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spk13: Good day, and welcome to the Bank of California second quarter of 2024 earnings conference call. All participants will be in a listen-only mode, and should you need any assistance during the call, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. If you would like to withdraw a question, you may press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Ann DeVries, Head of Investor Relations. Please go ahead.
spk00: Good morning, and thank you for joining Bank of California's second quarter earnings call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website. Today's presentation will also include non-GAAP measures, the reconciliations for these measures, and additional required information is available in the earnings press release and earnings presentation, which are available on our Investor Relations website. Before we begin, we would like to remind everyone that today's call may include forward-looking statements, which are subject to risks, uncertainties, and other factors outside of our control, and actual results may differ materially. For discussion of some of the risks that could affect our results, please see our safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation, as well as the risk factor section of our most recent 10-K. Joining me on today's call are Jared Wolf, President and Chief Executive Officer, and Joe Cowder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like to now turn the conference call over to Jared.
spk09: Thank you, Anne. Good morning, everyone, and welcome to Bank of California's second quarter earnings call. I'd like to start off by highlighting our successful core system conversion that was completed this past weekend. As we have previously discussed, We made the decision to move on to the Legacy PacWest system, FIS, and convert Bank of California customers. Our rationale was threefold. First, we would control risk by converting the smaller customer base. Second, we were able to negotiate with FIS to deliver some outstanding enhancements that would benefit all of our customers and ensure we maintain a leadership position with our digital offerings. And third, the overall price was compelling and resulted in key savings for the combined company. Our team, in collaboration with FIS, has dedicated an extraordinary amount of effort over the past seven months and has successfully converted nearly 20,000 clients and over 55,000 accounts. We've had minimal disruptions to date and while we continue to be vigilant, I'm very pleased with the conversion and I want to congratulate our teams on another successful effort. We effectively integrated a $10 billion bank onto a new system and our team did an outstanding job. With this important merger milestone behind us, We are energized about bringing the full power of our platform to our expanded client base prospects. Additionally, last week, we completed the sale of approximately $1.95 billion of civic loans to a process we ran with Morgan Stanley, who had deep familiarity with the portfolio. Due to the quality of the portfolio, we received numerous bids and ultimately sold it at a price above 98% of the underpaid principal balance, which was at the higher end of our target range. As a result, we have received net proceeds of approximately $1.9 billion and have freed up approximately $100 million in Tier 1 capital. We used about $545 million of the proceeds to pay down the outstanding portion of the BTFP and expect to use remaining proceeds to retire expensive funding and support growth. Additionally, we expect that some of the capital may be used to help us reposition a portion of our securities portfolio into higher yielding securities. We have several options we are evaluating, and we'll be able to share this more fully when we announce third quarter earnings. Again, I want to congratulate our team on the terrific execution of this sale. As we turn to discussing the quarter, these two initial efforts highlight our active transformation efforts, doing the work necessary to create a strong, well-positioned balance sheet that generates high quality and sustainable earnings. During the second quarter, we continued to execute well. It made solid strides toward driving long-term profitability. We paid down $1 billion in higher-cost BTFP funding, which contributed to our NIM expansion during the quarter. Our bankers' efforts to deepen and expand client relationships have resulted in steady growth in new non-interest-bearing deposits from new relationships to the bank, with $230 million generated in just two quarters. Our bankers also originated over $1 billion in loan commitments during the second quarter alone. We are on track to realize our expense saving targets, and we expect our operating expenses to continue to come down through the remainder of the year, with the greatest part of this impact showing up in Q4. Restructurings take time, and we are moving at a fairly good pace. During the second half of the year, we will continue to optimize the balance sheet, bring down expenses to achieve our cost targets, build pipelines, and maintain strong credit quality, all while building up capital and growing earnings. We expect these efforts will position us well to generate profitable, consistent growth as we look into next year. With respect to pipelines, while the overall climate for lending remains sluggish, we are seeing growth in certain areas and pipelines are building, notably warehouse, fund finance, construction, and some core C&I continue to show momentum while traditional real estate lending remains slower. As was the case in the prior quarter, new loans are coming into books at higher rates than what is paying off, So our loan production is accretive to our net interest margin. Our efforts to bring new relationships to the bank and capitalize on our market position continues to bear fruit as we grew average NIB 3% quarter over quarter. Our end of period balances of NIB were slightly lower than the prior quarter as we saw some volatility late in the quarter. But so far in the third quarter, we have seen balances continue to grow. During the second quarter, we also made the decision to move lender finance back to our core portfolio and resume efforts to grow this business line. Historically, the lender finance book performed well with strong credit quality. PacWest made the decision to discontinue the portfolio due to some liquidity issues, as we all know. But this is an asset class that provides attractive risk-adjusted yields, and we have ample opportunities to steadily grow the portfolio by adding loans that meet our discipline pricing criteria and underwriting. The movement of civic loans to held for sale had a positive impact on nearly all of our asset quality metrics in the quarter, with significant declines in non-performing loans and delinquencies, as our loan portfolio continues to perform well on a broad basis. We did see an increase in criticized and classified loans, as we downgraded several rate-sensitive loans in light of the current environment, and as we had forecasted we were likely to do. Past due and delinquent loans have remained at a relatively low level, which reflects the solid underlying credit quality that we have. We're being vigilant and will continue to monitor our credit portfolio carefully to look for signs of stress. Our net charge-offs were elevated in the second quarter due to charge-offs related to the civic portfolio moving to held for sale as the sale price discount to book value runs through charge-offs. We also had $27 million in other net charge-offs, which were primarily related to several commercial real estate loans secured by office properties that had previously largely been reserved for in prior quarters. We maintain a solid level of reserves at 1.19% of total loans, which together with the decline in non-performing loans resulted us ending the quarter with an NPL coverage ratio of 235%. Importantly, our ACL coverage ratio of 1.19% reflects an improvement from 1.15% at March 31st if you adjust for the civic loan sale. I think it's also important to note that our economic coverage ratio, which incorporates the lost coverage from our credit link notes, as well as the unearned credit mark from purchased accounting, is substantially higher at 1.83% of loans. Now let me hand it over to Joe, who's going to provide some more financial information, and then I'll have closing remarks before opening up the line for questions. Joe.
