Hello, welcome to Banc of California's first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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. Please go ahead.
Good morning, welcome to Banc of California's first quarter earnings call. Joining me on today's call is Raymond Rindone, our interim chief financial officer, who will talk in more detail about our quarterly results. Before discussing our performance, I would like to express our sympathy for those affected by the recent tragic events in banking. The horrible shooting in Kentucky was an unspeakable tragedy, and the failures of two banks have unsettled the banking community generally.
We understand the concerns and uncertainty that these events can create, and we remain committed to providing stability and support to our clients, communities, and colleagues, and to those displaced by these unfortunate events. We've been able to effectively manage through the recent turmoil in the banking industry due to the strong franchise, client base, and balance sheet that we have built over the last four years.
The fundamental strength of our franchise is reflected in all of our key metrics as of the end of the first quarter, including the following. Our average non-interest bearing deposits remain strong at 38%, ending the quarter at 36%, with overall net core deposit outflow of only around 2% for the quarter. We have significant available excess liquidity with our cash and available borrowing capacity, representing approximately 2.2x our level of uninsured and uncollateralized deposits, which were only 27% at quarter end.
A low level of total unrealized losses with approximately $47 million on $958 million of available-for-sale securities, representing less than 4% of CET1 capital after tax. We have a very high level of capital and strong capital ratios, bolstered by $1 billion of cash sitting on the balance sheet.
We repurchased approximately 1% of our common shares outstanding under our recently approved program. We have strong asset quality, which includes 20% decline in both delinquent loans and classified assets in the first quarter. Since mid-March, we have seen strong net inflow of core deposits with a solid pipeline of non-interest-bearing operating accounts and new relationships. As I have said for several quarters, the effect of the Fed's tightening has been to contract the economy and pull deposits out of the system across all categories.
The recent events only accelerated the outflow of deposits from mid-sized banks to some of the largest banks. Given that backdrop, I think our team performed extremely well and validated not only the strength of our franchise overall, but the solidity of our deposit relationships.
Our focus is on providing solutions to businesses who value our service and expertise that is unmatched at other banks. Those accounts are rate neutral, and we continue to focus on clients that value what we have to offer. The strength of the relationships that we have with our clients has proven to be extremely valuable throughout this recent period. We were proactive in reaching out to remind them of the financial strength and stability of Banc of California, and where appropriate, we used programs like ICS to reduce uninsured exposure for clients who expressed a desire for such coverage.
We added many new clients over the past several weeks who are looking to move to a stronger financial institution, and one of the slides in our presentation shows the growth we continue to see in commercial deposit accounts.
While the deposit base has been largely stable since the recent banking crisis began, given the uncertainty of the macro environment and our conservative approach to risk management, we increased our level of overnight borrowings and added some short-term broker deposits to increase our liquidity. The overnight borrowings brought cash balances to approximately $1 billion at quarter end, which was $750 million more than the approximately $250 million we have averaged in the past.
While these actions had an impact on our profitability in the first quarter, we believed it was prudent from a risk management perspective, and the short-term nature of the borrowings and broker deposits gives us the flexibility to quickly make adjustments in our liability mix in the future.
In terms of new loan production, we have the capital and liquidity to continue serving our clients, and we are still finding good lending opportunities in many verticals that we focus on, including bridge real estate, healthcare, entertainment and media, and education. Overall, we continue to see loan demand muted in the current environment due to higher rates and concern about the potential recession. Our total fundings were lower than the prior quarter.
We saw a decline in our C&I portfolio during the first quarter, which was entirely attributable to three loans totaling $90 million that matured and we chose not to renew. These were legacy loans originated many years ago that didn't provide meaningful deposits, and we didn't like the risk-adjusted yield associated with the renewal of these credits.
We are also in a strong position due to stable credit quality, relatively high levels of reserves, and very limited exposure to areas with scrutiny such as general office. Our investor deck details our very limited exposure to this sector and the strength of our portfolio. As we indicated we would do on our last earnings call if we didn't see enough attractive lending opportunities, we added to the investment portfolio given the higher yields that are now available.
As part of this strategy, we grew our securities portfolio $90 million or 8%, and our new securities purchases are relatively short-term maturities, which will give us the flexibility to redeploy these funds into the loan portfolio as economic conditions and loan demand improve. One of our key objectives over the past few years has been to right-size the expense base while investing to support our future growth.
