Q1 2024 Banc of California Inc Earnings Call
Hello, and welcome to Banc of California's first quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question.
You May press Star then one on your telephone keypad to withdraw your question. Please press Star then two today's call is being recorded and a copy of the recording will be available later today on the company's Investor Relations website.
Today's presentation will also include non-GAAP measures. The 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 would like to direct everyone to the company's Safe Harbor statement on forward looking statements included in both the earnings release and the earnings presentation I would now like to turn the conference over to Mr. Jared Wolff Banc of California's President and Chief Executive Officer.
Good morning.
Banc of California's first quarter earnings call.
Joining me on today's call are Joe CFO, and Bill Black our head of strategy.
We executed our first full quarter as a combined company.
For those of you who have followed banc of California for the past several years.
You have heard us talk about our commitment administrating, Luckily, making continuous progress on key initiatives and consistently moving the ball down the field excuse me into the nurse.
I'm sorry, yes, Sir it seems like it's breaking up on your aside I'm going to let place music into the call and I'll pick up your line privately just a moment please.
Yeah.
Okay.
[music].
Yeah.
Excuse me. This is the conference operator, Mr. Wolfe. Please recommenced the opening of your speech. Thank you.
Okay. Good morning, everybody, we will try that again.
Welcome to banc of California's first quarter earnings call.
Joining me on today's call are Joe counter our CFO and Bill what our head of strategy.
As I was saying earlier.
We executed well in our first full quarter as a combined company.
For those of you who have all of the banc of California for the past several years.
You've heard us talk about our commitment to demonstrating success methodically.
Im making continuous progress on key initiatives.
Consistently moving the ball down the field.
That's what we did in the first quarter, we made solid progress on the initiatives that will lead to us achieving the profitability targets, we have set for the fourth quarter 2020.
In the first quarter, we realized the benefits of the balance sheet repositioning we executed following the closing of the merger.
As a reminder, after closing on November 30th we executed on the sale of more than $6 billion of assets and pay down nearly 9 billion in borrowings.
This resulted in significantly higher levels of net interest income in Q1, and an expansion in our net interest margin.
The first quarter also demonstrated initial progress on the deposit gathering engine, we have built at a meaningful new business account relationships and absolute growth in noninterest bearing deposit balances much of which came from these new relationships.
The increase in Niv deposits, along with the benefits of the balance sheet repositioning resulted in our cost of deposits declined 28 basis points and contributes significant increase we had in our average margin.
In terms of operating expenses, we're also making solid progress on realizing the cost savings from the merger and operating expenses are trending lower.
Foster pace than we initially expected.
With our higher level of profitability and prudent balance sheet management, we generated an increase in our tangible book value per share this quarter as well.
As we've indicated.
<unk> ability as our primary focus this year rather than growth.
As a result, our total assets declined during the quarter, primarily due to our use of cash to pay down a bit over 1 billion of the bank term funding program as.
As well as running off higher cost deposits and borrowings.
Our loan balances remained relatively flat.
As we anticipated core loan production, which grew at a 4% annualized pace in Q1 was offset by run off in our discontinued loan portfolio, particularly those with lower yields which is our premium finance portfolio, which declined $77 million or 10, 5% not annualized quarter there.
The run off of those loans had a positive impact on our results given that the premium finance portfolio has an average yield of 334%.
Despite the muted economic backdrop, and what we perceive to be slow loan demand. We had good core production in a variety of our portfolios, which reflects the strength of our team and our market position.
This is true while we are also remaining conservative to ensure that loans meet our disciplined underwriting and pricing criteria.
But with loans coming on the books at higher rates than what is running off we're seeing an increase in our average loan yield which was 41 basis points higher than the prior.
Yeah.
On the credit side as we had previewed we remain appropriately proactive and conservative with respect to credit and downgraded various CRE credits.
CRE credits drove the majority of the increase in nonperforming loans during the quarter, which includes three office properties of one retail property.
We took specific reserves against two of the office credits that we believe are sufficient to protect against potential future losses and recorded a $10 million overall provision.
Additionally, the legacy civic portfolio contributed to an uptick in both delinquencies and nonperforming loans do we seen minimal potential losses in that portfolio.
We continue to feel very good about the credit profile of our overall loan portfolio.
The four CRE properties represented approximately 60% of the NPL increase.
<unk> closed accounted for approximately 29% of the increase.
Our consumer loans represented approximately 7% and various loans contributed to the remainder.
During the quarter. We also sold some of the civic loans held for sale for approximately carrying value.
While we continue to be pleased with the credit profile of the portfolio.
Consistent with our conservative approach to credit management.
These actions increased our level of loan loss reserves and raised our ACL to total loans to 1.26%.
As we have previously mentioned this ECL does not include the first loss position legacy pack was sold via credit linked notes on the S. F. Our portfolio and it also does not reflect the credit marks taken on the legacy Bank of California portfolio at the closing of the merger.
When these are factored in our ACL to total loans is well north of 1.8%.
Now I'll hand, it over to Joe who will provide some additional financial information and I'll have some closing remarks before we open up the line for questions Joe.
