Q1 2023 Banc of California Inc Earnings Call
Speaker 1: No.
Speaker 2: Hello and welcome to Bank of California's first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. For today's presentation, there will be an opportunity to ask questions.
Speaker 2: Todayís call is being recorded and a copy of the recording will be available later today on the companyís investor relations website.
Speaker 2: Todayís presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release, which is available on the companyís investor relations website. The reference presentation is also available on the companyís investor relations website.
Speaker 2: Before we begin, we would like to direct everyone to the company's Safe Harbor Statement on forward-looking statements included in both the earnings release and the earnings presentation. I would now like to turn the conference over to Mr. Jared Wolfe, Bank of California's President and Chief Executive Officer.
Speaker 2: please go ahead.
Speaker 3: Good morning, and welcome to Bank of California's first quarter earnings call.
Speaker 3: Joining me on today's call is Ray Rendoni, our Interim Chief Financial Officer, who will talk in more detail about our quarterly results.
Speaker 3: before discussing our performance.
Speaker 3: I would like to express our sympathy for those affected by the recent tragic events in banking.
Speaker 3: A horrible shooting in Kentucky was an unspeakable tragedy.
Speaker 3: and the failures of two banks have unsettled the banking community generally.
Speaker 3: We understand the concerns and uncertainty that these events can create, and we remain committed to providing stability and support to our clients, communities, and colleagues, and to those displaced by these unfortunate events.
Speaker 3: We've been able to effectively manage through the recent turmoil in the banking industry due to the strong franchise, client base, and balance sheet that we have built over the last four years.
Speaker 3: The fundamental strength of our franchise is reflected in all of our key metrics as of the end of the first quarter, including the following.
Speaker 3: Our average non-interest bearing deposits remain strong at 38%, ending the quarter at 36%, with overall net core deposit outflow of only around 2% for the quarter.
Speaker 3: We have significant available excess liquidity with our cash and available borrowing capacity representing approximately 2.2 times our level of uninsured and un-collateralized deposits, which were only 27% at quarter end.
Speaker 3: a low level of total unrealized losses with approximately $47 million on $958 million of available for sale securities representing less than 4% of CET1 capital after tax.
Speaker 3: We have a very high level of capital and strong capital ratios.
Speaker 3: bolstered by one billion of cash sitting on the balance sheet.
Speaker 3: We repurchased approximately 1% of our common shares outstanding under our recently approved program. We have strong asset quality which includes 20% decline in both delinquent loans and classified assets in the first quarter.
Speaker 3: And since mid-March, we have seen strong net inflow of core deposits with a solid pipeline of non-dutiful sparing operating accounts and new relationships.
Speaker 3: As I have said for several quarters, the effect of the Fed's tightening has been to contract the economy and pull deposits out of the system across all categories.
Speaker 3: The recent events only accelerated the outflow of deposits from mid-sized banks to some of the largest banks.
Speaker 3: Given that backdrop, I think our team performed extremely well and validated not only the strength of our franchise overall, but the solidity of our deposit relationships.
Speaker 3: Our focus is on providing solutions to businesses who value our service and expertise that is unmatched at other banks.
Speaker 3: Those accounts are rate neutral, and we continue to focus on clients that value what we have to offer.
Speaker 3: The strength of the relationships that we have with our clients has proven to be extremely valuable throughout this recent period.
Speaker 3: We were proactive in reaching out to remind them of the financial strength and stability of Bank of California, and where appropriate, we used programs like ICS to reduce uninsured exposure for clients who expressed a desire for such coverage.
Speaker 3: We added many new clients over the past several weeks who were looking to move to a stronger financial institution, and one of the slides in our presentation shows the growth we continue to see in commercial deposit accounts. While the deposit base has been largely stable since the recent banking crisis began, we have seen a growth in the financial institution.
Speaker 3: Given the uncertainty of the macro environment and our conservative approach to risk management,
Speaker 3: We increased our level of overnight borrowings and added some short-term broker deposits to increase our liquidity
Speaker 3: The overnight borrowings brought cash balances to approximately $1 billion at quarter end.
Speaker 3: which was 750 million more than the approximately 250 million we have averaged in the past.
Speaker 3: While these actions had an impact on our profitability in the first quarter,
Speaker 3: We believed it was prudent from a risk management perspective.
Speaker 3: and the short-term nature of the borrowings and broker deposits gives us the flexibility to quickly make adjustments in our liability mix in the future.
Speaker 3: In terms of new loan production, we have the capital and liquidity to continue serving our clients and we are still finding good lending opportunities in many verticals that we focus on including bridge real estate, healthcare, entertainment and media, and education.
Speaker 3: Overall, we continue to see loan demand muted in the current environment due to higher rates and concern about the potential recession.
Speaker 3: and our total fundings were lower than the prior quarter.
Speaker 3: We saw a decline in our CNI portfolio during the first quarter, which was entirely attributable to three loans totaling $90 million that matured and we chose not to renew.
Speaker 3: These were legacy loans originated many years ago that didn't provide meaningful deposits and we didn't like the risk adjusted yield associated with the renewal of these credits.
Speaker 3: We are also in a strong position due to stable credit quality, relatively high levels of reserves, and very limited exposure to areas with scrutiny such as general office. Our investor deck details our very limited exposure to this sector and the strength of our portfolio.
Speaker 3: As we indicated we would do on our last earnings call if we didn't see enough attractive lending opportunities.
Speaker 3: We added to the investment portfolio given the higher yields that are now available.
Speaker 3: As part of this strategy, we grew our securities portfolio $90 million, or 8%, and our new securities purchases are relatively short-term maturities, which will give us the flexibility to redeploy these funds into the loan portfolio as economic conditions and loan demand improve.
Speaker 3: One of our key objectives over the past few years has been to right-size the expense base while investing to support our future growth.
