Banc of California (NYSE: NYSE:BANC) has reported achieving its objectives for the first quarter, marking solid progress in key initiatives. The company has seen a rise in net interest income and an expansion in net interest margin due to successful balance sheet repositioning.
Additionally, Banc of California has experienced growth in new business account relationships and an increase in noninterest-bearing deposit balances, while operating expenses have trended lower than anticipated. Despite a decline in total assets from using cash to pay down borrowings, loan balances have remained stable.
The bank's conservative approach to underwriting and loan pricing, coupled with proactive credit management, has contributed to its financial health. Banc of California's net interest income reached $239.1 million, and its net interest margin increased to 2.78%, with noninterest income at $33.8 million and a decrease in noninterest expense by $73 million.
Key Takeaways
- Banc of California has seen an increase in net interest income and net interest margin.
- New business account relationships have grown, and noninterest-bearing deposit balances have increased.
- Operating expenses have been lower than expected, contributing to an increase in tangible book value per share.
- Total assets declined due to repayment of borrowings, but loan balances remained stable.
- The bank maintains a conservative approach to credit management, with specific reserves for nonperforming loans.
- Expectations for the fourth quarter of 2024 include a return on assets (ROA) of approximately 1.1% and a return on tangible common equity (ROTC) of approximately 13%.
Company Outlook
- Banc of California plans to reduce interest and operating expenses while growing deposits and maintaining a strong balance sheet.
- The bank aims to improve margins and profitability by issuing new loans at higher rates than those running off.
- A focus on growing noninterest-bearing deposits is expected to enhance the deposit mix and reduce deposit costs.
- Long-term growth and new client relationships remain a priority, with profitability targets set for 2024.
Bearish Highlights
- Total deposits decreased by $1.5 billion due to intentional runoff of high-rate, noncore relationships.
- The single-family portfolio acquired from PacWest had a high delinquency rate, which the bank is working to improve.
Bullish Highlights
- The core loan portfolio grew by 4% annually.
- The bank is successfully competing against larger banks and attracting customers from institutions like JPMorgan, Union Bank, and U.S. Bank.
- The payments platform, DeepStack, is anticipated to significantly impact the bank's performance next year.
Misses
- The bank did not provide specific guidance on net interest income or income statement numbers for future periods.
Q&A Highlights
- CEO Jared Wolff discussed building up capital and the potential sale of noncore assets, such as the CIVIC portfolio, to accelerate progress towards goals.
- CFO Joseph Kauder provided insights into accretion income, including expectations of stable accretion from both Banc of California and PacWest loan portfolios.
- The company is focused on lowering deposit costs and has a team dedicated to increasing noninterest-bearing deposits.
- Credit migration was addressed as a normalization, with appropriate provisions taken for loans that turned nonperforming.
Banc of California's conservative strategy and proactive management have positioned the bank to meet its profitability and growth targets, despite some challenges in the market. With a strong balance sheet and strategic initiatives in place, the bank is on track to achieve its goals for the fourth quarter of 2024 and beyond.
InvestingPro Insights
Banc of California (NYSE: BANC) has demonstrated not only a strategic approach to its financial operations but also a keen focus on growth and profitability. According to InvestingPro Tips, the bank is expected to see net income growth and sales growth in the current year, which aligns with its objectives and the positive trends reported in its quarterly results. However, it's worth noting that analysts have revised their earnings downwards for the upcoming period, which could be a factor for investors to consider.
The InvestingPro Data provides a snapshot of the bank's financial health and market performance. The bank's market capitalization stands at $2.41 billion, reflecting its size and stability within the industry. Despite the challenges, analysts predict that the company will be profitable this year, which could be an encouraging sign for potential investors. The bank's Price to Book ratio as of the last twelve months leading up to Q1 2024 is 0.83, suggesting that the stock might be undervalued relative to its assets.
Investors looking for more in-depth analysis and additional tips can find them on InvestingPro's platform, where there are 6 more tips listed for Banc of California. To gain access to these insights, investors can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
With its conservative strategy and the insights provided by InvestingPro, Banc of California appears well-positioned to navigate the current financial landscape and continue its trajectory towards achieving its long-term goals.