Thank you Jared.
We ended the prior quarter only included one month of combined operations and had a number of significant one time items I'm going to limit the linked quarter comparisons I review that you are.
Are you of our financial results.
Starting with the income statement.
We generated $239 1 million in net interest income, which reflects favorable changes in our mix of interest, earning assets and a lower amount of high cost wholesale funding, resulting from our balance sheet repositioning actions.
Our net interest margin in the quarter increased to 2.78% versus 1.69% in <unk> 2023.
And it increased to eight 2% for the month of March of 2024 versus 2.15% for the month of December 2023.
Both increases driven by improvement in our average yield on interest, earning assets and a decline in our average cost of funds.
The average yield on interest, earning assets increased 45 basis points from the fourth quarter of 2023, largely due to the full quarter inclusion of generally higher rate banc of California loans.
Along with the origination of higher yielding.
Loans in our core portfolio and an increase in yield associated with purchase accounting marks.
The average cost of interest bearing liabilities decreased 59 basis points from the fourth quarter of 2023.
And 81 basis points from December of 2023.
Reflecting a full quarter of benefits of the balance sheet restructuring action taken post merger.
The use of excess liquidity to continue to pay down high cost wholesale funding sources in Q1 of 'twenty 'twenty four.
The lower cost of core deposits driven by an increase in our noninterest bearing deposit ratio.
And targeted actions the local cost of our interest bearing core deposit portfolio.
As we have shared previously we expect to improve our cost of deposits and cost of funds through specific strategies for both core and wholesale funding.
While our model anticipates two rate cuts in 2024, both in the second half of the year.
Even in a static rate environment, we expect that to continue to move our deposit costs down.
Accordingly, we expect to see improvement in our net interest margin as we move through the year as new loan production originates at yields in excess of the yields on loans rolling off.
And we execute on our cost of funds strategy of reducing our reliance on high cost wholesale funding and growing our low cost core deposits.
We are also finding that even in a flat rate environment, we are often able to reprice maturing deposits at lower prices than when they were originated given that Pac west needed to pay high rates for deposits a year ago.
During the first quarter, we paid down $1 1 billion of our outstanding balances on our bank term funding program.
We chose to retain the remaining $1 5 billion in order to hold higher liquidity as we continue to run off expensive non core deposits.
At this point is likely that we will repay the remaining balance during the second quarter, but we could choose to retain it for a longer period of time based upon the deposit flows and the loan funding trends that we see.
Sure.
Our noninterest income was $33 8 million with.
With all of our major areas of non I'm, sorry of recurring non interest income coming in relatively close to the expected level.
This amount was consistent with the fourth quarter of 2023, when the fourth quarter number is adjusted for various one off items, including a legal settlement.
Yeah.
Our non interest expense was $210 5 million.
Down $73 million versus the December 2023 quarterly run rate.
We are starting to see the lower FDIC assessment rate that we expected.
However in the first quarter. We also recorded an additional $4 8 million related to the FDIC special assessment.
We continue to expect our assessment to decrease through the year, although the pace and timing of the reduction will be determined by the FDIC.
Our other expense initiatives are gaining traction and deliver results in excess of expectations for the quarter.
Turning to the balance sheet as Jarrett indicated our total loans were essentially flat. However, our core portfolio grew 4% annualized primarily in commercial loans.
Offset by lower civic loans, and and other discontinued portfolio loans.
Our non interest bearing deposits increased during the quarter, primarily as a result of new client relationships.
Our by our balance sheet management strategy allowed us to reduce total deposits approximately 1.5 billion during the quarter as we utilized our excess liquidity to pay down high cost legacy Pac west brokered deposit products.
This resulted in a favorable shift in our deposit mix with noninterest bearing deposits increasing from 25, 6% to 27, 1% of total deposits.
In addition, our wholesale funding percentage dropped 2% to 16.9% and our cash level was right sized to approximately eight 5%.
Consistent with our original merger targets.
Note, we continue to retain a robust liquidity with our total primary and secondary liquidity being two four times, our total uninsured and uncollateralized deposits.
At this time I will turn the call back over to Jared.
Thanks, Joe.
Looking ahead to the remainder of the year.
Our primary focus will be on continuing to execute well on the initiatives that will enable us to meet our stated profitability targets, most notably in reducing both interest expense and operating.
Based on the progress we are making.
We continue to expect to generate ROA of approximately one 1% and our OTC of approximately 13% in the fourth quarter of this year.
We continue to expect to generate ROA of approximately one 1% and our OTC of approximately 13% in the fourth quarter of this year.
While continuing to be conservative in our new loan production.
Based on the current loan pipeline, we expect to be able to largely offset the run off we have in noncore portfolios with new fundings, which should keep our total loans relatively flat.
But the new loans are expected to average higher rates than what is running off so production should continue to be accretive to our margin and improve our level of profitability.
We also have a good deposit pipeline and we expect to continue to grow in IV, which will further improve our deposit mix and reduce our cost of deposits.
Our ability to drive down our cost of deposits increase in IP and expand our margin are the result of solid execution by our team at a time when others are finding it hard to achieve the same objectives.