Speaker 3: As part of our regular review of appropriate staffing levels, we made a reduction in FTEs of about 3% during the first quarter.
Speaker 3: This reduction will help us to effectively manage our expense levels, while also enabling us to reallocate some of the cost savings to areas we are investing in, such as our payments processing business, which continues to proceed on the timeline we have previously allocated.
Speaker 3: As I mentioned earlier, we have focused on maintaining strong capital levels.
Speaker 3: Given the high level of capital that we have.
Speaker 3: We were able to increase the amount of capital that we return to shareholders by increasing our quarterly cash dividend by 67% during the first quarter while authorizing a new $35 million stock repurchase program.
Speaker 3: We were also able to take advantage of the market dislocation during the quarter to repurchase approximately 1% of shares outstanding, much of which we were able to do below tangible focus value.
Speaker 3: We'll continue to be opportunistic with respect to implementing the stock repurchase program, while ensuring that we maintain high levels of capital to manage through the current challenging operating environment and support the continued growth of our franchise.
Speaker 3: Over the past four years, as we have built Bank of California into the go-to bank for small and medium-sized businesses in California.
Speaker 3: We have focused on building sustainable franchise value.
Speaker 3: and in the process
Speaker 3: creating an institution that can perform well and deliver for both clients and shareholders in a variety of economic and interest rate scenarios.
Speaker 3: It's worth mentioning again that as a true relationship focused bank, we typically have the operating accounts that our clients utilize for businesses and we are deeply connected to them through the services we provide.
Speaker 3: Quarter after quarter, this has proven to be a truly sticky deposit base that provides stability, even during times of stress in the banking system like we are currently experiencing.
Speaker 3: Now I'll hand it over to Ray who will provide more color on our financial performance. Then I'll have some closing remarks before opening the line for questions.
Speaker 3: I'll hand it over to Ray who will provide more color on our financial performance. Then I'll have some closing remarks before opening the line for questions. Thank you, Jared.
Speaker 3: Please feel free to refer to our investor deck, which can be found on our investor relations website as I review our first quarter performance.
Speaker 3: I will 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 fourth quarter of 2022.
Speaker 3: Our earnings release and investor presentation provide a great deal of information, so I'll limit my comments to some of the areas where additional discussion is warranted.
Speaker 3: Net income for the first quarter was $20.3 million or $0.34 per diluted share.
Speaker 3: On an adjusted basis, net income totaled $21.7 million for the first quarter, or 37 cents per diluted common share, when net indemnified legal costs and investments in alternative energy partnerships are excluded.
Speaker 3: This compared to adjusted net income of $2628 million, or $0.45 per diluted common share, for the prior quarter.
Speaker 3: The fourth quarter's adjusted earnings excluded a $7.7 million loss on the sale of securities.
Speaker 3: Our net interest margin decreased 28 basis points from the prior quarter to 3.41%.
Speaker 4: Our overall earning asset yield increased by 20 basis points to 4.99%, while our total cost of funds increased 51 basis points to 1.68%, which was partly attributable to overnight borrowings and short-term broker deposits we brought on during March to temporarily increase our liquidity.
Speaker 4: which impacted the margin by seven basis points.
Speaker 4: Our average loan yield increased 15 basis points to 5.07% as the variable rate loans in the portfolio continue to reprice and we are seeing higher rates on new loan production.
Speaker 4: The average yield on securities increased 47 basis points to 4.66% due to portfolio resets and the impact of the repositioning we did in the prior quarter to sell lower yielding securities and reinvest the proceeds in higher yielding securities.
Speaker 4: Our average cost of deposits was 122 basis points for the first quarter, up 43 basis points compared to the prior quarter, while the average Fed funds rate increased 86 basis points over the same time period. As a result, the difference between our average cost of deposits and the average cost of the Fed funds rate widened from 286 basis points last quarter to 329 basis points for the first quarter.
Speaker 4: As Jared mentioned, we are carrying approximately $1 billion in cash, which is about $750 million more than we normally hold.
Speaker 4: We intend to hold this excess cash until such time as we see sufficient stability in the banking landscape and specifically in overall depositor confidence.
Speaker 4: Our non-interest income increased to $9.3 million from the prior quarter.
Speaker 4: due partially to the previously mentioned loss on the sale of investment securities.
Speaker 4: Other areas of non-interest income were relatively consistent with the prior quarter, with the most significant variances being in other income due to a $1.1 million recovery on a loan acquired in the Pacific Mercantile Bank transaction that had been charged off prior to the acquisition, and higher income from equity investments of $750,000.
Speaker 4: Our non-interest expense in the first quarter included approximately $1 million in severance expense related to the reduction in staff that Jared mentioned.
Speaker 4: Our adjusted non-interest expense increased approximately $800,000 from the prior quarter, which was primarily due to higher salaries, payroll taxes, and benefits that impact the first quarter. We also had an increase in FDIC insurance expense of approximately $300,000 due to higher FDIC assessments that are now in place.
Speaker 4: The effective tax rate for the first quarter was 26.7%, down from the prior quarter's rate of 29.6%.
Speaker 4: For 2023, we estimate our annual effective tax rate to be approximately 27 to 28 percent.
Speaker 4: Turning to our balance sheet, our total assets were $10 billion at March 31, an increase of approximately 9% from the end of the prior quarter due to the increase of our liquidity position
Speaker 4: Our total equity decreased approximately 700,000 during the first quarter as 20 million in net earnings were partially upset by a $10 million shift in AOCI and capital actions, which included both common stock dividends and the repurchase of approximately 5.2 million of our common stock.
