Banc of California (ticker: NYSE:BANC) has provided a comprehensive overview of its financial strategy and outlook during its fourth quarter earnings call. CEO Jared Wolff and CFO Joe Kauder detailed the progress following the merger with PacWest, including balance sheet restructuring and the return of legacy PacWest deposit accounts. The bank is expecting to achieve a net interest margin (NIM) of nearly 3% in the first quarter, driven by higher asset yields and reduced funding costs. Additionally, Banc of California is targeting a 1.10% return on average assets (ROAA) and a 13% return on average tangible common equity (ROTCE) by the fourth quarter's end. The bank is also focusing on loan production opportunities and maintaining credit quality, with loan balances expected to be flat to slightly down by the end of 2024, but with growth anticipated in 2025.
Key Takeaways
- The merger between Banc of California and PacWest was completed on November 30th, leading to balance sheet optimization.
- Expected net interest margin for Q1 is near 3%, with cost savings phased in through 2024.
- The bank aims for a 1.10% ROAA and 13% ROTCE by Q4 end.
- Loan balances are projected to be flat or slightly down from year-end 2023 levels, with growth expected in 2025.
- Banc of California is focusing on credit quality and managing expenses, including a 2% OpEx ratio target.
- The bank is actively working on expanding its payments business and fee income opportunities.
Company Outlook
- The bank expects to maintain a stable balance sheet size with a comfortable cash level of 8% to 10%.
- They aim to achieve significant cost savings and optimize the balance sheet through restructuring.
- Growth in non-interest bearing deposits and managing concentration risk are key goals.
Bearish Highlights
- Loan balances are anticipated to experience some runoff, particularly in premium finance, lender finance, civic, and student loans.
- The bank is cautious about its profitability in the current period and will provide more detailed guidance after the first quarter.
Bullish Highlights
- Banc of California sees opportunities to attract deposits from various industries, including venture tech-related deposits.
- The payments business is expected to contribute meaningfully to revenue later in the year or by 2025.
Misses
- The bank did not provide specific guidance on net interest income or cost savings for the first quarter.
- The size of the balance sheet ended up being larger than planned, although the bank intends to reduce it over time.
Q&A Highlights
- The company clarified that the $16.8 million expense related to the HOA business was a one-time event.
- The impact of purchase accounting is estimated to affect EPS by approximately $0.15 for the year.
In summary, Banc of California is navigating post-merger challenges with a strategic approach to balance sheet management, cost control, and revenue generation. The bank's leadership has conveyed confidence in their ability to deliver strong financial performance and to capitalize on market opportunities as they arise.
InvestingPro Insights
Banc of California (ticker: BANC) has recently been in the spotlight for its strategic financial maneuvers post-merger. In light of this, InvestingPro has provided some insights that could be crucial for investors following the bank's progress.
InvestingPro Data shows a significant return over the last week with a 1 Week Price Total Return of 13.66%. This performance is echoed in the longer term with a 3 Month Price Total Return of 15.36%, indicating a strong recent trend in the stock's performance. Despite a challenging financial landscape, the bank's stock seems to be gaining positive momentum, which might interest investors looking for short-term gains.
However, challenges remain as reflected in the latest financial metrics. The bank's P/E Ratio (Adjusted) for the last twelve months as of Q4 2023 stands at -3.25, which could signal concerns about profitability. Moreover, the Revenue Growth for the same period has significantly declined by -81.59%, suggesting that the bank is experiencing a substantial decrease in its revenue streams.
InvestingPro Tips highlight that analysts anticipate a sales decline in the current year, which aligns with the revenue growth data. This could be a point of caution for investors expecting growth in the near term. Additionally, the bank has been suffering from weak gross profit margins, which might affect its ability to generate income efficiently.
On a positive note, analysts predict that the company will be profitable this year, which could signal a turnaround from the past performance. Investors might find this forecast encouraging, especially when considering the bank's strategic focus on loan production and credit quality.
For those interested in a deeper analysis, there are additional InvestingPro Tips available, offering a more comprehensive understanding of Banc of California's financial health. Subscribing to InvestingPro now comes with a special New Year sale, offering discounts of up to 50%. Plus, use coupon code "SFY24" to get an additional 10% off a 2-year InvestingPro+ subscription, or "SFY241" to get an additional 10% off a 1-year InvestingPro+ subscription. These insights could be invaluable as the bank navigates its post-merger landscape and seeks to achieve its financial targets.
Full transcript - Banc of California (BANC) Q4 2023:
Operator: Hello, and welcome to Banc of California's Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. [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. At this time, I would like to turn the floor over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.