We have a very strong balance sheet with high levels of capital liquidity loan loss reserves and solid credit quality and our strong market positioning, California enables us to add attractive new client relationships at a time when many competing banks are not able to meet the needs of their clients due to capital and funding constraints or credit concerns.
While meeting our profitability targets remains our primary goal for 2024, we.
We will continue to operate with a long term approach and that new client relationships that we believe will lead to further profitable growth of our franchise.
And that value.
An additional value being created for shareholders in the coming years.
And most important.
Bank of California continues to benefit from having the best team in our markets very talented bankers and professionals, who know how to deliver on our goals and Shaw everyday looking to deliver for our clients and communities in a way that separates us from our competitors.
We continue to add talent to our workforce and I believe that will remain a differentiator for banc of California in the years to come.
As I said at the outset I'm very pleased with our progress to date and expect to continue methodically moving the ball down the field towards specific targets in the coming quarters.
With that operator, let's go ahead and open up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Jared Shaw with Barclays. Please go ahead.
Hey, guys good afternoon.
Hey, that'd be.
Maybe just starting on <unk> on the margin and on spread.
You know when you go back to the January call and the expectation for yield pickup.
And funding cost improvement coming from the end of the year it feels like.
You know maybe that didn't come through quite as quickly.
Quickly or are fully as you would expected.
Is that is that the right way to look at it and it's just sort of being pushed into the second quarter or are there. Other dynamics. There and then I guess, a corollary to that I'm just looking at accretion okay.
<unk> 32, and a half million was much higher than I guess sort of the run rate expectation, how should we be thinking about accretion in the scheme of margin and spread income for the rest of the year.
Thanks, Joe Let me start and then I'll turn it over to Joe.
As we've said in prior quarters, our margin has definitely an output and while we have a.
Our sense for where it is going to be we don't manage to it.
We achieved our objectives for the quarter, we are right on top of our budget on almost every measure and so we were able to get there as we said we have a lot of leverage simple. So you know we're going to do our best to give guidance, but if it comes in a little light, we're going to still get there some other way to hitting our earnings targets.
That's what we did this quarter again, we were right on top of our budget.
But let me it was a little lighter than we thought it would be but we were able to get there anyway, which is one of the things that we've said from the beginning of the year, which is we've got a lot of levers to pull in a lot of ways to get where we need to go and so.
I'll, let Joe explained why it was a little bit lighter than we thought.
Yeah. So you know as Jared said I do want to Echo we did for our internal plan. We did come in right on top of our plan for the quarter, we've appropriately been conservative in.
That estimate.
During the quarter as you guys all know inter.
Interest rates are at you know a lot of the tender, especially the shorter tenors increased.
Quite a bit versus probably what people were expecting at the beginning of the year and so as we went to refinance some of the brokered deposits that were coming due from Pac west.
They they refinanced at net savings to the bank significant net savings to the bank, but at slightly higher rates than we might have anticipated.
And so that those are just market factors and we we.
We make up for that by.
What we can control, which is on our core book growing noninterest bearing and bringing down the cost of our.
Of our interest bearing core deposits and also originating.
New loans at higher spreads.
Joe you want to touch on the accretion.
The accretion is you know a well first of all I don't think we publicly disclose that number so I'm not sure where you where you got that number from but the accretion came in line pretty much as we expected it and it was you know it's not it's not an insignificant piece of our results, but it's not it wasn't.
Enormous component of our results for the quarter.
Speaker Change: Okay, Alright, Thanks, and then just on the operating expenses.
Where can we where should we be seeing a savings there too.
To bring that ratio.
Or down into the middle of the range.
There's a there's a whole bunch of places we're seeing it I mean first we said the FDIC expense is a place where we expect that to come down.
In normal times <unk>.
<unk> quarterly FDIC assessment lies.
To $10 million a quarter.
And at the high you know.
Right before we acquired them.
And did the merger was about 36 million.
So yeah.
You can imagine how much savings, we're going to generate from the FDIC expense normalizing.
We expected to do over the course of the year, we're in very close contact with.
With our regulators on that we're monitoring it closely and it's just a function of time and a couple of other.
Things that happened and so we have line of sight to that normalizing through the course of the year.
Our system conversion.
Represents some savings that will be completed by the end of the third quarter and.
And that will realize some savings we have a whole bunch of facilities.
That will generate savings we have overlap in the number of locations and we're rationalizing those facilities.
And then there's a whole host of other kind of traditional operating expenses that you would you would you would expect to see a change over time. It just we said it's going be backend loaded and we're going to see those expense savings up pick up as we go through the year.
Great. Thanks.
Yes. The next the next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning.
Maybe for Joe to start.
<unk>.
Could you could you give us the spot rates on an earning assets in either the cost of deposits our cost of funds probably the cost of funds would be more helpful. Just to give us some line of sight in the <unk>.
Yeah.
So you know we've decided after last quarter.
That we were no longer going to give spot rates. We gave I think I gave you the monthly average in my.
In my speech and I can go back over that.