Speaker 4: Our loans were down approximately $61 million from the end of the prior quarter. This was primarily due to three loan payoffs that we had in the CNI portfolio that Jared mentioned and run off in the SFR portfolio. The decline in these two areas was partially offset by an increase in the CRE portfolio as we continue to see good opportunities in our targeted lending areas. Our total deposits decreased $169 million from the end of the prior quarter.
Speaker 4: The decline was primarily due to outflows we saw during January and February , which was a continuation of the trend we had been seeing of clients seeking higher rates for their excess liquidity, combined with our focus to grow low-cost commercial deposit relationships.
Speaker 4: As Jared indicated, since the second half of March, our total deposits have increased, excluding broker deposits. Our credit quality remained solid in the first quarter. We had stable non-performing loan and non-performing asset balances, while our delinquent loans declined by 19 million or 20%.
Speaker 4: While our asset quality was stable, we recorded a provision for credit losses of $2 million, which was primarily attributable to net charge-off activity and an increase in the general reserve, partially offset by changes in the portfolio mix and a decrease in total loan balances.
Speaker 4: Our allowance for credit losses at the end of the first quarter totaled 89.4 million compared to 91.3 million at the end of the prior quarter, and our allowance to total loans coverage ratio stood at 1.27 percent compared to 1.28 percent at the end of the prior quarter. For more information, visit www.fema.gov
Speaker 4: At this time I will turn the presentation back over to Jared.
Speaker 3: Our top priority will continue to be prudent risk management while economic conditions and the operating environment remain challenging.
Speaker 3: However, the work we have done to build our franchise the right way...
Speaker 3: has put us in a position to capitalize on the current disruption and dislocation we are seeing in our markets. The attractive qualities of our franchise are even more scarce today than they were at the beginning of the year.
Speaker 3: And ultimately, we expect to be a net beneficiary of the current turmoil in the banking industry, both in terms of adding new clients and banking talent as well.
Speaker 3: We're going to continue to focus on what we do really well.
Speaker 3: which has leveraged our strength in treasury management to bring in relationship oriented business clients and capitalize on the attractive lending opportunities provided by these clients.
Speaker 3: In the second half of the year, our new payments processing business will further improve the value proposition that we offer clients that enhance our business development capabilities.
Speaker 3: As many businesses re-evaluate their banking relationships in light of the current environment, we believe our differentiated payment solution will be a distinct competitive advantage. We are focused on creation of permanent franchise value by growing valuable deposits, continuing to produce earnings, and growing tangible book value.
Speaker 3: The environment we are currently in, which places stress on margin and growth, is temporary, and we will come out of it having continued to build on the fundamentals that we believe in.
Speaker 3: I want to thank our colleagues at Bank of California for all their efforts in this environment. We have a remarkable team. We take pride in our proven ability to execute.
Speaker 3: and we believe that we can effectively execute and capitalize on the current environment in a way that will create long-term value for our shareholders. With our solid foundation of low-cost deposits, we can make a difference.
Speaker 3: significant available excess liquidity, high levels of capital, and strong credit quality, we are well positioned for the road ahead.
Speaker 3: With that operator, let's go ahead now and open up the line for questions.
Speaker 2: Thank you. We will now begin the question and answer session.
Speaker 2: To ask a question, you may press star then 1 on your touch tone phone.
Speaker 2: If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster.
Speaker 2: Our first question comes from Timur Brasilia from Wells Fargo. Please go ahead.
Speaker 2: Hi, Tamir. Is your line open? Hi. Good morning, everyone.
Speaker 2: Hi, Tamir. Is your line open? Hi. Good morning, everyone. Morning, Tamir.
Speaker 3: Jared, you had mentioned that post-March you see the strong inflow of core deposits and the pipeline there is strong. Maybe can you just kind of go through what the competitive landscape in California has looked like subsequent to failure of Silicon Valley and the stressors of some of the other West Coast banks and if you can quantify kind of what those inflows and pipeline look like.
Speaker 4: Sure, happy to give some color there.
Speaker 4: You know, we're a little bit at ground zero right for all the all the activity that's that's been disruptive in the market with you know a heavy presence of First Republic and obviously Silicon Valley signature had had built quite a presence out here and then you have Some of the other names of some of our competitors who have been in the headlines that are have a heavy presence out here so a lot of disruption
Speaker 5: and our team did a remarkable job of...
Speaker 5: giving our clients confidence and explaining our balance sheet and the strength that we have and I think that's proven out and you know We're sitting at 36% non-interest bearing deposits. I mean, it's it's not lose sight of Where that is and I see that number growing From here on out. I mean we just I'm looking at our pipeline that looks strong and I there could be outflow And so again, this is the backdrop was a shrinking
Speaker 5: where deposits were flowing out of the system. So to stay flat you had to bring in new relationships because your existing depositors weren't going to bring in more deposits to you because their balance sheets were shrinking. So we are being effective in terms of if you are flat you are bringing in a lot of new relationships, and if you are growing that's fantastic in terms of non-interest bearing.
Speaker 5: So our treasury management solutions have really been able to shine. We benefited from a lot of the outflow that came from the resolution of Silicon Valley and Signature. We were careful. There was a lot of stuff we turned down. We thought it was too large and we didn't want to end up in a concentrated position.
Speaker 5: And so I feel really good about overall where we sit. But the first thing was about safety. And the second was about, you know, can you help people solve problems? And the third thing is about rate. And there's absolutely competitive pressure right now from the rate side. If depositors have excess balances, there isn't anybody who isn't asking for rate, which is, you know, and they're
Speaker 5: If they are retail oriented they are probably more likely to be highly rate sensitive. If they are business accounts you are already providing some services for them, and you can talk about the value that you are giving them on other things which mutes the demand for rate to a certain extent, only to a point. At some point you have to be giving them a decent enough return.
Speaker 5: on excess balances. So I think we're holding up really well. Our team has just done a remarkable job and we're very good at what we do on the business side and that's going to continue to be our focus.