spk06: Thank you, Jared. We reported earnings per share of $0.12 for the second quarter. There were a number of noteworthy items that impacted our reported results. and we laid out these items on slide 30 of the earnings presentation. Importantly, these items mostly canceled each other out so that there wasn't really much net impact to EPS. Putting aside these items, our core earnings drivers improved in Q2, resulting in an increase in pre-tax, pre-provision income. As a result of our financial performance and balance sheet management strategies, we also continued to build capital and further increased our tangible book value per share in the quarter. We generated $229 million in net interest income, which was slightly up from the prior quarter. While we had a smaller average balance sheet in the second quarter, this impact was offset by an increase in our net interest margin. Our net interest margin in the quarter increased 14 basis points to 2.80% due to higher average loan yields as new loans are coming on the books at higher rates than what is running off, as well as a further reduction in our cost of funds partially due to a higher average balance of non-interest-bearing deposits, resulting from the addition of new commercial deposit relationships. Our net interest margin trended higher throughout the quarter with a June rate of 2.83%. During the quarter, we originated $1 billion of new loan commitments at an average yield of 8.12%, and we funded $382 million of new loans on our balance sheet at 7.8%. Our yield on gross loans increased 10 basis points in the quarter to 6.18%, and our yield on total earning assets increased 9 basis points to 5.65%. During the quarter, we repaid $1 billion of our outstanding balance in the bank term funding program and added some FHLB puttable advances, which were at a lower rate than the BTFP. We also added some short-term broker deposits to support our near-term liquidity, which we plan to run off with part of the proceeds from the sale of the civic loans. Overall for the quarter, our cost of funds was down seven basis points to 2.95%, and our cost of deposits was down six basis points to 2.60%. With the positive trends we are seeing in both average yield and earning assets and our cost of funds, and the benefit we anticipate achieving from repurposing the capital freed up from the civic transaction, we expect further improvement in our net interest margin as we move through the year. Our non-interest income was $29.8 million, down from the prior quarter primarily due to a lower level of other income from elevated mark-to-market adjustments on our credit link notes and our SBIC equity investments. These marks can fluctuate from quarter to quarter. Other key drivers of non-interest income are relatively consistent. Our total non-interest expense was $203.6 million and was impacted by several items, including adjustments to our acquisition-related cost, a repurchase reserve related to the civic loan sale, and continued elevation in our FDIC expenses. Our tax rate was elevated at 32% for the quarter as a result of a couple of one-off tax items related to compensation. As noted, you can find greater detail on these items on slide 30 of the investor presentation. Putting these items aside, our controllable operating expenses declined 5% quarter over quarter, primarily due to a reduction in compensation and occupancy costs as we continue to progress with the merger integration. We expect our total non-interest expense to approach 195 to 200 million in Q4 of this year, and this represents a 30% reduction year over year when normalizing 4Q23 to include a full quarter of combined company expenses. Our target range anticipates significant reductions in both controllable and other expenses. Turning to the balance sheet, our total loans held for investment were down from the prior quarter, primarily due to the movement of 1.95 billion in civic loans to loans held for sale during the second quarter, in which the sale was completed last week. Along with lower balances and other discontinued portfolio loans, and runoff we are seeing in low yielding CRE and multifamily loans. This was partially offset by the increase we had in mortgage warehouse and construction loans. Our total deposits were down slightly in the quarter as we continue to utilize our high level of liquidity to let higher cost deposits run off, which we are partially replacing with non-interest bearing deposits generated from our new business development efforts. As I mentioned earlier, We added some short-term broker deposits to support our near-term liquidity, which we plan to run off as part of the proceeds from the sale of the civic loans. As we look ahead, we believe we are well positioned for potential rate cuts, with over 90% of our term deposits maturing in one year or less. Given the repositioning actions we are continuing to take with our balance sheet and the continued execution of our core strategy, we expect our net interest margin and overall profitability to expand in subsequent quarters. At this time, I'll turn the call back over to Jared.
