Q4 2023 Banc of California Inc Earnings Call
Yes.
Hello, and welcome to Banc of California's fourth quarter earnings Conference call.
All participants will be in a listen only mode should you need assistance.
Conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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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 a reconciliation for these 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'd like to direct everyone to the Companys Safe Harbor statement on forward looking statements included in both the earnings release and the earnings presentation.
At this time I'd like to turn the floor over to Mr. Jared Wolff Banc of California's President and Chief Executive Officer.
Good morning.
Welcome to banc of California's fourth quarter earnings call.
Joining me on today's call are Joe counter our CFO and Bill Black our head of strategy.
Our investor presentation, along with our earnings release were designed to provide a great deal of information given the unusual nature of the fourth quarter.
Which was impacted by the closing of the merger and several one time items related to our balance sheet repositioning actions.
We aren't going to do a detailed walkthrough of the changes in various line items from the prior quarter.
Instead, we'll utilize the time on our call today to introduce the new Banc of California.
An update on the progress we have made on the balance sheet repositioning.
Lay out the timing for our integration.
Provide insight into the key financial metrics for Q1 and beyond.
We'll be happy to answer any specific questions to our fourth quarter results later in the call.
I'm truly thrilled.
That we delivered on so many of the key objectives that we outlined when we announced the deal.
Thanks to the hard work of our talented colleagues and advisors and the work of the regulators we received approval for our transaction in record time.
Closed the transaction on the front end of our range.
We delivered seat you want on top of our 10% target.
Notwithstanding a complicated rate environment and considerable moving items on the balance sheet.
And we nearly hit $15 intangible book value after.
After getting to the mid to low $14 range, when we announce Q3 earnings.
Many other key metrics were delivered in line as well.
Since closing the merger on November 30th.
Our team has been collaborating exceptionally well.
And we've made excellent progress on the balance sheet repositioning actions that we indicated at the time of the merger announcement.
As a result, we have created the well capitalized highly liquid financial institution with strong earnings power in a strong position in California as we envisioned.
Today, we are the third largest bank headquartered in California based on assets with an enviable presence up and down the state.
Clean credit and an exceptionally talented team of colleagues who are focused on serving businesses with high touch service and.
And tailored solutions that our target clients arent getting from others.
The closing of our merger reflected the relentless execution that banc of California has become known for.
Among the most notable items, we completed the planned sales of legacy Banc of California's $1 7 billion FSFR portfolio.
Approximately $700 million of the multifamily portfolio.
And 1.2 billion of the investment portfolio as.
As well as approximately 2 billion of Pac less securities.
The proceeds are.
Along with the excess cash from Pac West were utilized.
Is to reduce the higher cost wholesale funding on the balance sheet.
We retired the $1 3 billion repurchase agreement with Atlas.
And I've also continued to reduce the volume of higher cost broker deposits, which were down nearly 4 billion from the time of the merger announcement through the end of 2023.
We also repaid $2 3 billion of the bank term funding program balance excuse.
Excuse me to retain a portion in order to maintain a higher level of liquidity and pay down pay down higher cost brokered deposits.
In total we.
We sold approximately $6 billion of assets with an average yield of three 6%.
And pay down approximately $9 billion of wholesale funding with an average cost of five 2% contributing.
Contributing more than 90 million annually to the net interest margin.
This was nearly all completed in the month of December.
As mentioned, we decided to retain a portion of our multifamily portfolio rather than selling the entire portfolio as originally planned.
These are well performing loans and after the purchase accounting mark they have attractive yields and an approximately four year effective duration that we determined were in our best interest to retain given the outlook for potentially declining rates.
As noted we were able to execute on most of our planned balance sheet repositioning actions in a short period of time strengthening our balance sheet and repositioning the company for improved performance and enhanced flexibility. We will continue to evaluate all available options as we seek to optimize our balance sheet going forward.
We are also starting to see some of the potential benefits that we believed we would have following the merger.
With the strength of the restructured balance sheet and superior level of service that we can provide.
We have started to bring back many of the operating deposit accounts of pack with clients that left the bank during the turmoil early last year.
We also felt that there would be opportunities to further capitalize on our position as a talent magnet.
We have already added already added a number of individuals and we'll look to continue adding exceptional banking talent that we believe can positively contribute to the profitable growth of our franchise in the coming years.
Now, let me hand, it over to Joe who will provide some additional financial information and I'll have some closing remarks before opening up the line for questions joke.
Thank you Jared.
I'm going to start by providing the spot rates for balance sheet items as of December 31st to provide some visibility to our net interest margin for the first quarter.
As of December 31, 2023, our estimated spot rate for loan yields was 6.18%.
Our estimate of spot rate with a yield of all interest earning assets was 563%.
Our spot rate for the cost of deposits.
It was 2.69%.
Our spot rate for the cost of funds was 299%.
And our estimate at spot rate for our net interest margin was 2.75%.
Compared to 1.69% for the fourth quarter and 2.15% for the month of December of 2023.
