Q4 2022 Banc of California Inc Earnings Call
Hello, and welcome to Banc of California's first quarter earnings Conference call.
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Today's call is being recorded and a copy of the recording will be available later today on the company's Investor Relations website.
Today's presentation will also include non-GAAP measures the reconciliations for these and additional required information is available in the earnings press release, which is available on the company's Investor Relations website.
The reference presentation is also available on the company's Investor Relations website.
Before we begin we would like to address every ones of the Companys Safe Harbor statement on forward looking statements included in both the earnings release and the earnings presentation.
I would now like to turn the conference call over to Mr. Jerry roof Banc of California's President and Chief Executive Officer. Please go ahead, good morning, and welcome to Banc of California's fourth 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.
Bank of California generated record net income in 2022, and I'm tremendously proud of our entire team.
Our results and overall performance reflects the strength of the franchise and high quality balance sheet that we have built over the last several years.
We were able to achieve what we set out to do in 2022, which was to generate solid earnings by capitalizing on our strong stable deposit base and disciplined expense management.
As we have continued to demonstrate over the last several quarters.
Our balance sheet has migrated to a balanced portfolio of high quality loans and stable commercial deposits.
As we forecast on this call many quarters ago.
We said that warehouse balances would migrate down, but we would continue to move our earnings forward.
These last several quarters have proven out that plan.
Our fourth quarter was strong even as we remain selective in our new loan production given the macroeconomic uncertainty.
As a result, while we had a slightly smaller average balance sheet in the fourth quarter.
Our core earnings were a bit higher than the prior quarter.
And we generated a significant increase in our tangible book value per share.
Our growth in tangible book value per share is important to highlight.
As it reflects our steady financial performance and prudent balance sheet management.
For the full year.
Our tangible book value per share increased by more than 2%.
Notwithstanding the impact of higher interest rates on the OCI.
And the significant capital actions we took.
Including the completion of our 75 million stock repurchase program, our $24 million acquisition of deep stack technologies and.
And the repositioning of a portion of our securities portfolio this quarter that will contribute to our future earnings.
Lynn will discuss this repositioning a bit later in the call.
Our loan fundings were lower than the prior quarter due to a combination of lower loan demand, resulting from higher interest rates and borrowers being more cautious given the economic uncertainty as.
As well as our decision to be more selective in the loans, we are adding in the current environment.
But excluding warehouse we.
We were able to slightly increase our commercial loan balances during the quarter and keep our overall loan balance is essentially flat.
We continue to see higher yields in the portfolio, which enabled us to realize more margin expansion when combined with the actions. We have taken this year to manage our funding costs and our stable noninterest bearing deposit base that remained around 40% of total deposits.
In terms of the launch of our payments business.
We remain on track with our projected schedule.
Earlier this month, we completed the integration of deep stack technology into our internal platform.
We have begun processing payments on our rails with banc of California, as the sponsor bank for select smaller clients.
We continue to build out the infrastructure necessary to process transactions at scale with.
With targeted completion around the end of the second quarter.
After which we will be more broadly developing our pipeline.
Now I'll hand, it over to Lynn, who will provide more color on our financial performance and then I'll have some closing remarks before opening up the line for questions.
Thanks Darrin.
Please feel free to refer to our investor deck, which can be found on our Investor Relations website as I review, our fourth quarter performance.
I'll start with some of the highlights of our income statement and then we'll move on to our balance sheet trends.
Unless otherwise indicated all prior period comparisons are with the third quarter of 2022.
Our earnings release, and Investor presentation provide a great deal of information So I'll limit my comments to some areas where additional discussion is helpful.
Net income available to common stockholders for the fourth quarter was 21.5 million or <unk> 36 cents per diluted share.
As Jerry mentioned, we repositioned a portion of our securities portfolio during the fourth quarter.
And recognized a pre tax loss on sale of securities of $7 7 million, which had a nine cent impact on diluted earnings per share.
On an adjusted basis net income totaled $26 8 million for the fourth quarter were 45 cents per diluted common share and a loss on sale of securities.
Indemnified legal costs and net losses on investments in alternative energy partnerships are excluded.
This compared to adjusted net income of $26 7 million or <unk> 44 cents per diluted common share for the prior quarter.
There were no securities sold in the prior quarter.
It is also worth noting that on an adjusted basis net income has more than doubled since the fourth quarter of 2021.
Our net interest margin increased 11 basis points from the prior quarter to $3 six 9% as our overall, earning asset yield increased by 46 basis points and our total cost of funds increased by 38 basis points.
Our earning asset yield increased to 4.79% due to higher yields on both loans and securities during the fourth quarter.
Our average loan yield increased 38 basis points to 492 due in part to the higher rate on loan production.
And the average yield on securities increased 81 basis points to 419.