Speaker 3: Okay, great. And then I guess as you're looking out at the remainder of the year, I understand that lending opportunities are kind of slower than what they had been. But just, I guess, looking at the loan to deposit ratio here, taking up over 100%, how are you thinking about that dynamic of loans versus deposits and to the extent that you are fund...
Speaker 5: just around 100. It's kind of moving around around that number. We're comfortable where we sit with every new lending loan opportunity that's coming in. We obviously are asking for deposits. Most loans are not self funding. But as I said earlier in the year, I didn't think there was going to be much of a loan growth.
Speaker 5: loan growth opportunity. They said we were going to be low single digits and that's probably where we'll end up as a based on what we see now. So it's kind of we're kind of trading out of old trading out of loans and going into new loans and it's kind of they're kind of replacing each other so it's not really putting pressure on the balance sheet. If we saw really good opportunities because we you know in terms of volume.
Speaker 5: But right now it seems to be moving kind of in tandem in terms of the loans that are paying off and the loans that were finally replaced them, which is if we if we grow a little bit, I think our deposits are good enough to keep our loan deposit ratio around where it is. Okay, then one last one for me again, bigger question, bigger picture question just...
Speaker 3: With all the dislocation that's taking place in your state particularly, is there some sorts of arm race in getting any kind of meaningful scale to better capitalize on that? And I guess just what are your thoughts on broader consolidation activity taking place in California?
Speaker 3: place in your state, particularly, is there some sorts of arm race and getting any kind of meaningful scale to better capitalize on that? And I guess just what are your thoughts on broader consolidation activity taking place in California? Well...
Speaker 5: I think it's a little bit early and I don't think, you know, we're fully out of the woods yet in terms of how things are going to play out. And I think there's a lot.
Speaker 5: That depends on what happens with First Republic and where it goes. I think they're supposed to report earnings on the 24th. And I know there are a lot of interest in that and kind of what they see as their path from here. And so I think there was a lot of things.
Speaker 5: that are waiting for that event to happen. There's a lot of conversation about the future of banking and consolidation and what that's gonna look like and what size levels.
Speaker 5: are appropriate. I really like where we sit from a scarcity value in terms of our franchise with the really really strong deposit base that we have with you know really good credit quality and high levels of capital. It's going to give us a lot of optionality to think about you know how we can grow and what we might want to do. We have a lot of organic options and then obviously you know we've shown that we've been an acquirer in the past. I think there are a lot of smaller banks that might just
Speaker 3: from Eric Spector from Raymond James. Please go ahead. Hey this is Eric Spector on the line for David Feaster. I appreciate it. Yeah good morning Eric. I appreciate you taking the question. Just wanted to follow up a little bit on the lending side. Curious where particularly you're seeing.
Speaker 3: good risk adjusted returns, and then where maybe you might have less appetite for credit here. I know you mentioned low single digit growth throughout the remainder of the year. Is it possible that you shrink if you don't see good risk adjusted returns, kind of just some additional color on the competitive environment too would be helpful. Sure, absolutely there's a possibility that we shrink.
Speaker 5: risk-adjusted return to want to lend today. You have to be there for your best clients and the ones that are there that have proven themselves over and over again, you want to make sure you're lending to them especially at times like this. But if we don't see anything, I mean, I think that that's really one of the strengths of our franchise is that we we do have discretion and restraint and we're not looking to grow just to grow in an environment that's not really
Speaker 5: estate roundtable the other night with with some of our clients and some of our senior executives and you know that around the table it was it was pretty quiet in terms of transaction activity. They were everybody sitting on the side lines waiting for the next opportunity but transaction volume in real estate right now is very very slow. We are seeing some good opportunities in our media and entertainment area. We're seeing some stuff in in in education warehouses you know they their balances
Speaker 5: low volume market right now where we sit.
Speaker 6: Got it, that makes sense. And then just also wanted to touch on the new commercial accounts you added. It looks like you added about 250 this quarter. Just curious what's attracting those clients to make California, where you're bringing those relationships over and how you think about non-interest bearing balances going forward.
Speaker 5: Yeah, so thanks Eric. We are able to bring in clients through sophisticated Treasury management solutions. We target
Speaker 5: businesses that need those solutions. So they're generally their accounts on earnings credit with analysis where you know there are earnings credit will offset the fees and charges if they keep sufficient balances. Oftentimes these are clients that need multiple accounts and want to have some sort of centralized reporting and oftentimes there are loans and lines of credit that go with it not always but...
Speaker 5: that came out this morning, you know, there were two things that caught me a little bit by surprise.
Speaker 5: One was the heavy focus from a headline perspective on earnings.
Speaker 5: Because I mean it wasn't more than three or four weeks ago that it was it was like Armageddon in banking and it was all about balance sheet strength and liquidity and access to available liquidity and Unassured deposit levels and like nobody cared about earnings And so the headline to see about earnings missing by a penny or whatever I just was I just got a chuckle out of that
Speaker 5: But the second thing has to do with deposit strength. And I don't think this is really the quarter for people to be annualizing what happened in the quarter. This is one of the most unusual quarters in history from my perspective. And what happened this quarter is in no way indicative of what's going to happen in the future unless we experience a repeat of it this quarter.
Speaker 5: But most likely things have stabilized. Again, we'll see what happens with the Firstview Public. So the outlook for deposits I don't think people can annualize, you know, a 2% outflow or whatever it was in any one category I think they should look at kind of
Speaker 5: stability and strength and overall metrics. And we feel very good about where we sit with 36% on interest bearing and I see that number maintaining or growing throughout the year. I mean it could be up or down 1%, but overall we expect that to grow over time and get back to 38 and then to 40. I appreciate the color and then just wanted to touch on interest rate management.