We are exiting the quarter with a much higher net interest margin due to the benefits of the merger and our balance sheet repositioning actions and we expect our first quarter net interest margin to approach 3%.
The expected increase in our net interest margin in the first quarter from December 31 spot rate will be driven by.
And approximate 15 basis point improvement in earning asset yields driven mostly by loan repricing and new originations at higher rates currently between 7% and 8%.
And an approximate 10 basis point improvement in cost of funds driven by the Paydown of higher cost wholesale funding and an increase in the relative percentage of lower cost core deposits.
Putting aside changes in interest rates, we expect to see a steady decline in our interest expense as we move through 2024 and continue to replace higher cost wholesale funding sources with lower cost deposits acquired through our business development efforts.
There are also some additional actions that we may take that could have a positive impact on our net interest margin, including additional asset sales and use an off balance sheet options for higher cost customer deposits.
At this point.
We are moderately liability sensitive and will benefit from a reduction in interest rates.
Once we have completed our balance sheet repositioning.
Including reaching our internal targets for low cost deposits, we intend to manage the bank to a neutral or slightly asset sensitive position.
Looking at noninterest expense.
It'd be reasonable to expect our first quarter 2024, opex ratio to be in the range of 210 to $2 20 per cent.
As we have indicated previously the expected cost savings from the merger we phased in over the course of 'twenty 'twenty four.
Major contributors to the cost savings include the completion of the systems conversion, which is scheduled to occur in may.
A reduction in FDIC assessment expense, which we anticipate to start declining in the first quarter.
And office consolidation with approximately 18% of the leases on Pac West office is expiring during 2024.
By the fourth quarter of 2024, we expect our opex ratio to be down around 2.0 per cent.
And we are targeting the Coty quarterly run rate for non interest expense to be approximately or below 2% of total assets from that point forward.
With all of the integration and balance sheet repositioning actions are proceeding on schedule the.
The guidance, we provided for our level of returns that we announced at the time of the merger has not changed.
Rather than focusing on the full year. Our primary focus is on ensuring our ending Q4 run rate is in line with our targets of approximately 1.10% R O a a M.
And 13% R O T C E given.
Given the timing of achieving cost savings throughout the year.
At this time I will turn the call back over to Jared.
Thanks, Joe.
I'd like to wrap up with some comments around our vision, we have for the company and the broader outlook.
We are organized around two primary areas first the bulk of our assets are centered in our community bank, which is comprised of our talented bankers who focus on in market relationship lending across California, and Denver, Colorado in Durham, North Carolina, and a few other locations.
We provide full service commercial banking across real estate, and C&I, including asset based lending.
Paired with our community bank, our specialty lines, which provide expertise in specific verticals, including homeowners and property management solutions.
Media and entertainment warehouse lending corporate asset Finance, SBA fund finance and venture banking.
Whether in our community or specialty areas, we offer best in class Depository and Treasury management solutions corporate asset management.
And the payments ecosystem, we are building, which includes merchant processing.
Card solutions, as an issuer and third party processing.
We believe we have great market position in California, given the strength of our franchise and superior level of service and expertise that we can provide particularly given the significant changes we have seen over the past few years and the California banking market with so many of our competitors exiting or significantly pulling back from the market.
We believe this presents us with significant opportunities to consistently add attractive new client relationships that provide low cost deposits are high quality loans.
And as we continue to build out our new payments ecosystem.
Which we believe will only further enhance our value proposition.
It will differentiate us from competing banks and positively impact our business development efforts.
As we've indicated we expect to be a high performing institution with strong earnings power.
A portion of that will come from restoring the high level of profitability that Pac west businesses have historically generated.
In recent years, there were some lower yielding assets added that were funded with higher cost funding sources that negatively impacted Pac west historical profitability.
With the balance sheet repositioning actions, we have taken.
We have significantly reduced these assets and funding sources, which creates a path to a higher level of returns for the combined institution.
As we start 2024.
While there remains some degree of economic uncertainty.
We are already seeing the positive impact of being a larger stronger financial institution on our loan production.
With a greater volume of opportunities for us to consider.
We're seeing a reasonable level of loan demand, which is enabling us to generate meaningful level of new loan production, while continuing to be conservative and highly selective in the loans, we choose to make.
In most cases loans coming on the books are being done at the same or higher rates than those paying off.
Given the volume of run off we anticipate while there is some uncertainty regarding the pace and the timing.
At this point, we were expecting to end 2024 with total loan balances that are flat to slightly down from the year in 2023 level.
And then growing during 2025 as economic conditions improve.
As we move through 2024, we will provide an update to our expectations based on any changes we see in economic conditions that have a material impact on loan demand and loan production.
Regardless of the rate curve and pace of changes in interest rates, we are well positioned to capitalize on such opportunity given the highly liquid balance sheet that we now have.
I want to note that we feel very good about the credit quality of the loan portfolio.
The merger process dictated that we take a close look at every loan in the portfolio of each legacy bank and make sure that they were appropriately rated as.
