Q4 2023 Banc of California Inc Earnings Call
Yeah.
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.
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After todays presentation, there will be an opportunity to ask questions to.
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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 and additional required information is available in the earnings press release, which is available on the company's Investor Relations website.
The reference presentation is also available on the company's Investor Relations website.
Before we begin we'd 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.
At this time I'd like to turn the floor over to Mr. Jared Wolff Banc of California's President and Chief Executive Officer.
Jared Michael Wolff: Good morning.
Jared Michael Wolff: Welcome to banc of California's fourth quarter earnings call.
Jared Michael Wolff: Joining me on today's call are Joe counter our CFO and Bill Black our head of strategy.
Jared Michael Wolff: 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.
Bob Ramsey: Which was impacted by the closing of the merger and several one time items related to our balance sheet repositioning actions.
Bob Ramsey: We arent going to do a detailed walk through of the changes in various line items from the prior quarter.
Bob Ramsey: <unk> will utilize the time on our call today to introduce the new Banc of California provide.
Bob Ramsey: Provide an update on the progress we have made on the balance sheet repositioning.
Bob Ramsey: And lay out the timing for our integration and provide insight into the key financial metrics for Q1 and beyond.
Bob Ramsey: We'll be happy to answer any specific questions to our fourth quarter results later in the call.
Bob Ramsey: I'm truly thrilled.
Bob Ramsey: That we delivered on so many of the key objectives that we outlined when we announced the deal.
Bob Ramsey: 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.
Bob Ramsey: Closed the transaction on the front end of our range.
Bob Ramsey: We delivered Q1 on top of our 10% target.
Bob Ramsey: Notwithstanding a complicated rate environment and considerable moving items on the balance sheet.
Bob Ramsey: And we nearly hit $15 intangible book value after.
Bob Ramsey: After guiding to the mid to low $14 range, when we announce Q3 earnings.
Bob Ramsey: Many other key metrics were delivered in line as well.
Bob Ramsey: Since closing the merger on November 30th.
Our team has been collaborating exceptionally well.
Bob Ramsey: And we've made excellent progress on the balance sheet repositioning actions that we indicated at the time of the merger announcement.
Bob Ramsey: 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.
Bob Ramsey: Today, we are the third largest bank headquartered in California based on assets with an enviable presence up and down the state <unk>.
Bob Ramsey: Clean credit and an exceptionally talented team of colleagues who are focused on serving businesses with high touch service.
Bob Ramsey: And tailored solutions that our target clients arent getting from others.
Bob Ramsey: The closing of our merger reflected the relentless execution that banc of California has become known for.
Bob Ramsey: 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.
Bob Ramsey: And $1 2 billion of the investment portfolio.
Bob Ramsey: As well as approximately $2 billion of <unk> securities.
Bob Ramsey: The proceeds.
Speaker Change: Along with the excess cash from Pac West.
Speaker Change: Were utilized to reduce the higher cost wholesale funding on the balance sheet.
Speaker Change: We retired the $1 3 billion repurchase agreement with Atlas.
Speaker Change: We have 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.
Bob Ramsey: We also repaid $2 3 billion of the bank term funding program balance.
Bob Ramsey: Choosing to retain a portion in order to maintain a higher level of liquidity and pay down pay down higher cost brokered deposits.
Bob Ramsey: In total we.
Bob Ramsey: We sold approximately $6 billion of assets with an average yield of three 6%.
Bob Ramsey: And pay down approximately $9 billion of wholesale funding with an average cost of five 2% contributing.
Bob Ramsey: Contributing more than $90 million annually to the net interest margin.
Bob Ramsey: This was nearly all completed.
Bob Ramsey: In the month of December.
Bob Ramsey: As mentioned, we decided to retain a portion of our multifamily portfolio rather than selling the entire portfolio as originally planned.
Bob Ramsey: These are well performing loans and after the purchase accounting Mark they are 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.
Bob Ramsey: 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.
Bob Ramsey: We are also starting to see some of the potential benefits that we believed we would have following the merger.
Bob Ramsey: With the strength of the restructured balance sheet and superior level of service that we can provide.
Bob Ramsey: We have started to bring back many of the operating deposit accounts of <unk> clients that left the bank during the turmoil early last year.
Bob Ramsey: We also felt that there would be opportunities to further capitalize on our position as a talent magnet.
Bob Ramsey: 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.
Bob Ramsey: 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 Joe.
Joe Counter: Thank you Jared.
Joe Counter: I'm going to start by providing the spot rates for balance sheet items as of December 31 to provide some visibility to our net interest margin for the first quarter.
Joe Counter: As of December 31, 2023, our estimated spot rate for loan yields was 618%.
Joe Counter: Our estimate of spot rate with a yield of all interest earning assets was 563%.