Speaker 6: kind of your philosophy there. You've been very active with the restructuring last quarter and the cash flow hedge this quarter. Can you just elaborate exactly what you put on this quarter with the 300 million dollar hedge and then just curious how you're thinking about managing rate risk at this point and whether you're looking at additional hedges or derivatives or any tools you have to manage rate sensitivity going forward? Yes, so
Speaker 5: And Ray I'll let you jump in here on the on the hedge but let me just give in an introduction. I mean we're we're rate neutral at this point you know we were slightly asset sensitive last quarter we're rate neutral at this point. We don't manage to our margin it's an output we're trying to manage to profitability in the quarter but obviously we have a perspective on you know where we think the margins going to go over time. I could see the margin going down.
Speaker 5: at this point slightly just based on where I see things and then you know coming back because there is a lot of rate pressure but it's really going to depend on how we grow non interest-bearing and how quickly we do it. Obviously low yields are not you know low yields are really good but there's not enough volume to offset.
Speaker 5: kind of just the overall rate pressure at the bottom. We could make a lot more loans. I mean, we see loans all the time. It's just we're just not seeing stuff that we love enough to want to do it right now. There was something I saw yesterday that we just turned down. It would have been safe, but it just didn't feel like it was the right time to be doing it. So it's again margins a little bit of an output of just kind of how active we want to be.
Speaker 5: In terms of the hedge, we're selectively looking at things that will protect against future rate changes, but we're not going all in on any one direction. We're just doing kind of selectively bucketing a couple things. This hedge was $300 million. And Ray, it was a five-year hedge that we did, or was it three years?
Speaker 5: Five years that's correct. So it was five years and we we locked in it I think it was at 3.8% for five years. That's great. For a group of thank you for a group of deposits and the idea was
Speaker 5: So it was five years and we locked in it I think it was at 3.8% for five years for a group of deposits and the idea was okay well
Speaker 5: We think that the cost of these deposits is going to go higher over time. It was a whole group that was maturing. And our idea was that, okay, well 3.8% for 5-year money is a good rate for us.
Speaker 5: And so, you know, in kind of any environment, you kind of borrow it 3.8% for five years. So if rates go down, well, it was still a good, it was still a good, good cost at the time. If rates go up, we kind of make, make a little more money. The model obviously said based on the forward curve that we were going to make a lot of money on this hedge. But we're not, we're not trying to bet really, we're just trying to kind of <expletive> it.
Speaker 5: little things that we see that might be maturing where we can lock in cost and just you got to be comfortable that the cost is is fair at the time you do it and so if rates move up or down and you're kind of agnostic to it because you just thought it was a fair trade at the time. I hope that provides some color Eric.
Speaker 2: Thanks for taking the questions and I'll step back. Our next question comes from Gary Tenner from DA Davidson. Please go ahead.
Speaker 5: Thanks guys, good morning. I wanted to ask about the brokerage CDs added in the quarter. Can you give us a sense in terms of the term and rate so we have a basis for how we're modeling those balances moving around going forward?
Speaker 7: Do you have the color on that?
Speaker 4: Sure. So, on the brokerage CDs,
Speaker 4: We ladder those out over time to manage our cost of funds. And we have various durations. We use that to help manage our liquidity and give us some optionality to manage our debt.
Speaker 4: We ladder those out over time to manage our cost of funds. We have various durations that we use that to help manage our liquidity and give us some optionality to manage our interest expense.
Speaker 5: We added about 300 million, Gary. They were, you know, laddered as Ray said, so I don't know that we can give you a blended rate. And the other thing is we, you know, we might bring them down, you know, and take them all. But Ray, I don't know if you have the, just as an example, like what the cost is for a 12 month broker TD right now or a six month broker TD.
Speaker 5: Will we see sort of a benefit there in the second quarter temporarily before there's reinvestment or does, you know, what would be the annual savings from the cuts initially and kind of thoughts on reinvesting? Yeah, I don't think you're going to see much because I think we're going to just use it in other ways.
Speaker 5: you know, we've guided to kind of the 48 to 50 million quarterly operating expense number and we're in the mid 49s right now. And so I think that, you know, between 49 and 50 is probably where we're gonna sit. Okay, thanks. And then in your comments, Sherrod, you very briefly kind of mentioned
Speaker 5: the payment product, can you kind of just update us? You said things are cracking on schedule. Can you update us on where things are and kind of transactions or other kind of metrics you could provide for us? Sure. Thank you.
Speaker 5: Where we sit today is we intend to onboard clients beginning in the second half of the year, you know, early in the third quarter, and hopefully a little ahead of that.
Speaker 5: And we'll start building traction through the end of the year so that we think by early 2024 and then on through 2024, this will be a really big contributor and a meaningful one to our numbers that year in terms of being in common and likely deposits.
Speaker 5: The way that we're looking at onboarding clients is you know we're going to walk before we jog before we run.
Speaker 5: And so, you know, we've been building our risk infrastructure and we're testing it now and making sure that it's right. And we expect to be onboarding clients here very shortly because you can test as much as you want in kind of a non-live environment, but I think, you know, you've got to bring on some real clients to then test the system and make sure it does what you think it's going to do the way you think it's going to do it and then
Speaker 5: you start adding more clients. And in fact, we've been in very close touch with the regulators as we've been doing this and I think, you know, the approach that we're taking is the right one and...
Speaker 5: I don't have much more to add there, Gary, other than I fully expect us to be bringing on clients.
Speaker 5: in the second half of this year. And we'll start with clients that are of a certain size, and obviously they'll grow in size and volume as we get through the year.
Speaker 5: this year and you know they'll be we'll start with clients that are of a certain size and obviously they'll grow in size and volume as we get through the year. Thank you.