As well as resolve some of the weaker credits.
As a result, the bank has cleaner credit and a higher level of reserves. Following the provision that we recorded in the fourth quarter.
And from an asset quality standpoint, we are comfortable with where we stand.
It's fair to say that based on our Q4 actions the new Banc of California has cleaner credit today than either of its predecessors.
I want to specifically, thank the dedicated and talented colleagues at banc of California for their amazing efforts contributions and many sacrifices for helping to create this new and exciting franchise.
I have witnessed heroic undertakings.
And I feel very privileged to be leading such an incredible group of colleagues.
Thanks to all of them I am confident in what we have set out to accomplish this year and beyond.
In closing, we believe we are well positioned to deliver strong financial performance for our shareholders and 24.
As well as to capitalize on our great market position that we have built in California to consistently enhance the value of our franchise in the coming years.
With that operator, let's go ahead and open up the line.
Ladies and gentlemen at this time, we'll begin the question and answer session to ask a question you May Press Star and then one using a touch tone telephone.
All your questions you May press star and two.
If you are using a speaker phone, we do ask that you. Please pickup your handset prior to pressing the numbers to ensure the best sound quality.
Again that is star and then wanted to join the question queue.
We will pause momentarily to assemble the roster.
And our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.
Hey, guys. How are you doing good morning, great.
Good.
Just wanted to start on expenses.
For the upcoming quarter and the related run rate I know you had a kind of a partial quarter in <unk>.
You get a kind of another month of legacy.
B a N C.
Our two months of legacy Bac D&C.
But can you can you speak to not only kind of where that run rate might shake out ex merger charges, but how much in the way of cost saves have you realized so far and how much are left.
We have a lot a lot left to do which is why we think that in the first quarter. The opex ratio is going to be between $2 and into 'twenty.
And.
The glide path will be getting down to two by the end of Q4.
The conversion isn't going to take place until May.
And there is.
A number of things that come out after that.
You know across across the company.
Joe mentioned the facilities you know we are going to get a lift from the FDIC assessment.
That we think will reduce beginning in the first quarter.
But you know there's a lot to take out that it's going to come later in the year, Joe I don't know if you have more color there.
Yeah, No I think you captured it correctly I think you know that we are about we manage a detailed list of savings initiatives. We have our plans in place and you know the the big initiatives that Jerry spoke to are some of the larger ones. We do expect to get the FDIC.
Assessment favorability in the first quarter and we will you will see it start coming out from there.
Matthew we literally have a list of like 30 things with a person assigned the deadline by which it's supposed to get done and the impact and we're going through that list and checking them off as we go and we're not going to lose track of them and they're all within our control. We believe in addition to that we obviously have the expense savings we think we can realize.
Matthew: On the interest side by being proactive about making sure deposit costs are appropriate.
Don't need to pay necessarily at the same levels, we are paying in the past given the strength of the franchise, but we want to protect relationships and a lot of that is going to be based on the volume of new relationships that we bring in new deposits that come back to the bank I solicited feedback for this call from.
A number of our colleagues and I ask them to share client wins and stories of clients coming back beyond what I already knew about and I got my Inbox is full of stories of people.
Talking about.
This client had had $2 million and they you know with tears in their eyes. They moved it out during the day.
Problems of early 2023, and they just brought it back they werent they werent happy at Bofa or wherever they went and they brought it all back and so there's a lot of stories like that but that's going to take place over the course of the year and that will impact our ability to improve our interest expense as well.
Got it and then just on earning assets trying to get at.
Better sense of where those balances might be coming into the year here.
You spoke to the loan piece of it for the year, but just knowing that you still have <unk> in some more.
Brokerage Cds and you probably would like to have how should we think about overall average earning assets this year.
Matthew: Well the fed made our decision really easy on P. P. F P rate with the announcement yesterday in terms of.
Jack and the cost at the end of March So I'm sure we'll probably.
Get out of it by then if not before.
Joe What's what's your sense for where our average earning assets will be.
Pretty flat I think they're going to be pretty flat for the year and you may see the balance sheet, just shrinking a little bit with the with the excess.
Liquidity that we have coming into the new year being deployed against the Bts P or high cost deposits, depending on what the right decision is as we move forward, but the earning assets should be pretty stable.
Yeah, we are going to prioritize profitability as Joe rightly pointed out in the call and so while earning assets, while our asset say, our total about 38 and a half.
Joe: It wouldn't be surprising to get lower by the end of the year, but we're not really focused on that we're focused on hitting our profitability targets, regardless of the size of the balance sheet and if it means we should be smaller than will be smaller if it means we should we're comfortable being a little bit larger because we have the ability to earn at the profitability levels. We said then we'll then we won't focus on it.
But profitability is the number one goal.
Okay, Great and then last one for me.
Whats your gut CET, one now over 10% 10 12 and.
Tangible Commons.
Rebuilding probably pretty quickly here I guess, what's the appetite for buyback with the stock below tangible book.
Well.