spk09: Thanks, Joe. Looking ahead to the remainder of the year, our primary focus will be on continuing to execute well on the repositioning initiatives that we believe will lead to improved profitability. As we've said before, we expect to consistently move the ball down the field each quarter, as we have consistently done over the last several years. The civic loan sale is a terrific example of how we are repositioning our balance sheet to right-size and optimize yields. This loan sale will provide significant benefits to our capital and liquidity ratios and will improve our core earnings power as we redeploy this capital and liquidity. As mentioned earlier, this includes using the capital relief to reposition our investment securities to improve yields and to use proceeds from the transaction to also pay off higher-cost funding. With the expansion in our margin and reduction in our operating expense, we expect to see steady improvement in our level of profitability. Our actions will result in the bank ending this year in a position that will drive profitable growth in 2025 and lead us to our profitability targets. Importantly, as we improve the balance sheet, we have taken an approach that rewards long-term profitability over short-term gains. Each quarter, we have the opportunity to improve profitability in the short term by extending duration on some of our deposits. However, we have stayed intentionally very short, which means we are paying a higher cost today than we otherwise would. We believe the future benefit is much greater than the benefits we could realize today. Given our deposit profile and liability-sensitive position, we are well poised to benefit significantly as interest rates move lower. I understand that it is perhaps challenging from the outside to see the profitability profile as we undertake these important steps, particularly when quarterly results have multiple moving parts. However, we have visibility to our goals and remain focused on our targets. What is important to us is not the specific quarter in which we achieve it, but the quality and sustainability of our profitability, so that when we are there, we cross that threshold and then have the strong balance sheet to keep moving beyond it with flexibility in various rate environments. We are doing that hard work now. In the meantime, we are focused on growing low-cost deposits, building solid pipelines, increasing operating efficiency through expense discipline, and ensuring credit quality remains strong. As we continue to build capital, we will be looking for ways to deploy it when we are confident our balance sheet moves are largely accomplished and capital growth will continue. Our vision is to be a leading and high performing commercial bank with strong core business deposits, excellent credit quality, and solid profitability. California is one of the most vibrant, attractive markets in the country, and we are proud to be the third largest bank headquartered here. Now that the conversion is complete, We'll begin stronger marketing efforts as a combined company to grow our client base and recruit talent in all of our markets and further the reputation we have built for providing a superior level of expertise, service, and technology, including robust treasury management and payment solutions. We continue to see opportunities to take advantage of our market position and strong balance sheet and to add attractive new client relationships with commercial customers. Above all else, our business is a people business. and we benefit from having talented and dedicated colleagues across our company and across the country. I want to thank them for their continued efforts to build our company. We'd like to say at Bank of California that banking is a team sport, and I couldn't be more proud of our team and all that we have accomplished together in just two full quarters. I am very confident in our success ahead. With that, operator, let's go ahead and open up the line for questions.
spk13: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, you may press star, then 2. At this time, we will pause just momentarily to assemble our roster. And our first question today will come from Matthew Clark with Piper Sandler. Please go ahead.
spk12: Hey, good morning, everyone. Good morning. First, on the FDIC assessment costs, I mean, they have been elevated for a while. Legacy PacWest, I think, was running $37 million in the last quarter before you all merged. And I think before the turmoil, they were high single digits. So what are you assuming in terms of relief around FDIC assessment costs in the fourth quarter and then how much do you think you might be able to eliminate assuming you get things right sized by year end and you also get brokered CDs down to some normal level? It sounds like it's going to take a little bit of time, but just trying to get a sense for how much are you assuming in the fourth quarter and how much would you still consider as excess in 2025?
spk09: Yeah, good question. So a couple things. First of all, this quarter you probably noticed that the increase was both on the normal assessment plus a catch-up for the special assessment. So there's those things. And just to remind everybody, when we make our accrual in this period as we're changing the company, we don't have a history of consistent FDIC assessments, so we have to make an estimation of what our assessment will be, and we accrue for that, and then we have a catch-up. As we get to normal levels, it's going to be kind of a more predictable assessment. And so that accrual will be probably much closer to the actual numbers. PacWest in normal times, and let's call that early 2023, excuse me, early 2022, mid 2022. And when they were larger than us, had a quarterly assessment of 10 million bucks, approximately. They ran at the end at about 36 million bucks. We think we're going to get down to that $10 million level. maybe $12 million because there's been some increase in FDIC costs that they've applied to all banks. So I think a $10 to $12 million number is fair. And we think we can get there by the fourth quarter. But if it's the first quarter, it's the first quarter. But as of right now, we think we can get there in the fourth quarter.
spk12: Okay. But that sounds like it's not baked into your 4Q expense guide.
spk09: Is that fair? I think it is. Joe, is that baked into our number?
spk06: Yeah, we assume we can get down to the high end of that range by the fourth quarter.
spk12: Okay. Got it. And then just on Civic, how much of non-interest expense relief will you get from selling that portfolio? I think there were some expenses tied to that book on a non-interest.
spk09: Yeah, there's headcount expense and other expenses. We are still servicing those loans, and we have commitments on some of the loans that we sell that will require some of that expense to continue. We think the relief is going to come at the end of the year, and you can think about it as a lot of the expense is gone, but you can think about it as maybe $2 million, $3 million that will continue to draw out and probably show up in the fourth quarter.
spk12: Okay. And then on that loan sale of $1.9 billion, how much do you think will go to pay down brokered CDs?
spk06: I think we're going to use, you know, probably somewhere north of half of that to pay down brokered CDs. It just sort of depends on some of the other actions we might want to take with our balance sheet.
spk12: Okay. And then just on credit, Can you isolate the charge-offs tied to the two previously identified office credits and whether or not you think there's anything else behind that within that portfolio? And then I'll just ask a quick one on classified, too.
spk09: Yeah. I don't expect it as of now, Matthew. I mean, look, we've been doing as much as we can on the portfolio to get ahead of things. I think we've signal that we were going to be appropriately aggressive in terms of looking at credit and viewing things and migrating credit, but with the whole goal of making sure that credit in future periods doesn't become a headwind when we're done with restructuring and become an earning asset story and start showing higher profitability. So we're trying to get ahead of it as much as we can. Obviously, we're environment dependent, and if there is some sort of economic downturn, if there's some sort of... you know, broader event in office or in, you know, the credit environment generally, we're going to be subject to that. Some people think that rates are going to come down only if there's a recession, meaning rates will come down, but we're probably not going to escape a recession. I currently think that's probably not going to happen. It looks like they're going to stick the landing, but it's hard to know. I mean, we are trying to be appropriately aggressive in looking at credit migrating now, which should be migrated so that we don't have headwinds when we want to show greater profitability.