Our spot rate for the cost of deposits.
Joe Counter: It was $2 six 9%.
Joe Counter: Our spot rate for the cost of funds was 299%.
Joe Counter: And our estimate at spot rate for our net interest margin was 275%.
Bob Ramsey: Compared to $1 six 9% for the fourth quarter and 215% for the month of December of 2023.
Bob Ramsey: 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%.
Bob Ramsey: The expected increase in our net interest margin in the first quarter from December 31 spot rate will be driven by.
Bob Ramsey: And approximate 15 basis point improvement in earning asset yields.
Bob Ramsey: Driven mostly by loan repricing and new originations at higher rates currently between 7% and 8%.
Bob Ramsey: 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.
Bob Ramsey: 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.
Bob Ramsey: 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 using off balance sheet options for higher cost customer deposits.
Bob Ramsey: At this point we.
Bob Ramsey: We are moderately liability sensitive and will benefit from a reduction in interest rates.
Bob Ramsey: Once we have completed our balance sheet repositioning.
Bob Ramsey: 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.
Bob Ramsey: Be reasonable to expect our first quarter 2024, opex ratio to be in the range of $2 10 to $2 20%.
Bob Ramsey: As we have indicated previously.
Bob Ramsey: The expected cost savings from the merger will be phased in over the course of 2024.
Major contributors to the cost savings include the completion of the systems conversion, which is scheduled to occur in may.
Bob Ramsey: A reduction in FDIC assessment expense, which we anticipate to start declining in the first quarter.
Bob Ramsey: And office consolidation with approximately 18% of the leases on Pac West offices expiring during 2024.
Bob Ramsey: By the fourth quarter of 2024, we expect our opex ratio to be down around two 8% and.
Joe Counter: And we are targeting the core quarterly run rate for noninterest expense to be approximately or below 2% of total assets from that point forward.
Joe Counter: With all of the integration and balance sheet repositioning actions preceding on schedule the.
Joe Counter: The guidance, we provided for our level of returns that we announced at the time of the merger has not changed.
Joe Counter: 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. One O percent R O a a.
Bob Ramsey: And 13% ROE TCE.
Given the timing of achieving cost savings throughout the year.
Jared: At this time I'll turn the call back over to Jared.
Jared Michael Wolff: Thanks, Joe.
Jared Michael Wolff: I'd like to wrap up with some comments around our vision, we have for the company and the broader outlook.
Jared Michael Wolff: 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.
Bob Ramsey: We provide full service commercial banking across real estate, and C&I, including asset based lending.
Bob Ramsey: 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.
Bob Ramsey: Whether in our community or specialty areas, we offer best in class Depository and Treasury management solutions corporate asset management.
Bob Ramsey: In the payments ecosystem, we are building, which includes merchant processing.
Bob Ramsey: Card solutions, as an issuer and third party processing.
Bob Ramsey: 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.
Bob Ramsey: We believe this presents us with significant opportunities to consistently add attractive new client relationships that provide low cost deposits and high quality loans.
Bob Ramsey: And as we continue to build out our new payments ecosystem.
Which we believe will only further enhance our value proposition.
Bob Ramsey: It will differentiate us from competing banks and positively impact our business development efforts.
Bob Ramsey: As we've indicated.
Bob Ramsey: We expect to be a high performing institution with strong earnings power.
Bob Ramsey: A portion of that will come from restoring the high level of profitability.
Bob Ramsey: <unk> businesses have historically generated.
Speaker Change: 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.
Speaker Change: With the balance sheet repositioning actions, we have taken we.
Speaker Change: We have significantly reduced these assets and funding sources, which creates a path to a higher level of returns for the combined institution.
Speaker Change: As we start 2024.
Speaker Change: While there remains some degree of economic uncertainty.
Joe Counter: We are already seeing the positive impact of being a larger stronger financial institution on our loan production.
Joe Counter: 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.
Joe Counter: In most cases loans coming on the books are being done at the same or higher rates than those paying off.
Bob Ramsey: Given the volume of run off we anticipate while there is some uncertainty regarding the pace and the timing.
Bob Ramsey: At this point, we're expecting to end 2024 with total loan balances that are flat to slightly down from the year in 2023 level.
Bob Ramsey: And then growing during 2025 as economic conditions improve.
Bob Ramsey: 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.
Bob Ramsey: 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.
Bob Ramsey: I wanted to note that we feel very good about the credit quality of the loan portfolio.
Bob Ramsey: 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.
Bob Ramsey: As well as resolve some of the weaker credits.
Bob Ramsey: As a result, the bank has cleaner credit and a higher level of reserves. Following the provision that we recorded in the fourth quarter.
Bob Ramsey: An asset quality standpoint, we are comfortable with where we stand.