We obviously believe that we're going to be building up capital at a very healthy pace.
And once we get to a level, where we believe we have sufficient excess capital and that it's sustainable at that level. We will certainly have a variety of options and they're not mutually exclusive.
We're going to obviously continue to reinvest in our company. While also looking at ways to reduce share count, whether it's preferred or common but I think it's important that we demonstrate the sustainability of our of our capital and earnings and that we build it up to levels that we consider excess and from there we'll have plenty of options.
Great. Thanks again.
Thank you.
Joe: Our next question comes from Brandon King from curious. Please go ahead with your question.
Hey, good afternoon.
Hey, Brian.
So could you just give us.
Brian: Give us some thoughts of how you're thinking about the level of deposits you mentioned.
Legacy <unk> customers that we're bringing the operating deposits back, but then you also have customers with no excess liquidity.
And I know, you're trying to manage deposit costs pretty.
Prudently. So you can kind of give us a sense of how you think the level of deposits should trend as we go throughout the year.
Yeah, It's a good question and what I focus on and historically have at Banc of California.
Was on our level of noninterest bearing deposits along with our loan to deposit ratio.
And so we'd like to maintain our loan to deposit ratio below 90%.
Preferably in the mid eighties, and we'll see how that goes.
As we watch our noninterest bearing percentage rise it gives us flexibility for other deposits that are.
That are of different different types. So we have a whole bunch of initiatives in place.
Here at Banc of California to grow our NII, which is bringing over operating accounts from businesses and.
And we expect to grow from 26% and eventually over time I'm not going to put a date on it but we'll get to 30 and we'll get to 35 and eventually we'll get to 40 that banc of California.
Legacy, we went from 12% to approximately 40% and IP, we have a roadmap to do this and how we do it and the pace at which we do will dictate what happens with all these other deposits.
We're not going to we're not going to ask customers to leave we value our customers and the relationships we have.
The one thing I will focus on the early and we've already started focusing on it as concentration risk.
We've all learned that we have to live within our means and not become too reliant on any one customer on the loan or the deposit side.
And so that's something that we're going to manage very carefully we have tools to help our clients keep their relationship at the bank, but bring it off balance sheet. So we're not relying on it for lending we have asset management.
A great team of people here that can help with corporate asset management should we need it and for some clients that's the right solution and so.
Brandon there's kind of a delicate balance of how we move all of these things together, we did it at banc of California, historically, and so I would say that the things that we look at our the loan to deposit ratio and our percent of Niv and that provides the flexibility for everything else.
Yeah.
Got it and then.
And then in your prepared remarks, you mentioned, how you're adding individuals' tally could you elaborate on that what type of what types of talent or you're adding how should we think about that as far as how it could impact expenses.
I know you have a pretty tight range, you're expecting this year, but just going forward.
Yeah, well there there were some positions and some areas that we want to grow we just added a talented leader to.
Had a venture in California.
And lead our team here we are.
Have.
Before we announced the acquisition we brought in a new head of corporate communications from city National Deb Bronder Who's doing a great job for US we have a head of underwriting on the community bank side that we brought in recently.
There is a whole host of talented leaders and and players at all levels that we're bringing in.
We were obviously were going to have to manage it within our expense targets and getting down to that 2% Opex ratio is going to require us to exercise some discipline.
But we're confident that we can do it.
Got it and then just lastly, you.
You gave us to spud yields. This is very helpful could you give us despite yield on the securities portfolio.
Joe do you have that.
You know I do just give me one SEC.
Okay, Brandon, we'll take a look for that Brandon I Gotta here Jared its 2.25%.
I'm, sorry, I read that wrong, 275% I apologize 275%.
Thank you very much very helpful. Thanks for taking my questions I couldn't read my handwriting.
[laughter].
Our next question comes from Gary Tenner from D. A Davidson. Please go ahead with your question.
Thanks, Good morning.
Good morning, a couple of questions.
<unk>.
The NIM guide of approaching 3% just confirming that's inclusive of the expected loan discount accretion that you've kind of lay out on annualized basis in the slide deck, yes, yes, okay, alright for that number.
Okay.
Jerry do you kind of answered part of this with your comment around the Bts P and repaying that probably before it ended the quarter, but in the deck.
Kind of one of your checklist items was a complete restructuring of the balance sheet now I know theres going to be kind of ongoing obviously for some period of time kind of optimizing of the balance sheet, but just wanted to get a sense of any kind of clear discrete items outside of the <unk> repayment that are still planned for the first quarter.
Well I think it's it's expense reductions there are there are there are pieces of the discontinued loan portfolios.
That.
Capital permitting we might look to sell.
If we think the yield is.
It is so low that we can it's somewhat of a negative carry relative to other funding that we could pay off.
Lastly, looking at that and looking at what the pricing isn't pricing is kind of moving around in the market as people settle in on or where they think rates are going to be so we're not.
Hum.
We're not.
Ignoring that there are other things that we could sell we just haven't made the decision to definitely sell those things.