Speaker 2: Yep. Our next question comes from Matthew Clark from Piper Sandler. Please go ahead. Hey, good morning. Thank you. Good morning.
Speaker 8: On the margin front, do you happen to have the spot rate on deposits at the end of March and the monthly margin in March?
Speaker 5: just to give us some visibility. Yeah, I don't think we've...
Speaker 5: I- Ray, did we disclose that or not?
Speaker 4: We didn't disclose the spot right in March now.
Speaker 4: right in March now. Okay.
Speaker 5: Okay, I would say that, you know, just generally, so this excess liquidity that we have on the balance sheet affects our margin by...
Speaker 5: I don't know, seven to 10 basis points. It's about 2 million of expense, of interest expense that we're carrying until we choose not to carry it. I certainly wanna wait and see what happens with First Republic and then we'll take it down. But it's about 2 million of expense and seven to 10 basis points on the margin. And so I think you can expect to get a benefit there when we take that out.
Speaker 5: But on the other hand, costs in March were definitely higher than they were averaging for the first quarter.
Speaker 5: And so I could see our margin being down 10 to 15 basis points in the second quarter, maybe 20. I mean, I just don't know it's going to really depend on the flow of
Speaker 5: of non-dispairing deposits and I don't know that anybody can predict what that's going to look like. And obviously if we see good loan opportunities and we choose to do it and we want to borrow to do that, it might affect our margin but we're going to make more money.
Speaker 5: It could be 20 basis points down, Matthew. I just don't know where it's going to be. We were looking at it last night and there's a whole bunch of factors that affect it. So I hope that color helps though. Yep, yep, yeah. I'm just looking for a guidepost on the deposit side at least. And then just on the non-interest bearing deposit front, you know, growing, you know, with more nucleation im buzzing about to tell because it's interesting trying to think likely to dead Come in, do my training when you need my four and my te Move on to a destroy.
Speaker 8: It's encouraging to see that you grew commercial accounts. But can you give us some sense of what you witnessed in terms of the runoff, and whether or not there was anything chunky in there, whether or not you expect some of that to come back, and whether or not there is some lag effect in terms of opening new commercial accounts and bringing...
Speaker 5: bring it over pretty quickly.
Speaker 5: very quickly.
Speaker 5: In terms of chunkiness or things like that, I think anything that, we didn't lose any relationships. And so I was really pleased that nobody said, hey, we're pulling our money, we're going over here.
Speaker 5: But like every bank, you know, we certainly banks our size, we experience clients saying, look, I've got this new money coming in and my board wants me to spread it here or spread it there. So we think that there's opportunity for some of those funds to come here. I was on a call with a client the other day who has an infusion of some money from a private equity firm. And the private equity firm said, hey, I know that's your primary bank, but we'd like you to.
Speaker 5: maybe put this money, this infusion somewhere else that one of the money center banks. And those conversations are definitely, definitely happening. So I think that, and they of course, you know, advocated for us and they said, hey, we want to get you on a call with Bank of California and we'll get their people on the phone. So that is happening, which is why that, you know,
Speaker 5: We're not losing any money at this point. It's all the opportunities ahead of us to bring that stuff back or to bring in new clients. And so that's why I see our deposit base continuing to grow because we did so well in spite of all of that.
Speaker 8: Okay, great. And then just a housekeeping item if you have it, the weighted average cost is $2,000.
Speaker 8: Okay, great. And then just a housekeeping item if you have it, the weighted average cost that you repurchase stock this quarter.
Speaker 5: We haven't disclosed that. Okay, that's fine. Thanks.
Speaker 5: We haven't disclosed that. Okay, that's fine. Thanks. Thank you.
Speaker 5: And Matthew, I think we did say that a lot of it was purchased below tangible book. It was, you know, we said the number that we did through the end of March, and then how much we got it, we bought after the end of March. So you can kind of figure out where we might have been.
Speaker 2: Yep, that's fine. The next question comes from Kelly Mata from KBW. Please go ahead.
Speaker 9: Hi, thanks for the question. I'll carry on on the repurchase commentary. Clearly you were in the market and continue to be this quarter. As you look ahead, capital levels are really strong, which bodes well in this environment. What's your appetite for repurchases here?
Speaker 5: maybe an outlook for capital management going forward. Yeah, thanks Kelly. Look, we feel really good about our company and where we sit for all the reasons we mentioned in our prepared remarks. And you know the fact that we're choosing to kind of be a little bit more conservative here.
Speaker 5: and you know to focus on growing our deposit base and building you know and focusing on our strength, I think is fine. Absolutely, we'll take the opportunity to buy back our stock. We have a repurchase authorization for $35 million. I think it's...
Speaker 5: you know, kind of pretty low relative to our capital levels, but we wanted to be prudent not knowing what the environment was going to look like and we'll be opportunistic in buying back our stock. I certainly don't like our stock at these levels, but if it is going to be at these levels we think it's an incredibly good bargain to buy our stock here.
Speaker 5: S switching over to credit Kelly one of the thing I mean just now, just to reflect on that. I mean you know we're sitting with such low levels of unrealized losses and are available for sale portfolio and even in our H T M, that you know. We know that our, in our secreity portfolio is is, is is also highly liquid in terms of its, you know, moderate to loweration, and so our tangi book value doesn't have the numberb.
Speaker 9: searching to credit with the charge off you had this quarter, can you provide any color as to what composed those charge offs and as we kind of look ahead in a...
Speaker 9: normalizing credit environment, what would you view as a normalized level of charge-offs? Would it be similar to this 20-ish basis points you had here? Any Clips or case would be helpful.
Speaker 5: Yeah, I think if I remember correctly it was like 500 grand was the charge-off. I mean it was a small event that we had prepared for. We did put aside two and a half and so the net number was two. It was just based on what we saw it was kind of basic.