Jared Wolff: Good morning, and welcome to Banc of California's fourth quarter earnings call. Joining me on today's call is Joe Kauder, our CFO, and Bill Black, our Head of Strategy. Our investor presentation, along with our earnings release, we're designed to provide a great deal of information given the unusual nature of the fourth quarter, which was impacted by the closing of the merger and several 1x items related to our balance sheet repositioning actions. We aren't going to do a detailed walk through of the changes in various line items from the prior quarter. Instead, we'll utilize the time on our call today to introduce the new Banc of California, provide an update on the progress we have made on the balance sheet repositioning and lay out the timing for our integration and provide insight into the key financial metrics for Q1 and beyond. We will be happy to answer any specific questions to our fourth quarter results later in the call. I am truly thrilled that we delivered on so many of the key objectives that we outlined when we announced the deal. Thanks to the hard work of our talented colleagues and advisors and the work of the regulators. We received approval for our transaction in record time and closed the transaction on the front-end of our range. We delivered CET1 on top of our 10% target, notwithstanding a complicated rate environment and considerable moving items on the balance sheet, and we nearly hit $15 in tangible book value, after guiding to the mid-to-low $14 range when we announced Q3 earnings. Many other key metrics were delivered in line as well. Since closing the merger on November 30th, our team has been collaborating exceptionally well, and we've made excellent progress on the balance sheet repositioning actions that we indicated at the time of the merger announcement. As a result, we have created the well capitalized, highly liquid financial institution with strong earnings power and a strong position in California, as we envisioned. Today, we are the third largest bank headquartered in California based on assets with an enviable presence up and down the state, clean credit and an exceptionally talented team of colleagues were focused on serving businesses with high touch service and tailored solutions that our target clients aren't getting from others. The closing of our merger reflected the relentless execution that Banc of California has become known for. Among the most notable items, we completed the planned sales of legacy Banc of California's $1.7 billion SFR portfolio, approximately $700 million of the multifamily portfolio, and $1.2 billion of the investment portfolio as well as approximately $2 billion of PacWest securities. The proceeds along with the excess cash from PacWest, we're utilized to reduce the higher cost wholesale funding on the balance sheet. We retired the $1.3 billion repurchase agreement with [indiscernible] and have also continued to reduce the volume of higher cost broker deposits, which are down nearly $4 billion from the time of the merger announcement through the end of 2023. We also repaid $2.3 billion of the bank term funding program balance, choosing to retain a portion in order to maintain a higher level of liquidity and pay down higher cost brokerage deposits. In total, we sold approximately $6 billion of assets with an average yield of 3.6% and paid down approximately $9 billion of wholesale funding with an average cost of 5.2%, contributing more than $90 million annually to the net interest margin. This was nearly all completed in the month of December. As mentioned, we decide to retain a portion of our multifamily portfolio rather than selling the entire portfolio as originally planned. These are well performing loans and after the purchase accounting mark, they have attractive yields in an approximately four year effective duration that we determined we're in our best interest to retain, given the outlook for potentially declining rates. As noted, we were able to execute on most of our planned balance sheet repositioning actions in a short period of time, strengthening our balance sheet, and repositioning the company for improved performance and enhanced flexibility. We will continue to evaluate all available options as we seek to optimize our balance sheet going forward. We have also started to see some of the potential benefits that we believed, we would have following the merger. With the strength of the restructured balance sheet and superior level of service that we can provide, we have started to bring back many of the operating deposit accounts of PacWest clients that left the bank during the turmoil early last year. We also felt that there would be opportunities to further capitalize on our positions of talent magnet. We have already added a number of individuals and will look to continue adding exceptional banking talent that we believe can positively contribute to the profitable growth of our franchise in the coming years. Now let me hand it over to Joe, who'll provide some additional financial information and I'll have some closing remarks before opening up the line for questions. Joe?
Joe Kauder: Thank you, Jared. I'm going to start by providing the spot rates for balance sheet items as of December 31st to provide some visibility to our net interest margin for the first quarter. As of December 31, 2023, our estimated spot rate for loan yields was 6.18%. Our estimated spot rate for the yield of all interest earning assets was 5.63%. Our spot rate for the cost of deposits was 2.69%. Our spot rate for the cost of funds was 2.99%, and our estimated spot rate for our net interest margin was 2.75% compared to 1.69% for the fourth quarter and 2.15% for the month of December of 2023. We are exiting the quarter with a much higher net interest margin due to the benefits of the merger and our balance sheet repositioning actions and we expect our first quarter net interest margin to approach 3%. The expected increase in our net interest margin in the first quarter from December 31st spot rate will be driven by an approximate 15 basis point improvement in earning asset yields, driven mostly by loan repricing and new originations at higher rates currently between 7% and 8%, and an approximate 10 basis point improvement in cost of funds driven by the pay down of higher cost wholesale funding, and an increase in the relative percentage of lower cost core deposits. Putting aside changes in interest rates, we expect to see a steady decline in our interest expense as we move through 2024 and continue to replace higher cost wholesale funding sources with lower cost deposits acquired through our business development efforts. There are also some additional actions that we may take that could have a positive impact on our net interest margin, including additional asset sales and using off balance sheet options for higher cost customer deposits. At this point, we are moderately liability sensitive and will benefit from a reduction in interest rates. Once we have completed our balance sheet repositioning, including reaching our internal targets for low-cost deposits, we intend to manage the bank to a neutral or slightly asset sensitive position. Looking at non-interest expense, it'll be reasonable to expect our first quarter 2024 OpEx ratio to be in the range of 210% to 220%. As we have indicated previously, the expected cost savings in the merger will be phased in over the course of 2024. Major contributors to the cost savings include the completion of the systems conversion, which is scheduled to occur in May. A reduction in FDIC assessment expense, which we anticipate to start declining in the first quarter, and office consolidation with approximately 18% of the leases on PacWest offices expiring during 2024. By the fourth quarter of 2024, we expect our OpEx ratio to be down around 2.0%, and we are targeting the quarterly run rate for non-interest expense to be approximately or below 2% of total assets from that point forward. With all of the integration and balance sheet repositioning actions proceeding on schedule, the guidance we provided for our level of returns that we announced at the time of the merger has not changed. Rather than focusing on the full year, our primary focus is on ensuring our ending Q4 run rate is in line with our targets of approximately 1.10% ROAA, and 13% ROTCE. Given the timing of achieving cost savings throughout the year. At this time, I'll turn the call back over to Jared.