The higher securities portfolio yield is due mostly to the CLO portfolio resets and the impact of the investment portfolio actions, we accomplished in mid November .
We sold $119 million in securities recognized a net loss of $7 7 million and reinvested. The net proceeds in securities with a higher average yield of approximately 230 basis points compared to the securities we sold.
We estimate this allocation of capital has a tangible book value earn back period of about three years and what caused the overall investment portfolio yield to increase 20 to 25 basis points going forward.
Our average cost of funds was 117 basis points up 38 basis points compared to the prior quarter.
Our average cost of deposits was 79 basis points for the fourth quarter up 32 basis points.
This increase in our average cost of deposits was primarily driven by rate increases and our money market and interest bearing checking accounts.
As well as the impact of the Cds that we have added to lock in some longer term funding as market interest rates have continued to climb.
This was partially offset by the positive impact of our average noninterest bearing deposits increasing to 41% of total deposits in the fourth quarter from 38% in the prior quarter.
As market interest rates have increased and liquidity has continued to be absorbed by the market. The expectation of deposit yield has also increased.
And while our cost of deposits increased 32 basis points quarter over quarter. The average federal funds rate increased to 147 basis points over the same time period.
As a result, the difference between our average cost of deposits and the average federal funds rate widened from 171 basis points last quarter to 286 basis points for the fourth quarter.
The net interest margin drivers page in the Investor presentation deck illustrates this information.
Our noninterest income decreased $7 1 million from the prior quarter due to the loss on sale of investment Securities.
There are areas of noninterest income were relatively consistent with the prior quarter, but the most significant variance being higher gains from equity investments of $724000.
Our adjusted noninterest expense increased $1 1 million from the prior quarter.
Which was a reflection of an increase in a variety of areas focused on internal projects, including but not limited to deep stack.
All of our other areas of noninterest expense were relatively consistent with the prior quarter as we continue to maintain disciplined expense control while investing in areas of the business that we believe will create long term franchise value.
The effective tax rate for the fourth quarter was 29, 6% up from the prior quarter's rate of 29, 1% or.
The higher effective tax rate for the current quarter decreased net income by approximately 170000 compared to the prior quarter.
For 2023 we estimate an annual effective tax rate to be approximately 28%.
Turning to our balance sheet.
Our total assets were $9 2 billion at December 31st down slightly from the end of the prior quarter.
Total equity increased by $7 6 million during the fourth quarter is $21 5 million in net earnings and a 1.7 million positive shifts and Aoc Guy were offset by capital actions, which included common stock dividends and the repurchase of $19 million in common stock.
But the fourth quarter repurchases, we completed the $75 million stock buyback program announced earlier this year and during 2022 we repurchased.
<unk> of our previous outstanding shares.
Our noninterest bearing deposits remained strong averaging 41% for the quarter and ended the quarter at 40%.
We continue to use wholesale funding sources to strategically manage both liquidity and funding costs. When we believe these sources are better options than rate sensitive client deposits.
This included adding 100 million in FH there'll be term advances in the fourth quarter.
Turning to credit quality.
Our credit quality remains strong in the fourth quarter nonperforming.
Loans, excluding single family residential loans or S F ours.
Decreased slightly quarter over quarter.
Well as so far M. P. L did increase they are well secured with very low loan to value ratios and we do not see loss exposure and our S. F. Our portfolio.
S F. Our mpls represented 38% of our Npls at year end.
In addition at December 31st.
35% of our nonperforming loans were either loans and a current payment status by classified nonperforming for other reasons or the guaranteed portion of loans that have an S. P. A government guarantee.
Similar to M. P else most of the increase in delinquent loans was driven by ssrs, which totaled $60 8 million or two thirds of total delinquencies at period end.
Currently happened we saw a drop in delinquency after quarter end and our <unk> delinquencies dropped by $23 7 million by the middle of January .
We did not record a provision for credit losses in the fourth quarter, given the lower loan balances, which offset the impact of weaker economic forecast.
Our allowance for credit losses at the end of the fourth quarter totaled $91 3 million compared to $98 8 million at the end of the prior quarter and our allowance to total loans coverage ratio stood at 1.28% compared to 1.36% at the end of the prior quarter.
The $7 $6 million decrease in the allowance for credit losses was due.
Due primarily to a $7 $1 million charge off of a specific reserve for purchased credit deteriorated loans from the P. M B acquisition.
Excluding the reserves associated with loans individually evaluated for impairment.
Total coverage ratio increased from one point to 4% to 1.25% quarter over quarter.
Excluding warehouse loans, which have lower relative risk and our reserve methodology. The ACL coverage ratio stood at 1.36% at December 31st.
Our ACL to nonperforming loan ratio remained healthy at 165%.
At this time I will turn the presentation back over to Jared.
Thank you Lynn.