Absent one or two things. So I think that's something that you could expect Gary.
Look there's a lot of these.
These are somewhat unclear times from an economic standpoint, and I think a lot of banks are.
Looking at the road ahead, and it's kind of filled with debris and theyre trying to figure out how theyre going to drive down the road and kind of get to the end zone.
I'm mixing my metaphors here, but we are.
We're fortunate that we have a very clear path and then I guess I'm very clear road ahead, and we can see very clearly what we need to do and we have it all laid out and if we execute on the things that we set out to do we believe it's largely within our control to achieve the earnings targets and profitability that we set in and that includes potentially having some loan sales and we have a law.
The levers to pull so if we don't sell those loans, we got something else that we wanted to do but I think loan sales as a possibility.
Along with all of those expense savings that I mentioned that we have listed out Joe I don't I don't know if you or bill have anything else to add here.
I would just say on the balance sheet you know as as the liabilities is in addition to the <unk>.
Broker deposits as they come due we will look at the market and we'll look at all the various options. We have do we let the.
Our wholesale funding ratio.
Drift up or down do we loan to deposit ratio et cetera. So there's lots of options we have.
We're going to make those as Jared articulated we're going to make those decisions as they come to us and based upon the economic environment and the best what's best for shareholders at that time.
Great appreciate it and if I can ask.
One more.
You mentioned that you're you've got several stories about former.
Former Pac West depositors coming back into the fold as it were.
<unk> deal you talked about the experience as to how those are coming back or are they kind of utilizing a suite or kind of share deposit product.
What kind of format or are those balances coming back.
It's all different formats, I mean, I've got a story right here from someone in one of our offices during the liquidity crisis, a longtime small business clients through $1 3 million out of his account. He was incredibly apologetic. He took the $1 3 million cashier's check to Bofa and opening the account.
Client quickly realized that he did not receive the same service that you're always enjoyed as you continue to bank with US was with much smaller balances. We continue to encourage them to bring the money back after the renewed strength of the bank and the merger and how dissatisfied he was within personalized service at this other bank the client brought back the $1 1 billion and attributed to our service and our particular.
[noise] banker that took care of them every week I mean, I I have pages of stories like this.
And.
Obviously, it is very gratifying and it's not surprising to me at all.
We did this at Banc of California, when I joined we really focused on service and solutions Pac West is really good at it they had outflows based on fear that were unfounded, but they had a very very loyal client base and I know that if we do what we say we're going to do and we do it on time and we continue to execute the way we always have.
We will be very successful in that effort.
Great. Thanks, guys.
Yep.
Our next question comes from Andrew its Rob from Stephens. Please go ahead with your question.
Hey, good morning.
Good morning, Andrew.
Just a couple of quick ones for me one just to confirm on the on the kind of.
Balance sheet size expectations, it sounds like from an average, earning asset and then total asset standpoint.
I mean relatively kind of <unk>.
Stable expectations throughout the year is that fair.
Yes.
Okay, what's the what's the comfortable level of cash you'd be willing to run up.
I think about 8% is that right here.
Yeah, I think 8% to 10% I mean were higher than we wanted to be right now, but I think 10% would be the high watermark and.
We bring it down and.
Historically, we ran with you know, 2%, 3% and I think banks today are running with a little bit more especially because you can get such a good yield.
On liquidity and so it's a function of what we can get right now so I think I think Joe's targets right.
Okay perfect.
And if I could ask all the commentary is super helpful.
I know theres a lot of moving pieces here, so I want to appreciate all the color.
Just wanted to ask on kind of the accent ROA for 110, and <unk> 24, I'm trying to get a better sense of it.
Just what type of exit margin you would expect the expense part is helpful. But it seems like the the one kind of.
Detail that I'm trying to get to here is that the NIM is there any kind of color you could provide on an exit <unk> NAND and that would underpin the <unk> it would be helpful.
Yeah the NIM.
We haven't we haven't defined that yet I don't think Joe heavily.
Are we going to find when we did our exit we did say our estimate spot rate for net interest margin was 275 at 12 31.
Andrew is that what Youre looking for.
He's asking for Q4, 2024, where we're going to be.
So Andrew Andrew the reason why we're not there because the NIM is pretty much enough of an output for us.
And so.
If we're if we're a little bit larger a little bit smaller it obviously.
Will will affect the NIM.
Kind of the mix of our portfolio and so we just haven't guided to it yet we know we have all of these levers we have all these models we've looked at three different ways to get there and the name is different in these different models, but we still achieve the same way.
And so we haven't provided guidance there yet.
Okay.
I'll do the easy way to.
Andrew the easy way to back into that though is that if you think about it of the three main income statement components fees net interest income and expenses, if youre comfortable with your estimate for fees and expenses you can essentially.
In some cases, you go through that and back into it.
So just give your own I mean.
The pressure test it on your own.
Yeah, I was I was running that analysis bill and it just seemed like the margin either plug N was pretty high so I just was trying to spot checking.
Okay I can move on the the one other I wanted to ask about was the $16 8 million of additional expense.
