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spk07: Hello and welcome to Bank of California's first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing 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 Wolf, Bank of California's President and Chief Executive Officer.
spk10: Good morning, and welcome to the Bank of California First Quarter Earnings Call. Joining me on today's call are Joe Kemp, CFO and Bill Black, our head of strategy. We executed the first full quarter as a combined company. For those of you who have followed Bank of California for the past several years, you have heard us talk about our commitment to demonstrating success by methodically making continuous progress on key initiatives and consistently moving the ball down the field. Excuse me.
spk07: I'm sorry, sir. It seems like it's breaking up on your side. I'm going to place music into the call, and I'll pick up your line privately. Just a moment, please. Thank you.
spk06: Thank you. Thank you. Thank you.
spk07: Excuse me. This is the conference operator. Mr. Wolf, please recommence the opening of your speech. Thank you.
spk10: Okay. Good morning, everybody. We will try that again. Welcome to Bank of California's first quarter earnings call. Joining me on today's call are Joe Cowder, our CFO, and Bill Black, 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 followed Bank of California for the past several years, you have heard us talk about our commitment to demonstrating success methodically by making continuous progress on key initiatives and consistently moving the ball down the field. That's what we did in the first quarter. and we made solid progress on the initiatives that will lead to us achieving the profitability targets that we have set for the fourth quarter of 2024. 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 paid 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, adding meaningful new business account relationships and absolute growth in non-interest-bearing deposit balances, much of which came from these new relationships. The increase in NID deposits, along with the benefits of the balance sheet repositioning, resulted in our cost of deposits declining 28 basis points and contributed to the 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 at a faster 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 in this quarter as well. As we've indicated, profitability is 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 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 runoff in our discontinued loan portfolio, particularly those with lower yields, such as our premium finance portfolio, which declined $77 million or 10.5% not annual license work. The runoff of those loans had a positive impact on our results, given that the premium finance portfolio has an average yield of 3.34%. Despite the muted economic backdrop and what we perceived 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 discipline, underwriting, and pricing criteria. But with loans coming on the books at higher rates than what is running off, we are seeing an increase in our average loan yield, which was 41 basis points higher than the prior quarter. On the credit side, as we had previewed, we remain appropriately proactive and conservative with respect to credit and downgraded various CRE credits. Four CRE credits drove the majority of the increase in non-performing loans during the quarter, which includes three office properties and 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 non-performing loans, so we see 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. Civic loans accounted for approximately 29% of the increase, SFR consumer loans represented approximately 7%, and various loans contributed to the remainder. During the quarter, we also sold some of the civic loans we had 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 ACL does not include the first loss position Legacy PacWest sold via credit link notes on the SFR 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.
spk00: Joe. Thank you, Jared. Given that 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 quarter comparisons I review as I review our financial results. Starting with the income statement, we generated $239.1 million in net interest income. which reflects the favorable change 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 4Q 2023, and it increased to 2.82% 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 Bank 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 2024, the lower cost of core deposits driven by an increase in our non-interest-bearing deposit ratio, and targeted actions to lower 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 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 fund 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 PacWest 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 the 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, it 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. Our non-interest income was $33.8 million with all of our major areas 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. 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 Jared indicated, our total loans were essentially flat. However, our core portfolio grew 4% annualized, primarily in commercial loans, offset by lower civic loans and other discontinued portfolio loans. Our non-interest-bearing deposits increased during the quarter, primarily as a result of new client relationships. 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 PacWest broker deposit products. This resulted in a favorable shift in our deposit mix, with non-interest-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 8.5%, consistent with our original merger targets. Note we continue to retain robust liquidity primary and secondary liquidity being 2.4 times our total uninsured and uncollateralized deposits. At this time, I will turn the call back over to Jared.