spk12: Okay, great. And then just the increasing classified sounds like you're being a little proactive there on repricing risk. It looks like some of it showed up in commercial real estate, but can you just speak to kind of specific types of businesses or industries that drove that and your view on loss potential?
spk09: Yeah, it's mostly real estate and it's repricing risk. If we think that, you know, we do the modeling and we say, look, even if these loans are well secured and even if they have strong guarantors and strong support, you know, what does it look like when rates go higher before they come down relative to where they are now? And that doesn't mean we're going to lose a dime on them, but it means that we had to rate them differently and in the current environment, and I think it was a proactive thing that our team did, but it's primarily real estate loans.
spk13: Got it. Thanks.
spk09: Thank you, Matthew.
spk13: And our next question will come from Jared Shaw with Barclays. Please go ahead.
spk05: Hey, guys. Good morning. You know, I think maybe to start off, when we look at where we exit 2024 from an earning asset, point of view, with all the puts and takes from loan sales and some of the restructuring, where do you think a good spot from an earning asset standpoint would be to start 2025?
spk09: I think it's going to be hard to say because it's going to depend on growth and some of the other portfolios and the pace of runoff. I'll try to give you an answer this way. This quarter we originated, we have a billion of new commitments this quarter. Only about 38% of it funded, which is a very low percent from my perspective relative to what I've seen in past periods. So we expect loan growth and outstandings to pick up as we get closer to 25 and obviously through 25 if the economy holds up. However, for now, it feels like runoff is going to outpace originations, which is what we said from the beginning of the year. If that's the case, and we just sold down $2 billion of Civic, loans could go lower from where we are right now. The other part of it is, though, we have about a billion of loans that are going to reprice higher that carry coupons of about 4%. And those are going to come out of their fixed rate period and have to reprice higher. So we do have some good news on existing loans that are going to reprice higher as opposed to, you know, just on the origination side. But it's hard to know, it's hard to peg exactly what that number is. Joe, I don't know if you have a sense for what number we could guide to.
spk06: Yeah, you know, I'm going to give you a range, say anywhere from like, you know, it's 31, 30 and a half billion up to like maybe 32 billion is a good range of earning assets.
spk05: Okay. Okay. And as, as, as sort of a year end starting or as a, as a starting point for next year, year end this year.
spk06: Yeah. Okay. It's going to depend upon, you know, how long growth, you know, manifest in the fourth, in the rest of the year.
spk05: Yep. Okay. And then, Looking at the lender finance, you talked about reengaging there. How much of a challenge is that going to be? If that's an area that you sort of telegraphed that you're exiting and you're stepping back, is there a challenge to retain those relationships and reengage with those relationships or did it not really get to that point in terms of actual relationship management?
spk09: I don't think it got to that point. I mean, we have about just for perspective, I mean, I think with the $350,000 that we bought, the portfolio, I'm doing this from memory, so I'm going to look up the exact number, is going to be close to $700 million. So we have a good starting point in terms of a portfolio. Yeah, it was $438,000 at the end of second quarter. We bought $350,000, so we're close to $750,000, $800 million. We think that's a very strong base that we can grow from with great relationships. I don't want to talk about the team too much, but More to come on that, and I think it's something we're going to be looking at expanding, along with some other areas that we think will expand. I think warehouse is going to continue to pick up. We have a strong team there and seeing good momentum. Construction has been picking up, and that's obviously loans that are funding that previously have originated and are starting to go vertical because usually the equity of the client goes in first and then our piece picks up. But we're seeing some demand on new construction loans right now, and we're leaning into that. And I think there are some other good C&I areas that seem to be picking up. But specifically on lender finance, I think we're starting with a strong base. And I think the word is out that we're in the market. And especially with buying back, that Aries portfolio was pretty competitive. And we got it, and there was a lot of news around us getting that. So I think the word will help us.
spk05: Okay. Okay. And then on deposits, obviously, still a lot of movement there with different components as we go through this year. But for 2025, how should we be thinking about the longer-term growth trajectory of deposits, keeping in mind the guide that you're laying out in terms of the loan-to-deposit ratio and the DDAs as a percentage of deposits? What's the... What's the view for longer-term deposit growth rate?
spk09: I just think we're going to be able to maintain our loan-to-deposit ratio around the band that we talked about. And so loans and deposits are going to move in relative tandem. Obviously, we're closer to 85 now with the sale of Civic on a core basis. So I think that we're obviously going to let our loans float up. uh, without deposits keeping pace. But once we're there, I think they're going to keep pace with each other. Uh, it's important to me that we don't get out above our, beyond our skis and that we always maintain growth in deposits and keep some balance there, um, which I, I'm confident that we can do.
spk05: Okay. Thanks. And just finally for me, you know, with the, with the expectation that we're in that, um, expense range of one 95 to 200 in fourth quarter, um, are you feeling optimistic around positive operating leverage for next year? Should we be seeing a more measured, moderate pace of expense growth with the backdrop of the broader growth?