At the end of the year, we found that the that the step off number that we provided included a very large amount of one time accretion due to a high volume of pay off activity and in retrospect was probably not an appropriate indicator of our <unk> 'twenty for normalized NIM run rate going forward, we're rolling going to speak.
To the the monthly averages as we feel that the most appropriate indicator of our future run rates.
Speaker Change: Does that makes sense okay.
Yep understood.
And then just.
Yeah, and Matthew to that to that point I mean on.
On page five of our Investor deck, one of the things that we wanted to put in there was to show people that this significant progress that we made so if you look at and it's got the monthly ones in there. So September was 143 December was 215 March was 282, we continue to see that stepping up and that's just the <unk>.
Rather than being that one day at the end of the month, we're providing the monthly than.
Monthly margin to show, where it's going.
So hopefully that's helpful. So that you can think about that 282 as this as the stepping off point for.
For Q2, and obviously, we're going to try to improve it from there.
Yep Yep.
Okay got it.
And then just maybe Jared on an interest expense maybe between you and Joe.
Yeah there is.
I know you're very much focused on it and reducing net interest expense, but can you just remind us of.
Of kind of what the Pla.
Plans are from here to reduce that materially.
You know both on the wholesale side and core deposit side.
Well Theres a couple of things I mean.
Speaker Change: The chart on page nine I think shows the.
The reduction that we've had to date in terms of our cost of deposits.
Cost of liabilities overall.
So there's a couple of levers one is obviously niv has a big impact on it because every dollar we bring an event.
Basically saving 5% brokered money or whatever other cost of deposits, we want to get rid of it and our teams have done an exceptional job in a very short amount of time to bring it in and I was very pleased with the progress we made in the quarter.
As we bring in deposits of all types, we can reduce the <unk>.
More expensive deposits.
And and the broker deposits that we have are kind of moving down. So when you see a decline in overall deposit that's because we are releasing deposits that we don't need. We're also doing this while balancing our loan to deposit ratio. We've said that we wanted.
Hey at around 90% or below and we're trying to be very careful with that and just kind of.
The good risk managers as we think about our overall loan to deposit ratio.
There are some other things that we can do including hedging.
Guarantee that we lock in the forward curve if it doesn't materialize.
And we're being very strategic in making sure that we're going to benefit from.
Potential rate reductions.
In the future, which is why we said that even if the rate curve doesn't materialize.
The way people think it will in terms of the two rate cuts. There are things that we can do to kind of protect ourselves and make sure that we benefit from that anyway, and so we're trying to be strategic there as well.
Okay. Thanks, and then last one for me just on the preferred and is there any appetite to maybe pull that pulled that forward and redeem it in <unk> to help you get to your to your goals.
And should we assume we don't need 25, yes, no no you should not we will get to our goals without redeeming the preferred.
One of the things that we think we need to do is show stable on the buildup of capital before we can start regaining capital and so we think that we want to get through this full year and show that we are good stewards of capital and building up capital.
And then we will figure out what we're going to do with our excess capital.
<unk>.
That's not to say, we would never do it it's not to say that it's not a possibility I just wouldn't plan for it and then if we're able to do it it will be something extra.
Got it thank you.
Yes.
The next question comes from Chris Mcgratty with K B W. Please go ahead.
Oh, Hey, guys Jared the the fourth quarter goals. The one one approximate in 13.
As you stand here today, what do you think the biggest either risk or opportunity. Each of those are I think you talked about the expense cadence you also talked about the rates moving up a little bit on the repricing, but but what's changed if anything.
I mean, nothing really I mean from when we set them I mean, we were right on top of our budget.
We are <unk>.
Very focused on it we've got four or five different ways to get there I mean, I think we have a sheet that at seven on it but I think there's only five kind of good ways to get there and we're tracking it really closely as of right now it looks like we're right on it and I mean, the impediments to getting there are.
Obviously rates going up I think would be a.
Would be I think something that everybody thinks is unlikely, but if that does happen I think.
There is a lot worse things that are going to be going on if rates go up and so I don't know that our profitability goals are going to be the most important thing in the world that that happens.
Obviously any sort of material economic shock that could disrupt.
The market generally.
Based on the way things sit right now we believe that we have within our control certainly the execution on the operating side for operating expenses.
And we believe that we have within our control within a reasonable amount of control for the reasons, Joe laid out how we're going to nail it on the interest expense side.
Revenues seem to be taking care of themselves in terms of loans are coming down nicely our team's doing a great job.
I was very pleased with kind of the core production you had this quarter.
Given given kind of the muted backdrop and so it looks like things are working very very well.
<unk>.
Speaker Change: So that's what I would say to what Chris like I don't want to come up with a whole bunch of <unk>.
Strawman I just right now it feels like we're going to get there. If we were not able to get there I think it's because.
<unk> do something.
People can foresee.
Okay. Thanks, Thanks Sara.
I guess, maybe what else what else might be on the table.
Youre accountable to the street in the fourth quarter, but you've got a couple of quarters in between what else might be on the table for either balance sheet repositioning.