Speaker 5: So, you know, we like to break that up. And so as it relates to CRE office, general office is a very, very small number for us. And so that's why we laid out those numbers. Well I.
Speaker 5: I'm not predicting any credit problems going forward and I think our reserve levels are adequate and you know relative to others they're actually pretty high who have similar portfolios to us, but we from a modeling and you know, we follow our model and from a model perspective the score We felt that this amount was appropriate
Speaker 9: Thanks for that. Can you expand upon just like the composition of that multifamily portfolio, just what a typical credit looks like, size, why you feel confident there, just because we are feeling confident in the way that we are feeling right now.
Speaker 9: questions on CRE, so just any color on your conference. Multifamily or office? Multifamily since you mentioned it.
Speaker 5: Yeah, I mean our multifamily portfolio has held up extremely well over all cycles. You know, we are lending primarily in California.
Speaker 5: to infill housing that is in a some of the densest demographic areas in the country with a huge housing shortage like San Diego for example I've mentioned this before they're approximately 300,000 units short and they're only bringing online about 10,000 units a year
Speaker 5: So, you know, the catch up is not looking very good. And in, you know, seeing across the street in my office in Brentwood from a building that's going up, you know, that's going to be sold out really quickly. We don't have a single non-performing multifamily loan.
Speaker 5: and I don't expect it to happen. You know, a lot of the conversation has been around how do you stress multifamily for rate changes and...
Speaker 5: Let's say you have a loan that's at three and a half or four percent that's that's maturing over the next 12 months and The rate for that loan today might be seven percent might be seven and a half depending on the loan Well, most of these buildings are fully stabilized and if they are
Speaker 5: There's a whole bunch of options. If for some reason rents have not caught up.
Speaker 5: and kept up with where rates are going from an instantrate perspective over those four or five years that that loan.
Speaker 5: has been outstanding, then the borrower is likely going to have to come up with equity. There are a whole bunch of people, I mentioned I was at this real estate dinner the other night, I mean, there are all these people sitting on the sidelines that are willing to put in GP equity next to somebody if they don't have the liquidity to bring down the loan.
Speaker 5: Most of them do they could sell the property they'd be able to sell it pretty easily Also the bank technically doesn't need to bring the loan up to seven and a half percent I mean we if the loans on at four and we bring it up to six six and a half We still have a better a better loan than we did before from a rate perspective, but we wouldn't do that We would bring it up to market rates And then the other thing is Fannie and Freddie are very very active so Fannie and Freddie are letting
Speaker 5: right now on multifamily properties in the mid to low fives. So the reason people don't go there is because they lose some flexibility in terms of the timing of the loan and you have a defeasance and you have to leave the loan outstanding longer so you lose some flexibility. So for all those reasons I don't see any problems in multifamily but starting with just the
Speaker 5: the tight demographics and the lack of the high demand for housing and the shortage of housing in our market. But there are all these other reasons why I don't think multifamily will have stressors.
Speaker 5: Those same conditions don't exist for office, which is why, you know, I think there is a potential problem with office. And that's why I'm glad that we have such low exposure. Our loans are recourse. They're performing very well to people with high liquidity. And, you know, we put some of the stats in there and we have just just such low exposure to general office. And I have a list on my desk. We only have about 80 million of office that is maturing in the next.
Speaker 5: through the end of next year, which is what is that, you know?
Speaker 5: which is what is that you know 17 months 16 months so
Speaker 5: I have a list on my desk of those loans and I don't see one that's a problem. I really appreciate all the color. I'll step back. Thank you. Sure. Thanks, Kelly.
Speaker 5: Our next question comes from Tim Coffey from Jannie. Please go ahead. Great, thanks. Morning Jared, how are you doing? Good, good, good morning. If I could just follow up on the CIE commentary there. So, you know, good details in the deck on the different property breakdowns. I'm wondering of the general office how much of that is in a central business district?
Speaker 5: question comes from Tim Coffey from Janney. Please go ahead. Great. Thanks. Morning, Jared. How are you doing? Good. Good. Good morning. If I could just follow up on the CIE commentary there. So, you know, good details in the deck on on the different property breakdowns. I'm wondering of the general office, how much of that is in a central business district? Well.
Speaker 5: There's no central business district in Los Angeles. You know, we have downtown, we got Brentwood, we got Westwood, we got Century City, we got Woodland Hills, we got Santa Monica, we got Culver City. I mean, there are pockets throughout. None of these buildings are sitting like, you know, in a desert.
Speaker 5: Yeah, you know, some of these buildings are in San Diego, like they're, they're, they're just all pocketed in where you would, when we underwrite loans, and we look at what we want to lend on. That's part of the understanding is, you know, that we have to do is look at, you know, what is the aptitude and the attitude for possible tendencies based on the turnover that we would might foresee during the duration of our loan and, you know, are they going to be able to get rents? That would
Speaker 5: you know and find tenants and that's all part of the appraisal process and the evaluation of the loan. So we believe that they're sufficiently well located to hold up to the extent that office is going to hold up at all. I mean that's not going to be the reason why these properties don't do well. It's going to be because of a transition away from office. But again, our loans are recourse. We hold our borrowers, we get frequent monitoring and you know, we just had a loan where we didn't like the occupancy and we went to the borrower and he put up all bunch of money and paid down the loan. So...
Speaker 5: That is why we are a recourse lender where our loans are guaranteed by people that have the wherewithal to carry the loans. Okay. Then I want to get your thoughts on the CLOs. Part of Western Alliance's de-risking is that they have considered selling some of their CLO holdings. I was wondering what your thoughts were on continuing to hold the CLO portfolio.
Speaker 5: Well, we're in a very different position than Western Alliance, I think, from a number of perspectives. I don't know the size of their portfolio. When I joined the bank, Tim, as you remember, I think our portfolio was...