Full transcript - Banc of California (BANC) Q1 2024:
Operator: Hello, and welcome to Banc of California's First Quarter Earnings Conference Call. [Operator Instructions] Today's call is being recorded and a copy of the recording will be available later today on the company's Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release, which is available on the company's Investor Relations website. The reference presentation is also available on the company's Investor Relations website. Before we begin, we would like to direct everyone to the company's safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would now like to turn the conference over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.
Jared Wolff: Welcome to Banco California's first quarter earnings call. Joining me on today's call are Joe Kauder, our CFO, and Will 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 Banc 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 30, 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 noninterest-bearing deposit balances, much of which came from the new relationships. The increase in NIB 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 are 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% non-annualized report. 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 perceive to be slow loan demand, we had good core production in a variety of our portfolios, which reflects the strength of our team and our market position. This is true while we are also remaining conservative to ensure that loans meet our disciplined underwriting and pricing criteria. But with loans coming on the books at higher rates than what is running off, we 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 nonperforming 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 nonperforming 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 represent 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-linked notes on the SFR portfolio, and it also does not reflect the credit marks taken on the legacy Banc of California portfolio at the closing of the merger. When these are factored in, our ACL to total loans is well north of 1.8%. Now I'll hand it over to Joe, who will provide some additional financial information, and I'll have some closing remarks, before we open up the line for questions. Joe?
Joseph Kauder: Thank you, Jared. Again, the prior quarter only included 1 month of combined operations and had a number of significant onetime items. I'm going to limit the quarter comparisons and review our year for 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 Banc of California loans, along with the origination of higher-yielding loans in our core portfolio and an increase in yield associated with purchase accounting marks. The average cost of interest-bearing liabilities decreased 59 basis points from the fourth quarter of 2023 and 81 basis points from December of 2023, reflecting a full quarter of benefits of the balance sheet restructuring action taken post merger, the use of excess liquidity to continue to pay down high-cost wholesale funding sources in Q1 of 2024, the lower cost of core deposits driven by an increase in our noninterest-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 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 expense of noncore 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 noninterest income was $33.8 million, with all of our major areas of recurring noninterest 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 noninterest 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 noninterest-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 noninterest-bearing deposits increasing from 25.6% to 27.1% of total deposits. In addition, our wholesale funding percentage dropped 2% to 16.9%, and our cash level was rightsized to approximately 8.5%, consistent with our original merger targets. Note, we continue to retain robust liquidity with our total primary and secondary liquidity being 2.4x our total uninsured and uncollateralized deposits. At this time, I will turn the call back over to Jared.
Jared Wolff: 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 noncore portfolios with new fundings, which should keep our total loans relatively flat. But the new loans are expected to average higher rates than what is running off, so production should continue to be accretive to our margins 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 additional value being created for shareholders in the coming years. And most importantly, Banc 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 Banc 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.
Operator: [Operator Instructions] The first question comes from Jared Shaw with Barclays.
Jared Shaw: Maybe just starting on the margin and on spread. When you go back to the January call and the expectation for yield pickup and funding cost improvement coming from the end of the year, it feels like 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, 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?
Jared Wolff: 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've 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 are right on top of our budget. 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.
Joseph Kauder: Yes. So as Jared said, I do want to echo, for our internal plan, we did come in right on top of our plan for the quarter. We have appropriately been conservative in that estimate. 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 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 noninterest-bearing and bringing down the cost of our interest-bearing core deposits and also originating new loans at higher spreads.
Jared Wolff: Joe, do you want to touch on the accretion?
Joseph Kauder: The accretion is -- 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, and it's not an insignificant piece of our results, but it wasn't an enormous component of our results for the quarter.
Jared Shaw: Okay. All right. And then just on the operating expenses, where should we be seeing savings there to bring that ratio more down into the middle of the range?
Jared Wolff: There's a whole bunch of places, I mean, we're seeing it. I mean, 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 million to $10 million a quarter. And at the height -- 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.
Operator: The next question comes from Matthew Clark with Piper Sandler.
Matthew Clark: 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 into 2Q.
Joseph Kauder: So we decided after last quarter that we were no longer going to give spot rates. I think I gave you the monthly average in my speech, and I can go back over that. At the end of the year, we found that the step-off number that we provided included a very large amount of onetime accretion due to a high volume of payoff activity and, in retrospect, was probably not an appropriate indicator of our 1Q '24 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?
Matthew Clark: Yes. Understood. And then just...