You know kind of an acceleration to get to those goals sure yeah, we've talked about civic and our appetite for potentially.
Sell pieces of the portfolio that are noncore, whether its civic or something else.
We have some loans that were held for sale that were civic that we moved off the balance sheet that we had for sale that were sold as I mentioned in my comments that was sold for approximately carrying value we have a little bit more of thats, probably going to follow this quarter and then looking at that portfolio overall, we would be open to.
Doing that we haven't made the decision that we're going to do it for sure, but we're open to doing it and we're we're certainly had people inbound inquiries on it.
<unk>.
So I think something like that could be pretty interesting. If we if we did move it it would.
We've modeled it and it looks pretty interesting to do it is that might be an example of something which could accelerate some of our partners.
That's great. Thanks, and then just one housekeeping for Jody.
The accretion income.
I guess.
To put a finer point on it of 32 and a half is that I.
I guess, what's the scheduled accretion or whats the pool from which to draw over the next several quarters.
Well that that number is the total accretion and if you look back at Pac West financial statements. They had accretion on purchase loans that predated the the accounting acquisition of Banc of California. So that's a total number and so you know theres a portion of that that relates to the banc of California alone.
Portfolio, that's a number we haven't disclosed yet.
But that number is not a super meaning as I said earlier, it's not a super meaningful number for the quarter.
Okay. So.
Totally get the two different parts, but generally stable accretion is kind of the message near term or maybe a downward bias.
I think there's a stable I think you should think about stable accretion going forward.
Alright Thats helpful. Thanks, Joe.
Wells Fargo: The next question comes from tumor, Brazil with Wells Fargo. Please go ahead.
Hi, good morning.
Good morning, sorry to belabor the topic here, but just back on accretion I think the scheduled accretion number was $63 million for the year.
More than half of that was booked in <unk> was there a lot of sellers.
Celebrated accretion in that number is that delta entirely from the dynamic that you're talking about from kind of the carryforward on Pac West side, and Joe did I hear you correctly that part of why you are not giving the spot rates was because you had some.
The accelerated accretion kind of inflate that initial number just trying to get a better sense on the on the 30 <unk> on.
On the 30, some odd million dollars versus the scheduled accretion of 63 million that we were told earlier.
Wells Fargo: So the $32 million includes accretion from the.
Let's go back to the number that was report that we put out at the end of last year was on just the banc of California portfolio.
The $32 million, which was disclosed as the total accretion on all loan portfolios are required by Banca by NUCYNTA Pac West was the accounting acquirer in this transaction, which includes accretions on other.
Wells Fargo: Loan portfolio is beyond just the banc of California loan portfolio.
The.
<unk>.
There was excess accretion and the in the fourth quarter that was a large payoff activity towards the end of the year.
And so when we were looking at the spot rate it was hard to separate out we could see we could see.
Income numbers, but it was hard to kind of allocate out the.
How to how to think through.
The accretion we were seeing so as I said in retrospect, maybe that wasn't the best number to put out but there was excess accretion in the fourth quarter.
In the first quarter.
There may have been a very small amount of catch up adjustment on something that we booked just real cut me a million or two but other than that it was pretty much.
That was the accretion level.
For the Banc of California numbers. It was the stable accretion number that we expect to see coupled with the accretions on the other portfolio or is that.
Pac West of previously acquired.
Okay got it and then maybe looking at the transformation of the deposit base. So the cost for the quarter was $2 63.
Wells Fargo: And then.
The spot rate.
At the end of the quarter was $2 54, I think you had mentioned that youre going to continue working that lower I guess, just as we think about the restructuring of the deposit base.
Maybe excluding some of the things that youre doing to bring in more noninterest bearing deposits, but how close are we to reaching a level of stability.
Deposit costs, I mean is that $2 54, a pretty indicative number of where things are how much lower could that go as you continue.
Book.
I mean look my view my view is that we're going to we're going to keep pushing it down.
It's all a function of how good we do on bringing in an IV and anybody that's followed the banc of California history knows that we were pretty good at it and.
We're using the same playbook, we got a great team, who knows what they're doing and they know how to do it and it's just a function of time for us to kind of build it back up Pac West historically ran with niv or well above 30%, 35%, 40% Banc of California. It got close to was around 40%.
So I think between kind of the history of these two organizations, we're going to be able to do that.
It's just going to take time and.
I am really pleased with how our teams are mobilizing around that right now.
Okay, and then it looks like there was some usage of cash towards the end of the quarter I think last quarter you.
Kind of 8% to 10%, we're getting close to that 8% bogey.
Yes, a should we assume that cash balances are more or less flat here and then just the remix that quarter end.
Are we assuming a pretty meaningful bump up in margin once again in <unk> is that average effect, it's fully baked in.
Yeah, I think I think the cash levels, you can assume or will be fairly stable I mean, they may move a little bit just because of the nature of the dynamic nature of our balance sheet, but right around the levels. We're currently at and then.
I think we would as we've said.
In this call a couple of different points, we do expect to continue to see margin improvement in net interest income improvement throughout the year.