spk10: 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 expense. Based on the progress we are making, we continue to expect to generate ROA of approximately 1.1% and ROTC 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 runoff we have in non-core 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 NIB, which will further improve our deposit mix and reduce our cost of deposits. Our ability to drive down our cost of deposits, increase NIB, and expand our margin are the result of solid execution by our team at a time when others are finding it hard to achieve those 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 position in 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 will continue to operate with a long-term approach and add new client relationships that we believe will lead to further profitable growth of our franchise and add value and additional value being created for shareholders in the coming years. And most importantly, 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 show up every day 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 Bank of California in the years to come. As I said at the outset, I am very pleased with our progress to date and expect to continue methodically moving the ball down the field to our specific targets in the coming quarters. With that, operator, let's go ahead and open up for questions.
spk07: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're 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.
spk01: Hey, guys. Good afternoon. Maybe just starting on the margin and on spread, when we 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 maybe that didn't come through quite as quickly or fully as you had expected. Is that the right way to look at it and it's just sort of being pushed into second quarter? or are there other dynamics there? And then, I guess, a corollary to that, just looking at accretion, you know, accretion, $32.5 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?
spk10: Thanks, Jared. Let me start, and then I'll turn it over to Joe. As we've said in kind of prior quarters, our margin is definitely an output. And while we have a sense for where it's 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're able to get there. As we said, we have a lot of levers to pull. So 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. And 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 and a lot of ways to get where we need to go. And so I'll let Joe explain why it was a little bit lighter than we thought.
spk00: Yeah. So, you know, as Jared said, I do want to echo, we did – for our internal plan, we did, you know, come in right on top of our plan for the quarter. We had appropriately been conservative in that estimate. The – During the quarter, as you guys all know, interest rates at a lot of the tenors, especially the shorter tenors, increased quite a bit versus probably what people were expecting at the beginning of the year. So as we went to refinance some of the broker deposits that were coming due from PacWest, 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 those are just market factors. And we make up for that by what we can control, which is on our core book, growing non-interest bearing and bringing down the cost of our interest bearing core deposits and also originating new loans at higher spreads.
spk10: Joe, you want to touch on the accretion?
spk00: The accretion... is, you know, well, first of all, I don't think we publicly disclosed that number, so I'm not sure 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 an insignificant piece of our results, but it wasn't an enormous component of our results for the quarter.
spk01: Okay. All right. Thanks. And then just on the operating expenses, where can we – Where should we be seeing savings there to bring that ratio more down into the middle of the range?
spk10: There's a whole bunch of places we're seeing it. First, we've said the FDIC expense is a place where we expect that to come down. In normal times, PacWest quarterly FDIC assessment was $8 to $10 million a quarter. And right before we acquired them and did the merger, it was about $36 million a quarter. So you can imagine how much savings we're going to generate from the FDIC expense normalizing, which we expected to do over the course of the year. We're in very close contact with our regulators on that. We're monitoring it closely, and it's just a function of time and a couple other things that happen. And so we have line of sight to that normalizing through the course of the year. Our system conversion will represent some savings that will be completed by the end of the third quarter, and that will realize some savings. We have a whole bunch of facilities that will generate savings. We have overlap in a 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 expect to see a change over time. We said it's going to be back-end loaded, and we're going to see those expense savings pick up as we go through the year.
spk01: Great, thanks.
spk07: Yep. The next question comes from Matthew Clark with Piper Sandler. Please go ahead. Hey, good morning, everyone. Good morning.
spk02: Maybe for Joe to start. Could you give us the spot rates on earning assets and either the cost of deposits or cost of funds? Probably the cost of funds would be more helpful just to give us some line of sight in the 2Q.
spk00: So, you know, we've decided after the last quarter that we were no longer going to give spot rates. We gave, I think I gave you the monthly average in my speech, and I can go back over that. You know, 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 payoff activity and in retrospect was probably not an appropriate indicator of our 1Q24 normalized NIM run rate. So going forward, we're only going to speak to the monthly averages as we feel that's the most appropriate indicator of our kind of future run rates. Does that make sense? Okay.