Jared Wolff: Thanks, Joe. I would like to wrap-up with some comments around our vision we have for the company and the broader outlook. We are organized around two primary areas. First, the bulk of our assets are centered in our community bank, which is comprised of our talented bankers who focus on in-market relationship lending across California, in Denver Colorado, in Durham, North Carolina, and a few other locations. We provide full service commercial banking across real estate and C&I, including asset-based lending. Paired with our community bank, our specialty alliance, which provide expertise in specific verticals including homeowners and property management solutions, media and entertainment, warehouse lending, corporate asset finance, SBA, fund finance, and venture banking. Whether in our community or specialty areas, we offer best-in-class depository and treasury management solutions, corporate asset management, and the payments ecosystem we are building, which includes merchant processing card solutions as an issuer and third-party processing. We believe, we have great market position in California given the strength of our franchise and superior level of service and expertise that we can provide, particularly given the significant changes we have seen over the past few years in the California banking market. With so many of our competitors exiting or significantly pulling back from the market. We believe this presents us with significant opportunities to consistently add attractive new client relationships that provide low cost deposits and high quality loans. And as we continue to build-out our new payments ecosystem, which we believe will only further enhance our value proposition, it will differentiate us from competing banks and positively impact our business development efforts. As we've indicated, we expect to be a high performing institution with strong earnings power. A portion of that will come from restoring the high-level of profitability that PacWest businesses have historically generated. In recent years, there were some lower yielding assets added that were funded with higher cost funding sources that negatively impacted PacWest's historical profitability. With the balance sheet repositioning actions we have taken, we have significantly reduced these assets and funding sources, which creates a path to a higher level of returns for the combined institution. As we start 2024, while there remains some degree of economic uncertainty, we are already seeing the positive impact of being a larger, stronger financial institution on our loan production with a greater volume of opportunities for us to consider. We're seeing a reasonable level of loan demand, which is enabling us to generate meaningful level of new loan production, while continuing to be conservative and highly selective in the loans we choose to make. In most cases, loans coming on the books are being done at the same or higher rates than those paying off. Given the volume of runoff we anticipate, while there is some uncertainty regarding the pace and the timing. At this point, we are expecting to end 2024 with total loan balances that are flat to slightly down from the year-end 2023 level and then growing during 2025 as economic conditions improve. As we move through 2024, we will provide an update to our expectations based on any changes we see in economic conditions that have a material impact on loan demand and loan production. Regardless of the rate curve and pace of changes in interest rates, we are well-positioned to capitalize on such opportunity given the highly liquid balance sheet that we now have. I want to note that we feel very good about the credit quality of the loan portfolio. The merger process dictated that we take a close look at every loan in the portfolio of each legacy bank and make sure that they were appropriately rated as well as resolve some of the weaker credits. As a result, the bank has cleaner credit and a higher level of reserves following the provision that we recorded in the fourth quarter. And from an asset quality standpoint, we are comfortable with where we stand. It's fair to say, that based on our Q4 actions, the new Banc of California has cleaner credit today than either of its predecessors. I want to specifically thank the dedicated and talented colleagues at Banc of California for their amazing efforts, contributions and many sacrifices for helping to create this new and exciting franchise. I have witnessed heroic undertakings, and I feel very privileged to be leading such an incredible group of colleagues. Thanks to all of them, I'm confident in what we have set out to accomplish this year and beyond. In closing, we believe we are well-positioned to deliver strong financial performance for our shareholders in '24 as well as to capitalize on our great market position that we have built in California to consistently enhance the value of our franchise in the coming years. With that, operator, let's go ahead and open up the line.
Operator: [Operator Instructions] Our first question today comes from Matthew Clark from Piper Sandler.
Matthew Clark: Just wanted to start on expenses for the upcoming quarter and in the related run rate. I know you had a kind of partial quarter in 4Q and you get a kind of another month of legacy of BANC or two months of legacy BANC. But can you speak to not only kind of where that run rate might shake out X merger charges, but how much in the way of cost saves have you realized so far and how much are left?
Jared Wolff: We have a lot left to do, which is why we think that in the first quarter the OpEx ratio is going to be between 210% and 220%, and the glide path will be getting down to by the end of Q4. The conversion isn't going to take place till May, and there's a number of things that come out after that across the company. Joe mentioned the facilities, we are going to get a lift from the FDIC assessment that we think will reduce beginning in the first quarter, but there's a lot to take out that's going to come later in the year. Joe, I don't know, if you have more color there.
Joe Kauder: No, I think you captured it correctly. I think there's a -- we manage a detailed list of savings initiatives. We have our plans in place and the big initiatives that Jared spoke to or some of the larger ones. We do expect to get the FDIC assessment favorability in the first quarter, and we will see a start coming out from there.