Jared Wolff: And Matthew, to that point, I mean, on Page 5 of our investor deck, one of the things that we want 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 1.43%, December was 2.15%, March was 2.82%. We continue to see that stepping up. And that's just -- rather than being one day at the end of the month, we're providing the monthly margin to show where it's going. So hopefully, that's helpful. So you can think of that 2.82% as the stepping off point for Q2. And obviously, we're going to try to improve it from there.
Matthew Clark: Okay. Got it. And then just maybe, Jared, on interest expense, maybe between you and Joe. 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, both on the wholesale side and core deposit side?
Jared Wolff: Well, there's a couple of things. I mean the chart on Page 9, I think, shows the reduction that we've had to date in terms of our cost of deposits and the cost of liabilities overall. So there's a couple of levers. One is, obviously, NIB has a big impact on it because every dollar we bring in NIB is basically saving 5% of brokered 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 the quarter. As we bring in deposits of all pipes, we can reduce the more expensive deposits. And the brokered 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-to-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-to-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, as we're trying to be strategic there as well.
Matthew Clark: Okay. 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 that it will happen in '25?
Jared Wolff: Yes. No. No, you should not. We will get to our goals without redeeming the preferred. One of the things that we think we need to do is show stable and a buildup of capital before we can start redeeming capital. So we think that we want to get through this full year and show that we are good stewards of capital and 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.
Operator: The next question comes from Chris McGratty with KBW.
Chris McGratty: 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?
Jared Wolff: 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 really closely. As of right now, it looks like we're right on it. And I mean, the impediments to getting there are obviously rates going up, I think something that everybody thinks is unlikely, but if that does happen, I think 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 kind of 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. Revenues can usually taking care of themselves in terms of loans are coming on nicely. Our teams are 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. Chris, like I don't want to come up with a whole bunch of strawman. 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 rates do something that people can't foresee.
Chris McGratty: Okay. I guess, maybe what else might be on the table? You're accountable to the Street in the fourth quarter, but you got a couple of quarters in between. What else might be on the table for either balance sheet repositioning, kind of an acceleration to get to those goals?
Jared Wolff: Sure. Yes, we've talked about CIVIC and our appetite to potentially sell pieces of the portfolio that are noncore, whether it's CIVIC or something else. We have some loans that were held for sale that were CIVIC that we moved off the balance sheet, that we had for sale, that were sold. As I mentioned in my comments, that 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 doing that. We haven't made the decision that we're going to do it for sure, but we're open to doing it, and we 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.
Chris McGratty: That's great. And then just one housekeeping for Joe. The accretion income, I guess, to put a finer point on the 32.5%, I guess, what's the scheduled accretion, or what's the pool from which to draw over the next several quarters?
Joseph Kauder: Well, that number is the total accretion. And if you look back at PacWest financial statements, they had accretion on purchased loans that predated the accounting acquisition of Banc of California. So that's a total number. And so there's a portion of that, that relates to the Banc of California loan portfolio. That's a number we haven't disclosed yet publicly, but that number is not a super meaning -- as I said earlier, it's not a super-meaningful number for the quarter.
Chris McGratty: Okay. So totally get the 2 different parts, but generally, stable accretion is kind of the message near term or maybe downward bias?
Joseph Kauder: I think you should think about stable accretion going forward.
Operator: The next question comes from Timur Braziler with Wells Fargo.
Timur Braziler: Well, not 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 1Q. Was there a lot of accelerated accretion in that number? Is that delta entirely from the dynamic that you're talking about from kind of the carryforward on PacWest side? 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.
Joseph Kauder: So the $32 million includes accretion from -- let's go back to the number that we put out at the end of last year was on just the Banc 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, which includes accretions on other loan portfolios beyond just the Banc 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 $1 million or $2 million. But other than that, pretty much that was the accretion -- for the Banc of California numbers, it was the stable accretion number that we expect to see, coupled with the accretions on the other portfolio that PacWest had previously acquired.
Timur Braziler: Okay. Got it. And then maybe looking at the transformation of the deposit base. So the cost for the quarter was 2.63%. The spot rate at the end of the quarter was 2.54%. 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 noninterest-bearing deposits. But how close are we to reaching a level of stability in that deposit cost? I mean is that 2.54% a pretty indicative number of working sub-3%. How much lower could that go as you continue to report in that book?
Jared Wolff: I mean look, my view is that we're going to keep pushing it down. I mean, it's all a function of how good we do on bringing in NIB. And anybody that followed the Banc 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 NIB of well above 30% -- 35% to 40%. Banc of California got close to -- it 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.
