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spk00: Hello and welcome to Bank of California's fourth quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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. The reference presentation is 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 like to now turn the conference call over to Mr. Gerard Wolf, Bank of California's President and Chief Executive Officer. Please go ahead.
spk05: Good morning, and welcome to Bank of California's fourth quarter earnings call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results. We had a very strong fourth quarter that capped a tremendous year for Bank of California. We substantially grew core earnings while also making investments that have strengthened our franchise and positioned us very well for continued growth in the years ahead. We are quite proud of what we accomplished in 2021. We exceeded our growth targets as our new business development efforts produced high-quality loan and deposit relationships that enabled us to grow our balance sheet, realize more operating leverage, and improve our level of returns. We continued to reduce our deposit costs and build the type of deposit franchise that we believe is the foundation of high-performing banks. We attracted substantially new talent to the company, which has not only strengthened our business development capabilities, but also increased the breadth and depth of our presence across the state of California. We laid the groundwork for our verticals in payments and tech while bolstering our capabilities in real estate, healthcare, media and entertainment, treasury management, and other core verticals. And we continued to optimize our use of capital to increase earnings and enhance franchise value, first with the redemption of our Series D preferred stock, and then with the acquisition of Pacific Mercantile Bancorp. We were able to do all of these things while managing through the continuing impact of the pandemic. I want to thank all of our colleagues at Bank of California for their extraordinary efforts that enabled us to achieve all of these goals that we set for 2021. During the fourth quarter, we completed our acquisition of Pacific Mercantile and integration has proceeded in line with our expectations. The system conversion was completed in mid-November. By the end of the year, we had put in place all measures necessary to achieve our target of 40% cost savings. which should be fully realized by the end of Q1 2022. Of course, we will continue to look for other opportunities where we can enhance efficiencies and realize additional cost savings. It is worth noting that the tangible book value dilution we expected from the transaction has come in much better than previously announced. And accordingly, our earn back will also occur much faster than originally anticipated. Our fourth quarter earnings were impacted by the merger related costs and day two provision expense for the Pacific Mercantile portfolio, which Lynn will discuss later in the call. But the core performance of the business was very strong, as our adjusted pre-tax, pre-provision income increased by 18% from the third quarter due to our continued organic growth and a partial quarter revenue contribution of Pacific Mercantile, with the impact of the cost savings to be realized in a more meaningful way in 2022. We ended the year with our largest quarter of new loan fundings and total loan fundings, which reflects our revenue growth engine, the strength of our commercial banking team we have built over the past few years, and the initial impact of the bankers we added from the PMB deal. Our production continues to be broad-based with good contributions across markets, asset classes, and industries. We had total loan fundings of $906 million in the fourth quarter, including $583 million of new fundings and $323 million of line advances, of which only $80 million related to net warehouse line advances. This represents an increase of 16% in new fundings and 19% in total loan fundings compared to the third quarter. However, we also saw a substantial increase in loan payoffs and paydowns, which were up by approximately $300 million from the prior quarter and impacted our level of organic net loan growth this quarter. Our loan production engine remains strong, and accordingly, we anticipate meaningful loan growth in 2022. We also had another solid quarter in terms of bringing in new low-cost deposit relationships. During the fourth quarter, we opened more than $200 million in new non-interest-bearing and low-cost checking accounts. We used a portion of the excess liquidity we added from Pacific Mercantile to reduce approximately $300 million of higher-cost deposits, which further improved our mix of deposits. With the continued improvement in our deposit base resulting from our business development efforts and the acquisition of Pacific Mercantile, we finished the year with a spot rate cost of deposits of seven basis points. A key driver of the improvement in our cost of deposits is our increasing mix of non-interest-bearing deposits, which represented 37% of total deposits at year-end, up from 32% at the end of the third quarter. Let me hand it over to Lynn, who will provide more color on our financial performance, then we'll have some closing remarks before opening up the line for questions.