Bob Ramsey: 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.
Joe Counter: 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.
Joe Counter: I have witnessed heroic undertakings and I feel very privileged to be leading such an incredible group of colleagues.
Joe Counter: Thanks to all of them I am confident in what we have set out to accomplish this year and beyond.
Joe Counter: In closing, we believe we are well positioned to deliver strong financial performance for our shareholders and 24.
Joe Counter: 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.
Joe Counter: 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 Task. A question you May Press Star and then one using a touchstone telephone withdraw.
Joe Counter: Withdraw your question you May press Star and two.
Joe Counter: 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.
Joe Counter: That is star and then one to join the question queue.
Joe Counter: We'll pause momentarily to assemble the roster.
Joe Counter: And our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.
Matthew T. Clark: Hey, guys. How are you doing good morning, great.
Matthew T. Clark: Good.
Matthew T. Clark: Just wanted to start on expenses.
Matthew T. Clark: <unk>.
Matthew T. Clark: For the upcoming quarter and the related run rate I know you had a kind of partial quarter in <unk>.
Matthew T. Clark: You get a kind of another month of legacy.
Matthew T. Clark: The ANC.
Bob Ramsey: Our two months of legacy Bac D&C.
Bob Ramsey: 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.
Bob Ramsey: 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 10 to 20.
Bob Ramsey: And the.
Bob Ramsey: The glide path will be getting down to two by the end of Q4.
Bob Ramsey: The conversion isn't going to take place until May.
And there is a.
A number of things that come out after that.
Bob Ramsey: Across across the company.
Joe Counter: Joe mentioned the facilities, we are going to get a lift from the FDIC assessment.
That we think will reduce beginning in the first quarter.
Joe Counter: But.
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.
Joe Counter: Yes, no I think you captured it correctly I think there is that we have.
Joe Counter: We manage a detailed list of savings initiatives we have.
Joe Counter: Our plans in place and the.
Joe Counter: 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.
Joe Counter: 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 are 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.
Matthew: By being proactive about making sure deposit costs are appropriate we 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.
Matthew: 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.
Matthew: Talking about this client had $2 million in.
Matthew: With tears in their eyes, they moved it out during the.
Bob Ramsey: Problems of early 2023, and they just brought it back they werent they weren't 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.
Bob Ramsey: Got it and then just on earning assets trying to get at.
Bob Ramsey: Better sense of where those balances might be coming into the year here.
Joe Counter: You spoke to the loan piece of it for the year, but just knowing that you still have <unk> in some more.
Joe Counter: Brokerage Cds and you probably would like to have how should we think about overall average earning assets this year.
Joe Counter: Well the fed made our decision really easy on VTS P rate with the announcement yesterday in terms of.
Joe Counter: Jack and the cost at the end of March So I'm sure we'll probably.
Bob Ramsey: Get out of it by then if not before.
Bob Ramsey: Joe.
Joe Counter: What's your sense for where our average earning assets will be but.
Joe Counter: I think they've been pretty flat I think they're going to be pretty flat for the year.
Joe Counter: And.
Bob Ramsey: You may see the balance sheet, just shrinking a little bit.
Bob Ramsey: 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.
Bob Ramsey: Alright decision is as we move forward, but the earning assets should be pretty stable.
Bob Ramsey: 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 Counter: 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.
Joe Counter: But profitability is the number one goal.
Bob Ramsey: Okay, Great and then last one for me.
Bob Ramsey: Whats your gut CET, one now over 10% and 12 in.
Bob Ramsey: Tangible common.
Bob Ramsey: Rebuilding probably pretty quickly here I guess, what's the appetite for buyback with the stock below tangible book.
Bob Ramsey: Yeah.
Bob Ramsey: Well.
Bob Ramsey: 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.
Bob Ramsey: 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.
Bob Ramsey: Great. Thanks again.
Bob Ramsey: Thank you.
Bob Ramsey: Our next question comes from Brandon King from curious. Please go ahead with your question.
Bob Ramsey: Hey, good afternoon.
Brian: Hey, Brian.
Brandon King: Okay. So could you just give us.
Brandon King: Give us some thoughts so how are you thinking about the level of deposits you mentioned.
Brandon King: Legacy <unk> customers are bringing the operating deposits back, but then you also have customers with excess liquidity.
Brandon King: And I know, you're trying to manage deposit costs pretty.
Brandon King: 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.
Bob Ramsey: Yes, it's a good question and what I focus on and historically have at Banc of California.
Bob Ramsey: Was on our level of noninterest bearing deposits along with our loan to deposit ratio.
Bob Ramsey: And so we'd like to maintain our loan to deposit ratio below 90%.
Bob Ramsey: Preferably in the mid eighties, and we'll see how that goes.