Timur Braziler: Okay. 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, 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?
Joseph Kauder: Yes. 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 net interest income improvement throughout the year.
Timur Braziler: Great. And then just last for me on the three office loans that had migration into nonperformers. Can you provide geography and any other kind of maybe tying threads between those three credits.
Jared Wolff: I think they were all California. And I would look at the credit migration, of course, 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 NPLs 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 on these loans. I mean I think we were just doing what we thought was right, and I think we're well reserved.
Operator: The next question comes from Gary Tenner with D.A. Davidson.
Gary Tenner: Just a quick follow-up on the last question. Were those credits, were the Legacy Banc of California or legacy PacWest?
Jared Wolff: They were a mix.
Gary Tenner: Okay. And then I just wanted to ask what you've got in the back, I think, as it relates to the kind of year-end targets, the asset size. Kind of saying 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?
Jared Wolff: Gary, I don't actually know the answer to the question. I think I can tell you what could happen, which is, 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 stable after Bank Term Funding. Putting aside Bank Term Funding, we do something with CIVIC and it's more dramatic, right? It could be $2 billion. So that's why I don't know. There might be other assets that -- a lot of these discontinued portfolios, we've had a lot of inbound inquiries on. 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.
Gary Tenner: Okay. I appreciate that. And then if I could just ask one last question. There was a question earlier about kind of the cash balance relative to the size of the balance sheet overall. With that in mind, is BTFP effectively replaced? I mean, it sounds like what we're just saying, it's paid off the balance sheet to contract. So those cash balances by definition, and are they lower than that 8% range that I think, Joe, you referenced from a prior question?
Jared Wolff: Joe, what do you think?
Joseph Kauder: I'm sorry, I didn't quite understand the question. Can you keep it more...
Gary Tenner: Yes. 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 overall balance sheet?
Joseph Kauder: Yes, the subsequent paydown of BTFP will come from -- it would not result in a big reduction in our cash balance. That's why I think I qualified -- in my comments in the script, I qualified that 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.
Operator: The next question comes from Andrew Terrell with Stephens.
Andrew Terrell: Jared, if I could just start on the noninterest-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 trended so far in the second quarter? Have you seen continued growth or any kind of moderation there?
Jared Wolff: 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 and pipelines are only as good as what actually gets booked. But I like the momentum and I like the progress that we're making. And I think it's just going to -- quarter-to-quarter, hard to know. Over the course of the year, 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.
Andrew Terrell: 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 that maybe the base was a little too high to start because of the purchase accounting. But now that 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?
Jared Wolff: I don't think it's unreasonable. I mean I think it's definitely -- again, it's an output for us in terms of where we end up. And we have a lot of levers to pull, which is why we can still hit our numbers even if the margin 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 up those expenses in terms of interest expense later as NIB picks up and other things. Is 15 basis points of improvement a reasonable goal for the quarter? Yes, I think so. Are we going to get all the way there? Is it going to be 10%? Is it going to be 15%? I don't know, but it's not unreasonable. What do you think, Joe?
Joseph Kauder: Yes. I would echo what Jared said. I think there's a lot of moving pieces. It depends upon 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. So we have a good trajectory there, a good glide path, and we'll see how it comes out.
Jared Wolff: Yes. One of the things that Joe and I talked about was on the spot rate. 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 month is probably a better thing to do going forward, which is why we laid out that chart in the deck.
Andrew Terrell: Yes. 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, the preference would be to continue to build capital, at least in the short run. Can you just remind us kind of goalpost 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?
Jared Wolff: Yes. I think Q1 getting that closer to 11% is probably when we feel like we'll have excess capital. And so from there, I think it will be an easy conversation to have about how we're going to deploy it.
Andrew Terrell: Got it. Okay. If I could sneak one more in. I appreciate the color you guys gave around the delinquencies on the nonperformers, but the classified loans, what drove the step-up in classified this quarter?
Jared Wolff: Joe, do you want to touch on that?
Joseph Kauder: I was going to say, I think it's a lot of the same drivers that impacted delinquencies and NPLs, but Jared, I'm not sure if you had further color.
Jared Wolff: No, it was the same group.
Operator: The next question comes from Timothy Coffey with Janney.