spk01: Thanks, Jared. First, as mentioned, please refer to our investor deck, which can be found on our investor relations website, as I review our fourth quarter performance. I'll start by reviewing some of the highlights of our income statement, and then we'll move on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the third quarter of 2021. With the impact of closing the Pacific Mercantile acquisition during the quarter, net income available to common stockholders for the fourth quarter was $4 million, or $0.07 per diluted share, down from $21.4 million, or $0.42 per diluted share, for the third quarter of 2021. The fourth quarter results included, on a pre-tax basis, $13.5 million of merger-related costs and $11.3 million of provision for credit losses related to the non-purchased credit deteriorated loans and unfunded commitments acquired from PMB. Given the noise created from the Pacific Mercantile acquisition, we'll focus on our adjusted pre-tax, pre-provision numbers this quarter, which are more reflective of our core performance. Our adjusted pre-tax, pre-provision net income totaled $32.6 million, an 18% increase compared to $27.6 million for the prior quarter. This $5 million increase was due to higher net interest income of $10.1 million driven by higher average loans from both organic growth and acquired loans, offset by lower non-interest income of $659,000 and higher operating costs of $4.5 million, as we included PMB's operations since the date of acquisition. Our annualized adjusted pre-tax, pre-provision return on average assets increased 4% to 139 basis points from the 134 basis points achieved in the third quarter. Our net interest margin remained steady at 3.28% during the quarter as our overall asset yield decreased by seven basis points and our total cost of funds decreased by eight basis points. Our earning asset yield decreased to 3.66% due mostly to an increase in lower yielding other interest earning assets as a result of the level of cash balances acquired from Pacific Mercantile and then subsequently deployed in the quarter. Our average loan yield increased two basis points to 4.2% during the fourth quarter due in part to higher prepayment fees and a greater mix of commercial real estate, multifamily, and construction loans. Our average cost of funds decreased eight basis points to 41 basis points due mostly to lowering our average cost of deposits by four basis points to 11 basis points for the fourth quarter and a reduction in other borrowings. The decrease in our average cost of deposits reflected an increase in our mix of non-interest-bearing deposits, which averaged 35% of total average deposits during the fourth quarter, compared to 30% during the third quarter. During the fourth quarter, 330 million of high-cost deposits with a weighted average rate of 53 basis points repriced or matured, including deposits acquired from Pacific Mercantile. This is reflected in our lower period end deposit spot rate, and we expect to receive a full quarter's benefit in the first quarter. Our adjusted expenses increased $4.5 million from the prior quarter due mostly to higher salary and benefits, occupancy equipment, data processing, and other expenses associated with adding Pacific Mercantile's operations since the October 18th acquisition date, followed by the system conversion in mid-November. In addition, we incurred $13.5 million in merger-related costs and had $642,000 in indemnified professional fees during the quarter. The effective tax rate for the fourth quarter was 32.4% compared to 27.2% for the third quarter. The increase in the effective tax rate during the fourth quarter was due mostly to the impact the Pacific Mercantile acquisition had on our annual effective tax rate and other permanent items. Our annual effective tax rate is approximately 25%. Turning to our balance sheet, our total assets increased by $1.1 billion in the fourth quarter to $9.4 billion, and total equity increased by approximately $220 million. In the Pacific Mercantile Acquisition, we issued approximately 11.9 million shares, increasing equity $222 million. and we recorded goodwill and other intangible assets of $62 million. At December 31st, our tangible book value per common share was $13.88, down from $13.99 at the end of the third quarter. The PMB acquisition reduced our tangible book value per share by 10 cents, which was less than we had previously estimated. Our gross loans held for investment increased by $1 billion, or 16.4%, during the fourth quarter, with growth across all lending categories attributable to the impact of the acquired Pacific Mercantile loans and organic production. Excluding the $905 million of loans added in the Pacific Mercantile acquisition and outstanding at year-end, loans increased by $117 million. This growth included $696 million in production and $210 million in SFR loan purchases, offset by $789 million in payoffs, paydowns, and other reductions. The overall activity increased the mix of commercial-related loans to 79% of total loans, up from 77% at the end of the third quarter. As of December 31st, we had $123 million in PPP loans, consisting of $27 million from Round 1 and $96 million from Round 2. Deposits increased $896 million during the fourth quarter, due mostly to approximately $1.1 billion of deposits added from the Pacific mercantile acquisition and outstanding at year-end, offset by utilizing excess liquidity to fund outflows of higher-cost deposits. We acquired $479 million in cash and cash equivalents, which gave us the flexibility to exit higher-costing deposits during the quarter. Demand deposits, non-interest-bearing plus low-cost interest checking, increased by 20% from the prior quarter. This represents our 10th consecutive quarter of demand deposit growth, a goal we remain very focused on to drive franchise value. We expect this favorable shift in our deposit mix to further support our net interest margin in the first quarter. Over the past year, demand deposits increased to 70% of total deposits, up from 60%, reflecting the improvement we have made in our deposit base. This increase, combined with our proactive efforts to reduce deposit costs and bring in new relationships, drove our all-in average cost of deposits down from 36 basis points in the fourth quarter of 2020 to the 11 basis points achieved in the fourth quarter of 2021. We believe we are very well positioned to benefit from the coming cycle of rising interest rates. Due to the transformation of the franchise to our relationship-based banking model, with higher percentages of non-interest-bearing deposits and variable-rate commercial loans, Our one-year gap ratio, which compares the percentage of earning assets that are scheduled to mature or reprice within one year to the percentage of rate-sensitive term liabilities that are scheduled to reprice or mature within one year, has steadily increased. At the end of 2021, our one-year gap ratio stood at 38%, up from 7% at the end of 2019. This is one measure of asset sensitivity and with a significant increase in this ratio, we expect to see some expansion on our net interest margin as short-term rates increase. Our credit quality remains strong in the fourth quarter, and we saw positive trends in most categories, excluding the impact of the loans added from Pacific Mercantile. Non-performing loans increased $6.9 million to $52.6 million in the fourth quarter, including the addition of 21.6 million of loans acquired in the Pacific Mercantile Acquisition that was largely offset by payoffs, paydowns, charge-offs, and sales. The non-performing loans acquired in the Pacific Mercantile Acquisition included a $12.8 million CNI loan and $5.5 million in PPP loans, which were all known to us through our acquisition due diligence. At December 31st, 55% of non-performing loans are either in a current payment status but are classified non-performing for other reasons or are SBA loans guaranteed through the PPP or 7 programs. Let me turn to our provision for the quarter. The provision for credit losses was $11.3 million in the fourth quarter compared to a reversal of $1.1 million for the third quarter. The fourth quarter provision for credit losses included an $11.3 million charge related to non-purchased credit deteriorated loans and unfunded commitments added as of the Pacific Mercantile Acquisition Date. In addition, we recorded no provision expense related to other loan portfolio and unfunded commitment activity during the quarter. We determined that the impact of the quarter's net loan growth was offset by improving economic forecasts utilized in our model, improved credit quality in our loan portfolio, and lower unfunded commitments. Our allowance for credit losses at the end of the fourth quarter totaled $98.2 million, and our allowance to total loans coverage ratio stood at 1.35%. The increase in the coverage ratio from 1.26% at the end of the third quarter is due to the general and specific reserves established for the acquired Pacific Mercantile loan portfolio. Excluding our PPP loans and warehouse loans, both of which have lower relative risk levels in our reserve methodology, the ACL coverage ratio stood at 1.7% at December 31st. Our ACL coverage to non-performing loan ratio remained healthy at 187%. Our capital position remains strong and has benefited from the strategic actions completed over the past several quarters. We continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value. At this time, I will turn the presentation back over to Jared.