2022 was a very successful year for banc of California in terms of executing on our strategic initiatives delivering strong financial performance.
And continuing to build long term franchise value.
And I want to thank all of our colleagues at Banc of California for their outstanding effort and performance.
One of the pages in our deck.
Is that what we set out as goals for 2022, and how we checked each of those boxes.
It is important we continue to deliver for our shareholders by doing what we say we're going to do.
Turning to 2023.
We believe that the franchise, we have built positions us well to manage through the current environment and to continue delivering strong financial performance.
We have a very stable base of non interest bearing deposits as a result of the work we have done over the past several years.
And high quality commercial relationships the value of the level of service and expertise that we provide.
We have a well diversified conservatively underwritten loan portfolio that we have a high level of capital with our total capital ratio and TCE ratio, finishing the year at 11, 4% a nine 3% respectively.
We've been very successful in attracting talent to the company and we expect that to continue this year as we see many highly productive bankers that want to be part of banc of California.
We also continue to invest in technology to further enhance efficiencies and elevate the client experience.
With the priority being placed on investments that will further improve our ability to attract low cost deposits.
Since my first day as CEO , our goal has been to build a robust core deposit gathering engine, which we have successfully done.
We firmly believe that franchise value is driven by the deposit base and we remain committed to ensuring that we have the best in class technology service levels, a specialized expertise for targeting deposit rich verticals that will enable us to continue taking market share and adding more commercial deposit relationships.
2023 has begun with economic uncertainty, which makes it challenging to forecast at this point.
Most notably around the level of loan growth, which is going to be largely dependent on the economic environment and there's a wide range of possible outcomes.
But with our consistent success in deposit gathering we expect to have opportunities to profitably invest those inflows and generate higher earnings.
If we don't see enough lending opportunities that we like.
Then we can put money to work in the securities portfolio, given the attractive yields that are now available.
Absent an economic turnaround.
We would expect earnings to be slightly up in 2023 compared to 2020 two's core results.
And I assume that the first quarter tends to be slower than the fourth quarter.
We expect earnings to build throughout the year.
We remain steadfastly focused on credit quality.
Continuing to grow a high quality deposit base by bringing new commercial relationships to the bank.
Let me take a minute to touch on the vision, we have for this company going forward.
Today, we have over $9 billion in assets with 40% non interest bearing deposits.
Our slightly asset sensitive balance sheet with a healthy net interest margin.
Growing earnings plenty of capital, a very safe credit portfolio of which approximately 65% is secured by residential real estate, a low loan to values.
We are located at the heart of the fifth largest economy in the world.
You have a core banking business, serving commercial clients with exceptional solutions and niches in real estate entertainment.
Care education, and a few other areas.
As the world moves away from checks and toward card and cashless transactions. We were building a payment in core merchant processing solutions that allow us to be the hub of this ecosystem.
Processing card transactions directly on behalf of the merchant without intermediate software sales partners with a promise of greater visibility into transaction activity and faster receipt of funds for the client.
And eventually card issuance as well helping.
Helping our clients with payments and a very complete way.
We have a significant number of existing clients that will benefit from these solutions and we know there are an even greater number that we will target that are not our clients today.
The synergy of banking and payments should be abundantly clear.
And our track record of execution should also be very clear by now.
Well, we have laid out general timing is important to stress that we are building solutions for the long term and focused on doing it right.
While our progress remains on track we are building a true business line and these things take time to do it right and we will not be deterred. However, long it takes.
Even with an uncertain economic backdrop, given the fundamentals I just laid out in the strategic initiatives. We have underway 2023 is going to be an exceptional year for banc of California.
I can't be exactly sure where loan growth will shake out.
But I do know we have amassed an incredibly talented team.
We have an exceptional mission driven and values based culture with the vision and roadmap. We Havent had 2023 will be a year that continues our track record of driving even greater returns and long term value for shareholders.
With that operator, let's go ahead now and open up the line for questions.
Thank you we will now begin the question and answer session.
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Today's first question comes from Matthew Clark of Piper Sandler. Please go ahead.
Good morning.
Maybe just starting on the earning assets.
I know loan growth is difficult to pinpoint.
Mortgage warehouse, maybe nearing a bottom.
But give us a sense for how youre trying to manage maybe overall, earning assets is the plan to kind of stabilize them from here, maybe even grow them incrementally.
With some leverage or not.
Sure well good morning, I I think you know.
We'd like to keep assets relatively flat.
If we can grow them, great. There's there's probably opportunities to use a little bit of leverage.
And maybe growing a little bit more but we'd like to at least target.
The level of staying.
Saying flat, where they are to keep earnings power, where it needs to be and then if you know if we see opportunities to grow a little bit we'll do it the pipelines are not huge right now.
They're probably the slowest they've been since I've been at the company, but we're not we're also not pressing.