spk09: No, I think we're in a good spot to continue to show operating leverage and expand from there. One thing that we're trying to do, Jared, and I think this is probably coming across pretty clearly, is set the bar pretty low. I mean, we We obviously came out of the gate fairly hot, and I've been specific about this, that we gave that guidance for fourth quarter of 24. There were a whole bunch of reasons why when we announced the deal we chose to do that. And, you know, hindsight is 20-20. What it did is it focused people on a specific event in a specific period as opposed to the company that we're creating. And people ended up creating estimates off of that that backed into the quarterly guidance that we didn't provide, but people are like, all right, if they're going to get there, then this must mean this and this must mean this, which basically set us up for kind of negative delivery regardless of what we tried to do. And we're trying to reset it. And I think it's really important that we reset the narrative about the franchise that we're creating. We have a history of doing really good work and creating a really valuable franchise, both at Bank of California and the teams at PacWest. And I'm very, very confident in what we're doing here. And the things that we've pulled off in a short amount of time are pretty damn heroic, and our team is fantastic. And so we are trying to reset the narrative. We're trying to set the bar lower. We're trying to set expectations lower so that we don't have to fight against kind of the narrative that we might have improperly created the first time out of the gate. And again, hindsight's 20-20. We have not moved off our targets. I think it's important that those profitability targets be established. And we did say that as we got through the year, we would try to give better guidance but it was very hard to do when we, you know, when we signed up the merger and when we had just closed the deal. And so hopefully people understand what we're trying to do here.
spk05: Okay. Uh, thanks. I'll step back.
spk13: Appreciate it. And our next question will come from David Feaster with Raymond James. Please go ahead. Hey, good morning, everybody.
spk03: Morning. Um, You know, we've talked a lot about, you know, creating a higher quality bank. And obviously, you've been very active executing on that. But you know, the challenge is the earnings trajectory just in the short run is there's a lot of loans and security that we need to reprice. I just was you touched a bit about it. I think you said about a billion in the back half of the year, but I'm just kind of curious how you think about the repricing dynamics of a book if you could walk through some of the timing you know, especially heading into the next year, whether we should expect that pace of repricing to maybe accelerate?
spk09: Sure. First of all, I think our margin is unique in that we're, you know, both our cost of deposits are going down, our cost of funds are going down, and our margin is expanding at a time when others are doing the opposite. And this is not dissimilar to what we did at Bank of California, where we went in exactly the opposite direction of You know, when everybody else was trying to expand their margin, it was contracting and ours was expanding. This is the same thing. We've done this before. Our deposits are really short right now. Our term deposits are all under a year. We're keeping them there. Like I said, we could pull forward a lot more profitability by just choosing to go longer duration on deposits and locking in two-year money. And, you know, it's worth millions of dollars every quarter, but we don't think that's the right thing for the long term. We think it's better to stay short, wait for rates to come down, and, you know, gradually reprice deposits for the long term. And so I think the repricing of deposits is going to be an important story for us over the next 12 months. You know, the timing of it is rate dependent. It depends on when rates – obviously, we're bringing in NIV, and that's bringing us down, but the accelerator will be when rates come down and Some people think it's going to happen this quarter. I don't know. But, you know, we have it happening in the back half of the year. Maybe it's September. Maybe it's November, December. But, you know, when it happens, it happens, and I think we'll continue from there. And on the loan side, there's so much stuff running off that our loan yield is going to continue to climb even as rates come down, in my view, because the stuff that's running off is just so low that even as rates – in this current environment – We have enough buffer, even with rates coming down slightly, that our loans are still going to reprice higher than what's coming off the books. So overall, I feel like our margin will continue to expand for those reasons. It's hard to see it not expanding. The pace at which it expands is a function of rates, but we've been able to make very steady progress on our margin. I don't know that I can be more specific than that, David, because it will depend upon the timing of rate cuts.
spk06: Jared, I'll just offer that. On page 10 of the deck, you can see that about 40% of our assets are either floating rate or will be repricing within a year. Okay. That's helpful.
spk03: And then you talked a lot about bringing new relationships to the bank. You've obviously had a lot of success. I'm curious from your perspective, what's attracting these new relationships to the bank? where are you having success bringing these relationships from and, and what, what segments are kind of driving it? I think we've talked in the past about HOA and venture, um, being, being a focus, but I'm just kind of curious, um, where you're having success and what do you think some of the drivers are?
spk09: Yeah. Well, first of all, I'd say it's very broad based second. I would say that, um, I, I hope that we achieve more momentum because we've been a little bit, uh, The last two months, I would say, we've been very cautious about it because we didn't want to bring over customers and then have them go through a conversion. Our marketing efforts are going to pick up now that conversion is through the gate. It's going to allow us to really unlock the full value of this combined franchise as one company on one system. It's going to make it a lot easier for our teams across the country to do what they're doing. There's a couple of differentiators, and I can tell you where we're getting it. One is we're competing a lot with the disruption that is occurring at some of these larger banks. I like to say that for many of our competitors, their clients ended up with them, they didn't choose them. If you're a Union Bank client, formerly Union Bank, you ended up at U.S. Bank, you didn't choose Union Bank. If you're a First Republic client, you ended up at Chase, you didn't choose Chase. I realize some people could say the same things about PacWest clients ending up at Bank of California, but we were much more similar as companies. And we had a much more common, I would say, DNA and thread across our company than those other banks that I described ending up in these larger banks. So there's been a lot of disruption in our markets, especially in California. You guys have heard me read off the list of banks that no longer exist. And therefore, we're going after those disrupted relationships. They're all good targets for us, and I would say it's a target-rich environment. And our treasury management folks are deeply experienced and are brought in with our business teams across the company to help leverage kind of the tools that we have and the technology that we have and provide a compelling case of why they should be banking with us. To bank with somebody that knows you and understands you is meaningful. Another thing that I've shared, and this is in our market, but it might exist in other markets for other banks, is the nature of the relationship managers that we have. They're very, very experienced. And so a company that has $5 million in revenue, $50 million in revenue, $100 million in revenue, $100,000 in deposits or $5 million in deposits or more than that, they're going to work with somebody that's very experienced, that's fundamentally not an entry-level employee. The levels that I just described at some of our larger competitors, they will be relegated to employees that are talented but are probably much more junior in that organization overall. And that really stands out when we speak with clients is they realize that they're working with very seasoned individuals. And so I would say that it's broad-based. We're just getting started. I like the momentum that we have. But, again, we've held off on marketing because we didn't want to bring people into a bank that was going to get converted. So let's see where we go from here, but I like the momentum so far.