spk05: Thank you, Lynn. I'll wrap up with a few comments about our outlook for 2022. With the banking talent we have added and continue to add, the impact of the PMB acquisition, and the way our entire organization is executing at a very high level, we believe we are extremely well positioned to deliver another strong year in 2022, particularly given the strength of the attractive California markets in which we operate. We have positioned this company to continue generating top-line growth and to benefit from rising rates. With interest rates expected to rise in 2022, we think we'll be in a good position to benefit from the improvements we've made in the composition of our balance sheet over the past few years that have made us more asset sensitive. Building a superior deposit franchise has been our top priority, and the robust deposit gathering engine we have developed consistently brings in low-cost deposits to fund our growth in earning assets. We've seen the benefit of lower deposit costs over the past two years, and as rates rise, the value of the deposit base we have built will become even more apparent. At the end of 2021, non-interest-bearing deposits increased to 37% of total deposits, up from 15% when I joined the company in early 2019. And with the addition of PAC Merck's loan portfolio, our percentage of variable rate loans has also increased, making us even more asset sensitive. This should provide yet another catalyst for earnings growth and improve returns as our net interest margin benefits from the higher level asset sensitivity we expect in a rising rate environment. As we enter 2022, we're focused on fully realizing the synergies from the PMB acquisition including opportunities to expand relationships with our new clients that have larger financing needs to support their growing businesses. Additionally, in 2022, we will be accelerating investment in technology, as the greater scale we have following the PMB deal enables us to increase our investment while still realizing improved operating leverage. Our goal is to be the hub of the financial services ecosystem for our clients, and we want to be able to make innovative solutions available to them either directly through our own platform or through partnerships with FinTech companies like our recent investment in Finexio, a B2B payments platform. The technology roadmap that we are developing is designed to elevate the client experience and ensure that we meet all of our clients' banking needs in a rapidly evolving marketplace. Finally, we will continue to be very focused on optimizing our use of capital. As we've previously indicated, Subject to regulatory approval, we would like to redeem our Series E preferred stock that is a 7% after-tax coupon sometime during the first half of this year, which would increase our net income available to common stockholders. Following that redemption, we will continue to be opportunistic in evaluating other ways to optimize our return on capital for shareholders. In closing, we believe we have significant leverage to pull in 2022 and anticipate top-line growth, expanding operating leverage, growth in our verticals, investment in our core systems and technology, and continued optimization of our capital. As always, our North Star remains creating true franchise value for shareholders in 2022, as well as the years ahead. As always, thank you for listening. I look forward to sharing more about Bank of California's progress in the coming quarters. With that, operator, let's go ahead now and open up the line for questions.
spk00: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question will come from Tamir Brasiler of Wells Fargo. Please go ahead.
spk07: Hi, good morning. Morning. Maybe starting, Jared, on your last point there about technology investments, if you could talk us through some of the types of projects you're looking or capabilities you're looking to add on here beginning in 22 or, I guess, building on in 22. And then as we look at the 40% expected cost saves from PMB, how should we be thinking about how much of that flows through to the bottom line versus gets reinvested back into the business?
spk05: Sure. Well, thanks. You know, really, really pleased with the quarter. And as we said before, we, you know, we continue to move the ball down the field and that's our, our goal, our progress. Sometimes it's firing on all cylinders. Sometimes it's just a few objectives, but this quarter felt like we did a lot, you know, the ability to, acquire, close an acquisition and integrate it in the same quarter and close it all toward the end of the quarter was pretty remarkable, and I'm really particularly proud of our team for doing that. So I wanted to lead off and say thanks to all the California colleagues who helped us do that. There's a couple areas where we think investment is critical to remain, and as I said in my comments, be the hub of our clients' financial services ecosystem. We know that we can't do everything. but we think we can give them access to a lot of things. And so we'll be making decisions on what we want to own or invest in, like Finexio, or what we think we might just need to find a partner to bolt on to provide that solution for our clients. The first thing that's critical for us to be able to do this and stay ahead of our clients is to make sure that we can perform digitally. And so we're looking at optimizing and improving our end-to-end loan origination system right now. We're in the final stages of selecting a partner, and we expect that that's something that we're going to be rolling out by mid-this year to be able to provide a digital end-to-end solution for our clients. It also has to do with how we think about our view of the clients. What can we see in terms of the – do our colleagues here at Bank California have a view of our client that's optimal to allow them to serve our clients? And so we want to make sure that we can give them all the tools necessary to make sure that we understand what our relationships look like and how we can serve them better. It's a very holistic strategy that we're looking at. We're looking at it from the beginning of a client life cycle through how we serve our client going forward, and it also has to do with what services we offer to our clients. We talked about Finexio, which is a B2B payments platform, but it's also an optimization program for receivables and payables for clients and how they optimize their cash flow. And so we're in the middle of white labeling this product and rolling it out for our clients. And so these are a number of things that we're thinking about. There's kind of more to come here, and we'll be talking about it more as we roll it out. I don't like giving too much ahead of the curve here because these things take time, but I'm optimistic that in 2022 we'll be doing a lot in terms of this, and we'll be disclosing more as we hit our benchmarks. Lynn, do you want to address... how much of the 40% you think will be reinvesting in technology, if there's a way to think about that?