Jared Wolff: Matthew, we literally have a list of like 30 things with a person assigned the deadline by which it's supposed to get done and the impact, and we're going through that list and checking them off as we go and we're not going to lose track of them and they're all within our control. We believe. In addition to that, we obviously have the expense savings. We think we can realize on the interest side by being proactive about making sure deposit costs are appropriate. We don't need to pay necessarily the same levels we were paying in the past given the strength of the franchise, but we want to protect relationships and a lot of that's going to be the -- based on the volume of new relationships that we bring in and new deposits that come back to the bank. I solicited feedback for this call from a number of our colleagues and I asked them to share client wins and stories of clients coming back beyond what I already knew about, and I got my inbox was full of stories of people talking about this client had $2 million and they with tears in their eyes, they moved it out during the problems of early 2023 and they just brought it back. They weren't happy at BofA or wherever they went and they brought it all back. And so there's a lot of stories like that, but that's going to take place over the course of the year, and that will impact our ability to improve our interest expense as well.
Matthew Clark: And then just on earning assets, trying to get a better sense of where those balances might be coming into the year here. You spoke to the loan piece of it for the year, but just knowing that you still have BTFP and some more brokered CDs than you probably would like to have, how should we think about overall average or any assets this year?
Jared Wolff: Well, the Fed made our decision really easy on BTFP right, with the announcement yesterday in terms of jacking the cost at the end of March. So, I'm sure we'll probably get out of it by then, if not before. Joe, what's your sense for where our average earning assets will be --
Joe Kauder: I think they're going to be pretty flat for the year. And you may see the balance sheet just shrinking a little bit with the excess liquidity that we have coming into the New Year being deployed against the BTFP or high-cost deposits, depending on what the right decision is as we move forward. But the earning assets should be pretty stable.
Jared Wolff: Yes. We are going to prioritize profitability as Joe rightly pointed out in the call. And so, while our earning assets, while our assets say, are total about $38.5 billion, it wouldn't be surprising to get lower by the end of the year. But we're not really focused on that. We're focused on hitting our profitability targets regardless of the size of the balance sheet. And if it means we should be smaller, then we'll be smaller. If it means we should -- we're comfortable being a little bit larger, because we have the ability to earn at the profitability levels, we said then we'll then we won't focus on it. But profitability is the number one goal.
Matthew Clark: And then last one for me, what's -- you got CET1 now over 10%, 12% and tangible commons rebuilding probably pretty quickly here. I guess, what's the appetite for a buyback with the stock below tangible book?
Jared Wolff: Well, we obviously believe that we're going to be building up capital at a very healthy pace. And once we get to a level where we believe we have sufficient excess capital and that it's sustainable at that level, we will certainly have a variety of options. And they're not mutually exclusive. We're going to obviously continue to reinvest in our company, while also looking at ways to reduce share count, whether it's preferred or common. But I think it's important that we demonstrate the sustainability of our capital and earnings, and that we build it up to levels that we consider excess. And from there we'll have plenty of options.
Operator: Our next question comes from Brandon King from Truist.
Brandon King: So could you just give us some thoughts of how you're thinking about the level of deposits? You mentioned, legacy PacWest customers, you're bringing the operating deposits back, but then you also have customers with excess liquidity. And I know you're trying to manage the deposit costs pretty prudently. So if you could kind of give us a sense of how you think the level deposit should trend as we go throughout the year?
Jared Wolff: Yes, it's a good question. And what I focus on and historically have at Banc of California was on our level of non-interest bearing deposits along with our loan to deposit ratio. And so, we'd like to maintain our loan to deposit ratio below 90%, preferably in the mid-80s, and we will see how that goes. And as we watch our non-interest bearing percentage rise, it gives us flexibility for other deposits that are of different types. So we have a whole bunch of initiatives in place here at Banc of California to grow our NIB, which is bringing over operating accounts from businesses, and we expect to grow from 26%. And eventually, over time, I'm not going to put a date on it, but we'll get to 30% and we'll get to 35% and eventually we'll get to 40%. At Banc of California legacy, we went from 12% to approximately 40% NIB. We have a roadmap to do this and how we do it and the pace at which we do will dictate what happens with all these other deposits. We're not going to ask customers to leave. We value our customers and the relationships we have. The one thing I will focus on though early, and we've already started focusing on it, is concentration risk. And I think we've all learned that we have to live within our means and not become too reliant on any one customer on the loan or the deposit side. And so that's something that we're going to manage very carefully. We have tools to help our clients, keep their relationship at the bank, but bring it off balance sheet so we're not relying on it for lending. We have asset management, a great team of people here that can help with corporate asset management should we need it. And for some clients, that's the right solution. And so, Brandon, there's kind of a delicate balance of how we move all these things together. We did it at Banc of California historically. And so, I would say that the things that we look at are the loan to deposit ratio and our percent of NIB and that provides the flexibility for everything else.
Brandon King: And then in your prepared remarks, you mentioned how you are adding individuals and talent. Could you elaborate on that, what types of talent are you adding? And how should we think about that as far as how it could impact expenses? I know you have a pretty tight range you are expecting this year, but just going forward?