The environment is pretty uncertain and we're being very selective in the deals that we do.
Okay great.
And then maybe for Lynn.
Just your thoughts on the noninterest expense you know core run rate of 48, and a half a million this quarter no.
That might go this coming year.
Sure sure Yeah, I think we had provided previously a range of 40 to 50 million. We were at the lower end of the range I think our expectation is yeah, 49, 48, and a half probably at the lower end I think the range is still appropriate though.
At 50 million you.
Maybe I think we'd be at the higher end of the range as we look into you know first quarter has seasonally higher expenses.
And then as the year unfolds I think we've continued to invest them in many initiatives and.
I think that'll put us.
That's closer to the higher end of the range.
Okay, and then just any updated thoughts on you.
Your interest bearing deposit beta.
Where do you think it might settle out the cycle, 39% cycle to date.
And I think it was in the mid fifties last cycle.
Yeah, I mean, we we we continue to focus on bringing in low cost deposits and I'm really proud of kind of how are there I know there were questions, where you know we grew noninterest bearing deposits grew 12% to 40% in people. So does that real is it going to hold up and.
What we've said last quarter in the prior quarter was as the economy contracts.
We expect there to be outflows of liquidity, but we don't expect our mix to change very much because it's you.
You know the economy is moving downward overall and that's what we're seeing in our book and that's what's been holding up so we're going to try to keep growing our noninterest bearing percentage in our deposit beta is really it's not something we track very much honestly not too because it's an outflow.
Excuse me, it's an output of kind of all the other efforts that we have in.
This quarter, what Lynne pointed out to me was that our percent.
Of the fed increases was much lower than prior quarters, which meant we did a better job of not increasing deposit costs as much relative to the market.
So I.
I don't know if we have a target number we just wondering we were still slightly asset sensitive.
We think there's probably a little bit of room for margin to expand.
But I would say that.
Given we're getting closer to peak interest rate increases based on what the fed has indicated they're going to do.
We're likely to move at some point to neutrality to optimize earnings for the long term and we will.
We'll be smart about it and protect shareholders. So we don't have a specific deposit beta number. It really is we don't know where it's going to end up in the quarter. We just keep trying to grow noninterest bearing and we'll make sure that we have enough deposits to fund the growth that we see or we're making investments I know that's not a direct kind of specific answer to your question.
But.
That's how we talk about it internally Lynn I don't know if you have anything to add there.
I think the only thing I would add is I think you were looking at it relative to prior cycle and the trend of us being lower data that's in the numbers that you provided.
Because I think are resolved and the fact that our noninterest bearing deposits are a higher percent of our deposits.
The base of our funding base.
To that extent when we look at you know a prior period versus now our prior interest cycle compared to now I think our expectation is that it would.
Generally be lower and then to <unk> point them, you know the focus on noninterest bearing deposits and managing our core funding base. Yeah. We expect that mix to continue to have a positive impact on our deposit beta.
As we move forward.
Okay, great. Thanks for the color and then last one for me just on capital you start to accrete capital here again, 11, 9% CET, one buybacks done and what are your thoughts on them.
Authorizing another share repurchase program at this point well cycle.
Yeah, we we've got we haven't made any announcements there I mean, I think there's a couple of things that we could do here, we're going to be looking at and we have board meetings coming up in early February looking at you know what are the investments we have planned for the company for the year, including the number of initiatives, we have and what's.
What's the best use of capital going forward.
In terms of dividend buyback and all those things. So we're going to look at all of that stuff. If our stock is trading at a at a low level then.
Obviously buying it back and in many cases makes sense.
And hopefully it won't be there for very long.
Okay, and then actually if I could sneak one in just point of clarification in your.
Well opening comments I think you mentioned that you expect earnings to be up modestly in 'twenty three relative to 'twenty two on a core operating basis I just want to make sure we're using the right.
Base I assume that's on a pre provision basis since it has a big recovery last year. Yeah. I was wondering I was thinking about exactly I was thinking about that backing out that that recovery was the thing I was thinking about when I made those comments that was.
Obviously, one time and unusual and so when you back out the unusual stuff, we would expect to be a little bit a little bit higher.
And have it built build through the year.
Where we sit now thats kind of how it looks.
Great. Thank you.
And our next question today comes from Kumar <unk> with Wells Fargo. Please go ahead.
Hi, good morning.
Good morning.
Maybe just following up on the last line of on comments. So is that assuming that there's essentially a zero provision for the year, if kind of current asset.
Growth projections play out and Theres no real change in the seasonal methodology.
I don't think it's reasonable to expect zero provision this year.
Uh huh.
Think that we're gonna have to look at the landscape and we feel really really good about our credit quality.
You know there was an uptick in the twos and semester forest, but we've never seen any loss in that portfolio and we don't expect it now based on how it's underwritten.