Timothy Coffey: Jared, in the prepared remarks, you said the comp sales are coming in better than expected. Do you have any color on that? And would it cause you to update your estimate for cost savings, like this was around $130 million pretax.
Jared Wolff: I'm definitely not going to update kind of our guidance for where we think we can get to. We said we'd get to between 2.0% 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 output for it.
Joseph Kauder: Yes. I would echo what Jared said, just people executing just slightly ahead of schedule.
Timothy Coffey: Okay. And can you remind me what the dollar value of the Credit-Linked Notes is, or how much of the single-family residential portfolio it covers?
Jared Wolff: Yes. Bill, do you have that handy?
William Black: Jared, it's about $125 million on the balance sheet. It covers about $2.65 billion of loans.
Timothy Coffey: Great. And they absorb somewhere around 5%, right?
Joseph Kauder: Right, the absorb is the first 5% loss, right?
Timothy Coffey: Great. And then my last question, I just wonder if you can provide a little bit of color on CIVIC. The deck says the loans of low LTV were 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 you could...
Jared Wolff: Yes. So the loans are -- just as a reminder for everybody, we have a little over about $2.3 billion of total CIVIC loans. $2 billion approximately are four rent single-family homes that are investor owned. And the remaining balance are bridge loans. You can think about them as fix-and-flip primarily on single-family, but they could be on multifamily as well, 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 some 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. They're not experiencing losses on these loans. It's just borrower behaviors. 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 ourselves in-house. We've got a great team on it. 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?
Timothy Coffey: Yes, extremely. Those were my questions.
Operator: The next question comes from Brandon King with Truist Securities.
Brandon King: So you're sticking to the profitability targets in 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 if you could frame what the dollar NII amount could be to hit those targets.
Jared Wolff: I don't think we've given that guidance, Brandon. Joe, what have we said on that?
Joseph Kauder: Yes. We've not put out specific NII or income statement numbers, and I don't think we intend to.
Brandon King: Okay. Okay. And then for 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?
Jared Wolff: So I would characterize most of it -- there's two parts of the runoff. One 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 is too high and it was noncore. 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 when we said we're not going to pay the rate that they wanted, and they wouldn't have found a rate somewhere else. So I would say that some of it was just seasonal movements of customer deposits, but overwhelming majority was of the ladder type, which was rate-sensitive deposits that we didn't need any longer.
Brandon King: Okay. And do you think that's largely over going forward? Or are you expecting maybe some more incremental...
Jared Wolff: 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 fundamentally they might be brokered, 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 loan-to-deposit ratio. We want to make sure we stay comfortably within kind of our guidepost.
Operator: The next question comes from David Feaster with Raymond James.
David Feaster: Just kind of circling back to the NIB growth. Look, like you alluded to, this is in stark contrast what most other banks are seeing right now in the industry. You highlighted the new account growth in that the pipeline looks good. I'm curious if there's any segments that you're seeing more success early on where you see the most growth opportunity? And maybe just could you walk through what do you think is allowing you to be so successful on the NIB growth side?
Jared Wolff: So 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 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 end up at U.S. Bank. And customers that ended up for Citizens, which is becoming a larger bank. And so I think that we've done a good job of being a great option in the market. People know our name. They know who we are. When people say, "Hey, I need to think about banks now. Banc of California is definitely on their list, because of the marketing that we've done and the position that we have. And so we're trying to optimize that. We still bring in a lot of accounts from Wells Fargo, which is a very good local competitor, but we seem to have really good traction against them. And 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 there, David.
David Feaster: That's great. And I'm just curious how DeepStack plays into that? Because I mean you talked about HOA, the venture business. I believe that you were excited about what DeepStack could be 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?
Jared Wolff: Well, we expected it to be a meaningful contributor this year to Banc of California on a stand-alone 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 the specific contributions that DeepStack is contributing both in terms of cards and the other things that'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.
David Feaster: Yes. 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 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 more deepening the bench or expanding into new segments.
Jared Wolff: Well, first of all, we've got an amazing team here. Just there was obviously detail 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. Started this week. We've added people in most of our lending areas, and we're adding people in our functional areas as well. I mean, we're absolutely open to adding the right talent across the bank. And there are some key spots that we have opened that we'll be adding very shortly, but we continue to add talent, even though we have a deep edge here.
Operator: This concludes our question-and-answer session and Banc of California's first quarter earnings conference call. Thank you for attending today's presentation. You may now disconnect.
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