Giving too much ahead of ahead of the curve here because these things take time, but im optimistic that in 2022, we'll be doing a lot in terms of this will be.
Disclosing more as we as we hit our benchmarks Lynn do you want to address.
How much of the 40% you think will be.
Reinvesting in technology, if theres, a way to think about that.
Sure.
Hi, Tomorrow, I would say that.
We do expect to receive a full 40%.
Cost benefit or saves when I kind of reflect on <unk> historical expense space.
I think that there is an opportunity for maybe that 40% plus.
That we would look at reinvesting I think there is also an opportunity to invest some of our own cost efficiencies that we've continued to identify and rationalize.
And then repurpose those dollars of investment in client experience technology.
And so to that end I think.
We're looking at.
Our run rates, including our investment.
In technology and client experience in the 2022.
To be I think fairly.
Reflective of 2021, and what we were able to accomplish.
Plus I would say.
55% to 60% of <unk> historical expenses.
So that's where we are right now.
Yes.
Another point there is.
We're wrapping all of these changes.
Kind of our theme for 2022 internally as is the client experience.
And so all of our colleagues are very focused on how we're optimizing and delivering decline.
The client experience.
For our clients and as we bring a new relationship showing them the difference that banc of California can really make.
For their financial services delivery.
Okay. That's great color. Thank you for that and then maybe switching to the client experience and some of the growth you saw this quarter.
It'll fundings very impressive as where the payoff activity, maybe just talk through kind of where youre seeing the growth on the funding side. If there is any particular verticals that are seeing incremental strength and then similarly on the payoffs was was that kind of abnormality, just given maybe fall.
From third quarter getting pushed into the fourth quarter and then similarly first quarter being pulled forward into the fourth quarter.
Yes, the payoffs were high.
And.
It's unfortunate, but I don't get too worried about it because I really focus on what we can control.
Which is which and as long as our production engine is strong I know that thats those things like that will revert to the mean.
And we will show net growth I was really pleased with the quality.
Our production and the balance of it is I look at fourth quarter versus the third quarter.
CRE was up relative to the third quarter multifamily was up relative to the third quarter construction was down.
Warehouse was up a little bit, but it was really in balance as we said, we weren't going to grow at an outsized level.
C&I was pure C&I was almost flat. So overall it was really well balanced we made we announced yesterday that we made a hire.
Brought in.
Someone to lead media and entertainment for US who comes with a tremendous resume to balance our already exceptional team. So we expect our media and entertainment vertical to continue to grow we have a new hire that we'll be announcing soon in the nonprofit and education space to continue to grow that vertical which has been very strong for us and so we see core C&I.
Hi.
Continuing to grow this year and obviously, we have a strong vertical in.
And in real estate and that that's going to continue to be strong and was on our pipeline call yesterday.
Im very very pleased with what I've heard and I don't see anything that looks like a headwind for us right now.
That's great color. Thank you for the questions and congrats on getting the deal closed and rectal.
Thank you thanks Timur.
The next question comes from David Feaster of Raymond James. Please go ahead.
Hey, good morning, everybody.
Good morning, good morning.
I just wanted to follow up on that last discussion, it's great to see the new hire.
I believe as you call in the presentation that you have created a talent magnet.
Just curious how you think about the hiring market youre hiring pipeline near term it seems like there could be a real opportunity for you all just in light of the disruption around you just any commentary on hiring and where you are most interested in adding talent.
So we're.
Getting hires were getting new talent.
First of all we have exceptional people here at Banc of California, and our desire to add people is really to support our growth we need to do that both in.
In the back office and on the front lines to deliver the banc of California experienced in the.
And the difference that we make here to as many people as possible. We do think that the market for US is it's very positive.
So we're finding new colleagues from all of our competitors.
I will say it is a very very very competitive market and.
We're finding that the cost to bring in talent is.
Higher than we've seen in the past but.
For the right people were willing to make those adjustments and bring them in and we're trying to make sure that our existing team.
Is supported as well in there.
Working hard and they deserve to get the benefits of our growth and so we're looking to share that with them as well.
We haven't really had a problem finding the people that we've been looking forward, but we've been very selective on the people that we've been looking for and these are <unk>.
Surgical and very targeted hires.