Overall, our quarter was really solid we do as Lynn laid out I felt really well in her comments like.
Our coverage ratio is pretty darn high certainly relative to peers with similarly, similar portfolios and every time, we stress our portfolio.
Come out well.
I'd like to have some loan growth this year that makes sense and if so you know we will have to look at whether provisions are appropriate.
They would be if we're growing our portfolio.
If the portfolio stays flat and the economic climate deteriorates.
You know I would think that provisioning would be would be appropriate.
We just haven't seen it yet and so it's a little bit.
Economy dependent.
Tomorrow, but.
You know I I see what everybody else sees.
In terms of where things are going right now.
Yeah that all makes sense and then maybe just circling up again on DDA, which you guys have done an excellent job in keeping in house and I. Appreciate the comments that it'll keep kind of the mix shift unchanged, while the liquidity picture plays out.
How much liquidity is still at risk here is they're missing much visibility and does that kind of outflow lagged the last rate hike or as much of that already effectively in the numbers.
Let me Lynn I don't know if you want to if you have any immediate thoughts but.
I would say that we're continuing to see pressure on deposits if I'm answering your quite if I understand your question correctly, we're continuing to see pressure on deposit pricing.
It's not it's not fully baked in I.
I mean, there was there was an interesting article that came out.
Yesterday about what could happen if the government defaults on debt and how that could cost liquidity problems for banks, we feel obviously very good about all of our sources of liquidity primary secondary and tertiary in there there are meaningful and very very healthy.
We're managing at a 100% loan to deposit ratio I think extremely comfortably and holding earnings to where we want them to be but I would say that liquidity stress is still exists in the market.
It doesn't concern us based on all the things that we've been able to do in the ways that we can pivot.
One thing I think it's really important to keep coming back to is our is our our tangible book value growth.
And our lack of ACO I OCI impairment relative to others.
We really have true very very little and Linda and her team have done an exceptional job of managing our securities portfolio and that that's real liquidity for US. We don't have these big marks that would keep us.
From having to sell it or cause a big drop in capital if we chose to to to tap into that we don't see any of that coming to play.
Think that things are stable for us and we think we're managing it well, but I think it's a differentiator that's worth pointing out, especially with our existing high levels of capital we have that on top of it.
Great and then just last for me looking at the expense base that $48 million to $50 million range is that encompassing the investment needed to standup deep SEC and I guess, how should we be thinking about that investment both in magnitude and kind of timing.
Lin who will take that sure yeah, yeah, and thanks for following back up on that I should have added that the fifth.
$50 million does include the additional expense from the fourth quarter.
With deep stack and I think as we look forward.
We do expect that it will move with some higher fee income. So we expect to be able to leverage the expense base that we have them for some of the initiatives, including deep stack. So he can answer your question. Yes. It includes it tomorrow.
Great. Thank you for the color.
Thanks to work with you and our next question today comes from Gary Tenner with D. A Davidson. Please go ahead.
Good morning.
Good morning, Lynn wanted to ask about the the broker deposits added in the quarter. If you could kind of give us an idea of what the timing and.
Determined rate is on those deposits.
It was about.
Okay I've got Paul maybe some of the detail I think just a general comment or observation you know we've kept our balance sheet I think fairly nimble so as we've brought down.
Some of the warehouse balances we've let some of the funding associated with that also migrate off so a portion of that broker deposits are shorter term in nature.
Versus using maybe overnight Oh.
Dan says so they can be 30 to 60 days they are actually less expensive to a certain extent compared to overnight.
And then the rest have terrorists then move out to about two years. So after Paul more specific information.
Okay no. Thank you that's that's helpful.
And then just in terms of deep stuff Jared I appreciate it.
Competition, and obviously, you're going to be thoughtful about kind of building that business out.
<unk>.
Had thought that you might be providing a little more in the way of kind of expectations or your initial expectations for how youre thinking about that business for this year, whether it's in terms of kind of or maybe I'll. Just ask you how you're thinking about in terms of deposit flows are.
Kpis to be thinking about over the course of the year as it relates to that business.
Sure I think you know we wanted to get it completely stood up as I mentioned in my comments, we've now started onboarding clients on our rails.
We're doing it very slowly making sure we get it right there's a lot of.
Things that we want to get right, particularly on the regulatory side and compliance side and make sure that all the systems are working well so that we get all the theaters and we're exercising our right of our responsibility of oversight of all the transaction volume that we expect to be able to handle.
And so we have a roadmap of how we're rolling this out and I think our team is doing a really good job with it.
We are slated to be as I mentioned by the end of the second quarter to kind of be closer to scale.
And by then.
I'll be more comfortable saying, okay, what's the pipeline and how do we give people an indication of what we should expect for now it's going to be kind of in the rearview mirror as it happens we'll be sharing it and as we get through the second quarter it'll be easier to be a little bit more forward looking.