Bob Ramsey: As we watch our noninterest bearing percentage rise it gives us flexibility for other deposits that.
Bob Ramsey: That are of different different types. So we have a whole bunch of initiatives in place here.
Bob Ramsey: Alright, Thank you, California to grow our NII, which is bringing over operating accounts for businesses.
Bob Ramsey: And we expect to grow from 26% and eventually over time I'm not going to put a date on it but we.
Bob Ramsey: 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.
Bob Ramsey: We're not going to we're not going to ask customers to leaf we value our customers and the relationships we have.
Bob Ramsey: The one thing I will focus on the early and we've already started focusing concentration risks and I think 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.
Bob Ramsey: 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.
Bob Ramsey: <unk> asset management.
Joe Counter: 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 King: Brandon there is 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.
Joe Counter: Yeah.
Brandon King: Got it that makes sense.
Brandon King: 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 are you, adding how should we think about that as far as how it could impact expenses.
Brandon: We have a pretty tight range, you're expecting this year, but just going forward.
Brandon: Yes, there was some positions and some areas that we want to grow we just added a talented leader to head a venture in California.
Joe Counter: And lead our team here.
Joe Counter: We have.
Joe Counter: Before we announced the acquisition we brought in a new head of corporate communications from city National <unk>, who is doing a great job for US we have a ahead of underwriting.
Joe Counter: <unk>.
Brandon King: On the community Bank side that we brought in recently.
Brandon King: There is a whole host of talented leaders and.
Brandon King: And players at all levels that we're bringing in.
Brandon King: We obviously are going to have to manage it within our expense targets and getting down to that 2%.
Joe Counter: Opex ratio is going to require us to exercise some discipline.
Joe Counter: But.
Joe Counter: We're confident that we can do it.
Speaker Change: Got it and then just lastly on <unk>.
Speaker Change: Despite yields this is very helpful could you give us despite yield on the securities portfolio.
Speaker Change: Yeah.
Joe Counter: Joe do you have that.
Joe Counter: I do just give me one second.
Brandon King: Okay, Brandon, we'll take a look for that Brandon.
Brandon: I got it here Jared it's 2.25%.
Jared Michael Wolff: I am sorry, I read that wrong, 275% I apologize 275%.
Jared Michael Wolff: Thank you very much very helpful. Thanks for taking my questions I Couldnt read my experience running.
Jared Michael Wolff: Yeah.
Jared Michael Wolff: Sure.
Speaker Change: Our next question comes from Gary Tenner from D. A Davidson. Please go ahead with your question.
Speaker Change: Thanks, Good morning.
Speaker Change: Good morning, a couple of questions.
Speaker Change: One.
Speaker Change: The NIM guide of approaching 3%.
Speaker Change: Information Thats inclusive of the expected loan discount accretion.
Speaker Change: You kind of lay out on an annualized basis in the Lundbeck, yes, yes, okay, alright forget number.
Speaker Change: Okay.
Jerry Smith: Jerry do you kind of answered part of this with your comment around the Bts P and repaying that.
Jerry Smith: Right into the quarter, but in the deck.
Jerry Smith: One of your checklist items was to 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 the balance sheet, but just wanted to get a sense of any kind of clear discrete items outside the <unk> repayment that are still planned for the first quarter.
Jerry Smith: Well I think its expense reductions there are there are pieces of the discontinued loan portfolios that <unk>.
Jerry Smith: Capital permitting we might look to sell.
Joe Counter: If we think the yield is.
Joe Counter: Is so low that we can it's somewhat of a negative carry relative to other funding that we could pay off we're constantly looking at that and looking at what the pricing is in pricing is kind of moving around in the market as people settle in on on where they think rates are going to be so.
Joe Counter: We're not.
Joe Counter: Yeah.
Joe Counter: We're not.
Joe Counter: Ignoring that there are other things that we could sell we just haven't made the decision to definitely sell those things.
Joe Counter: Absent one or two things so I think thats something that you could expect.
Joe Counter: Gary.
Joe Counter: There is a lot of.
Joe Counter: These are somewhat unclear times from an economic standpoint, and I think a lot of banks are.
Joe Counter: Looking at the road ahead, and Thats kind of filled with debris and they're trying to figure out how theyre going to drive down the road and kind of get to the end zone.
Joe Counter: Im mixing my metaphors here, but we are.
Joe Counter: We're fortunate that we have a very clear path and then I guess, a 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 said that.
Joe Counter: That includes potentially having some loan sales and we have a lot of 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.
Joe: Along with all of those expense savings that I mentioned that we have listed out Joe I don't know, if you or bill have anything else to add here.
Joe: Yes.
Joe Counter: I'd, just say on the balance sheet.
Joe Counter: As the liabilities is in addition to the <unk> broker.