spk01: Sure. Hi, Tamar. I would say that, you know, we do expect to receive the full 40% cost benefit or saves when I kind of reflect on PMB's historical expense base. I think that there's an opportunity for maybe that 40% plus that we would look at reinvesting. I think there's also an opportunity to invest some of our own cost efficiencies that we've continued to identify and rationalize and then repurpose those dollars as investment in client experience, technology. And so... To that end, I think, you know, we're looking at our run rates, including our investment in technology and client experience in the 2022 to be, I think, fairly reflective of 2021 and what we were able to accomplish. Plus, I would say, you know, 55 to 60 percent of PMB's historical expenses. So that's where we are right now.
spk05: I mean, another point there is we're wrapping all of these changes and kind of our theme for 2022 internally is the client experience. And so all of our colleagues are very focused on how we're optimizing and delivering the client experience for our clients. And as we bring a new relationship, showing them the difference that Bank of California can really make, you know, for their financial services delivery.
spk07: Okay, that's great, Collin. Thank you for that. And then maybe switching to the client experience, to some of the growth you saw this quarter. Total fundings, very impressive as were the payoff activity. Maybe just talk through kind of where you're seeing the growth on the funding side, if there's any particular verticals that are seeing incremental strength. And then similarly on the payoffs, was that kind of abnormality just given maybe fallout from third quarter getting pushed into the fourth quarter and then similarly first quarter being pulled forward into the fourth quarter?
spk05: Yeah, you know, the payoffs were high and, you know, it's unfortunate, but I don't get too worried about it because I really focus on what we can control, which is, and as long as our production engine is strong, I know that that's, you know, those things like that will revert to the mean and will show net growth. I was really pleased with the the quality of our production and the balance of it. As I look at, you know, fourth quarter versus the third quarter, you know, CRE was up relative to the third quarter. Multifamily was up relative to the third quarter. Construction was down. Warehouse was up a little bit, but it was really in balance. As we said, we weren't going to grow at an outsized level. And C&I was – pure C&I was almost flat. So, overall, it was really well balanced. You know, we made – we announced yesterday that we made a higher – brought in someone to lead media and entertainment for us who comes with a tremendous resume to balance our already exceptional team. So we expect our media and entertainment vertical to continue to grow. We have a new hire that we'll be announcing soon in the nonprofit and education space to continue to grow that vertical, which has been very strong for us. And so we see Corsi and I continuing to grow this year. And obviously, we have a strong vertical in in real estate, and that's going to continue to be strong. I was on a pipeline call yesterday, and I'm very, very pleased with what I've heard, and I don't see anything that looks like a headwind for us right now.
spk07: That's great, Collin. Thank you for the questions, and congrats on getting your close and wrapped up.
spk05: Thank you. Thanks, Tamar. Thanks.
spk00: The next question comes from David Feaster of Raymond James. Please go ahead.
spk08: Hey, good morning, everybody. Morning. I just wanted to follow up on that last discussion. You know, it's great to see the new hire. And I believe, as you call it in the presentation, that you have created a talent magnet. I'm just curious how you think about the hiring market, your hiring pipeline near term. It seems like there could be a real opportunity for y'all just in light of the disruption around you. Just any commentary on hiring and where you're most interested in adding talent.
spk05: So we're... getting hires, we're getting new talent. First of all, we have exceptional people here at Bank of California and our desire to add people is really to support our growth. We need to do that both in the back office and on the front lines to deliver the Bank of California experience and the difference that we make here to as many people as possible. We do think that the market for us is very positive. So we're finding new colleagues from all of our competitors. I will say it is a very, very, very competitive market. And we're finding that the cost to bring in talent is higher than we've seen in the past. But for the right people, we're willing to make those adjustments and bring them in. And we're trying to make sure that our existing team is supported as well. And, you know, they're working hard and they deserve to get the benefits of our growth. And so we're looking to share that with them as well. Um, we haven't really had a problem finding the people that we've been looking for, but we've been very selective on the people that we've been looking for. And these are surgical and very targeted hires as opposed to, you know, opening the floodgates and, and just grabbing, grabbing whoever walks in the door. Um, you know, we're very careful in who we hire and I'm, I'm grateful to our, we have a tremendous, uh, talent recruiting team who has really supported us these last several years. And they, they, they really understand our bank and, what it takes to be successful here. We like to say that everybody here carries a shovel and maybe a toolkit as well, maybe a hammer and some nails. There are very few people who get to walk around and basically move traffic without driving a vehicle too. And so everybody here plays a role. And so it's not the right bank for everybody, but I think our team has done a great job of finding the right people.