spk03: Okay. Okay. That's great. That's helpful color. And then I know you've made a bunch of new hires lately, and you've focused, you know, part of the strategy is focusing on being more tech forward and expanding the tech offerings. I'm just kind of curious maybe what are some of the things that you guys are working on right now? And, you know, just kind of any thoughts on the digital strategy and just, you know, the tech initiatives that you're primarily focused on?
spk09: I could talk about this for hours. I love the topic. You know, we are constantly investing in our company. We have a very focused list of objectives. And so, you know, you can get overwhelmed by your tech initiatives and, you know, you can fill up more hours than you have in terms of bodies multiplied by the hours in the week and you'll never get it all done and you'll divide and you will never conquer. And so we are very focused on what we're going to do and how we're going to do it and have a a priority list of things that we think are really going to move the needle. And it's divided among internal projects, things that will help our colleagues be more efficient. You know, we deployed ServiceNow. We have Salesforce getting up and running. We have Encino that's a full workflow program for our employees and some other specific back office and digital enhancements. In addition, we have client-facing things and things that are really going to help our clients. So, you know, on the payment side, our team has done a really good job of launching our credit card platform and rolling out credit cards to clients. We are an issuer of cards, and we have a digital platform that accompanies it. And the adoption of cards is something that will make a bigger impact down the road. We rolled out DeepStack for HOA. So now DeepStack is the power behind our HOA platform, accepting payments for credit cards for those who want to pay their their HOA payments. More initiatives like that are coming, and obviously DeepStack is something that we said is going to have a bigger impact in 25. I hope to have some announcements later in the year about that, but we had to get through conversion first, and we have other tech initiatives which are going to follow.
spk03: Yeah, that's helpful. Thanks, everybody.
spk09: Thank you, David.
spk13: And our next question will come from Chris McGrady with KBW. Please go ahead.
spk02: Oh, great.
spk13: Hey, Jared. Good morning.
spk02: The rate component of your guide or your long-term targets is fairly important. If the forward curve comes in, as we expect, one, two this year, and roughly three to four more next year, can you get close to those targets by the end of next year?
spk09: Chris, can you say your question? You cut out on my end a little bit. Oh, yeah, no worries. Good question. Thanks.
spk02: Yeah. So rates are a big piece of the timing of getting to your guide. If the forward curve is right, which it generally is not, but if the forward curve is right this year and you get one to two and then a few more next year, I guess how close can you get to those long-term targets by maybe exit 25 into 26? The 1% – 1 ROA and the 13% return on tangible common?
spk09: If we – Yes. Because we have, you know, just kind of, well, it's definitely going to accelerate us for sure. We're being as conservative as we can right now. You know, we're hell bent on hitting our targets. And by the end of 25, I think that's fully reasonable.
spk02: And then on capital, over time, can you just remind us the binding ratio? when you might look at a buyback, given your stocks below book, and any other considerations?
spk09: We've said that we think we need to show capital sustainable, get to 11, and then we can start those conversations in terms of CT1. And then the question is, do you need to maintain it at 11? Is it around 11? And so we're prepared to have those conversations when we're when we're there and ahead of time, obviously, with our regulators.
spk06: Okay.
spk02: And then, Joe, maybe one – okay, sorry, Joe.
spk06: I was going to say we're looking at lots of different options in those scenarios as we generate capital from the CITIC sale, from other actions, how best to utilize that capital.
spk02: Okay. That was the bond repositioning comment. Okay. And how about the tax rate, Joe, going forward after this quarter's elevated number?
spk06: Yeah, we expected to be back down to the 27, 28%. This was a one-time elevation. Okay, perfect. Thank you.
spk13: And our next question will come from Andrew Terrell with Stevens. Please go ahead. Hey, good morning.
spk11: Good morning. I wanted to follow up just on that last question around the kind of 11% CT1, maybe less in the context of buyback, but then on the point of securities repositioning, I guess, do you feel like you need to get to 11% or around 11% before you start repositioning the securities portfolio? I guess more of a question of kind of timing around potential security sales and if you're comfortable doing it before you reach 11%.
spk09: Yeah, I mean, yeah, we'd start doing it now. That 11% was more about other uses of capital. We would certainly be willing to use some of that capital to reposition securities now. Joe, you agree with that?
spk06: Yeah, especially when we have one-off contributions to capital like the civic transaction. You know, we can use some of that capital to immediately reposition those securities and higher yielding securities has immediately beneficial impact to our earnings going forward and will help us generate more capital going forward. So we're considering, you know, we're looking at that. We're looking at other options as well, consistently reevaluating and trying to optimize the balance sheet, optimize our capital levels and our earnings profile.