Speaker 5: We're in a very different position than Western Alliance, I think, from a number of perspectives. I don't know the size of their portfolio. When I joined the bank, Tim, as you remember, I think our portfolio was over a billion and a half of CLOs.
Speaker 5: We're sitting now, I believe, at under 500 million. And so it's kind of self-liquidating. It obviously was tested through COVID. And as you know, they trade on credit spreads. And so that's something that we monitor very carefully, but we're in AA and AAA CLOs. It's part of our asset sensitivity. You know, it's something that's more asset sensitive because they're short-term. And so we don't have any plans to sell it right now. I think it's gotten down to a...
Speaker 5: reasonable level of our overall securities portfolio and it's performing well. Okay, we've had offers to buy it because we've had offers to buy it but it's got a pretty low unrealized loss position right now and I think we certainly wouldn't sell it at a loss because there's no reason to do that. If it was trading at a gain and we could trade into something else that was equivalently short.
Speaker 2: Again, if you have a question, please press star then 1.
Speaker 2: Our next question comes from Andrew Terrell from Stevens. Please go ahead.
Speaker 5: Hey good morning. Most of them I haven't asked and answer already. I did have a couple just going back to the office commercial real estate book. I understand it's a low portion of loans for you guys.
Speaker 5: The underwriting looks solid at a 54% LTV. I'm just curious, have you seen, Jared, any office properties, either within your book or across your markets, get recently reappraised and what the value change was on the property? Just trying to get a sense of kind of incremental comfortability here with how low leverage.
Speaker 5: or how low the leverage points are across your portfolio? Yeah so ours are recently appraised, you know, recent numbers. We do it annually, you know, and these are relatively recently done. So I feel very good about our portfolio. So I wouldn't take away from our numbers that, you know, well it's
Speaker 5: 55% loan to value, but that was based on an appraisal two years ago and it's really 85%. That's not the position of our portfolio. But I will tell you that generally, yes, office properties have gone way down in value and it has to do with the size of the property primarily and the location and kind of a whole bunch of other factors. Large office buildings are under tremendous stress.
You know, we don't have any of those. We got B and C low rise buildings, and you know, where you know, you got the CPA working there cause he doesn't want to work from home, or she doesn't want to work from home. And you got, you know, somebody else, they're kind of suite based buildings that are not very large. Large office buildings under tremendous amount of pressure unless they have long-term anchor tenants.
so you know there I think that the Wells Fargo building in San Francisco just traded for 200 bucks a square foot in in downtown which was crazy given what it would cost to replace that building. Most of these these large buildings are selling for well below replacement cost and smaller buildings less so.
And so, you know, there, I think that the Wells Fargo building in San Francisco just traded for 200 bucks a square foot in downtown, which was crazy given what it would cost to replace that building. Most of these large buildings are selling for well below replacement costs and smaller buildings less so. Yeah.
Okay and then similar thing on the debt service coverage. Do you get like how recently is that debt service number refresh? Is it similar as to how often you get appraisals on properties? No it's more frequent because we're yeah we're looking at this stuff you know almost quarterly in terms of understanding rent rolls and you know cash flow of buildings and things like that. It's it depends on on on each loan but you know we obviously things that have low debt service coverage.
we're looking at and are in constant conversations, things that are higher that have been performing with good rent rolls and stable tenants, there's not as much need to look at. Yeah, okay. And then on the three credits for 90 million or so that were sold this quarter or exited, I think it's good to see some balance sheet kind of pruning where it makes sense. Do you feel like there's, as you look out, kind of anything else across the,
loan portfolio that might be legacy in nature that you could be looking to trim up over the next couple of quarters? Aaron Muellner-Miesleman Yeah, there is a whole bunch of stuff where the deposit relationship just is not there for the size of the loan. And so as this stuff comes up we are sizing and saying look, you've got to put more compensating balances in our company, or you are going to have to go borrow from somebody else. And there were loans that were made before I got here that just didn't have deposits associated with them....
And we've tried to bring in deposits from those relationships over time, but you can't necessarily cause somebody to bring them over with you unless they have a new request. And so once the loan's made, we're committed on the loan. And so I think that's the easiest opportunity is looking at any of those relationships where we haven't been able to bring in deposits for whatever reason on that specific loan, we just won't renew it. I mean, everybody here knows that we are not making any loans without a deposit relationship period.
And that's been the way it's been since I've been here, but you know, it's even more true today.
I might have missed this. Can you talk to non-interest bearing deposit flows since quarter end? Have you seen a slowdown in the cadence of NIB outflows? Does it feel like that's improved so far? Just trying to get a sense of as we work into 2Q, the level of stability.
for the NIBs? Yeah, I know I 36% I mean where we sit today where we sat at quarter end that feels right and we expect it to grow from there.
Yeah, I know, I, 36%, I mean, where we sit today, where we sat at quarter end, that feels right and we expect it to grow from there.
I know I 36% I mean, where we sit today where we sat at quarter end that feels right and we expect it to grow from there. You know.
It's just we had some early outflow in the beginning of the quarter that we knew was coming. There was some acceleration of outflow, but not in size, but in terms of kind of numbers that happened, you know, when the meltdown happened and then a lot of it came back. And then we have a pipeline now where we've got some really good, you know, good opportunities in front of us that I feel good about. And so I think our NIB is going to be stable and growing. It's hard as I mentioned at the beginning of the year.
I see the opportunity to grow it from there.
But, you know, if something else happens and there's another little chink in the armor and there's a, you know, something else happens, then you could keep, all banks could see some outflow and then we'll be down and we'll bring it back up. But NIB is really using services at our company and it's kind of the last money to kind of want to leave.
Thank you for taking the questions. I appreciate it. Thank you, Andrew. This concludes our question and answer session.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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