As opposed to opening the floodgates and just grabbing gravlin whoever walks in the door.
We're very careful in who we hire.
Grateful to our.
A tremendous talent recruiting team who has really supported us. These last several years and they really understand our bank and what it takes to be successful here, we'd like to say that everybody here carries a shovel.
And maybe maybe toolkit as well maybe hammer and some nails there are very few people who.
Just to walk around.
And basically move traffic without driving driving a vehicle to and so everybody here plays a role and so it's not the right bank for everybody, but over I think our team has done a great job of finding the right people.
Okay. That's helpful.
And then just maybe touching on the loan pipeline could you just talk about how that themes as we head into 'twenty, two and how that compares quarter over quarter and just any expectations for growth.
As we look into next year and just how new loan yields are trending it looks like the new rate on production decline a bit I. Just was curious if that was a mix issue or whether you're in.
That was a mix issue as I look at <unk>.
I look at production yield.
CRE quarter over quarter was flat multifamily was actually up a little bit.
Construction was down and we had some large construction come on in the quarter C&I was flat and so.
I think it was just a mix issue I think overall, if anything loan yield one of the things thats going to happen when rates rise and my experience is theres going to be a little bit of a pause.
So.
And then it'll be interesting to see how long that loss generally when rates rise.
Deposit costs are obviously going to lag, but on the loan side.
There's kind of a hold in the market because buyers are want to pay less for properties and when it's going to cost them more to finance. It for example, or in C&I people that are buying equipment.
Cost them more to finance that they might they might wait and see if that's permanent.
And then sellers of properties or equipment.
<unk>.
In negotiating the price might not be fully prepared to expect the change in terms.
New interest rates will will indicate and so oftentimes there is a little bit of a lag in new activity the moment that rates rise.
We'll see if that happens here or not.
Our expectations overall for 2022 is that we're going to have robust loan growth.
In terms of what that predicts for net loan growth we want to target.
High single digits low double digits for sure.
I'm hesitant to say that that will happen because I don't know what payoffs are going to be.
But one thing that I'm confident of is how well we're positioned from an asset sensitive asset sensitivity standpoint, and a new page of our presentation, which I want to make sure people see.
Is on page 17.
That has a sensitivity around deposit betas.
And shows the full extent Lynn talked about our GAAP ratio and the full extent to which we expect to participate in the benefit from rising rates. So.
I expect our loan growth in our loan production to be very robust.
How it nets out.
I don't know what I'd like to I'd like to see us be in the high single digits, and our lower lower double digits.
Know that from an earnings perspective, we're going to figure out a way to get to where we need to be to make this a very productive year and whether it comes because we benefit from.
Net loan growth is high and we get the benefit of interest rate upticks in our asset sensitivity. That's great that's going to be the hormone scenario. If we get the benefit of the interest rate uptick and net loan growth is a little bit lower.
Mid to upper single digits, but it doesn't hit the double digits, we're still going to figure out a way to make earnings.
Really really strong and Linda has shown a tremendous ability with her team to optimize our use of cash.
And to create operating leverage quarter over quarter and I'm sure that we're going to continue to do that even as we reinvest in technology. So David I'm not I'm not trying to Dodge. Your question I, just don't know the answer.
I'm, telling you where I would like to be.
But I know that.
We'll see if we can get there.
Yeah, that's helpful and know that slide on the rate sensitivity using the different betas was extremely helpful.
But just circling back maybe to the expense side. It sounds like you've got a decent amount of the <unk> savings in there.
Curious what might be a good.
Core expense run rate as we come out of the first quarter once everything's.
Integrate it and then just how you think about expense growth just in light of the inflationary pressures the new hires that you're talking about some of the tech initiatives that you've got going on.
Lynn do you want to take that sure sure I can I can start I think just kind of following on from my comments earlier.
I reflect back and Youre able to probably see these as well looking back at Pacific mercantile their expenses.
They were running maybe around.
Just over $88 million a quarter or so.
We are looking at our expense savings, we've said 40 plus so.
Based on what we've been able to achieve plus our desire to continue investments in our initiatives.
Including those expense saves and I will say that in the fourth quarter given the system conversion was in November .
We will get the full benefit of a full quarter of the combined operations starting in the first quarter.
So yeah.