You guys called out is related to the HOA business this quarter.
Can you talk about specifically, what what drove that and was that more transitory in nature. So should we should view it as one time.
There was one time.
It was one time it was a it was a catch up expense for a specific client.
And we took care of it in the in the fourth quarter.
Got it okay.
And then actually last one that the borrowing facility termination for $19 5 million did.
Did that come through operating expense or was that in and your interest.
Interest expense.
Operating expense.
Okay perfect I appreciate it.
Thank you Andrew I appreciate it.
Our next question comes from Tamir Brasilia from.
Wells Fargo. Please go with your question.
Hi, good morning.
Good morning.
Jerry you had made a comment regarding loans that balances more or less flat as demand is okay, but youre continuing to see some run off or maybe you're expecting some run off I'm just wondering.
As we're looking at the categories today, where could we see some additional trimming off of loan balances.
So in the discontinued portfolio pre.
Premium finance loans like we laid this out on a table in the deck of what the discontinued portfolios are versus.
Kind of the what we consider core portfolios going forward.
Brian: And you have <unk>.
Premium finance lender finance all of those things in the lender finance is coming off of it.
About $100 million quarter over quarter as what it was last quarter.
You know if it's going to continue at that pace, but that 732 has run down and it's a lower yield.
Little below three 5%.
We have some good deals and some of the other stuff civics coming down for sure.
A portion of that is bridge and the other portion is kind of for rent single family.
So those are those are two of the categories that I think student loans.
There's barely any national lending left.
But the stuffs running down.
We think the loan portfolio overall will be.
Flat to slightly down.
And this is obviously an environment, where you can get a reasonable yields.
Got it.
Your liquidity.
Relative to the stuff that's paying off but obviously, we want to deploy the funds in good loans because the rates right now are very good for lending.
As Joe said, 7% to 8% is what we're getting and in many cases higher than that.
And so we want to deploy it in good loans, but we're being conservative.
And we're.
Making sure that it's the <unk>.
Relationships, we really want to use our.
Our balance sheet for our clients and for full relationships and so we're ensuring that when we are lending today.
Comes with a real relationship with the reduction in banks.
Overall.
It's easier for us to require larger.
Components of the overall relationship to bank with us and to lend and in the past it was much much more complicated.
Given the position of our bank and the options available to the clients that are speaking to us we're in a much better position to demand more it's not to say that every client is going to have a single banking relationship I talked to somebody yesterday I ran into a restaurant.
And well known real estate Guy.
He said can I call you after lunch I sort of course.
And he called me as he said he would and he said look we've been with we've been with first Republic, which is now chase.
And with city National and they're pulling back and are you open to talking to US we have about $40 million to $50 million balances were not going to put it all at one bank, but we do need to put our operating account somewhere.
And I said, we'd love to talk to you I said I want to make sure that we can serve you with what you need.
And how you need it and so let us look at all of that and then come back to you to make sure that we can meet you where you're going but there's a lot of opportunities like that.
Okay, Great and then.
Maybe again, just circling back to your comments about bringing back legacy Pac West deposits left last year I'm, just wondering what industries those are in and to what extent you're getting some of the venture.
Tech related deposits.
Engaging with the bank.
I would say.
Deposit outflows that <unk>.
Pac West had in Banc of California had as well, but they were obviously more more dramatic at Pac West.
We're in all areas and so there isn't an area, where we're not looking to bring deposits back.
But the headline of course was the deposits that went out on the venture side and how Pac was classified those.
I would say that my observation.
We have is that those relationships are very very strong.
We've been able to positively promote the strength of our bank.
And this combination really really gave people a lot of comfort.
Our credit ratings came out obviously very strong and.
And so we have been successful at bringing back relationships and deposits out left in those areas.
And we're going to continue to do that the area, where I want to be careful is we all agree that we're going to manage concentration better so.
So that we don't end up with depositors that are too large for our balance sheet and we have corporate asset management, we have a great tool that we can use to have about half balances in the family, but not on the balance sheet. So we might be successful.
Two more by bringing back relationships, even if they don't show up in our deposit numbers because they're there.
Asset management off balance sheet, and so we're doing both.
We want them back we want them in the family we want them here, we think we can serve them better than others, but we're gonna be careful what we keep on balance sheet and what we lend against.
Okay, and then I guess just last for me and you again, you touched on this a little bit but looking at the payment rollout and we're deep stack fits into all of this.
Originally when when that was introduced.
The update was kind of revenue contribution back end of 'twenty three.
I'm wondering if a the Pac west deal delayed that a little bit and then B. If you can provide some update on the magnitude of what the payment vertical might look like.
And what Pac West does to that run rate.
Absolutely. So we said that we said that deep stack on a standalone basis.
Old Banc of California.
We said that deep stack with cart would start contributing meaningfully to fee income.
In 2024.
Pac West has fee income historically at $10 million to $12 million per month.
And that is that is continuing.
So the ability of deep stack to make an impact.