spk02: Yep, understood.
spk10: And then just to that point, I mean, on page five of our investor deck, one of the things that we wanted to put in there was to show people the 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, you know, rather than being the one day at the end of the month, we're providing the monthly eight. know the monthly margins to show where it's going so hopefully that's helpful so that you can think about that 282 as the stepping off point for for q2 and obviously we're going to try to improve it from from there yep yep okay got it um and then just maybe jared on on interest expense maybe between you and joe um you know there's
spk02: I know you're very much focused on it and reducing that interest expense, but can you just remind us of kind of what the plans are from here to reduce that materially, you know, both on the wholesale side and core deposit side?
spk10: Well, there's a couple things. I mean, the chart on page nine, I think, shows the reduction that we've had to date in terms of our cost of deposits and these costs of liabilities overall. So there's a couple levers. One is, obviously, NIB has a big impact on it because every dollar we bring in of NIB is basically saving 5% of broker money or whatever other cost of deposits we want to get rid of. And our teams have done an exceptional job in a very short amount of time of bringing in NIB. And I was very pleased with the progress we made in a quarter. As we bring in deposits of all types, we can reduce the more expensive deposits. and the broker deposits that we have are kind of moving down. So when you see a decline in overall deposits, that's because we're releasing deposits that we don't need. We're also doing this while balancing our loan deposit ratio. We've said that we want to stay at around 90% or below, and we're trying to be very careful with that and just kind of be good risk managers as we think about our overall loan deposit ratio. There are some other things that we can do, including hedging, to 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 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.
spk02: Okay, thanks. And then last one for me, just on the preferred, is there any appetite to maybe pull that forward and redeem it in 4Q to help you get to your goals? And should we assume it's gone 25?
spk10: 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 and a buildup of capital before we can start redeeming capital. And so we think that we want to get through this full year and show that we are good stewards of capital and have been building up capital. And then we'll figure out what we're going to do with our excess capital. 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.
spk02: Got it. Thank you.
spk07: The next question comes from Chris McGrady with KBW. Please go ahead.
spk14: Hey, guys. Jared, the fourth quarter goals, the 1-1 approximate and 13, as you stand here today, what do you think the biggest either risk or opportunity to 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 what's changed, if anything?
spk10: I mean, nothing really. I mean, from when we set them, I mean, we were right on top of our budget. We are very focused on it we've got four or five different ways to get there i mean i think we have a sheet that has 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 you know obviously rates going up i think would be a uh you know would be i think something that everybody thinks is unlikely but if that does happen i think you know there's 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 if that happens. Obviously, any sort of material economic shock could disrupt the markets generally. But 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. you know, revenues need to be taken care of themselves in terms of, you know, loans are coming down nicely. Our team's doing a great job of, I was very pleased with kind of the core production we had this quarter, given kind of the muted backdrop. And so it looks like things are working very, very well. So that's what I would say to it. Chris, like, I don't want to come up with a whole bunch of, you know, straw man. I just, right now it feels like we're going to get there. But if we are not able to get there, I think it's because you know, rates do something, you know, that people can foresee.
spk14: Okay. Thanks, Jack. I guess maybe what else might be on the table? You know, you're accountable to the stretch of the fourth quarter, but you've got a couple quarters in between. What else, you know, might be on the table for either balance sheet repositioning, you know, kind of an acceleration to get to those goals?
spk10: Sure. Yeah, we've talked about CIVIC. and you know our appetite to potentially uh you know sell pieces of the portfolio that are non-core whether it's civic or something else uh we 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 were sold for approximately carrying value we have a little bit more that's probably going to follow this quarter and then looking at that portfolio overall we would be open to you know to doing that. We haven't made the decision that we're gonna do it for sure, but we're open to doing it and we certainly have had people inbound inquiries on it. So I think something like that could be pretty interesting. If we did move it, we've modeled it and it looks pretty interesting if we're able to do it. So that might be an example of something which could accelerate some of our progress.