Okay, and then just to clarify when you say onboarding clients to the bank rails.
That means you're moving existing <unk> clients over to your platform correct as opposed to onboard new clients.
We on boarded yeah, we havent boarded one or two new clients. So far this quarter, which is which is great and we wanted to do it in what I call. It a soft test environment. You know you don't want to put on massive volume you want to put on the volume that you can monitor and if something happens you can you can you know it.
It breaks you can fix it without disrupting so it's moving the way we thought and our team is doing a great job. It's.
We're excited to share and really to open up the floodgates as it were to get this thing moving at a faster speed, we're just not ready to do that yet until we've we've pressure tested it and make sure that we can fulfill our compliance obligations.
Alright Thats helpful. Thank you.
Hey, Gary.
I was able to pull that one piece of detail for the benefit of everybody and so are our brokered Cds have a.
Tenure of about nine months and our rates our weighted average rates about 385.
Thank you Lynn.
Hmm.
Okay.
Thank you and our next question today comes from David Feaster with Raymond James. Please go ahead.
Hi, good morning, good morning.
So you guys have been just kind of following up on the deep stack stuff, you've been pretty active and attack in the payment side with the <unk> investment and in deep stack now and you've been pretty forward looking from that standpoint, I guess at a high level as you step back and think about are there any other innovative aspects in banking that you're interested in.
Expanding into any other pieces that may be additive to these businesses that you're you have now and I'm just kind of how do you. How do you think about that or do you have all the pieces now that you need and it's it's really just execution and growth from what you have.
Well I think we have all the pieces and certainly all of the people. We just added a new head of payments risk Kenyon.
Kenyan who's got a deep background in payments since she joined us yesterday, and she's going to provide a big lift to the team there aren't a lot of people in the industry that have been in payments that long and I also have been at banks.
And so we're thrilled to have her here.
We're continuing to add really really high quality talent I would say David that from a vision standpoint, we have the people we have the technology, but we see as I mentioned in my comments being able to build out a complete ecosystem for payments.
And so we're pursuing in parallel paths.
Both what we have on the deep stack side as well as what we think we can do on the issuing side.
And our Chief operating Officer, John Setoodeh has both of these pads underneath him and he's kind of pursuing them.
Correct, Lee and in parallel and they're so we're rolling out solutions for clients that we think will provide a complete solution. So we can also be the issuer as well as the merchant processor and.
J P. Morgan created many years ago was a closed loop system, where they were on both sides of the transaction.
That's obviously very attractive if you have the systems to get there. So we are forward looking I think we're thinking about it potentially differently than others and we're putting the pieces together that will allow us to.
Capture as much as possible, but it's early so I'm just I'm excited to share the vision, but we obviously have to execute and demonstrate.
Each of these pieces before we get too excited about that.
Got.
And still kind of thinking about it kind of breakeven this year more contribution in 2024.
Yes.
And we were able to outperform that that'd be great, but I think that's the right way to look at it. Okay. And then you touched on this several times about having maybe a bit more of a cautious outlook, which makes a ton of sense I'm. Just curious where are you seeing loans come across your desk that still bring risk.
Active risk adjusted returns and just any other thoughts on AR or commentary from the demand side from your standpoint, where where demand is slowing where it still remains solid, especially in light of some of the new hires that you've made.
Sure Good question so.
Where we see opportunity that we think is attractive we continue to see good opportunities and financing streaming content.
You know, it's it's slowed a little bit, but there's still a lot of content creation going on these channels have to get filled even is.
Other things slow down and that's been that's been really stable for us we've carved out a really good niche our team is excellent at it and we've now got a lot of people coming to us asking for our our financing when we put together a really good program. So I would also say health care is an area that continues to thrive in our market and there are.
Mystic things to do and specialty hospitals.
Financing.
Physician practice groups and things like that and our team is smart their education charter schools is something where we have a niche.
That is deposit rich and continues to be good in terms of financing.
Charter schools with basically revolving lines of credit to help them bridge the receivables they get from the state.
And there aren't a lot of banks that know how to do that and so we've been we've been successful at that.
On the real estate side.
It's very very slow certainly on the permanent financing. Besides the things that are getting done today or are there things that need to get done because people basically just flipped into a floating rate note or they they reached maturity.
There is some bridge stuff so are.
Most sophisticated borrowers are the ones that are are seeing people, who are in who are caught in a situation where they can no longer afford the alone.
Trying to be opportunistic to take stuff out so when we have you know.
Strong guarantors, who know what they're doing and they did this in the last cycle.
We want to be there to support them. They personally guarantee the loans that are low loan to values and they have a track record of execution. So.
But that's a lot slower than it was that activity is still.