Great and then just last for me on the on the three office loans that were that had migration into non performers can you provide geography and any other kind of maybe tying threads between those three credits.
They were.
They were all California.
And we.
We are.
Our credit I would look at the credit migration in the quarter is fairly normal.
We were being I think appropriately conservative.
We obviously have the capital and the ability to.
To take it.
Take the provision we wanted to take.
<unk>.
I think <unk>.
Running with really really low npls that 26 basis points wherever we had in the first quarter was probably a little bit abnormal for just historically and for markets generally and now we're close to 60 basis points.
Just probably a more normal level to be below 1% and still very very healthy and I don't know what other banks are going to do but for me I just felt like it was a normalization of credit.
We were taking.
That we thought were appropriate at the time so.
I don't know that Theres more color to provide in these loans I mean, I think we were just.
Doing what we thought was right and I think we're well reserved.
Yeah.
Great. Thanks for the questions.
Yes, Thanks, Tim.
The next question comes from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, just a quick follow up on that last question where those.
Credits, where the legacy bank, California or legacy Qwest.
They were a mix.
Okay, and then I just wanted to ask you got it in the deck I think as it relates to the kind of year end targets.
Asset size kind of saying you think it'll be stable 36, but it could be between 34 and 36 as we think I think you talked about the <unk> repayment in the probably in the second quarter.
Is it reasonable to anticipate sort of a dip and then grew it back towards 36 at the end of the year or just kind of where do you see that kind of a balance sheet.
Flows are trends kind of on a quarterly basis for the rest of the year.
Gary.
I don't actually know the answer to the question I think.
I can tell you what.
Could happen which is.
If we.
Absent selling kind of a large portfolio.
We're going to pay down bank term funding.
Our balance sheet shrinks by that much and then I think we're relatively safe.
After pension fund.
Putting aside Patriot funding, we do something with civic and.
It's more dramatic rate it could be $2 billion.
So that's why I don't know.
There might be other assets that.
A lot of these discontinued portfolios, we've had a lot of inbound inquiries on them.
And so whether it's student loans, our lender finance or whatever and so we can we can exit these loans if the pricing is right and if it makes sense.
For the company going forward, there's not a size that we're focused on it's more profitability.
I think those are the moving parts that could impact the balance sheet, but if we if we take out any dramatic moves.
I think you can think about Patriot funding coming off shrinking by that much and then its stable from there.
Okay I appreciate that and then if I could just ask one last question as it was a question earlier about kind of the cash balance.
Relative.
Relative to the size of the balance sheet overall.
With that in mind.
<unk> effectively rips.
To replace I mean, it sounds like from what we're just saying it's paid off the balance sheet can track so.
Do those cash balances by definition, then are they lower than that 8% range that I think Joe you referenced from a prior question.
Joe what do you think.
I'm, sorry, I didn't quite understand the question could you repeat one more time.
Sure I mean first of all I was just trying to clarify if each ft repayment is done out of existing cash based on what your comments were about you know the current cash.
Level being kind of a relatively where you'd want it as is.
The percentage of overall balance sheet.
Yes.
The subsequent pay down of Bts P will come from not would not it would not result in a big reduction in our cash balance.
That's why I think I qualify in my comments in the script that qualified the yes, we'll have to look at deposit inflows and other outflows before we make a final decision on whether we're going to pay it down.
You should not expect to see a step down in cash.
Okay. Thanks.
Great.
The next question comes from Andrew Terrell with Stephens. Please go ahead.
Hey, good morning.
Good morning.
Jared if I could just start on the noninterest bearing deposits.
Pretty nice build kind of in the quarter and was curious if you could give any color on how the niv deposits have trended so far in the second quarter have you seen continued growth or.
Any kind of moderation there.
We have seen continued growth.
I got an update this morning, and you can get reports on a regular basis I'm hesitant to tell everybody that that's what's going to happen because I know that this stuff can vaporize.
And pipelines are only as good as what actually gets booked.
But I like the momentum and I like the progress that we're making and I think it's just going to.
Quarter to quarter hard to know over the course of the year Niv is going to grow.
And so it could be uneven I hope, it's steady I hope, it's kind of consistent.
But right.
Right now it looks like it will be consistent.
And I guess, we'll know at the end of the quarter, but.
It's looking positive.
Okay I appreciate it.
And then sorry to go back to just the margin question, but.
Last quarter, I mean, we talked about 15 basis points of earning asset yield improvement in the first quarter and I understand it sounds like the maybe the base was a it was a little too high to start because of the purchase accounting.
But now that we're kind of Ah that that's behind US would you still expect.
15 basis points of earning asset yield expansion per quarter, just from from booking loans at higher yields and replacing the lower yielding loans.
I guess 15 is still a good number.
Yeah.
I don't think it's unreasonable I mean, I think I think it's definitely.
Again, it's an output for us in terms of.
Where we end up and we have a lot of levers to pull which is why we can still hit our numbers, even if the margin as we can make it up on volume rate and there's there's other levers that we have to pull on expenses and other things to kind of get our numbers to a place where we think it's sustainable.
If the issue.
Interest rate curve doesn't cooperate early.