As part of our regular review of appropriate staffing levels, we made a reduction in FTEs of about 3% during the first quarter. This reduction will help us to effectively manage our expense levels while also enabling us to reallocate some of the cost savings to areas we are investing in, such as our payments processing business, which continues to proceed on the timeline we have previously indicated. As I mentioned earlier, we have focused on maintaining strong capital levels.
Given the high level of capital that we have, we were able to increase the amount of capital that we return to shareholders by increasing our quarterly cash dividend by 67% during the first quarter while authorizing a new $35 million stock repurchase program.
We were also able to take advantage of the market dislocation during the quarter to repurchase approximately 1% of shares outstanding, much of which we were able to do below tangible book value. We'll continue to be opportunistic with respect to implementing the stock repurchase program while ensuring that we maintain high levels of capital to manage through the current challenging operating environment and support the continued growth of our franchise.
Over the past four years, as we have built Banc of California into the go-to bank for small and medium-sized businesses in California, we have focused on building sustainable franchise value and in the process, creating an institution that can perform well and deliver for both clients and shareholders in a variety of economic and interest rate scenarios.
It's worth mentioning again that as a true relationship-focused bank, we typically have the operating accounts that our clients utilize for businesses, and we are deeply connected to them through the services we provide. Quarter after quarter, this has proven to be a truly sticky deposit base that provides stability even during times of stress in the banking system like we are currently experiencing. I'll hand it over to Ray, who will provide more color on our financial performance. I'll have some closing remarks before opening up the line for questions.
Thank you, Jared. Please feel free to refer to our investor deck, which can be found on our investor relations websites as I review our first quarter performance. I'll start with some of the highlights of our income statement, and then we'll move on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the fourth quarter of 2022. Our earnings release and investor presentation provide a great deal of information, so I'll limit my comments to some of the areas where additional discussion is warranted.
Net income for the first quarter was $20.3 million or $0.34 per diluted share. On an adjusted basis, net income totaled $21.7 million for the first quarter or $0.37 per diluted common share when net indemnified legal costs and investments in alternative energy partnerships are excluded.
This compared to adjusted net income of $26.8 million or $0.45 per diluted common share for the prior quarter. The fourth quarter's adjusted earnings excluded a $7.7 million loss on the sale of securities. Our net interest margin decreased 28 basis points from the prior quarter to 3.41%. Our overall earning asset yield increased by 20 basis points to 4.99%, while our total cost of funds increased 51 basis points to 1.68%, which was partly attributable to overnight borrowings and short-term broker deposits we brought on during March to temporarily increase our liquidity, which impacted the margin by 7 basis points.
Our average loan yield increased 15 basis points to 5.07% as the variable rate loans in the portfolio continue to reprice and we are seeing higher rates on new loan production. The average yield on securities increased 47 basis points to 4.66% due to portfolio resets and the impact of the repositioning we did in the prior quarter to sell lower yielding securities and reinvest the proceeds in higher yielding securities.
Our average cost of deposits was 122 basis points for the first quarter, up 43 basis points compared to the prior quarter, while the average federal funds rate increased 86 basis points over the same time period.
As a result, the difference between our average cost of deposits and the average cost of the federal funds rate widened from 286 basis points last quarter to 329 basis points for the first quarter. As Jared mentioned, we are carrying approximately $1 billion in cash, which is about $750 million more than we normally hold.
We intend to hold this excess cash until such time as we see sufficient stability in the banking landscape and specifically in overall depositor confidence. Our non-interest income increased to $9.3 million from the prior quarter, due partially to the previously mentioned loss on the sale of investment securities.
Other areas of non-interest income were relatively consistent with the prior quarter, with the most significant variances being in other income due to a $1.1 million recovery on a loan acquired in the Pacific Mercantile Bank transaction that had been charged off prior to the acquisition and higher income from equity investments of $750,000. Our non-interest expense in the first quarter included approximately $1 million in severance expense related to the reduction in staff that Jared mentioned.
Our adjusted non-interest expense increased approximately $800,000 from the prior quarter, which was primarily due to higher salaries, payroll taxes, and benefits that impact the first quarter. We also had an increase in FDIC insurance expense of approximately $300,000 due to higher FDIC assessments that are now in place.
The effective tax rate for the first quarter was 26.7%, down from the prior quarter's rate of 29.6%. For 2023, we estimate our annual effective tax rate to be approximately 27%-28%. Turning to our balance sheet. Our total assets were $10 billion at March 31, an increase of approximately 9% from the end of the prior quarter due to the increase of our liquidity position.