spk08: Okay, that's helpful. And then just maybe touching on the loan pipeline, could you just talk about how that stands as we head into 22 and how that compares quarter over quarter and just any expectations for growth as we look into next year and just how new loan yields are trending? It looks like the new rate on production declined a bit. I'm just curious if that was a mixed issue or whether you're seeing more.
spk05: That was a mixed issue. As I look at production yields, CRE quarter-over-quarter was flat. Multifamily was actually up a little bit. Construction was down, and we had some large construction come on in the quarter. CNI was flat. And so I think it was just a mixed issue. I think overall, if anything, loan yields... One of the things that's going to happen when rates rise, in my experience, is there's going to be a little bit of a pause. And it'll be interesting to see how long that lasts. Generally, when rates rise... You know, deposit costs are obviously going to lag. But on the loan side, there's kind of a hold in the market because buyers want to pay less for properties when it's going to cost them more to finance it, for example. Or in C&I, people that are buying equipment, if it's going to cost them more to finance it, they might wait and see if that's permanent. And then sellers of properties or equipment might, you know, in negotiating the price, might not be fully prepared to expect the change in terms. that new interest rates will indicate. And so oftentimes there's a little bit of a lag in new activity the moment that rates rise. We'll see if that happens here or not. Our expectations overall for 2022 is that we're going to have robust loan growth. In terms of what that predicts for net loan growth, we want to target high single digits, low double digits for sure. I'm hesitant to say that that will happen because I don't know what payoffs are going to be. But one thing that I'm confident of is how well we're positioned from an asset sensitivity standpoint. And a new page of our presentation, which I want to make sure people see, is on page 17 that has a sensitivity around deposit betas and shows the full extent. Lynn talked about our gap ratio and the full extent to which we expect to participate in the benefit from rising rates. I expect our loan growth and our loan production to be very robust. How it nets out, I don't know. I'd like to see us be in the high single digits or lower double digits. I know that from an earnings perspective, we are going to figure out a way to get to where we need to be to make this a very productive year. And whether it comes because we benefit from, you know, net loan growth is high and we get the benefit of interest rate upticks in our asset sensitivity, that's great. That's going to be the home run scenario. If we get the benefit of the interest rate uptick, but net loan growth is a little bit lower, it's in the mid to upper single digits, but doesn't hit the double digits, we're still going to figure out a way to make earnings really, really strong. And Lynn has shown a tremendous ability with her team to optimize our use of cash and to create operating leverage quarter over quarter. And I'm sure that we're going to continue to do that, even as we reinvest in technology. So, David, I'm not trying to dodge your question. I just don't know the answer. I mean, I'm telling you where I'd like to be, but I don't know that, you know, we'll see if we can get there.
spk08: Yeah, that's helpful. I know that slide on the rate sensitivity using the different betas was extremely helpful. But just circling back maybe to the expense side, it sounds like you've got a decent amount of the PACMARC savings in there. Just curious what might be a good, you know, core expense run rate as we come out of the first quarter once everything's integrated and just how you think about expense growth just in light of the inflationary pressures, the new hires that you're talking about, some of the tech initiatives that you got going on.
spk05: Lynn, you want to take that?
spk01: Sure, I can start. I think just kind of following on from my comments earlier, You know, as I reflect back, and you're able to probably see these as well, looking back at Pacific Mercantile, you know, their expenses, I'm going to say we're running maybe around just over $8 million a quarter. So, you know, we are looking at our expense savings. We've said 40 plus. So, you know, based on what we've been able to achieve, plus our desire to continue investment in our initiatives, including those expense saves. And I will say that in the fourth quarter, given the system conversion was in November, we will get the full benefit of a full quarter of the combined operations starting in the first quarter. So to save you all a little bit of math there, I think we would target our operating expenses to be in the range of, I'm going to say, about $45.5 to $47 million a quarter. First quarter tends to be a little bit higher as you kick off the year. And definitely appreciate your comment about inflation, the competitive landscape for recruiting talent. We're trying to take a hard look at that and incorporate all that into you know, our expenses and how we continue to leverage our investment in those resources. So I think that's what we're looking at. I think there's still opportunity to create operating efficiencies.
spk08: Okay. That's helpful. Thank you very much.
spk05: Yeah, I mean, we see ourselves expanding our operating leverage even as we make these reinvestments in technology and see our ROA going up and our EPS going up. going up. I mean, all the top-line growth gives us a lot of flexibility, and we see a lot of top-line growth ahead.
spk07: Thank you.
spk00: The next question comes from Andrew Terrell of Stevens. Please go ahead.
spk09: Hey, good morning.
spk05: Morning, Andrew. Good morning.
spk09: Hey, Jared or Lynn, I was maybe hoping to start on the $5.5 million in net charge-offs this quarter. I think some of it was related to PAC-MERC, but was the remainder just kind of year-end cleanup, if you will, or just any kind of color you can provide on the charge-offs this quarter?