Then we can take out expenses earlier more earlier and the interest rate curve will catch up with us will catch up with the interest rate curve later in takeout.
Those expenses in terms of interest expense later.
And then it picks up at other things.
It's 15 basis point of improvement a reasonable goal for the quarter. Yes, I think so are we going to get all the way there or is it going to be term is it going to be 16, I don't know, but it is not unreasonable what do you think.
I would I would echo what Gerry said I think there's a lot of moving pieces it depends upon.
Our ability what loans, we originate in the quarter also what loans.
Maybe paydown ahead of ahead of it.
<unk> had a plan, but there is.
Just to give you a sense.
What we're looking at the first quarter, our new loan production yield was was north of 8% up getting up towards towards eight 5%.
So as you can imagine a lot of the loans that are rolling off are much much lower than that so.
We have we have good trajectory there good a good glide path and we'll see how it comes out.
Yes, one of the things that Joe and I talked about was on the spot rate is we gave that's really just a moment in time on the margin and there's a lot of pieces to it and so we just feel like.
In the deck.
Yeah.
Yep understood its helpful. I appreciate it.
Back to the there was a question around the preferred and potential redemption, there and it sounded like Darren in your response, the preference would be to continue to build capital at least in the short run.
Can you just remind us kind of goalposts on the.
On the capital front, I forget, which metric you're paying most close attention to but can you just refresh us on your your kind of capital targets.
Yes, I think Steve you, one getting that closer to 11 is probably when we feel like we will have excess capital.
And so from there I think.
The conversation to have about how we're going to deploy.
Got it okay, if I could sneak one more and just and I. Appreciate the color you guys gave around the delinquencies and the non performers, but the classified loans.
What drove the step up in classified this quarter.
Okay.
Yes.
Joe do you want to touch on that.
I was going to say I think there's a lot of the same drivers.
Impacted delinquencies and Npls, but.
Yes, I'm not sure if that further color.
No.
Jim Zinger.
Okay understood alright, thank you for taking the questions.
Thanks.
The next question comes from Timothy Coffey with Janney. Please go ahead.
Hey, gentlemen, thanks for the question.
Oh good.
In the prepared remarks.
Hospitals are coming in better than expected.
Do you have any color on that and would it cause you to update your estimate for cost saves it looks like it was around 130 million pretax.
I'm definitely not going to update R. R.
Wells Fargo: Are you know kind of our guidance for where we think we can get to we said we'd get to between two and 210 expense ratio.
I think that's good not everything is going to go our way I know that we just had a really good quarter in terms of expense savings.
A little bit ahead of schedule, so that gives us a little breathing room, if something else doesn't go our way, but hopefully we can outperform.
Yeah, I would I would echo what Joe said just people executing just slightly ahead of schedule.
Okay.
Thanks.
And then can you remind me what the dollar value of the credit linked note.
How much of all single family residential portfolio that covers.
Yes, Bill do you have that handy.
Yeah.
Yes.
Looking Jared it's about $125 million on the balance sheet. It covers about 2.65 billion of loans.
Great. Thanks.
And Andrew.
5% right.
Right Bill absorbs the first 5% loss rate.
Yes.
Great and then my my last question.
Sure.
Yes, thank you operator.
So the loans are just as a reminder for everybody we have about.
A little over about $2 3 billion the full Senate loans 2 billion approximately are.
For rent single family homes.
Our investor owned.
And the remaining balance are bridge loans, you can think about them as fixed and flip primarily on single family, but that could be on on multifamily as well it's more multifamily.
Wells Fargo: <unk>.
It operates in many ways like the single family portfolio, which has a lot of delinquency people pay in one of the ways that it was being managed before Pac West audit.
Wells Fargo: Was <unk>.
Does it wasn't a bank they didn't mind, if they weren't DQ because they just charge them more fees.
And obviously, that's not our profile thats not the way that we want to run things and so as.
As the portfolio transitions.
Atlas discontinued it and kind of.
Got it more in house, there they had to change the borrower behavior.
Yes.
We're not experiencing losses on these loans, it's just our behaviors.
I guess it was a condition to behave differently than what we would like them to bank. So.
It's serviced by a third party.
We asset manage it ourselves in house.
We've got a great team on it.
It makes money.
It's just not what I would call a.
Great portfolio of owned inside of a bank and so it's either going to run off over time or will figure out a way to exit if we get a price that we like.
We would look at those.
Does that help.
Yes extremely excuse me.
Those are my questions. Thanks, a lot.
Thanks, Tim.
Wells Fargo: The next question comes from Brandon King with Truest Securities. Please go ahead.
Hey.
So youre sticking to the profitability targets in the <unk> run rate, but could you help frame, what you're expecting NII to be I know, there's a lot of moving pieces, but I think it's helpful. If you could frame what the dollar.
II amount could be to that.
As targets.
I don't think we've given that guidance Brandon Joe what have we said about where do we sit on that.
Yeah, we've not put out specific NII or.
Income statement numbers I don't know that.
We.
We intend to.