spk11: Yeah, understood. And is there a level in which kind of as you contemplate securities repositioning transactions, a level which you would not want to take CET1 below?
spk06: I don't think we will. I mean, we came out of the gate at 10%, but I don't think that's really our floor. I think our goal is to continue to grow capital consistent with our earnings profile and So I think the way to think about it is we would like to show steady progress on that target, you know, that march towards 11% or so. And if we end up in situations where we have a little excess, we might use that to reposition securities or other actions that can improve the profitability of the franchise.
spk11: Okay. Makes sense. I appreciate it. On the deposits this quarter, it's good to see the non-interest-bearing deposits really held in there. I want to ask on the interest-checking bucket, it looked like it came down $520 or so million this quarter. Any color as to the flows in there? I'm not sure if there were any broker deposits that show up in that category or not, but any color on what you're seeing in the interest-checking category?
spk09: There was no brokered in there. You know, a big part of that was movement that we saw at the end of the quarter that looks like it's come back a little bit. But I don't have a lot more detail for you now. It looked like just normal movements.
spk06: Yeah. And, you know, we also do, you know, I think we've told Steph in the beginning that we had some higher cost depositors that over time we were looking to move out and replace with lower cost funding. And so some of that happened this quarter. We contributed to part of that decrease.
spk11: Okay. And then just maybe to clarify on the expenses, so the 195 to 200 million 4Q expense guidance does include an assumption for the insurance assessment to come down to the, call it, $10, $12 million territory. Is that right?
spk06: I'd say the high end of that range.
spk11: Okay. Thank you for taking the questions.
spk09: Thank you, Andrew.
spk13: Our next question will come from Brandon King with Truist Securities. Please go ahead.
spk07: Hey, a question on the 4Q NIM guidance of 293%. Could you just elaborate kind of what are the biggest swing factors for you to get to the higher end or to the lower end of that range?
spk06: You know, there's a lot of uncertainty in the market right now with yields and other things and how rate cuts might impact customer behavior. So we're naturally being very cautious with our NIM guidance as we think through that. We should have some benefit in our NIM from, you know, the civic transaction just from, you know, if you look at those civic loans, there was only about a 1% spread of our marginal cost of borrowing. So that should benefit NIM. We should also get some benefit from the security-free positioning and then continue to grow NIB. So, you know, we look for, you know, if you're looking for what the higher end range, I think we, you know, that's a pretty good, feel pretty comfortable with this range. And we have, you know, potential upside if we're continuing to grow NIB faster or if we have other contributions due to either accelerated rate cuts or other types of actions.
spk07: Okay. And that, I guess that cost of funds expectation over that 20 to 25 basis point decline is How much of that do you think just based off of just interest rates moving lower versus, you know, the other actions on the funding side of the balance sheet?
spk06: We haven't broken that out specifically with respect to interest rates, but we only have one cut baked into our forecast for the year, and the rest of it is from other actions. Just the CIVIC action alone will contribute just that 1% spread. That contributes 5 to 10 basis points to the lower cost of funds as we're going to use the liquidity generated from CIVIC to pay down higher cost broker deposits. So then when you So that would then I be, and, um, you know, or you are really the bigger drivers than rate cuts.
spk07: Okay. Yeah. I was trying to just see, it seems like you can get that 20 basis points even without any rate cuts this year. So that was kind of what I was getting to. Um, okay. And, and then, you know, a follow up on the security restructuring or potential security restructuring. How are you thinking about a potential earn back for that sort of transaction?
spk06: You know, we're looking, we have looked at that and then we're, we're still considering our options, but you know, it's probably in the, you know, somewhere a little bit north of two years, probably, uh, earn back. Um, but we still think that the benefit is, is pretty, uh, powerful.
spk09: Yeah. When you have a one-time capital event, like the sale of civic and it generates as much capital as it did earn back analysis is important, but we're also looking at permanent enhancements of profitability. And so, you know, you're weighing those things against each other.
spk07: Okay. Makes sense. I'll step back in the queue.
spk13: Thank you. And our next question will come from Gary Tanner with DA Davidson. Please go ahead.
spk11: Gary?
spk13: Gary, your line is open.
spk08: Sorry about that. I was on mute. Good morning. Joe, you just alluded to this answering a question a moment ago, but in terms of the civic loan yield, you talked about it just being a 1% spread. What was the yield in that portfolio, actually, just on a yield basis?
spk06: It was right around 6%, maybe right around there, a little bit less.
spk09: Yeah, the loans we sold were So we still have a bridge portfolio that's $250 million. That's a little bit higher yielding. That's very short term. But the loans we sold were, Joe's right, it's around there, maybe six and a quarter.
spk08: Okay, that's helpful. And then just to clarify on your fourth quarter outlook slide, that NIM assumption of $290 to $3, that is inclusive of an assumed balance sheet repositioning, or would the repositioning be additive to that?
spk06: It is inclusive, but as we said, we've tried to be very cautious with our NIM guidance given the uncertainty that's in the environment right now.
spk08: Okay. And then on the FDIC assessment comments you made, Jared, I was a little bit confused. The increase this quarter was more related to, it looked like in the slides, to a first quarter reduction. Was this – is this quarter – is there anything unusual in this quarter other than just the ongoing PacWest elevated assessment level, or is there some other noise in this quarter?
spk01: I was confused about that.