On a fee basis on a revenue basis to the combined company.
<unk> is no longer there in 2024 to the way to the same magnitude it would've done on a standalone bank of California.
So just to put it in context.
On a standalone basis, it would've contributed meaningfully but it it's obviously dilutive now.
The payments business that we're building is three things it's merchant processing.
Which is our ability to go direct to merchants to process credit cards without any third party intermediaries.
Issuing issuing credit cards directly on our balance sheet to clients to whom we have credit this isn't.
This isn't selling consumer credit cards broadly this is giving card solutions to our existing clients to whom we already provide credit and benefiting from the interchange as the issue of those cards.
Third is using our rails or infrastructure that we've built in the bins. The identification numbers that we have with Mastercard and visa to process third party transactions for trusted partners like World PE like others, who are well known in the business. Those are the three layers of our ecosystem.
And those are all rolling out now and so I think.
I'm, hoping that later in this year or by the end of the year, it's making enough that we want to call it out specifically and making enough. So I call. It out specifically means meaningful enough on this combined balance sheet that doesn't mean, it's not contributing anything.
But we're not going to call. It out till we think we have something to talk about that.
Good enough number it's obviously going to have to be a bigger number now but there are many ways in which we think this is going to accelerate the merger. For example, the HOA business is going to be using is going to be using deep stack is a digital payment acceptance tool.
For their clients you know its got $4 billion in deposits, it's got hundreds of clients.
And they think deep stack is a is a great feature to allow them to accept payments to provide a tool that their clients really would like to make their payments acceptance easier. The venture business has embedded clients interested in our payment tools PWB was actually further along than we were at banc of California and digital account opening.
Which is a huge part of rolling out our payments business. So theres lots of positive synergies that we're going to realize through the year did I think will benefit us.
Hopefully this year, but certainly in 2025.
We're also focused on optimizing the F I S integration and setting up payments and a truly optimal way.
Meeting with the CEO and we'll pay executives at their headquarters in Jacksonville in February to discuss this they've been very focused on what we're doing in payments, we're very unique world tastes. Obviously, the 100 pound gorilla out there and we're excited to partner with them and see if we can find some ways to accelerate our progress.
Great. Thank you for that color I appreciate it.
Yeah.
Okay.
Our next question comes from Kelly Motta from K B W. Please go with your question.
Hi, Thanks for the question.
Kelly.
Hey, I thought maybe we could talk a bit about these and not deep stack, but just more.
More broadly and in general.
On a combined basis I know, you're bringing together two banks with different capabilities I'm, just wondering where you see like complementary opportunities to maybe you know.
You know one product or another.
Pac West or bank of what you may have not had before.
And kind of how what your run rate fee income looks like etsy.
Our next year and kind of how that could be additive to that.
<unk>.
Yeah, So I'll start with carts.
<unk>.
Yeah.
Pac West was.
Much further along than we were in kind of their card partnerships. They werent an issuer of cards. They were basically a reseller of others cards, but they had that they were doing it in a good way with a virtual card program and I was just looking at materials. This morning, and I bet.
I think we're great.
Susan Tang leads that group and they did a great job with it and we were looking at how we can accelerate that and.
Build off the momentum that they had previously the $10 million to $12 million per month of fee income wasn't wasn't solely from that pack west did a good job of collecting fees and a variety of ways, but for now we think that that fee income per month is the right. The right level that people should expect.
And then hopefully we can build on it from there we have some.
As we have said a little bit of retooling to do as an issuer the way we're going to build this out and roll. It up is we have to close down the partner programs and then start with our new programs and so it's not going to slow down the fee income, but I don't think we're going to see any acceleration in it until later in the year.
Got it that's helpful.
So it was really good to see the tangible book value number come in higher than what you had expected last quarter I was hoping maybe this is a question for Joe, but if you could.
Help us kind of bridge the gap on how we should be thinking about a OCI with that.
What that's against in the Securities book duration, and how we should be thinking about the feedback of that.
Her time, just trying to get a sense of the cadence of tangible book value growth.
Yeah.
So on the OCI, we've come down significantly to 434 million.
Compared to where the Pac west was on a standalone basis, which was eight.
800, and some change in the in the third quarter.
Our duration of that portfolio is north of five years out in the secure period wed like to over time bring that duration down in it.
At higher yielding securities to that portfolio.
We feel pretty good about where we are in the on the unrealized loss. These are high quality securities and as interest rates. If introduced do continue to come down as the forward curves suggest then the unrealized loss that's in a OCI will continue to come down as well.
Thanks, I'll step back.
Yeah.
I should have mentioned.
I Should've mentioned, we've got a whole team working on this payments ecosystem and.
I've mentioned before it's led by Jack <unk>, Who's our chief payments officer, and what I've been so impressed with is how as we brought the banks together.
We found the best pieces of each to kind of move this forward if theres a development team that that Pac West has that we didn't have at banc of California, that's really jumped in and done a great job of helping to build the user interfaces and the things that we want to move forward on payments and so there's a lot of good things going on and I wish I can mention them all but we will be excited to see how this rolls out later on.