spk05: Sure. I'll start, and then, Lynn, if you want to jump in. I mean, we looked at a whole bunch of loans that we took the opportunity to sell that were non-performing that we – We got a premium on several of them, and our team did a superb job of getting that done through the end of the quarter. And we just thought it was a great quarter to take that opportunity. You don't often see premiums on loans like that. And so we wanted to do that and keep our – we knew what we were bringing over with PACMIRC, and we did it with our eyes open with the ability to take the appropriate reserves. And so we wanted to make sure that these levels remained appropriate. And so we – There was a little bit of that going on.
spk01: Yeah, let me just, I can add.
spk05: One other comment, Linda, one other comment before, just to remember. I should point out that on our delinquencies, we had about 30 million of delinquent loans return to non-delinquent status after the end of the quarter. And that tends to happen with the SFRs. It just, they're really, really lumpy. And they're delinquent temporarily because it's just the way that people live. And then they pay their fee, and then they bring them back to normal status. And so our delinquencies, as long as we got this SFR portfolio, are going to run a little bit red at the end of the quarter, and then they normalize after the end of the quarter. It's been the same trend for many, many quarters. And as we've built up our SFR portfolio, that's happened. So I just wanted to point that out. Sorry, Lynn.
spk01: Oh, no, it's fine. So when I look at the loans charged off and the recoveries in the quarter, through both acquisition accounting plus our own activity, that's what comprised the numbers. Jared's absolutely correct. With our few non-performing loans that we decided to exit, we were able to yield some gains on some, and then we did take some charge-offs on the smaller piece. Also included in charge-offs for the quarter was a loan that we had specifically reserved for in prior quarters and wrote that off or charged that off in the fourth quarter. I'd say the other large numbers in there relate to loans that were acquired in the Pacific Mercantile Acquisition. They were fully reserved through purchase accounting, and then they were offset also by a known recovery. and the timing of when we received the cash relative to the acquisition date. So that's the majority of the charge-offs and the recovery numbers.
spk09: Okay, great. That's really helpful, Caller, and I appreciate it. Maybe, Jared, just moving back over to some of the loan growth, I saw the announcement for the head of media and entertainment business. I think that portfolio represents a relatively kind of smaller portion of the overall balance sheet today. Can you maybe just give us some color on how this new hire expands that business line and kind of what it adds for you and then what kind of market opportunity you see in that segment?
spk05: Sure. Well, pleased to add Guillaume to our team. He's got a great background and I know he's going to make great contributions. He's joining an already very talented team with led by Adrian and others that have been on the team for many years, and Randy and others who have done just a superb job for us. We expect us to – we've primarily been playing in the streaming space. So we've been – as we've talked about before, we finance streaming production and content. So when a producer has the idea for a show, they might go to Netflix or Hallmark or Hulu and run the idea up the flagpole, and then if they like it, the streaming service, the production company will buy the content, they'll buy the script, and they'll basically sign a contract and say, if you make it, we'll buy it. And so then they come to us with the contract, and we then help them finance the production of the show. That's primarily what we've been doing. But there's opportunities in the whole ecosystem to do more financing without taking, you know, we're not taking any box office or distribution risk with streaming, right? We're not getting repaid based on how many people show up at the theater. We have a contract from Netflix, which we know is good money, or from Amazon or whomever. And so how do you play in this ecosystem without expanding your risk profile? Well, there are a lot of supportive services that are in the same ecosystem that we're not currently serving that we can continue to serve. And a lot of the different players that are there, we think, are people that we can reach out to for similar financing. There's the ability to finance distribution, the content that's already been made, where people have already signed a distribution deal, and a whole host of other things that are in that ecosystem, as well as in the related areas of television and music. And so without going into too much detail about specifically what we're going to do, I hope that gives you some color for what we could do.
spk09: Yeah, no, that's very helpful. I appreciate it. And maybe just a housekeeping question for Lynn. I think I heard you on the 45 and a half to 47 million kind of per quarter of expenses in 2022. Just curious, does that contemplate any kind of step down in some of the legacy litigation expenses or is the potential for that kind of, would it kind of benefit the run rate in 2022?
spk01: Sure. So for the legacy litigation expenses, which have primarily been resolved or well-identified, and we refer to them as the indemnified professional fees, that's outside of that number.
spk09: Okay, perfect. Thanks for taking my questions.
spk01: Yep.
spk09: Thank you.
spk00: The next question comes from Kelly Marta of KBW. Please go ahead.
spk02: Hi, good afternoon. Thank you so much for the question. I really appreciate all the additional color in the slides on your asset sensitivity post-PMBC. I was hoping if you could just give us a sense of how you expect, given all the changes you've made on the funding side, how you expect the funding to react to the first couple rate hikes. Do you expect... it to be relatively resistant now, given the nice shift you've had?