Save you all a little bit of.
Math, there I think we would target.
Operating expenses too.
Be in the range I must say about 45, and a half to $47 million a quarter.
First quarter tends to be a little bit higher as you kick off the year.
And definitely appreciate your comment about.
Inflation, the competitive landscape for recruiting talent.
We're trying to take a hard look at that and incorporate all of that into.
Our expenses and how we continue to leverage our.
Our investment in those resources so.
I think that's what where we're looking at.
There's still opportunity there.
<unk>.
Great operating efficiencies.
Okay. That's helpful. Thank you very much.
We see ourselves expanding our operating leverage even as we make these reinvestments in technology and CRM OE going up in our EPS going up I mean.
All the topline growth gives us a lot of flexibility and we see a lot of top line growth ahead.
Thank you.
The next question comes from Andrew Charles of Stephens. Please go ahead.
Hey, good morning.
Good morning, Andrew.
Hey, Jared Atlanta, I was maybe hoping to start on the.
$5 5 million in net charge offs. This quarter I think some of it was related to.
Pac Merck, but.
Is the remainder just kind of year end clean up if you will or just any kind of color you can provide on.
The charge offs this quarter.
Sure I'll start and then let if you want to jump in I mean, we looked at a whole bunch of.
Loans that we took the opportunity to sell that were nonperforming that we got we got a premium on several of them.
And our team did a superb job of getting that done through the end of the quarter and we just thought it was a great quarter to take that opportunity you don't often see premiums on on on loans like that and so.
We wanted to do that and keep our.
Keep our we knew what we were bringing over with Pac Merck and we did it with our eyes open with the ability to take the appropriate reserves and so we wanted to make sure that these levels remain appropriate and so.
So we.
There was a little bit of that going on.
Yes.
One other comment one other comment before I, just just to remember.
I should point out that on our delinquencies.
We had about $30 million of delinquent loans.
Return to return to non delinquent status after the end of the quarter.
That tends to happen with the <unk>, just there really really lumpy.
They are delinquent temporarily because it's just the way that people live.
They pay their fee and then they bring them back to normal status and so our delinquencies as long as we got this sfer portfolio are going to run a little bit a little bit read at the end of the quarter and then a normalized after the end of the quarter. Its been the same trend for many many quarters and as we've built up our rest of our portfolio.
That's happened so I just wanted to point that out sorry Lin.
Oh no.
So and I look at the loans charged off in the recoveries in the quarter.
Through both acquisition accounting plus our own activity.
That's what comprised the numbers there is absolutely correct with our few.
A few nonperforming loans that we decided to exit we were able to yield some gains on some and then we did take some charge offs on this.
I'm going to say the smaller piece.
So included in charge offs for the quarter was a loan that we had specifically reserved for in prior quarters.
And took the.
And wrote that off or charge that off in the fourth quarter.
The other large numbers in there relate to loans that were acquired in the Pacific Mercantile acquisition.
They were fully reserved through purchase accounting.
And then they were offset also by unknown recovery.
And the timing of when we receive the cash relative to the acquisition date.
So.
That's the majority of.
The charge offs in the recovery numbers.
Okay, Great. That's really helpful color I appreciate it.
Maybe Jerry just moving back over to some of the loan growth I saw the announcement for the head of media and entertainment business.
I think that portfolio represents a relatively smaller portion of the overall balance sheet today.
Can you maybe just give us some color on how this new higher expands that business line.
Kind of wanted to ask for you and then what kind of market opportunity you see in that segment.
Sure well.
Pleased to add him to our team we've got a great great background, and I know he's going to make great contributions.
He is joining an already very talented team with.
Led by Adrian.
And.
And others that have been on the team for many years.
And Randy and others, who have done just a superb job for us.
We expect us to we've primarily been playing in the streaming space. So we've been as we've talked about before refinance streaming production, so and content. So when a producer has the idea for a show they might go to Netflix our hallmark of Hulu and run the idea of the flagpole and then if they like it.
The streaming service the production come would be it will buy the content they'll buy the scripts.
And they will basically start to contract and say if you make it will buy it and so then they come to us with the contract.
And we then help them finance the production of the shelf.
Primarily what we've been doing.
But there is opportunities in the whole ecosystem.