spk09: There was a special assessment that was assessed against all banks that we have to trip as well. Yeah.
spk06: Okay.
spk09: You have to make an estimate. You have to make an estimate for that. Go ahead, Joe.
spk06: I was just going to say there was some moving pieces in both quarters, and it gets kind of complicated because you get this bill in arrears, and then there's You know, you have the core base, you have the core amount, then you have this, as Jarrett speaks to, the special assessment. But then you also have the FDIC will occasionally say, well, you know, here's an extra charge or here's a reduction in your charges related to some work we did for quarters in the past and we're truing up for that. And so, you know, you get these bills late in arrears and you just basically book to it. And I think due to some of the complexity with PacWest, what they went through in 2020, three, that we've had some true ups in our bills that have come through. And so it's just a little noise in the two quarters.
spk09: That's why I think that the guide that we're giving for what normal would look like is important. And we're just trying to move to there. And our outlook right now is higher end of that range that we gave 10 to 12 in Q4. Okay.
spk08: Thanks for the rest of my questions were asked.
spk09: Thanks, Gary.
spk13: As a reminder, if you have a question, you may press star or the 1 to join the queue. Our next question will come from David Ciaverini with Wedbush Securities. Please go ahead.
spk04: Hi, thanks. A couple of clarification questions. The first one related to the continuing optimization of the balance sheet. Could additional optimization include additional portfolio sales, or is that more a reference to the securities repositioning?
spk09: I think we're more likely to sell securities than sell portfolios at this point. We have some non-core portfolios, but it doesn't seem like it would be actionable to sell those right now, especially at the pace at which they're running off. I would never say never because, you know, something comes up and we see a portfolio we might want to sell. But at this point, it's more likely that we restructure securities than sell loan portfolios. Also, because I want to turn into an earning asset story. And I think we have the ability to build up assets. And if you start, you know, Civic made complete sense to sell. It was really a negative carrier at best neutral. And it was a lot of work and it was throwing a lot of noise into our numbers. There aren't a lot of other portfolios in our book that look like that. There might be one or two that I'm thinking of, but at this point, it's most likely that we will only restructure securities.
spk04: Got it. Thanks for that. And then a follow-up on the expense outlook. It sounds like the $195 to $200 million might be conservative, given you'll get there from the FDIC assessment alone. Any other opportunities for expense savings, or is that the main driver?
spk09: There's quite a few. Go ahead, Joe.
spk06: I was just going to say, one thing I would just point out when you say we'll be there from the FDIC alone, I'll just remind you that if you look on page 30 of the deck, that there were numerous noteworthy items that impacted expenses during the quarter. So while we do believe our core controllable expenses were down 5% in the quarter, total expenses probably weren't quite as good as maybe that number looked when you add back some of the things that were on that page. So we still have some work to do to achieve our target in the fourth quarter. Now, in terms of what further opportunities are is, you know, we continue to optimize our operations, our platforms, our processes, our systems, and looking for opportunities to reduce costs wherever we can. We're going through all of our vendor spend line item by line item, and we are doing other initiatives that in facilities and other large cost areas to drive our costs down while we continue to be able to invest in the platform in the areas that we want to grow.
spk01: Very helpful. Thank you.
spk09: Yeah, and David, on that point, Joe, that's well said. I think, which is why we tried to draw a line to show that if we achieved our target at the end of the fourth quarter, it's going to be a 30%, you know, 30%, 30% plus from Q1 normalized. or Q4 when we closed the deal. And so, you know, even this quarter might not, like at Q3, the OPEX might not look like a big drop because there was so much noise in the second quarter. So we're trying to show if we get to this number at the end of Q3, at the end of Q4, how much it was relative to our starting point.
spk04: Got it. Thank you.
spk13: Thank you. And our next question will come from Tim Coffey with Jani. Please go ahead.
spk10: Hey, thanks for sharing. Good morning. So you've been around the PacWest portfolio now for half a year, and I'm wondering if you're starting to get a better feel for its puts and takes in terms of, you know, what comes in the pipeline and gets funded and what actually falls out.
spk09: Getting there in terms of the loan pipeline. Yeah. Yeah, we're getting there. So we've been doing this for six months. I'd say we had good pipeline reports for four. And so we had to reorganize the teams. We spotted people. People changed roles. We gave them goals. They have to build that up themselves. Remember, they were in hunker down mode and weren't out there beating the streets trying to generate loans. And so as much as it's been six months that we've been a combined company, you know, two full quarters, it's been about four months of pipelines. And so it's not that long. But I've been watching it and seeing stuff, and I'm getting a better sense for it.
spk10: Okay. And how do you feel about PacWest's portfolio credit quality?
spk09: Terrific. Look, the office credits were what we were focused on from the outset. They've behaved as we thought they probably would. I think our reserve levels, when you – what I call our, you know, coverage, which includes the first loss on the single family loans, and you have the marks on the Bank of California portfolio, it's 1.8%. That's a big reserve. So I feel like we're well covered for the portfolio that we have. And I think we're on top of the loans that, you know, might pose risk. The office loans, I think they're less than 4% of our combined portfolio at this point. And, you know, we migrated what we thought were repricing risk loans when they came off their fixed rate portfolio, I think those loans are going to be fine. But we thought it was smart to migrate them and make sure we got a little bigger reserve against them going forward. So I think we're taking the right actions and we feel good about our portfolio.
spk10: Okay, great. Thank you. Those are my questions.
spk09: Thank you, Tim.
spk13: And with no remaining questions, we will conclude today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines.
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