Joe Counter: 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.
Joe Counter: <unk>.
Joe Counter: Wholesale funding ratio.
Speaker Change: Drift up or down do we loan to deposit ratio et cetera. So there's lots of options we have.
Speaker Change: We're going to make those as Jared articulate we're going to make those decisions.
Jared: As they come to us and based upon the economic environment and the best what's best for shareholders at that time.
Jared: Yeah.
Jared: Great appreciate it.
Jared: One more.
Speaker Change: George You mentioned that you're you got several stories about former.
George You: Former Pac West depositors coming back into the fold as it were.
George You: <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.
George You: What kind of format or those balances coming back.
George You: It's all different formats I mean.
George You: 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. It was incredibly apologetic you took the $1 3 million cashier's check to Bofa and opening the account a client quickly realize that he did not receive the same service that you're always enjoyed as you continue to bank with us.
George You: With 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 banker that took care of them every week I have pages of stories like this.
George You: And.
George You: Obviously, it is very gratifying and it's not surprising to me at all.
George You: 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.
George You: We will be very successful in that effort.
George You: Great. Thanks, guys.
George You: Yes.
Our next question comes from Andrew its Rob from Stephens. Please go ahead with your question.
George You: Hey, good morning.
Andrew: Good morning, Andrew.
Andrew: Just a couple of quick ones for me one just to confirm on the on the kind of <unk>.
Andrew: Balance sheet size expectations, it sounds like from an average, earning asset and then total asset standpoint.
Andrew: Relatively.
Andrew: Stable expectations throughout the year is that fair.
Andrew: Yes.
Andrew: Okay, what's the what's the comfortable level of cash you would be willing to run at.
Andrew: I think about 8% is that right here.
Andrew: Yes, 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 as we bring it down and.
Historically, we ran with 2%, 3% and I think banks today are running with a little bit more especially because you can get such a good yield.
Joe Counter: On liquidity and so it's a function of what we can get right now so I think I think Joe's targets right.
Joe Counter: Okay perfect.
Joe Counter: <unk>.
Joe Counter: And if I could ask all the commentary is super helpful.
Joe Counter: I know theres a lot of moving pieces here, so I want to appreciate all the color.
Joe Counter: Just wanted to ask on kind of the exit row, four for 110, and <unk> 24, I'm trying to get a better sense of it.
Joe Counter: What type of exit margin you would expect.
Joe Counter: The expense part is helpful, but it seems like the one kind of.
Joe Counter: Detail that I'm trying to get to here is the NIM is there any kind of color you can provide on an exit <unk> NAND and that would underpin a 110 ROA it would be helpful.
Joe Counter: Yes, the NIM.
Joe Counter: We haven't we haven't defined that yet I don't think Joe heavily.
Joe Counter: 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: Andrew is that what Youre looking for.
Andrew: No. He is asking for Q4, 2024, where we're going to be.
Andrew: So Andrew Andrew the reason why we're not there is because the NIM is pretty much enough of an output for us.
Andrew: And so.
If we're if we're a little bit larger a little bit smaller it obviously.
Andrew: We will affect the NIM and 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 ROA.
Andrew: And so we haven't provided guidance there yet.
Okay.
I'll do the easy way to.
Andrew: 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.
Andrew: In some cases go through that and back into it.
Andrew: So just give your own.
Andrew: The pressure test it on your own.
Bob Ramsey: Yeah, I was I was running that analysis bill and it just seemed like the margin I'd plug N was.
Bob Ramsey: Pretty high so I just was trying to spot checking.
Bob Ramsey: Okay.
Bob Ramsey: Okay I can move on the the one other I wanted to ask about was the $16 8 million of additional expense you.
Joe Counter: You guys called out is related to the HOA business this quarter and.
Joe Counter: Can you talk about specifically what drove that and was that more transitory in nature. So should we should view it as one time.
Joe Counter: There was one time.
It was one time it was it was a catch up expense for a specific client.
Joe Counter: And we took care of it in the in the fourth quarter.
Joe Counter: Got it okay.
Joe Counter: And then actually last one that the borrowing facility termination for $19 5 million.
Does that come through operating expense or was it in your.
Jerry Smith: Interest expense.
Jerry Smith: Operating expenses.
Jerry Smith: Okay perfect I appreciate it.
Jerry Smith: Thank you Andrew I appreciate it.
Speaker Change: Our next question comes from Tamir, Brazil, yet from <unk>.
Speaker Change: Wells Fargo. Please go with your question.
Speaker Change: Hi, good morning.
Speaker Change: Good morning.
Jerry Smith: Jerry you had made a comment regarding loans.
Jerry Smith: 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.
Jerry Smith: As we're looking at the categories today, where could we see some additional trimming off of loan balances.