spk05: Yeah, good morning, Kelly. Good afternoon, I guess, to you. So with all the liquidity in the market, you know, we don't know what the deposit betas are going to be, but my expectation is that the early rate hikes are going to show no appreciable change in, you know, on the deposit side. We're not going to see any sort of movement of money. We've moved really, really hard out of money market. And so when you look at our deposit breakdowns, the detail of it, money market has been shrunk dramatically, and that was very, very intentional. So we wouldn't expect this. Obviously, non-interest-bearing deposits aren't going to react. You wouldn't see low-cost checking expected to react. And so then it's just about money market would be the one that would react, and then you'd expect CDs to to obviously react at maturity, which you can control. Even there, though, with so much liquidity in the market, we don't see rates influencing depositors. We don't see us participating in providing higher rates to depositors anytime soon. We don't see the need. And so hard to know, but that's why we wanted to provide the sensitivity chart on the bottom of page 17 about what could happen in an upgrade environment based on historical betas or zero betas.
spk02: Thanks so much, Jared. Maybe just a quick one on capital. I appreciate the digital update on the preferred redemption. Just wondering if there's any changes on how you're thinking about maybe deploying the buyback given where the stock's trading. Thanks.
spk05: Well, look, you know, obviously we don't like where our stock is trading today, and and hopefully it rebounds, and hopefully this communication helps in some way to let people know about our story. We think the first thing we need to do with our capital is redeem our preferred stock, and we want to give ourselves the benefit of, and the regulators, the benefit of giving enough time to do that, because we do need approval, but we're optimistic that it'll be done in the first half of this year, and if we can get it done in the first quarter, that would be fantastic. From there, then it's always a question of where are we trading. And we think our investors would prefer a return on capital versus a return of capital. But that's not to say that we wouldn't put in place a buyback program if it made sense so that we can be opportunistic about where our stock is trading. We just got to look at that versus all the other uses of our capital, including reinvestment in our company for growth. And we see robust growth. And we know we need to reinvest in technology. It's not to say we couldn't do all those things, but I think it's probably that's kind of how we stack them. Lynn, do you have any other thoughts there?
spk01: No, I think you summarized it well.
spk02: Thanks. Great. Thank you so much for the update, Karen. Appreciate it. And Lynn, thank you.
spk05: Thanks, Kelly.
spk00: The next question comes from Gary Tenner of DA Davidson. Please go ahead.
spk04: Thanks. Good morning. The questions have largely been answered. I just wanted to ask, the loan yield adjustments, I think, that were called out, the press release during the DAC added 12 bps this quarter versus 11 last quarter. I'm assuming lower PPP fees this quarter and presumably some increased discount accretion benefit. Can you kind of break out the relative impacts of both of those items, third quarter versus fourth quarter, for us?
spk01: Sure. Gary, this is Lynn. So I think as we step back, especially as the PPP program, for all intents and purposes, is kind of winding down. So there's less of that in the numbers, and rightfully so. So that's a smaller portion of it this quarter relative to last quarter. I think the variation is mostly related to prepayment fees that we see coming through given the elevated levels of prepayment activity. So while it didn't, to your point, create much variance between the loan yield between quarters, there is a small component that's always associated maybe with prepayment fees based on that activity. So as you look at the numbers for the fourth quarter, the majority of the 11 basis points is the prepayment fees. and less to do with PPP amortization or accelerated accretion. And then I would say the same is true for last quarter, so less prepayment fees and a little bit more PPP acceleration. So those are the pieces. I think my general comment is there is always some piece of either now that we have an acquired portfolio discount accretion as we bring that through, and prepayments, and maybe a little bit of PPP. And that's a couple million dollars every quarter, which is what that 12 basis points represents.
spk04: All right. Thanks very much. Thanks, Carrie.
spk00: The next question comes from Tim Coffey of Jani. Please go ahead.
spk03: Thanks. Morning, guys. Morning. I got on the call a little bit late, so I apologize if you already covered this, but if you looked at kind of your legacy deposits, it looks like there was some churn in the quarter, perhaps a bit of a decline. Is that seasonal or targeted?
spk05: I think it was, Lynn, is that the, you want to discuss when we moved out? Yeah.
spk01: Sure. Yeah. Tim, good morning. I would say it was by design. We recognized as we were working together towards the specific mercantile, close date, the high levels of cash, and we started to look at what opportunities we had within our own deposit mix, and we were able to identify, I'm going to say, gave us the flexibility to go ahead and exit. Some that were maybe less relationship, a little bit higher cost, typically available in the market if you want to go bring those in. So, I would say less seasonal and more strategic reduction.
spk03: Okay. And in relation to kind of the excess liquidity you brought on balance sheet from the transaction, do you feel comfortable or confident with the deposits you have right now to invest that excess liquidity, or you still have more to do working on the mix of deposits?
spk01: I can start the – Based on our liquidity profile at the end of the year and the deployment of the cash, I think we feel very comfortable being able to invest our liquidity. I think we talked about how much excess liquidity is in the marketplace. I think we view our funding base as stable. We've had real growth. I think it's well understood. Appreciate that some liquidity may be put to work. but we're also growing our deposit base. We think the mix is reflective of where we're headed in the future, even if some liquidity comes out. So I think we're comfortable investing our liquidity at this point.
spk03: Okay. And then, Jared, just a follow-up on the hiring questions. Are any of the Are you opposed to hiring outside your geographical footprint at this time?
spk05: No. So we have a couple hires up in the Bay Area that, you know, Ahmed ran that market for Wells, and so was a couple people he had good relationships with or that he knew either worked for him or that he knew well ended up coming to work for us. So we have a team up there that's doing a superb job, and we don't have any branches up there. And then in terms of more broadly, we are open to hiring people based on their skill set and what we think would be a good fit with our company. It matters the job. Not every position in this company is ripe for kind of a remote hire, but we're absolutely open to it for the right people.