Everything else is pretty slow I mean, C&I is as we said is very very slow.
Worry about.
Businesses that got caught with oversupply and then they get slow paid by their.
By their own.
Buyers. So we are just being super cautious, but that's some color.
Maybe just maybe staying on that topic. What are some you know just from your perspective I know you you guys are sitting kind of in the cat bird seat with really low risk loan portfolio, but if you look at the market. I mean, what are you seeing that is causing you. Some concern I mean investors are obviously focused on on CRE and <unk>.
Notably some of the segments within there like office and those types of things, but just curious.
Maybe from your from your standpoint, what are some of the segments that you might be more cautious on and continued pull in pulling back on and and just you know the credit environment and the market for you now.
From a credit standpoint in Europe Union well.
Well.
So hospitality.
It's not something that we traffic in and so I would start by staying away from that second is office.
We don't really have much in.
We would stay away from it now for sure.
There aren't a lot of there is there isn't a business that I have heard of that isn't picking about reducing their space and so that begs a lot of questions.
When leases come up how that how that's going to perform.
Construction is obviously something that.
You've got to be careful now.
The good side of construction is that.
Supplies are more available teams are more available.
And the best developers.
No that downturns are sometimes the best time to build because youre building and when there's no demand and then.
Soon as you come out of the ground you can fill it up pretty quickly and certainly for infill housing theres opportunities. So I wouldn't say that you would avoid all construction, but you know.
What's the what's the price of the land that they are contributing with the building cost today. Some of the building costs have actually gone down that can offset some of the rate increases, but I would say that on most cases youre going to be extremely careful in construction.
And.
I'll go back to just core C&I things that are things that are going to get triple hit with.
Interest rates labor shortages and supply chain.
Do you think about distribution and warehouse.
And things like that that could be could be hard hit.
If youre doing can C&I right now you'd better have a good ABL team because thats one of the safer ways to do C&I.
C&I and this sort of environment, but even there you have to be super cautious.
Yeah, I would say on the other side <unk> remains remains safe and we continue to see opportunities on the <unk> side that that look.
Very attractive and if it makes sense to pull the trigger we will we don't originate but we have we have.
Unique channels too.
Get that that asset and if we see good stuff we wouldn't hesitate.
Okay. That's helpful. Thanks, everybody.
And our next question today comes from Heathrow with Stephens. Please go ahead.
Hey, good morning, good morning, Hi, there.
Jarrod or maybe for Len, just looking at the 2023 strategic objectives.
You could just maybe expand on what type of balance sheet opportunities.
You might look to take advantage of when speaking about enhancing kind of longer term earnings just maybe some incremental color there.
Yeah, I mean, I think we just touched on it a little bit and it was touched on in the beginning it's a good question.
Well you can.
There are opportunities to buy securities that might be more attractive than than loans.
You could.
Borrow to buy Securities. If you were able to match it right and really benefit as when rates come back down Youre going to have your funding costs come down and your securities yield is probably going to go up so.
There's good opportunities there.
We are seeing we are seeing lending opportunities.
So theyre just not robust.
And then Lynn.
How else would you augment that.
Okay.
I agree with your comments and I think we started out talking about you know looking at average, earning assets you know maintaining them and to the extent that yeah, there's not opportunities and loan portfolio.
We view that there's opportunities the securities portfolio, especially as we continue to manage funding costs.
I think those are primarily I don't think we have to recognize the economic landscape that we're gonna be operating with them. How do you think there's an ability to accomplish that.
Okay.
That's helpful. Thank you.
And maybe if I can move really quickly to the noninterest bearing deposits I know that.
The end of period was down maybe a bit more than the average was throughout the quarter I was hoping just to hear any kind of color you have regarding trends so far in January .
I'd say, we're running about the same place we were at the end of the quarter.
The average for the quarter was 41% and the.
Period end was $39 five so its pretty close to right. We look at within within a 5% band up or down is kind of.
Kind of reasonable, though we don't expect to be that wide. So right now we're running where we were at the end of the quarter I would say that as.
As I mentioned earlier I think the pressure on pricing continues to.
It continues I Wouldnt say its increasing it just continues and the fed is probably going to bump rights here a few more times.
That's gonna roll down roll down the hill the way it has and so we're just trying to optimize our relationships with the way that we're looking at at this as you know.
We're trying to be selective and not reprice, our entire deposit portfolio by just promoting rates.
So we still have a strategy, where we are pricing relationships individually.
And monitoring relationships reminding them the service that we provide and then when people ask for higher rates, we're having direct conversations with a lot more work.
And but it's I think protected our overall deposit base and that's that's one of the reasons why we've grown out to the brokered market or even the whole world.
Yes.
The non core market to get funding so that we when we want to buy in bulk so we don't have to reprice.