Jared Wolff: Yes. Well, there were some positions in some areas that we want to grow. We just added a talented leader to Head of Venture in California, and lead our team here. We have, before we announced the acquisition, we brought in a new Head of Corporate Communications from City National, Debora Vrana, who is doing a great job for us. We have a head of underwriting on the Community Bank side that we brought in recently. There is a whole host of talented leaders and players at all levels that we're bringing in. We obviously are going to have to manage it within our expense targets and getting down to that 2% OpEx ratio is going to require us to exercise some discipline. But we are confident that we can do it.
Brandon King: And then just lastly, you gave us the spot yields, which is very helpful. Could you give us the spot yield on the securities portfolio?
Jared Wolff: Joe, do you have that?
Joe Kauder: You know, I do. Just give me one second.
Jared Wolff: Okay, Brandon. We'll take a look for that, Brandon.
Joe Kauder: No. I got it here, Jared. It's 2.25%. I'm sorry. I read that wrong. 2.75%. I apologize. 2.75%.
Operator: Our next question comes from Gary Tenner from D.A. Davidson.
Gary Tenner: A couple of questions. One, the NIM guide of approaching 3%, just confirming that's inclusive of the expected loan discount accretion that you kind of lay out on an annualized basis in the slide deck?
Jared Wolff: Yes.
Gary Tenner: Okay. And Jared, you kind of answered part of this with your comment around the BTFP and repaying that probably before the end of the quarter. But in the deck, it kind of one of your checklist items was to complete restructuring of the balance sheet. Now, I know there's going to be kind of ongoing, obviously, for some period of time, kind of optimizing of the balance sheet, but just wanted to get a sense of any kind of clear discrete items outside the BTFP repayment that are still planned for the first quarter?
Jared Wolff: Well, I think its expense reductions. There are pieces of the discontinued loan portfolios that capital permitting, we might look to sell. If we think the yield is so low that we can, it's somewhat of a negative carry relative to other funding that we could pay off. We're constantly looking at that and looking at what the pricing is. And pricing is kind of moving around in the market as people settle in on where they think rates are going to be. So, we're not ignoring that there are other things that we could sell. We just haven't made the decision to definitely sell those things, absent one or two things. So, I think that's something that you could expect, Gary. Look, there is lot of -- these are somewhat unclear times from an economic standpoint, and I think a lot of banks are looking at the road ahead and it's kind of filled with debris and they're trying to figure out how they're going to drive down the road and kind of get to the end zone. I'm mixing my metaphors here, but we are -- we're fortunate that we have a very clear path and I guess a very clear road ahead and we can see very clearly what we need to do, and we have it all laid out and if we execute on the things that we set out to do, we believe it's largely within our control to achieve the earnings targets and profitably that we set and that that includes potentially having some loan sales. And we have a lot of leverage to pull. So, if we don't sell those loans, we got something else that we want to do. But I think loan sales is a possibility along with all of those expense savings that I mentioned that we have listed out. Joe, I don't know, you or Bill have anything else to add here.
Joe Kauder: I would just say on the balance sheet, as the liabilities is in addition to BTFP with other broker deposits as they come due we'll look at the market and we'll look at all the various options we have. Do we let the wholesale funding ratio drift up, drift down, do we loan deposit ratio, et cetera. So, there's lots of options we have, and we're going to make those as Jared articulate, we're going to make those decisions as they come to us and based upon the economic environment and the best, what's best for shareholders at that time.
Gary Tenner: If I could ask one more, Jared, you mentioned that you've got several stories about former PacWest depositors coming back into the fold as it were post deal. You talked about the experiences to how those are coming back. Are they kind of utilizing a sweep or a kind of shared deposit product? What kind of format are those balances coming back?
Jared Wolff: It's all different formats. I mean, I got a story right here from someone in one of our offices during the liquidity crisis. So a long time, small business client withdrew $1.3 million out of his account, and he was incredibly apologetic. He took the $1.3 million cashier's check to BofA and opened the account. Our client quickly realized that he did not receive the same service that he always enjoyed as he continued to bank with us with much smaller balances, we continued to encourage him to bring the money back after the renewed strength of the bank and the merger and how dissatisfied he was with the impersonalized service at this other bank. The client brought back the $1.1 million and attributed to our service and our particular banker that took care of them every week. I mean, I have pages of stories like this. And it obviously is very gratifying and it's not surprising to me at all. We did this at Banc of California when I joined. We really focused on service and solutions. PacWest is really good at it. They had outflows based on fear that were unfounded, but they had a very, very loyal client base. And I know that if we do what we say we're going to do, and we do it on time and we continue to execute the way we always have we will be very successful in that effort.
Operator: Our next question comes from Andrew Terrell from Stephens.
Andrew Terrell: Just a couple of quick ones for me. One, just to confirm on the kind of balance sheet size expectations, it sounds like from an average earning asset and then total asset standpoint, I mean, relatively kind of stable expectations throughout the year. Is that fair?
Jared Wolff: Yes.
Andrew Terrell: What's the comfortable level of cash you'd be willing to run at?
Joe Kauder: I think about 8%. Is that right, Jared?
Jared Wolff: Yeah, I think 8% to 10%. I mean, we're higher than we want to be right now, but I think 10% would be the high watermark. And as we bring it down, and historically we ran with 2%, 3%. And I think banks today are running with a little bit more, especially because you can get such a good yield on liquidity. And so, it's a function of what we can get right now. I think Joe's targets is right.