spk03: Is opening branches in the Bay Area in the cards? Yes.
spk05: I think it's possible. We want to look at what sort of what I would call footings, which is, you know, loans and deposits that we have in a market. We have deposits from all the clients that we lend to, so the folks that are up there have their deposits and branches that are down here. We would look at what the scale was and make sure that it was appropriate. I wouldn't build something hoping that people would come to it. I would build it if I knew I had enough base to have a profitable branch from day one.
spk03: Good. Very good. Those are my questions. Thank you very much.
spk05: Thanks, Tim. Appreciate it.
spk00: The next question comes from Matthew Clark of Piper Sandler. Please go ahead.
spk05: Good morning. Good morning, Matthew.
spk06: Do you happen to know how much in the way of cost saves you've realized to date with PMBC after the conversion in November, maybe on an annualized basis in dollars, and what might be left?
spk01: Off the top of my head? I don't know that I have that number, but I could probably answer it a different way. I think that given that we effectively operated both organizations from the October 18th close date to the middle of November, and then needed to rely on the teams to finish up with the integration. You know, there's probably I'm going to say half a million to a million that may be included as we kind of work through that last portion of the year. I don't know if that's helpful.
spk06: It is. It is. Thank you. Okay. And then, Jared, maybe strategically thinking about your kind of financial goals, that you're striving for, you know, maybe in another year or so, what's your sense for, you know, what you're trying to achieve on an ROA and maybe return on tangible perspective?
spk05: Yeah, I mean, without putting, yeah, without putting, you know, kind of lines in the sand about when and where, you know, we said that we were going to get to a 1, then we were going to get to a 110, then we were going to get to a 125, and then we were going to get to a 140 ROA. Lynn and I were just going over some numbers yesterday about where we think we're going to be on a standalone basis after PAC market. Definitely accelerated us a year. I mean, you know, I think that we think that we're going to move past that first, that, you know, certainly we're, you know, past a one. So then, you know, are we between a 110 and a 125 for this year on a full year basis? I think that's probably reasonable. And, you know, how do we get there and what are the levers that we pull? And we try to think about it in a, you know, interest rate neutral environment. And then if interest rates help us, that's even better.
spk06: Got it. Okay.
spk05: But we're obviously not happy with that. And, you know, look, it's tremendous from where we were, but, you know, we have high aspirations for where we're going. And I think we've shown that we have quite a bit of urgency about it. And so... On the return on tangible common, it's obviously a super important number. It might even be more important than ROA at some point. I think the question is, do we have too much stock outstanding, and is that holding us back? All those things play in, but we don't want to be in the low double digits. We want to be in the upper.
spk06: Great. I'm not sure if you discussed this in your prepared remarks, but Just switching gears to the loan pipeline, you know, where does that stand at year end? How does it compare to the prior quarter? And, you know, whether or not you still feel good about kind of mid to high single digit organic loan growth going forward this year?
spk05: So you might not have heard my comments earlier. Our pipeline is as strong as it's been. And so I feel very, very good about it. I don't know what the payoff situation is going to be. But let's assume that that kind of normalizes. I don't see any reason why we shouldn't be in the mid-upper single digits, but we would aspire to be higher than that. As I mentioned, I think sometimes when rates rise, the market takes a pause because there's a delta between the bid and the ask for the buyers and sellers for whatever services they're looking for or whatever properties or products. And that definitely happens. I've seen it every time. And so I think that might disrupt kind of the pace of lending activity, but it might not. It might not. The economy is very strong. It's holding up really, really well. I mean, nobody seems to recognize that, like, war is about to break out on the tip of Ukraine, and hopefully it doesn't. And hopefully that doesn't happen and it doesn't revert back to our economy. But everything locally seems very, very strong, and notwithstanding, you know, the variant, which kind of slowed things down at the beginning of the year and the end of last year. With Omicron, everybody seems to be pushing through now, and things seem pretty robust. So in terms of the level of pipeline, it's high, and our teams have a high degree of confidence, and I do as well. What the net loan growth number ends up being, I don't know, but we would like to, you know, we're going to aspire for it to be in the upper single digits, and hopefully it'll get into the double digits. And as I mentioned earlier, If that doesn't happen for some reason, we have a whole bunch of ways to pivot to get our earnings to where we need them to be. But we believe that this year for us is a – our top line growth is going to be pretty strong.
spk06: Okay, great. And then just last one for me on the media entertainment hire. Can you give us a sense for how large his book of business was and whether or not there's an opportunity to cherry pick some of that or – is he going to be starting?
spk05: We hire people based on their experience and their, their, you know, industry relationships. And so it was less about a book and more about helping us design our strategy going forward. And then, and then rolling out that strategy. And, you know, I don't see if we have a hundred million dollar, you know, book today, I don't see any reason why over the next two to three years, we couldn't double or triple that, that portfolio. I see no reason why we couldn't do that. If not, if not more than that, we have, I think this is going to be an important sector for us, and we want to continue to capitalize on the market position that we have.
spk06: Great. Thank you.
spk05: Thanks, Matthew.
spk00: Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.
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