spk14: That's great, thanks. And then just one housekeeping for Joe. The accretion income, I guess to put a finer point on it, the 32 and a half, I guess what's the scheduled accretion or what's the pool from which to draw over the next several quarters?
spk00: Well, that number is the total accretion. And if you look back at PacWest Financial Statements, they had accretion on purchase loans that predated the accounting acquisition of Bank of California. So that's a total number. And so You know, there's a portion of that that relates to the Bank of California loan portfolio. That's a number we haven't disclosed yet publicly, but that number is not a super meaningful, as I said earlier, it's not a super meaningful number for the quarter.
spk14: Okay, so totally get the two different parts, but generally stable accretion is kind of the message in your term or maybe a downward bias?
spk00: I think there's a stable, I think you should think about stable accretion going forward.
spk14: All right, that's helpful. Thanks, Joe.
spk07: The next question comes from Timur Braziler with Wells Fargo. Please go ahead.
spk12: Hi, good morning. We're trying 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 one queue. Was there a lot of... Accelerated accretion in that number, is that dealt entirely from the dynamic that you're talking about from kind of the carry forward on PAC Westside? And Joe, did I hear you correctly that part of why you're not giving the spot rates was because you had some accelerated accretion kind of inflate that initial number? Just trying to get a better sense on the 30 some odd million versus the scheduled accretion of 63 million that we were told earlier.
spk00: So the $32 million includes accretion from the – let's go back to the number that we put out at the end of last year was on just the Bank of California portfolio. The $32 million, which was disclosed, is the total accretion on all loan portfolios that were acquired by – since PacWest was the accounting acquirer in this transaction, so it includes accretions on other portfolios. loan portfolios beyond just the Bank of California loan portfolio. There was excess accretion. In the fourth quarter, there 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 interest income numbers, but it was hard to kind of allocate out 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 for a million or two. But other than that, it was pretty much that was the accretion level. For the Bank of California numbers, it was the stable accretion number that we expect to see, coupled with the accretions on the other portfolio that we PacWest had previously acquired.
spk12: Okay, got it. And then maybe looking at the transformation of the deposit base, so the cost for the quarter was 263. The spot rate at the end of the quarter was 254. I think you had mentioned that you're 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 you're doing to bring in more non-interest-bearing deposits, but how close are we to reaching a level of stability in that deposit cost? I mean, is that 254 a pretty indicative number of where things ? How much lower could that go as you continue to work in that book?
spk10: I mean, look, 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 NID. And anybody that followed the Bank of California history knows that we were pretty good at it. And we're using the same playbook. We've 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. PacWest historically ran with NID at well above 30%, 35% to 40%. Bank of California got close to, you know, 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'm really pleased with how our teams are mobilizing around that right now. Okay.
spk12: And then it looks like there was some usage of cash towards the end of the quarter. I think last quarter it was kind of 8% to 10%. We're getting close to that 8% bogey. I guess, A, should we assume that cash balances are more or less flat here and then just the remix at quarter end? Are we assuming a pretty meaningful bump up in margin once again in 2Q as that average effect is fully baked in?
spk00: Yeah, I think the cash levels you can assume will be fairly stable. I mean, they may move a little bit just because 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 and that interest income improvement throughout the year. Great.
spk12: And then just last for me, on the three office loans that had migration into non-performers, can you provide geography and any other kind of maybe tying threads between those three credits?
spk10: I think they were all California. I would look at the credit migration as fairly normal. We were being, I think, appropriately conservative. We obviously have the capital and the ability to take the provision we wanted to take. I think running with really, really low MPLs at 26 basis points or whatever 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, which is 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, it just felt like it was a normalization of credit, and we were taking the marks that we thought were appropriate at the time. So I don't know that there's 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.
spk09: Great. Thanks for the questions.