Two to do more financing without taking we're not taking any box office or distribution risk with streaming right. We're not getting repaid based on how many people show up at the theater.
We have a contract from Netflix, which we know is good money or from Amazon or whomever.
And so how do you play in this ecosystem.
Without expanding your risk profile well there are a lot of supportive services that are in the same ecosystem that we're not currently serving.
That we can continue to serve.
And a lot of a lot of the different players that are there we think.
Our people that we can reach out to for more similar financing.
There is the ability to finance distribution thats already of the content. That's already been made where people have already signed a distribution deal.
And a whole host of other things that are in that ecosystem as well as in the related areas of television and.
And music and so without going into too much detail about specifically, what we're going to do I hope that gives you some color for what we could do.
Yes, no that's fair.
Very helpful. I appreciate it.
And maybe just a housekeeping question for <unk> I think I heard you on the 45, 5% to $47 million kind of per quarter of expenses in 2022, I'm. Just curious does that contemplate any kind of step down in some of the legacy litigation expenses or is the potential for that kind of would you kind of.
Benefit the run rate in 2022.
Sure so.
So for the legacy litigation expenses, which have primarily been resolved are well identified and we refer to them as the indemnified professional fees.
Outside of that.
That's outside of that number.
Okay perfect. Thanks for taking my questions.
Yep. Thank you.
Our next question comes from Kelly Motta of Keyw. Please go ahead.
Hi, good afternoon. Thank you so much for the question.
I really appreciate all the additional color in the slides on.
Your asset sensitivity post CNBC.
Hoping if you could just give us a sense of how you expect.
Given all the changes you've made.
Funding side, how you expect to see.
Funding to react to the first couple rate hikes do you expect.
It should be relatively resistant now given that the nice shift you've had.
Yes, good morning, Kelly good afternoon, I guess to you.
So with all the liquidity in the market.
We don't know what the deposit betas are going to be but my expectation is that the early rate hikes.
Are going to show no appreciable change in.
On the deposit side, we're not going to see any sort of movement of money. We've we've moved really really hard out of money market and so when you look at our deposit breakdowns.
Breakdowns.
The detail of it we have money market has been shrunk dramatically and that was very very intentional. So we wouldn't expect obviously noninterest bearing deposits aren't going to aren't going to react you wouldn't see low cost checking expected to react and so then it's just about kind of money market would be the one that would react and then you would expect Cds too.
So obviously reacted maturity, which you can control.
Even there, though I just.
So much liquidity in the market.
We don't see rates.
Influencing depositors.
We don't see.
Us.
Participating in providing higher rates to depositors anytime soon we don't we don't see the need.
So hard to know, but that's why we wanted to provide the sensitivity chart on the bottom of page 17 about what could happen.
In an operating environment based on historical betas or zero basis.
Thanks, So much Derek maybe just a quick one on capital I appreciate it.
<unk> will update on the preferred redemption, just wondering if theres any changes.
How youre thinking about maybe deploying the buyback given where the stocks trading.
Well look at.
Obviously, we don't like where our stock is trading today and hopefully it rebounds and hopefully this communication helps in some way to let people know about our story.
We think the first thing we need to do with our capital as redeem our preferred stock and we wanted to give ourselves the benefit of and the regulators the benefit of.
Given enough time to do that because we do need approval, but we're optimistic that it will be done in the first half of this year and if we can get it done in the first quarter.
That would be that would be that would be fantastic.
From there then there's always the question of where are we trading and.
We thank our investors would prefer a return on return on capital versus return of capital.
But that's not to say that we wouldn't put in place a buyback program. If it made sense. So that we can be opportunistic about where our stock is trading we just got to look at that versus all the other uses of our capital including reinvestment in our company for growth.
We have some we see robust growth and we know we need to reinvest in technology. It's not to say, we can do all of those things, but I think it's probably.
Kind of how we stack them.
Lindsay of any other thoughts there.
No I think you've done very well thanks.
Great. Thank you so much for the update here and I appreciate that.
Yes.
Thanks Kelly.
The next question comes from Gary Tenner of D. A Davidson. Please go ahead.
Thanks, Good morning.
Was it largely been answered I just wanted to ask the loan yield.