Okay, Okay, and then for deposit the deposit run off could you just frame what kind of deposit runoff you saw in the quarter I guess what amount of that was intentional in what is left to run off going forward.
So I would characterize most of it is there's two parts of the runoff.
Some of that's just seasonal movements in balances by customers.
And the other is intentional run off of deposits that we don't need.
The majority was run off of deposits that we just chose we don't need it because the rates too high and it was noncore.
It was broker otherwise we looked at the relationship and they only had one account with US it was an interest bearing account and they weren't using any other services of the bank.
And so when we said, we're not going to pay the rates that they wanted in a woman right somewhere else. So I would say that some of it was just seasonal movements of customer deposits, but overwhelming majority was.
The latter type which was.
Rate sensitive deposits that we didn't need any longer.
Okay.
Do you think that's largely over going forward or are you expecting maybe some more.
Criminal.
Well no I think I think as we replace as we build up our momentum in terms of bringing in relationship deposits both niv in.
Other deposit types that come with those relationships, we will feel good about letting go more expensive deposits that are.
Fundamentally they might be appropriate they might be core, but they're probably not true relationship deposits that we would like and so we will see that migration over time, but we'll be we're focused on our loan to deposit ratio and want to make sure we stay comfortably within our guidance.
Okay.
And this is my question. Thank you.
Thanks, Brian.
The next question comes from David Feaster with Raymond James. Please go ahead.
Hi, good morning, everybody.
Good morning.
Im just kind of circling back to the Niv growth look like you alluded to this is in Stark contrast, what most other banks youre seeing right now in the industry you highlighted the new account growth in that the pipeline looks good I'm curious if there's any segments that you're seeing more success early on where you see the most growth opportunity.
Maybe just could you walk through what do you think's, allowing you to be so successful on the niv growth side.
So.
We had good traction in HOA in terms of the accounts that were opened and we had good traction in.
In venture and fund finance and warehouse in most of our segments in the community Bank we.
We saw good inflows of.
<unk>.
We have a.
Kind of a deposit contest that we do and so we track it very carefully and it's about bringing new relationships to the bank.
Wells Fargo: And making sure that people understand why we can provide.
A better experience.
And then our competitors and the lead cycle to bring in deposits as longer than loans and so people have to start early and that's why showing good traction in the first quarter is great because I know, it's going to build on what we should be able to show better traction going forward.
Where we find these deposits are generally competing against the larger banks a lot of people don't choose to get the larger banks. They end up at the larger banks and some specific examples of that are first Republic customers that end up at Jpmorgan and Union bank customers that ended up at.
At U S Bank and.
And Gino.
Customers that ended up at for citizens, which is.
Becoming a larger bank and so I think that we've done a good job of being a great option in the market people nowhere name. They know who we are where when people say, hey, I need to think about banks. Nowadays. Thank you, California is definitely on their list.
Because of the marketing that we've done in the position that we have.
So we're trying to optimize that we still bring in a lot of accounts from Wells Fargo, which is a very good local competitor, but we seem to have really good traction against them.
There's a ton of great banks in California, and in the other markets, where we operate at a.
Very strong banks and very good competitors.
We seem to be holding our own so that's some color there.
Great and.
I'm just curious how deep stack plays into that.
You talked about HOA and adventure business I believe that you had you were excited about the deep stack can do on those businesses and then maybe more broadly where we are in the rollout with with deep stack and when do you think that that could be a more meaningful contributor.
Well.
We expected it to be a meaningful contributor this year to banc of California on a standalone basis, but because.
The increased.
Fee income that that.
That Pac west brought to the combined company.
No.
Deep stack wont have the ability to make a meaningful impact on that this year and so we said it will have a meaningful impact next year.
Nothing would make me happier than to be able to highlight and disclose the specific contributions that destock as is contributing both in terms of cards.
Wells Fargo: And the other things that's doing our payments platform really is three things thats its deep stack, which is merchant acquiring its cards. We've started issuing credit cards directly to clients and then the third side is just sponsorship meeting we're helping other.
Are these processed transactions over our rails and all of those things will be contributing on the fee income side, and we believe on deposits as well, but David I don't have any targets to put out right now on that.
Yeah, Okay. That's helpful.
And then last one for me just you talked about the hiring initiatives.
<unk> had several announcements over the past few months just curious how do you think about hiring and the team that you've assembled maybe where youre looking to add additional talent.
And whether it's more deepening the bench or.
Expanding into new segments.
We've had really first of all we've got an amazing team here.
Just there was obviously deep talent at both companies and so we're benefiting from that right now.
There are pockets, where we felt like it's prudent to add talent and.
We just we just had two great folks come over to our finance team from another bank started this week.
We've added people in most of our lending areas.
And we're offering we're adding people in our functional areas as well I mean, there's we're absolutely open to adding the right talent across the bank and there are some key spots that we have open that we will be adding very shortly.
We continue to add talent, even though we have a deep bench here.
Speaker Change: That's helpful. Thanks, everybody.
Thank you.
This concludes our question and answer session and Banc of California's first quarter earnings Conference call. Thank you for attending today's presentation. You may now disconnect.
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