Jerry Smith: So in the discontinued portfolio.
Jerry Smith: Premium finance loans like we laid this out on a table in the deck of what the discontinued portfolios are versus.
Jerry Smith: Kind of what we consider core portfolios going forward.
Jerry Smith: And you have.
Jerry Smith: Premium finance lender finance all of those things in the lender finance is coming off it.
Jerry Smith: About $100 million quarter over quarter as what it was last quarter.
Jerry Smith: Don't know if its going to continue at that pace, but that 732 is running down and it's a lower yielding a little below three 5%.
Jerry Smith: We have some good yields on some of the other stuff civics coming down for sure.
Jerry Smith: A portion of that is bridge and the other portion is kind of for rent single family.
Speaker Change: So those are those are two of the categories that I think student loans.
Speaker Change: There's barely any national lending left.
Speaker Change: But the stuffs running down.
Speaker Change: We think the loan portfolio overall will be.
Flat to slightly down.
Speaker Change: And this is obviously an environment, where you can get a reasonable yields.
Speaker Change: Hi.
Speaker Change: Your liquidity.
Speaker Change: Relative to the stuff thats paying off but obviously, we want to deploy the funds in good loans because the rates right now are very good for lending.
Joe Counter: As Joe said, 7% to 8% is what we're getting and in many cases higher than that.
Joe Counter: And so we wanted to deploy it in good loans, but we're being conservative.
Joe Counter: And we're.
Joe Counter: Making sure that it's the right relationships, we really want to use our.
Joe Counter: Our balance sheet for our clients and for full relationships and so we're ensuring that when we are lending today.
Joe Counter: Comes with a real relationship with the reduction in banks.
Joe Counter: Overall.
Joe Counter: It's easier for us to require larger.
Joe Counter: Components of the overall relationship to bank with us and to lend and in the past it was much much more complicated.
Joe Counter: 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.
Joe Counter: And well known real estate Guy.
Joe Counter: He said can I call you after lunch I sort of course.
Joe Counter: 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.
Speaker Change: 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.
Brandon King: 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.
Brandon King: And how you need it.
Joe Counter: 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.
Joe Counter: But theres a lot of opportunities like that.
Joe Counter: Okay, Great and then.
Joe Counter: Maybe again, just circling back to your comments about bringing back legacy Pac west deposits that left last year I'm, just wondering what industries those are in and to what extent youre getting some of the venture.
Joe Counter: Tech related deposits.
Engaging with the bank.
Joe Counter: I would say.
Joe Counter: The deposit outflows that Pac west had in banc of California, as well, but they were obviously more more dramatic at Pac West.
Joe Counter: We're in all areas and so there isn't an area, where we're not looking to bring deposits back.
Joe Counter: But the headline of course was the deposits that went out on the venture side and how Pac west classify those.
Joe Counter: I would say that my observation and the data that we have is that those relationships are very very strong.
Joe Counter: We've been able to positively promote the strength of our bank.
Joe Counter: And this combination really really gave people a lot of comfort.
Joe Counter: Our credit ratings came out obviously very strong.
Joe Counter: And so we have been successful at bringing back relationships and deposits out left in those areas.
Joe Counter: 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 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 that have balances in the family, but not on the balance sheet.
Joe Counter: We might be successful.
Joe Counter: Tomorrow by bringing back relationships, even if they don't show up in our deposit numbers because they're in.
In 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 going to be careful what we keep on balance sheet and that what we lend against.
Joe Counter: Okay and then.
Joe Counter: I guess just last for me.
Joe Counter: 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.
Joe Counter: Originally when when that was introduced.
Joe Counter: <unk>.
Joe Counter: <unk> kind of revenue contribution back end of 'twenty three.
Joe Counter: 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.
Speaker Change: And what Pac West does to that run rate.
Speaker Change: Absolutely. So we said that pack that we said that deep stack on a standalone basis.
Brandon King: Banc of California.
Brandon King: We said that deep stack with would start contributing meaningfully to fee income.
Brandon King: In 2024.
Brandon King: Pac West has fee income historically at $10 million to $12 million per month.
Brandon King: And that is that is continuing.
Brandon King: So with the ability of deep stack to make an impact.
Brandon King: On a fee basis on a revenue basis to the combined company.
Brandon King: Is no longer there in 2024 to the way to the same magnitude it would've done on a Standalone bank in California.
So just to put it in context.
Brandon King: On a standalone basis, it would have contributed meaningfully but it's obviously diluted now.
Brandon King: The payments business that we're building is three things it's merchant processing.
Brandon King: Which is our ability to go direct to merchants to process credit cards without any third party intermediaries.
Brandon King: Issuing issuing credit cards directly on our balance sheet to clients to whom we have credit this isn't.