Adjustments I think that were called out in the press release during the desk added 12 bps this quarter versus 11 last quarter Im assuming lower PPP fees this quarter and presumably some increase discount accretion benefit could you kind of break out the relative impacts of both of those items third quarter versus fourth quarter for us.
Sure Gary This is Glenn.
So I think as we step back, especially as the PPP program for all intensive purposes is kind of winding down so there's less of that.
And the numbers.
And rightfully so.
So that's a smaller portion of it this quarter relative to last quarter.
Thank the variation is mostly related to prepayment fees that we see coming through given the elevated levels of.
Prepayment activity.
So while it did and to your point create much variance between the loan yield between quarters. There is a small component that's always associated maybe with prepayment fees based on that activity.
No.
As you look at the numbers for the fourth quarter.
A majority of the.
The 11 basis points as the prepayment fees.
And less to do with PPP amortization or accelerated accretion.
And then I would say.
The same is true for last quarter, so less prepayment fees and a little bit more PPP acceleration.
Yes.
Those are the pieces.
I think my general comment is.
There is always some piece of either now that we have an acquired portfolio discount accretion as we bring that through and prepayments.
And maybe a little bit of PPP.
No.
And that's a couple million dollars every quarter.
What that 12 basis points represents.
Alright, thanks very much.
Thanks, Gary.
Our next question comes from Tim Coffey of Janney. Please go ahead.
Good morning, guys.
Good morning.
I got on the call a bit late so I apologize if you already covered this but if we were to kind of your legacy deposits because there was some churn in the quarter, perhaps a bit of a decline I wonder is that seasonal or targeted.
I think it was Linda is that you wanted to discuss.
Yes sure yes.
Tim Good morning, and I would say it.
It was by design, we recognized as we were working together towards the.
Civic mercantile close dates the high levels of cash and.
We started to look at what opportunities we have within our own.
Deposit mix and we were able to identify MSA gave us the flexibility to go ahead and exit.
Some of them were maybe less relationship a little bit higher.
Cost typically available in the market if you want to go bring those and so.
I would say less season on more strategic.
Strategic reduction.
Okay.
And in relation to kind of the excess liquidity you brought on balance sheet from the transaction.
Or you feel comfortable or confident with the deposits you have right now to invest that excess liquidity are you still have more to do working on the mix of deposits.
I can start the <unk>.
Based on our liquidity profile at the end of the year and the deployment of the cash I think we feel very comfortable with being able to invest our liquidity.
We've talked about how much excess liquidity is in the marketplace.
We view our <unk>.
Lending basis stable, we've had real growth I think it's well understood.
I appreciate that some liquidity may be put to work.
But we're also growing our deposit.
Deposit base, we think the mix is reflective of where.
Where we are headed in the future even if some liquidity comes.
So I.
I think we're we're comfortable investing our liquidity at this point.
Okay.
And then Jerry just a follow up on the hiring questions.
Are any of the.
Are you opposed to hiring outside of your geographical footprint at this time.
No.
So we have a couple of hires up in the Bay area.
Amit.
Net debt market for for wells and so it was.
Couple of people, who had good relationships with or that he knew either worked for him or her that he knew knew well and they're coming to work for us we have a team up there that's doing a superb job.
We don't have any branches up there.
And then in terms of more broadly we are open to hiring people.
Based on their skill set and what we think would be a good fit with our company and matters. The job not every position and this company is ripe for kind of a remote higher but we're absolutely open to it for the right people.
Okay.
Opening branches in the Bay area and the cards.
I think it's possible we want to look at what sort of what I would call footings, which is loans and deposits that we cabinet market. We have deposits from all the clients that we lend to the folks that are up there have their deposits and branches that are down here. We will look at what the scale was to make sure that it was appropriate I wouldn't build something and hoping that people would come.
Do it I would build it if I knew I had enough base to have a profitable branch from day one.
Okay.
Very good those are my questions. Thank you very much.
Thanks, Tim I appreciate it.
Our next question comes from Matthew Clark of Piper Sandler. Please go ahead.
Good morning.
Good morning, Matthew.
Do you have to.
No how much in the way of cost saves you've realized to date with CNBC. After the conversion in November maybe on an annualized basis in dollars.
Sure.
And what might be left.
The top of my head.