<unk> of deposits here by providing that rates to everybody because a lot of people are asking for I believe it or not and a lot of our Cds, just rollover automatically and so we're trying to be pretty selective about it and strategic about it.
Okay.
And then last one for me I just wanted to ask on the I think the non accrual loans were up about $12 million or so this quarter just was hoping to get maybe a little bit of color on what we'll do.
Drove the uptick in an acquired credit with a PCB mark already against that or one that the A&P originated.
Uh huh.
Well, we consider I don't think it was a the charge offs that we took.
That was specifically reserved against that was that was a.
Can be credit.
And that was that.
That kind of proceeded as planned and I think we're well reserved on it the other ones.
I don't remember if the loans came from P M b or not at this point.
Andrew I, just we own the loans and were responsible for them and I don't know that they had specific reserves on them but.
There, we think that we have reserve properly at this point, we don't see a lot of credit noise down the road so far.
History here, we really haven't had any from the way that we've been underwriting.
I think we'll be able to manage these.
Fine.
It's certainly not a trend from my point of view.
Okay.
Very good well thank you for taking my questions.
Thank you very much.
And our next question today comes from Kelly Motta. Okay. VW. Please go ahead.
Hey, good morning. Good morning. The question most of mine have been asked and answered already but if I could.
Back to the warehouse spark I know that's difficult to predict but I'm wondering if there's any sort of minimum amount of activity you expect that to bottom out at as well as if you could remind us.
The deposit relationships that come with that in terms that sure either loan to deposits or yeah. Yeah.
In nature so.
First of all we have a really really good warehouse team that is.
Does a fantastic job of managing relationships and managing.
Kind of quality of credits and so they're very selective in who we're going to lend to and how we're going to manage it and so we've been <unk>.
Fortunate that things for us have gone smoothly, despite kind of the run down in kind of that industry generally.
Let me tackle the deposit piece first we have a good amount of deposits with that business. Those deposits are very stable their institutional depositors, who.
They operate through warehouse, but not necessarily on the origination side, sometimes theyre on the buy side, they're buying loans that have already been funded so.
And that way, it's true C&I.
And they are kind of sitting there with cash buying loans as needed and where we're helping to fund that so.
There is the deposit flows have been very stable.
As warehouse balances have come down.
Warehouses, a business is a higher percentage of it is self funded and so we monitor that very closely but it's pretty stable in terms of where the balances are going to.
Flow out I'm trying to pull up the most recent numbers and Lynn you may have them in front of you of kind of where we think warehouse will will fallout.
I don't know like whether it's going to go down more.
At the end of the fourth quarter, it was a $600 million.
603.
Okay.
Go ahead, yeah, maybe just to add I mean.
We expected yeah warehouse to continue to pull back I think the decline was mostly in line with maybe what we observed across the entire market I think as we look forward I think that that.
Decrease is expected to moderate given where rates have gone.
So it maybe that it comes down somewhat but not at the levels that we observed I think in the fourth quarter.
And I think maybe the averages will pan out to be about the same so I think it's less of a headwind.
As we look forward and we've obviously built up the book and other places.
Yes, I think.
I think to that point Kelly, if I could just add we certainly.
Feel like we've done a good job of diversifying our portfolio.
Outside of the concentration warehouse that we had before and continue to grow earnings.
Through that and so we don't see warehouses getting away back up even as rates come back down, but our team has done a good job of staying within a band.
So we've always said like up or down $100 million warehouse was kind of the band as its shrunk maybe that's too big a band now but.
We're gonna be I don't know if between six and 650, probably I, it's hard to peg it exactly but if I were guessing today I'd say, that's probably pretty close.
I appreciate all the color on both sides of it that's very helpful.
Last question from me, it's a bit nitpicky, but I saw customer service fees are down.
Quarter over quarter.
Where they had been running the past couple of quarters I'm wondering if.
That's activity driven just less customer activity or if theres anything structural and in.
I don't know if that's the deposit service charges and maybe some changing in the way youre charging theyre just interested in any any color that would be helpful. On a go forward basis.
Sure Mike.
Please go ahead yeah.
So included I would tell you that included in there is both deposit and loan.
Service fees and so with some of the loan production volume being a little bit lower and that I think.
Impacted the number for the quarter.
And then yeah I don't see much in the way of the deposit service fees I think there's.
While we.
We are still competing heavily for our customers our business say expect that yeah, we would have.
Similar deposit customer service fees. So I think what we're seeing in just in the.
The fourth quarter is mostly to do with.
The loan side and you know.
I don't know that we would see it going any further down.
Got it that's helpful. Thank you so much.
Thanks Kelly.
And ladies and gentlemen. This concludes today's question answer session.
Operator was was there one more question or does that question John .
They drop they removed himself from the queue.
Gotcha. Thank you, yes, Sir so this concludes our question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.