Andrew Terrell: And if I could ask that all the commentary is super helpful in terms of, I know there's a lot of moving pieces here, so I want to appreciate all the color. Just wanted to ask on kind of the exit ROAA for 1.10% in 4Q ‘24. I'm trying to get a better sense of just what type of exit margin you would expect. The expense part is helpful, but it seems like the one kind of detail that I'm trying to get to here is the NIM. So any kind of color you could provide on an exit for NIM that would underpin the 1.10% ROAA would be helpful.
Jared Wolff: The NIM is -- we haven't defined that yet, I don't think Joe have we?
Joe Kauder: Well, our -- we haven't defined what we did. Our exit, we did say our estimate spot rate for net interest margin was 2.75% at 12.31%. Andrew, is that what you're looking for?
Jared Wolff: No. He's asking for Q4 2024 where we're going to be. So Andrew the reason why we're not there is because the NIM is pretty much an output for us. And so, if we're a little bit larger, a little bit smaller, it obviously we will affect the NIM, and kind of the mix of our portfolio. And so, we just haven't guided to it yet. We have all these levers, we have all these models. We've looked at three different ways to get there and the NIM is different in these different models, but we still achieve the same ROA, and so we haven't provided guidance there yet.
Andrew Terrell: Okay. Yes.
Bill Black: Andrew, the easy way to back into that though is that, if you think about it, of the three main income statement components, fees, net interest income and expenses, if you're comfortable with your estimate for fees and expenses, you can essentially in some cases you go through that and back into it. So just to give your own, I mean, to pressure test it on your own?
Andrew Terrell: Yes, I was running that analysis, Bill, and it just seemed like the margin that I had to plug in was pretty high. So I just was trying to spot check it. I can move on. The one other I wanted to ask about was the $16.8 million of additional expense you guys called out as related to the HOA business this quarter. Can you talk about specifically what drove that and was that more transitory in nature? We should view it as one time?
Jared Wolff: It was one time. It was a catch-up expense for a specific client and we took care of it in the fourth quarter.
Andrew Terrell: And then actually last one the borrowing facility termination for $19.5 million, did that come through operating expense or was it in your interest expense?
Joe Kauder: Operating expense.
Operator: Our next question comes from Timur Braziler from Wells Fargo.
Timur Braziler: Jared, you had made a comment regarding loans that balances more or less flat as demand is okay. But you're continuing to see some runoff or maybe expecting some runoff. I'm just wondering, as we're looking at the categories today, where could we see some additional trimming off of loan balances?
Jared Wolff: So in the discontinued portfolio premium finance loans, like we laid this out on a table in the deck of what the discontinued portfolios are versus kind of what we consider core portfolios going forward. And you have premium finance, lender finance, all those things. And lender finance is coming off at about $100 million quarter-over-quarter is what it was last quarter. And I don't know if it's going to continue at that pace, but that 7.32% is running down and it's a lower yield, a little below 3.5%. We have some good yields on some of the other stuff, civic is coming down for sure. Half a portion of that is bridge and the other portion is kind of for rent single family. So, those are two of the categories that I think student loans. There's barely any national lending left, but the stuff's running down. We think the loan portfolio overall will be flat to slightly down. And this is obviously an environment where you can get reasonable yields with your liquidity relative to the stuff that's paying off. But obviously, we want to deploy the funds in good loans because the rates right now are very good for lending. As Joe said, 7% to 8% is what we're getting and in many cases higher than that. And so we want to deploy any good loans. But we're being conservative and we're making sure that with the right relationships, we really want to use our balance sheet for our clients and for full relationships. And so we're ensuring that when we are lending today, it comes with a real relationship. With the reduction in banks overall, it's been easier for us to require larger components of the overall relationship to bank with us and to lend. And in the past, it was much more complicated. Given the position of our bank and the options available to the clients that are speaking to us, we're in a much better position to demand more. It's not to say that every client is going to have a single a relationship. I talked to somebody yesterday, I ran into at a restaurant and a well-known real estate guy. And he said, can I call you after lunch? I said, of course. And he called me as he said he would. And he said, look, we've been with First Republic, which is now Chase. We've been with City National, and they're pulling back. And are you open to talking to us? We have about $40 million to $50 million in balances. We're not going to put it all at one bank, but we do need to put our operating account somewhere. And I said, we'd love to talk to you. I said, I want to make sure that we can serve you with what you need and how you need it. And so let us look at all that and then come back you to make sure that we can meet you where you're going. But there's a lot of opportunities like that.
Timur Braziler: And then maybe again just circling back to your comments about bringing back legacy PacWest deposits that left last year. I'm just wondering what industries those are in and to what extent you're getting some of the venture tech related deposits reengaging with the bank?