spk07: Yep. Thanks, Timur. The next question comes from Gary Tenner with DA Davidson. Please go ahead.
spk09: Thanks. Just a quick follow-up on the last question. Were those credits with a legacy Bank of California or legacy PacWest?
spk10: They were a mix.
spk09: And then I just wanted to ask, you've got in the deck, I think, as it relates to the kind of year-end targets, the asset size kind of thing. You think it will be stable at 36, but it could be between 34 and 36. As we think, I think you talked about BTFP repayment probably in the second quarter. Is it reasonable to anticipate sort of a dip and then growth back towards 36 at the end of the year? Or just kind of where do you see the kind of balance sheet flows or trends kind of on a quarterly basis for the rest of the year?
spk10: You know, Gary, I don't actually know the answer to the question. I think I can tell you what could happen, which is, If we, you know, if 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, you know, after bank term funding. Putting aside bank term funding, you know, we do something with Civic, and, you know, it's more dramatic, right? It could be $2 billion. So that's why I don't know. You 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 or lender finance or whatever. And so 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. So I think those are the moving parts that could impact the balance sheet. But if we take out any dramatic moves, I think you can think about bank term funding coming off, shrinking by that much, and then it's stable from there.
spk09: Okay, I appreciate that. And then if I just ask one last question. There was a question earlier about kind of the cash balance, you know, relative to the size of the balance sheet overall. With that in mind, is BTFP effectively replaced? I mean, it sounds like from what we're just saying, it's paid off the balance sheet contract. 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?
spk00: Joe, what do you think? I'm sorry. I didn't quite understand the question. Could you repeat one more time?
spk09: Yeah, sorry. I mean, effectively, I was just trying to clarify if BTFP repayment is done out of existing cash based on what your comments were about the current cash level being kind of relatively where you'd want it as a percentage of the overall balance sheet.
spk00: Yeah, the subsequent pay down of BTFP will not result in a big reduction in our cash balance. That's why I think I qualified, you know, in my comments in the script, I qualified the, 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. But you should not expect to see a step down in cash. Okay.
spk09: Thank you.
spk07: The next question comes from Andrew Terrell with Stevens. Please go ahead.
spk03: Hey, good morning. Morning.
spk07: Good morning.
spk03: Jared, if I could just start on the non-interest-bearing deposits. Pretty nice build kind of into quarter end. I was curious if you could give any color on how the NIB deposits have turned it so far in the second quarter. Have you seen continued growth or any kind of moderation there?
spk10: We have seen continued growth. I got an update this morning and we 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, you know, and, you know, 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, NIB is going to grow. And so it could be uneven. I hope it's steady. I hope it's kind of consistent. But 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.
spk03: 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 maybe the base was a little too high to start because of the purchase accounting. But now that we're kind of, that's behind us. Would you still expect 15 basis points of earning asset yield expansion per quarter just from booking loans at higher yields and replacing the lower yielding loans? I guess 15 is still a good number.
spk10: I don't think it's unreasonable. I mean, I think it's definitely, again, it's an output for us in terms of, you know, 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 is we can make it up on volume, right? And 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 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 We'll catch up with the interest rate curve later and take out those expenses in terms of interest expense later as NIB picks up on other things. Is 15 basis point of improvement a reasonable goal for the quarter? Yeah, I think so. Are we going to get all the way there? Is it going to be 10? Is it going to be 16? I don't know, but it's not unreasonable.
spk00: What do you think, Jeff? I would echo what Jared said. I think there's a lot of moving pieces. It depends upon... ability, what loans we originate in the quarter, also what loans sort of maybe pay down ahead of plan. But just to give you a sense of what we're looking at, in the first quarter, our new loan production yield was north of 8%, getting up towards 8.5%. So as you imagine, a lot of the loans that are rolling off are much lower than that.