Brandon King: 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.
Brandon King: 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 pay like others, who are well known in the business. Those are the three layers of our ecosystem.
Brandon King: And those are all rolling out now and so I think.
Brandon King: 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.
Brandon King: But we're not going to call. It out until we think we have something to talk about that.
Brandon King: 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.
Brandon King: Using deep stack as a digital payment acceptance tool.
Brandon King: For their clients, it's got 4 billion in deposits as Scott hundreds of clients.
Brandon King: And they think deep stack 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.
Jerry Smith: 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 that I think will benefit us.
Jerry Smith: Hopefully this year, but certainly in 2025.
Joe Counter: We're also focused on optimizing the <unk> integration and setting up payments and a truly optimal way I'm 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 pays obviously, a 100 pound gorilla out there and we're excited.
George You: A partner with them and see if we can find some ways to accelerate our progress.
George You: Great. Thank you for that color I appreciate it.
George You: Yes.
Okay.
George You: Our next question comes from Kelly Motta from <unk>. Please go with your question.
George You: Hi, Thanks for the question.
Kelly Motta: Hey, Kelly Hey.
Kelly Motta: Hey.
Kelly Motta: Maybe we could talk a bit about these and.
Kelly Motta: Deep stack, but just.
Kelly Motta: More broadly and in general.
Kelly Motta: Yeah.
Kelly Motta: On a combined basis I know, you're bringing together two banks with different capabilities I'm, just wondering where you see like.
Kelly Motta: Complementary opportunities to maybe.
Kelly Motta: So one product or another.
Kelly Motta:
Kelly Motta: Neither pack lesser bank of what you may have not had before.
Kelly Motta: And kind of how what your run rate fee income looks like etsy.
Kelly Motta: Our next year and kind of how that could be additive to that.
Kelly Motta: Yes, so I'll start with cards.
Kelly Motta: <unk>.
Kelly Motta: Yeah.
Kelly Motta: Pac West was.
Kelly Motta: 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.
I think we're great.
Kelly Motta: Susan Tang leads that group and they did a great job with it and we were looking at how we can accelerate that and.
Kelly Motta: Build off the momentum that they had previously the $10 million to $12 million per month or fee income wasn't wasn't solely from that <unk> did a good job of collecting fees and a variety of ways, but for now we think that that fee income per month.
Susan Tang: <unk> is the right the right level that people should expect.
Susan Tang: And then hopefully we can build on it from there we have some.
Susan Tang: 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 with what 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 till later in the year.
Susan Tang: Got it that's helpful.
Speaker Change: So it was really good to see the tangible book value number came in higher than what you had expected last quarter I was hoping maybe this is a question for Joe, but if you could.
Joe Counter: Help us kind of bridge the gap on how we should be thinking about a OCI with that.
Joe Counter: What that is again in the securities book duration, and how we should be thinking about the back of that.
Joe Counter: Over time, just trying to get a sense of the cadence of tangible book value growth.
Joe Counter: Yeah.
Joe Counter: So on the OCI, we've come down significantly to $434 million.
Speaker Change: <unk> to where the Pac west was on a standalone basis, which was eight.
Speaker Change: 800, and some change in the third quarter.
Speaker Change: Our our duration of that portfolio is north of five years unsecured period, we'd like to over time bring that duration down.
Speaker Change: At higher yielding securities to that portfolio.
Speaker Change: We feel pretty good about where we are on the on the unrealized loss. These are high quality securities and as interest rates. If interest do continue to come down as the forward curves suggest then.
Unrealized loss that's in a OCI will continue to come down as well.
Speaker Change: Thanks, I'll step back.
Speaker Change: Sure.
Speaker Change: Yes, I Should've mentioned, we've got a whole team working on this payments ecosystem and.
Jack <unk>: I've mentioned before it's led by Jack <unk>, who is our chief payments officer.
Jack <unk>: What I've been so impressed with is how as we brought the banks together.
Bob Ramsey: We found the best pieces of each to kind of move. This forward. If there is 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 could mention them all but we will be excited to see how this rolls out later on.
Jack <unk>: The year.
Jack <unk>: Okay.
Jack <unk>: Thanks.
Once again, if he would like to ask a question. Please press star and one.
Jack <unk>: Give yourself from the question queue, you May press Star two.
Jack <unk>: Two.
Jack <unk>: Our next question comes from Tim Coffey from Janney. Please go ahead with your question.
Speaker Change: Hey, good morning, gentlemen.
Speaker Change: Good morning.
Speaker Change: Good morning.
Speaker Change: Well I appreciate all the details in the press release today, especially the spot rates.
IRA to look at the spot rates and apply them to period imbalances.
Speaker Change: We're getting a net interest income number closer to $300 million is that a reasonable.