Jared Wolff: I would say the deposit outflows that PacWest had and that Banc of California had as well, but they were obviously more dramatic at PacWest. We're in all areas. And so there isn't an area where we're not looking to bring deposits back. But the headline, of course, was the deposits that went out on the venture side and how PacWest classified those. I would say that my observation and the data that we have is that those relationships are very, very strong. We've been able to positively promote the strength of our bank. And this combination really, really gave people a lot of comfort. Our credit ratings came out obviously very strong. And so we have been successful at bringing back relationships and deposits that left in those areas. And we're going to continue to do that. The area where I want to be careful is we've all agreed that we're going to manage concentration better so that we don't end up with depositors that are too large for our balance sheet. And we have corporate asset management. We have a great tool that we can use to have balances in the family, but not on the balance sheet. So we might be successful Timur by bringing back relationships, even if they don't show up in our deposit numbers, because they're in asset management off balance sheet. And so we're doing both. We want them back, we want them in the family, we want them here. We think we can serve them better than others, but we're going to be careful what we keep on balance sheet and what we lend against.
Timur Braziler: And then, I guess just last from me and again, you touched on this a little bit, but looking at the payment rollout and, and where Deepstack fits into all of this originally when that was introduced, the update was kind of revenue contribution back end of ‘23. I'm wondering if A, the PacWest deal delayed that a little bit? And then B, if you can provide some update on the magnitude of what the payment vertical might look like and what PacWest does to that run rate?
Jared Wolff: Absolutely. So we said that PacWest, we said that Deepstack on a standalone basis, old Banc of California, we said that Deepstack would start contributing meaningfully to fee income in 2024. PacWest has fee income historically at $10 million to 12 million per month. And you know that that is continuing. So the ability of Deepstack to make an impact on a fee basis, on a revenue basis to the combined company is no longer there in 2024 to the same magnitude it would've done on a standalone Banc of California. So just to put it in context that on a standalone basis, it would've contributed meaningfully but it's obviously diluted now. The payments business that we're building is three things. Its merchant processing, which is our ability to go direct to merchants, to process credit cards without any third party intermediaries. It's issuing, issuing credit cards directly on our balance sheet to clients to whom we have credit. This isn't selling consumer credit cards broadly. This is giving card solutions to our existing clients to whom we already provide credit and benefiting from the interchange as the issue of those cards. And third is using our rails, our infrastructure that we've built and the bins, the identification numbers that we have with Mastercard (NYSE:MA) and Visa (NYSE:V) to process third-party transactions for trusted partners like Worldpay, like others who are well-known in the business. Those are the three layers of our ecosystem, and those are all rolling out now. And so I'm hoping that later in this year or by the end of the year, it's making enough that we want to call it out specifically and making enough so I call out specifically means meaningful enough on this combined balance sheet. That doesn't mean it's not contributing anything, but we're not going to call it out till we think we have something to talk about. That's of a good enough number. It's obviously going to have to be a bigger number now, but there are many ways in which we think this is going to accelerate the merger. For example, the HOA business is going to be using Deepstack as a digital payment acceptance tool for their clients. It's got $4 billion in deposits, it's got hundreds of clients and they think Deepstack is a great feature to allow them to accept payments and to provide a tool that their clients really would like to make their payments acceptance easier. The venture business has embedded clients interested in our payment tools. PWB was actually further along than we were at Banc of California in digital account opening, which is a huge part of rolling out our payments business. So there's lots of positive synergies that we are going to realize through the year that I think will benefit us. Hopefully this year, but certainly in 2025. We're also focused on optimizing the FIS integration and setting up payments in a truly optimal way. I'm meeting with the FIS CEO, and Worldpay executives at their headquarters in Jacksonville in February to discuss this. They've been very focused on what we're doing in payments. We're very unique. Worldpay is obviously the 100 pound gorilla out there, and we're excited to partner with them and see if we can find some ways to accelerate our progress.
Operator: Our next question comes from Kelly Motta from KBW.
Kelly Motta: I thought maybe we could talk a bit about fees and not Deepstack, but just fees more broadly in general. On a combined basis, I know you're bringing together two banks with different capabilities. I'm just wondering where you see like complimentary opportunities to maybe sell one product or another to either PacWest or bank of what you may have not had before. And kind of how -- what your run rate fee income looks like as we start next year and kind of how that could be additive to it.
Jared Wolff: Yes, so I'll start with cards. I mean, PacWest was much further along than we were in kind of their card partnerships. They weren't an issuer of cards, they were basically a reseller of others' cards, but they had, they were doing it in a good way with a virtual card program. And I was just looking at materials this morning that I think were great. And Susan Tang leads that group and they did a great job with it. And we were looking at how we can accelerate that and build-off the momentum that they had previously. The $10 million to $12 million per month of fee income wasn't solely from that. PacWest did a good job of collecting fees in a variety of ways, but for now, we think that that fee income per month is the right level that people should expect. And then hopefully we can build on it from there. We have some -- we have a little bit of retooling to do as an issuer. The way we're going to build this out and roll it up is we have to close down the partner programs and then start with our new programs. And so, it's not going to slow down the fee income, but I don't think we're going to see any acceleration in it till later in the year.
Kelly Motta: I was also -- it was really good to see the tangible book value number come in higher than what you had expected last quarter. I was hoping maybe this is a question for Joe, but if you could help us kind of bridge the gap on how we should be thinking about AOCI with the -- what that's against in the securities book duration and how we should be thinking about the exceed back of that over time. Just trying to get a sense of the cadence of tangible book value growth.