Don't know that I have that number but I can probably answer it a different.
A different way.
Thanks Vince.
Given that we effectively operated both organizations through.
From the October 18th close date for the Middle of November and then needed to rely on the team.
To finish up with the integration.
Yes, there is.
Probably.
Let's say a half million to a $1 million.
That that may be included as we kind of worked through that last.
A portion of the year.
That's helpful.
It is it is thank you.
Okay, and then Jared maybe strategically thinking about your financial goals.
Youre striving for maybe in another year or so.
What's your sense for what Youre trying to achieve on an ROA.
Maybe return on tangible perspective.
Yes, I mean, given the without putting given without putting guidance without putting kind of lines in the sand about when and when and where.
We said that we were going to get to a one then we're going to get to a 110 and we're going to get to a $1 25, and then we're going to get to 140 <unk> ROA.
Linda and I were just going over some numbers yesterday about where we think we're going to be on a standalone basis. After pack market definitely accelerated us a year.
I think that.
We think that we're going to <unk>.
Move past that first that certainly where we are.
Pascal one. So then are we about are we between a $1 10 and 125 for this year on a full year basis.
Thank you.
That's probably reasonable.
And.
How do we how do we get there and what are the levers that we pull in we try to think about it in a interest rate neutral environment and then if interest rates help us that's even better.
Got it Okay and then we're obviously not we're obviously not happy with that and look that's tremendous from where we were but we have high aspirations for where we're going and I think we've shown that we have.
Quite a bit of urgency about it and so on the on the return on tangible common.
It's obviously a super important number it might be even be more important than ROA at some point and so I.
I think question is do we have too much stock outstanding.
Pulling us back in so.
All of those things planned, but we want to be.
We don't want to be in the low double digits, we want to be.
Sure.
Okay great.
Great and then.
I'm not sure. If you discussed this in your prepared remarks, but just switching gears to the loan pipeline, where does that stand at year end, how does it compare to the prior quarter.
And whether or not you still feel good about kind of mid to high single digit organic.
<unk> growth going forward this year.
So you might not have heard my comments earlier.
Yeah.
Our pipeline is as strong as it's been.
And so I feel very very good about it.
I don't know what the payoff situation is going to be.
But let's assume that that kind of normalizes I don't see any reason why we shouldn't be in.
Mid upper single digits, but we would aspire to be higher than that.
As I mentioned I think sometimes when rates rise the market takes a pause because there is a delta between the bid and the ask for the buyers and sellers for whatever services. They are looking for or whatever properties are products.
That definitely.
Definitely happens I've seen it every time and so.
I think that might disrupt kind of the pace of lending activity, but it might not it might not the economy is very strong it's holding up really really well.
Nobody seems to recognize that like war is about to break out on the on the tip of the tip of Ukraine, and hopefully it doesn't but and hopefully that doesn't happen and it doesn't revert back to our economy.
But everything locally seems very very strong and notwithstanding.
The variant, which kind of slowed things down at the beginning of the year and the end of last year.
With omicron, everybody seems to be pushing through now.
Things seem pretty robust so in terms of the level of pipeline.
Hi.
And our teams have a high degree of confidence and I do as well with.
With a net loan growth number ends up being I don't know, but we would like to you know we're going to aspire to for it to be in the upper single digits, and hopefully it'll be get into the double digits.
And as I mentioned earlier.
If that doesn't happen for some reason we have a whole bunch of ways to pivot to get our earnings to where we need them to be.
But we believe that this year for us as our topline growth is going to be pretty strong.
Okay, Great and then just last one for me on the on the media Entertainment higher.
Can you give us a sense for how large is book of business was and whether or not there's an opportunity to cherry pick some of that.
Or is it going to be starting we hire people based on their experience and their.
Industry relationships and so it was less about a buck and more about helping us design.
Our strategy going forward, and then and then rolling out that strategy.
I don't see if we have $100 million book.
Book Today, I don't see any reason why over the next two to three years, we couldnt double or triple that that portfolio.
No reason why we couldnt do that if not if not more than that we have I think this is going to be an important sector for us and we want to continue to capitalize on the market position that we have.
Great. Thank you.
Thanks Matthew.
Thank you ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time and we thank you for your participation.
Okay.
Okay.