spk10: um we have we have good trajectory there good a good glide path and we'll see how it comes out yeah i you know one of the things that we joe and i talked about was on you know on the spot rate is you know we gave you know 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 giving the margin for the court for the month is probably a better better thing to do going forward which is why we laid out that chart uh in the deck yeah
spk03: Yeah, understood. It's helpful. I appreciate it. Back to the, there's a question around the preferred and potential redemption there. And it sounded like, Jared, in your response, that 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 capital front? I forget which metric you're paying most close attention to, but can you just refresh us on your kind of capital targets?
spk10: Yeah, I think CC1, getting that closer to 11 is probably when we feel like we'll have excess capital. And so, you know, from there, I think it'll be an easy conversation to have about how we're going to deploy.
spk03: Got it. Okay. If I could sneak one more in, just I appreciate the color you guys gave around the delinquencies and the non-performers, but the classified loans, what drove this step up in classified this quarter?
spk10: Joe, do you want to touch on that?
spk00: I was going to say, I think it's a lot of the same drivers that impacted delinquencies in MPLs, but Joe, I'm not sure if you have further cover.
spk10: No, it was the same group.
spk03: Okay, understood. All right, thank you for taking the questions.
spk07: Thanks. The next question comes from Timothy Coffey with Jannie. Please go ahead.
spk08: Hey, John. Thanks for the question. Jared, you in the prepared remarks said that cost dates are coming in better than expected. Do you have any color on that, and will it cause you to update your estimate for cost dates? I believe it's around $130 million pre-tax.
spk10: I'm definitely not going to update our, you know, kind of our guidance for where we think we can get to. We said we'd get to between 2 and 2.10 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.
spk00: Yeah, I would echo what Jared said. It's just people executing just slightly ahead of schedule.
spk08: Okay, great. Thanks. And can you remind me what the dollar value of the credit link note is or how much of the single family residential portfolio it covers?
spk10: Yeah, Bill, do you have that handy?
spk11: Looking, Jared, it's about $125 million on the balance sheet. It covers about $2.65 billion of loans. Great. Thanks, Andy.
spk00: And it absorbs the first 5%, right? Bill, it absorbs the first 5% of loss, right? Yes.
spk08: Great. And then my last question is, I just wonder if you can provide a little bit of color on Civic. The deck says the loans are low LTV, well-collateralized, but there seems to be a lot of migration for a business that was shut down about a year ago. I'm wondering if... Yeah, the operating...
spk10: So the loans are, just as a reminder for everybody, we have about a little over, about $2.3 billion in total civic loans. $2 billion approximately are for-rent single-family homes that are investor-owned. And the remaining balance are bridge loans. You can think about them as fixed and flipped primarily on single-family, but they could be on multifamily as well, on small multifamily. It operates in many ways like a single-family portfolio, which has a lot of delinquency. People pay. And one of the ways that it was being managed before PacWest bought it was because it wasn't a bank, they didn't mind if they went DQ because they just charged them more fees. And obviously, that's not our profile. That's not the way that we want to run things. And so as the portfolio transitioned and PacWest discontinued it and kind of brought it more in-house, they had to change the borrower behavior. you know, they're not experiencing losses on these loans. It's just our behavior was, you know, I guess it was conditioned to behave differently than what we would like in a bank. And so, look, it's serviced by a third party. We asset manage it ourselves in-house. We've got a great team on it. You know, it makes money, but it's just not what I would call a great portfolio to own inside of a bank. And so it's either going to run off over time or we'll figure out a way to exit if we get a price that we like. And we would look at both. Does that help?
spk08: Yeah, extremely. Those are my questions. Thanks a lot.
spk07: Thanks, Tim. The next question comes from Brandon King with Truist Securities. Please go ahead.
spk04: Hey. So you're sticking to the profitability targets and the 4Q 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 that you could frame what the dollar NII amount could be to hit those targets.
spk10: I don't think we've given that guidance, Brandon. Joe, what have we said on that?