Speaker Change: Estimate for the profitability of that company today.
Speaker Change: Yes.
Speaker Change: I don't know that were ready to say that yet.
Speaker Change: To confirm that number as being higher LOE. The reason being is theres a lot of moving pieces and I think.
Speaker Change: We understand why it's difficult because we only had one month.
Combined balance sheet with a whole bunch of stuff moving around.
Speaker Change: 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.
Speaker Change: But to to forecast today, what Q1 kind of run rate PPE and our 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.
Speaker Change: Hopefully people took away a lot of confidence from what we've done I mean, I think what we accomplished in Q1 Q4 was.
Speaker Change: Tremendous.
Speaker Change: 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 thats going to happen here, but I have every level of confidence in our ability to execute and be successful.
Speaker Change: And so I would like to get through Q1, Tim to be able to guide from there.
Speaker Change: Okay.
Speaker Change: Would you say that.
Speaker Change: And I also appreciate the cadent.
Speaker Change: Cost saves throughout the year I'm wondering when it comes to restructuring the balance here reviewing the balance sheet is there anything coming up in one queue of significance.
Joe Counter: The FDIC I think that's a pretty big Hi, Joe Yes.
Joe Counter: Yes, so on the on the cost the FDIC assessment.
Joe Counter: Assuming we get that as a very big.
Joe Counter: 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.
Joe Counter: 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.
Joe Counter: For example, the <unk>, which you can come due in March.
Bob Ramsey: Yes, that's actually what I was asking about was on the balance sheet side.
Bob Ramsey: Just the Bts P. Then.
Bob Ramsey: Well, there's other there's other higher cost broker deposits, which are.
Bob Ramsey: Coming due in the first quarter and Thats I made a comment earlier about how we evaluate them as they come due and we look at the.
Bob Ramsey: <unk>.
Bob Ramsey: The situation's economic environment at the time, when we make decisions what's best.
John A. Bogler: John manage the portfolio optimally on a day by day basis.
John A. Bogler: Okay.
John A. Bogler: Thank you.
John A. Bogler: And then Tim Tim Tim one other thing.
Speaker Change: We did mention that we are constantly looking at loan sales.
Tim: 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.
Tim: We have opportunities to do that but if we don't get the right price, we obviously won't do it.
Tim: Okay.
Tim: That piece of the multifamily is off the market now are you going to hold onto that that yes, yes. Okay.
Tim: Hey, Mike.
Tim: I would say there might be a very small subset of the multifamily that was very small subset 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.
Tim: <unk>.
Mike: Okay. Okay. Thank you.
Mike: And then my final question.
Jerry on the size of the balance sheet.
Mike: Being critical because I think he is what it is.
Jerry Smith: Precedent in banking this merger.
But I thought I'd announcements.
Jerry Smith: The 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 deal with that if you want to do or was this more or was there a strategic reason for keeping it bigger.
Jerry Smith: Well the first piece of it was keeping.
Jerry Smith: The extra piece of multifamily.
Jerry Smith: And we.
Jerry Smith: We have more cash I think than we planned.
Jerry Smith: But I do think I do see it coming down like I said, we're not we're not.
Jerry Smith: Okay.
Jerry Smith: We're really managing to profitability and to that 110, ROA and obviously.
Jerry Smith: Once an ROI and a bigger balance sheet means more earnings so if we might need to bring down the balance sheet.
Jerry Smith: Based on where we see earnings.
Jerry Smith: And it's a delicate balance obviously, because you get rid of assets and the earnings up and where the expenses that go along with it but we're managing all of that to make sure we get to that 110, ROA and Roe out.
Jerry Smith: Out of the out of the gate in Q4.
Jerry Smith: To start 2025.
Jerry Smith: So I don't know, where we're going to land.
Confident we're going to get to our profitability targets.
Jerry Smith: Okay great.
Jerry Smith: Those are my questions. Thank you very much.
Jerry Smith: Thanks, Tim.
Wells Fargo: And our final question is a follow up from <unk> from Wells Fargo. Please go ahead with your question.
Wells Fargo: Alright, 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.
Wells Fargo: So.
Wells Fargo: In the deck, we included a page which showed the how.
Joe Counter: How the accretion we estimate the accretion will roll off and so on.
Joe: 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.
Joe: <unk> impact for the year.
Joe: Which includes loan marks consistent with <unk>.
Susan Tang: Aggregate way consistent with the yields that we're seeing on our new originations.
Kelly Motta: Great. Thank you for that.
Kelly Motta: Yeah.
George You: Hey, good morning, gentlemen.
George You: And ladies and gentlemen, with that we will be concluding today's conference call and presentation. We do thank you for joining you.
George You: You may now disconnect your lines.
Okay.