Joe Kauder: On the AOCI, we've come down significantly to $434 million, compared to where the PacWest was on a standalone basis, which was, I think, $800 million and some change in the third quarter. Our duration of that portfolio is north of five years up in the six year period. We'd like to over time bring that duration down and add higher yielding securities to that portfolio. We feel pretty good about where we are on the unrealized loss. These are high quality securities and as interest rates, if interest do continue to come down as the four curve suggests, the unrealized loss as an AOCI will continue to come down as well.
Jared Wolff: Yes, I should have mentioned, we have got a whole team working on this payments ecosystem. And I have mentioned before, it's led by Jagdeep Sahota, who is our Chief Payments Officer. And what I have been so impressed with is how, as we brought the banks together, we found the best pieces of each to kind of move this forward. There is a development team that that PacWest has, that we didn't have a Banc of California that's really jumped in and done a great job of helping to build the user interfaces and the things that we want to move forward on payments. And so there's a lot of good things going on and I wish I can mention them all, but we'll be excited to see how this rolls out later in the year
Operator: [Operator Instructions] Our next question comes from Tim Coffey from Janney.
Tim Coffey: So, I appreciate all the details in the press release today, especially the spot rates. If I were to look at the spot rates and apply them to period end balances, I started getting a net interest income number closer to $300 million. Is that a reasonable estimate for the profitability of that company today?
Jared Wolff: I don't know that we are ready to say that yet. To confirm that number is being high or low, the reason being is there's a lot of moving pieces. And I think, we understand why it's difficult because we only had one month combined balance sheet with a whole bunch of stuff moving around. What we'd like to do is deliver a Q1 balance sheet and income statement. And I think it's going to be much easier for us to guidance off of that. But to forecast today what Q1 kind of run rate TPNR, other things are going to be, we're not -- we don't want to do that yet. We want to make a little bit more progress. Hopefully, people took away a lot of confidence from what we've I mean, I think what we accomplished in Q1, in Q4 was tremendous. We did this at Banc of California. We always did it faster than we said we were going to do it. And I can't promise that that's going to happen here, but I have every level of confidence in our ability to execute and be successful. And so, I'd like to get through Q1, Tim, to be able to guide from there.
Tim Coffey: And then I also appreciate the cadence the cost saves throughout the year. I'm wondering as it comes to recession of balance sheet, redoing the balance sheet, is there anything coming up in 1Q of significance?
Jared Wolff: The FDIC assessment is pretty big. Isn't it, Joe?
Joe Kauder: Yes. So, on the cost, the FDIC assessment, assuming we get that's a very big run rate item. And then there's -- there are some other initiatives we have, which they come in throughout the year. There are other things that are happening in the first quarter. But I think were you asking about the balance sheet restructuring in the first quarter, because on that, I think you could see us deploying some of our excess liquidity against, for example, the BTFP, which is going to come due in March.
Tim Coffey: Yes, that's actually what I was asking about, it was on the balance sheet side. Is it just the BTFP then that you're, that's front end of?
Joe Kauder: Well, there's other higher cost broker deposits which are coming due in the first quarter and that's I made a comment earlier about how we evaluate them as they come due. We look at the situation, the economic environment at the time and we make decisions what's best to kind of manage the portfolio optimally on a day-by-day basis.
Jared Wolff: Tim, one other thing, we did mention that we are constantly looking at loan sales. And so I don't know that we're going to execute it. It depends on the price, but I wouldn't be surprised if we did because we have opportunities to do that. But if we don't get the right price, we obviously won't do it.
Tim Coffey: And let be clear that the multifamily is off the market now, right? You're going to hold onto that?
Jared Wolff: Yes. We're going to hold onto that.
Joe Kauder: I would say there might be a very small subset of the multifamily that was that very small subset that there seems to be a lot of interest in that piece of it we may, but it would not be a large portion.
Tim Coffey: And then my final question is Jared on the size of the balance sheet, and I'm not being critical because I think he has what you do with pretty much unprecedented in banking this merger. But I thought at announcement the balance sheet was going to be smaller than it is today. And I'm just kind of wondering did you kind of just run out of time to do all the stuff you wanted to do? Or was this more, or was there a strategic reason for keeping it bigger?
Jared Wolff: Well, the first piece of it was keeping the extra piece of multifamily. And we have more cash I think, than we planned. But I do see it coming down. Like I said, we’re not -- we're really managing the profitability and to that 1.10% ROAA and obviously 1.10% ROAA on a bigger balance sheet means more earnings. So if we might need to bring down the balance sheet if, based on where we see earnings. And it's a delicate balance obviously, because you get rid of assets and they're earnings something and where are the expenses that go along with it. But we're managing all of that to make sure we get to that 1.10% ROAA out to the gate at Q4 to start 2025. So I don't know where we're going to land, but I'm confident we're going to get to our profitability targets.
Operator: And our final question is a follow-up from Timur Braziler from Wells Fargo.
Timur Braziler: Just one quick one. What are the assumptions for purchase accounting that are embedded in your estimates for ‘24?
Jared Wolff: I know that question wasn't directed to me, so I'll let Joe answer that.
Joe Kauder: So, in the deck we included a page which showed the how the accretion, we estimate the accretion will roll off. And so, I think on Page 29 of the deck, but I think, our current assumption is that we'll have a we estimate that it'll be about $0.15 EPS impact for the year, which includes loan marks consistent with in an aggregate way consistent with the yields that we're seeing on our new originations.
Operator: And ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
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