spk00: Yeah, we've not put out specific NII or income statement numbers, and I don't think we intend to.
spk05: Okay.
spk04: Okay. And then for deposit, the deposit runoff, could you just frame just what kind of deposit runoff you saw in the quarter? I guess what amount of that was intentional and then what is left to intentionally run off going forward?
spk10: So I would characterize most of it, there's two parts of the runoff. Some is just seasonal movements in balances by customers. And the other is intentional runoff of deposits that we don't need. The majority was runoff of deposits that we just chose. We don't need it because the rate's too high and it was non-core. It was brokered or 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, you know, when we said we're not going to pay the rate that they wanted, and they went and found a rate somewhere else. So I would say that some of it was, you know, just seasonal movements of customer deposits, but overwhelming majority was of the latter type, which was, you know, rate sensitive deposits that we didn't need any longer. Okay.
spk04: And do you think that's largely over going forward or expecting maybe some more incremental?
spk10: No, I think as we build up our momentum in terms of bringing in relationship deposits, both NIB and other deposit types that come with those relationships, we will feel good about letting go more expensive deposits that are fundamentally, they might be broker, 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're focused on our loaner deposit ratio and want to make sure we stay comfortably within kind of our guideposts.
spk04: Okay. Answers my questions. Thank you. Thanks, Brandon.
spk07: The next question comes from David Feaster with Raymond James. Please go ahead. Hi.
spk13: Good morning, everybody. Good morning. Good morning. Just kind of circling back to the NIB growth, you know, look, like you alluded to, this is in stark contrast to what most other banks are seeing right now in the industry. You highlighted the new account growth and 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, and maybe just could you walk through what do you think is allowing you to be so successful on the NIB growth side?
spk10: So, you know, we had good traction in HOA in terms of accounts that were opened and we had good traction in venture and fund finance and warehouse and most of our segments in the community bank. We saw good inflows of accounts. We have a, you know, 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 and making sure that people understand why we can provide a better experience than our competitors. And the lead cycle to bring in deposits is 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 and 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 be at 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 US Bank and customers that ended up at First 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 know our name. They know who we are. When people say, hey, I need to think about banks now, Bank of California is definitely on their list because of the marketing that we've done and the position that we have. 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 that are very strong banks and very good competitors, but we seem to be holding our own. So that's some color they're doing.
spk13: That's great. And, you know, I'm curious how DeepStack plays into that. I mean, you talked about HOA and the venture business. I believe that you were excited about what DeepStack could do on those businesses. And then maybe more broadly, where we are in the rollout with DeepStack, and when do you think that that could be a more meaningful contributor?
spk10: Well, we expected it to be a meaningful contributor this year to Bank of California on a standalone basis, but because of the increased fee income that PacWest brought to the combined company, DeepStack won't 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 kind of the specific contributions that DeepStack is contributing, both in terms of cards and the other things it's doing. Our payments platform really has three things. It's DeepStack, which is merchant acquiring. It's cards. We've started issuing credit cards directly to clients. And then the third side is just sponsorship, meaning we're helping other parties process 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 for you right now on that.
spk13: Yeah. Okay. That's helpful. And then last one for me, just, you talked about the hiring initiatives and you've had several announcements over the past few months. Curious thing. How do you think about hiring and the team that you've assembled, maybe where you're looking to add additional talent and whether it's, you know, more deepening the bench or you know, expanding into new segments.
spk10: We've had really, first of all, we've got, an amazing team here. 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 had two great folks come over to our finance team from another bank. It started this week. We've added people in most of our lending areas and we're adding people in our functional areas as well. We're absolutely open to adding the right talent across the bank. And there are some key spots that we have open that we'll be adding very shortly. But we continue to add talent even though we have a defense here.
spk13: That's helpful. Thanks, everybody.
spk07: Thank you. This concludes our question and answer session and Bank of California's first quarter earnings conference call. Thank you for attending today's presentation. You may now disconnect.
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