A year.
Yeah.
Thanks.
Once again, if you would like to ask a question. Please press star and one to remove yourself from the question queue. You May press star two.
Our next question comes from Tim Coffey from Janney. Please go ahead with your question.
Hey, good morning, gentlemen.
Good morning.
Good morning.
Well I appreciate all the details in the press release today, especially the spot rates.
I want to look at the spot rates and apply them to period imbalances.
He was getting a net interest income number closer to $300 million is that a reasonable.
Estimated for the profitability of that company today.
Yes.
I don't know that were ready to say that yet.
To confirm that number as being higher LOE. The reason being is theres a lot of moving pieces and I think.
We understand why it's difficult because we only had one month.
Combined balance sheet with a whole bunch of stuff moving around.
What we'd like to do is deliver a Q1 balance sheet and income statement and I think it's going to be much easier for us to guidance off of that but.
But to to forecast today, what Q1 kind of run rate P. P and or other things are going to be we're not we don't want to do that yet we want to make it a little bit more progress.
Hopefully people took away a lot of confidence from what we've done I mean, I think what we accomplished in Q1 Q4 was was tremendous we.
Brian: Did this at Banc of California, we always did it faster than we said we were going to do it and I can't promise that that's going to happen here, but I have every level of confidence in our ability to execute and be successful.
And so I'd like to get through Q1 tend to be able to guide from there.
Okay.
I say that.
I also appreciate the cadent.
Throughout the year I'm wondering when it comes to restructuring the balance you're redoing the balance sheet is there anything coming up in one queue of significance.
The FDIC I think that's pretty big Hi, Joe Yeah.
Yeah. So on on the on the cost the FDIC assessment.
Assuming we get that as a very big run rate item and then there are some other initiatives, we have which they come in throughout the year. The other things are happening in the first quarter.
But I think.
Were you asking about the balance sheet restructuring in the first quarter because of that I think you could see us deploying some of our excess liquidity against.
For example, the Bts P, which you can come due in March.
Yes, that's actually what I was asking about what's on the balance sheet side.
The Bts P. Then.
Well, there's other there's other higher cost broker deposits, which are coming.
Coming due in the first quarter and that's you know I made a comment earlier about how we evaluate them as they come due and we look at the the.
You know the situation the economic environment at the time, when we make decisions what's best.
Trying to manage the portfolio optimally on a day by day basis.
Okay I appreciate that thank you.
The team there is Tim Tim one other thing.
We did mention that we are constantly looking at loan sales.
And so I don't know that we're going to execute it depends on the price, but I wouldn't be surprised if we did because we have opportunities to do that but if we don't get the right price, we obviously won't do it.
Okay.
Well most of that piece of the multifamily is off the market.
Hold all of that debt, yes, yes, we're going to wonder okay.
I would say there might be a very small subset of the multifamily that was that very small subset that there seems to be a lot of interest in that that piece of it we may but it would be it would not be a large.
Portion.
Okay. Okay. Thank you.
And then my final question.
Jerry on the size of the balance sheet.
Being critical because I think he is what it is you're pretty much.
And in making this merger, but I thought I had announcements that announcement.
Balance sheet was going to be smaller than it is today and I'm just kind of wondering did you did you kind of just run out of time to do all the stuff you want to do or was this more or was there a strategic reason for keeping it bigger.
Well the first piece of it was keeping.
The the extra piece of multifamily.
And.
We have more cash I think than we planned.
Brian: But I do think I do see it coming down like I said, we're not we're not.
Yeah.
We're really managing to profitability and to that 110, ROA and obviously.
One to an ROI on a bigger balance sheet means more earnings so if we might need to bring down the balance sheet.
If based on where we see earnings.
And it's a delicate balance obviously, because you get rid of assets than they're earning something and where the expenses that go along with it but we're managing all of that to make sure we get to that 110.
Out of out of the gate in Q4.
To start 2025, so I don't know, where we're going to land, but I'm confident we're going to get to our profitability targets.
Okay.
Those are my questions. Thank you very much.
Thanks, Tim.
And our final question is a follow up from <unk> from Wells Fargo. Please go ahead with your question.
Hi, Thanks for the follow up just one quick one what are the assumptions for purchase accounting that are embedded in your estimates for 'twenty four.
I know that question wasn't wasn't directed to me so I'll, let Joe answer that.
So you.
In the deck, we included a page which showed the how.
How the accretion we estimate the accretion will roll off and so I.
I think it's on page 29 of the deck, but I think our current assumption is that we will have a.
We estimate that it would be about 15 cents.
EPS impact for the year.
Which includes loan marks consistent with.
Aggregate way consistent with the yields that we're seeing on our new originations.
Great. Thank you for that.
Yeah.
Hey, good morning.
And ladies and gentlemen, with that we'll be concluding today's conference call and presentation. We do thank you for joining you.
You may now disconnect your lines.
Okay.
Okay.