Our total equity decreased approximately $700,000 during the first quarter as $20 million in net earnings were partially offset by a $10 million shift in AOCI and capital actions, which included both common stock dividends and the repurchase of approximately 5.2 million of our common stock. Our loans were down approximately $61 million from the end of the prior quarter.
This was primarily due to three loan payoffs that we had in the C&I portfolio that Jared mentioned and run off in the SFR portfolio. The decline in these two areas was partially offset by an increase in the CRE portfolio as we continue to see good opportunities in our targeted lending areas. Our total deposits decreased $169 million from the end of the prior quarter.
The decline was primarily due to outflows we saw during January and February, which was a continuation of the trend we had been seeing of clients seeking higher rates for their excess liquidity, combined with our focus to grow low-cost commercial deposit relationships. As Jared indicated, since the second half of March, our total deposits have increased, excluding broker deposits. Our credit quality remained solid in the first quarter.
We had stable non-performing loan and non-performing asset balances, while our delinquent loans declined by $19 million or 20%. While our asset quality was stable, we recorded a provision for credit losses of $2 million, which was primarily attributable to net charge-off activity and an increase in the general reserve, partially offset by changes in the portfolio mix and a decrease in total loan balances.
Our allowance for credit losses at the end of the first quarter totaled $89.4 million, compared to $91.3 million at the end of the prior quarter, and our allowance to total loans coverage ratio stood at 1.27%, compared to 1.28% at the end of the prior quarter. At this time, I'll turn the presentation back over to Jared.
Thank you, Ray. Our top priority will continue to be prudent risk management while economic conditions and the operating environment remain challenging. However, the work we have done to build our franchise the right way has put us in a position to capitalize on the current disruption and dislocation we are seeing in our markets. The attractive qualities of our franchise are even more scarce today than they were at the beginning of the year.
Ultimately, we expect to be a net beneficiary of the current turmoil in the banking industry, both in terms of adding new clients and banking talent as well. We're going to continue to focus on what we do really well, which is leverage our strength in treasury management to bring in relationship-oriented business clients and capitalize on the attractive lending opportunities provided by these clients.
In the second half of the year, our new payments processing business will further improve the value proposition that we offer clients and enhance our business development capabilities. As many businesses reevaluate their banking relationships in light of the current environment, we believe our differentiated payment solution will be a distinct competitive advantage. We are focused on creation of permanent franchise value by growing valuable deposits, continuing to produce earnings, and growing tangible book value.
The environment we are currently in, which places stress on margin and growth, is temporary, and we will come out of it having continued to build on the fundamentals that we believe in. I want to thank our colleagues at Banc of California for all their efforts in this environment. We have a remarkable team.
We take pride in our proven ability to execute, and we believe that we can effectively execute and capitalize on the current environment in a way that will create long-term value for our shareholders. With our solid foundation of low-cost deposits, significant available excess liquidity, high levels of capital, and strong credit quality, we are well-positioned for the road ahead. With that, operator, let's go ahead now and open up the line for questions.
Thank you. We'll now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two . At this time, we'll pause momentarily to assemble our roster. Our first question comes from Timur Braziler from Wells Fargo. Please go ahead. Hi, Timur. Is your line open?
Hi. Good morning, everyone.
Morning, Timur.
Jared, you had mentioned that post-March, you've seen a strong inflow of core deposits and the pipeline there is strong. Maybe can you just kind of go through what the competitive landscape in California has looked like subsequent to the failure of Silicon Valley and the stressors of some of the other West Coast banks, and if you can quantify kind of what those inflows and pipeline look like?
Sure. Happy to give some color there. You know, we're a little bit at ground zero, right, for all the activity that's been disruptive in the market with, you know, a heavy presence of First Republic and obviously Silicon Valley Signature had built quite a presence out here. Then you have some of the other names of some of our competitors who have been in the headlines that have a heavy presence out here. A lot of disruption, a lot of concern from clients around uninsured deposits and what that means.
Overall, I would say that the first competitive event was really about safety and depositor confidence. You know, were people's deposits safe?
I think, again, our team did a remarkable job of giving our clients confidence and explaining our balance sheet and the strength that we have. I think that's proven out. You know, we're sitting at 36% non-interest-bearing deposits. I mean, it's, let's not lose sight of where that is. I see that number growing from here on out. I mean, I'm looking at our pipeline, it looks strong.
There could be outflow. Again, the backdrop was a shrinking economy where deposits were flowing out of the system. To stay flat, you had to bring in new relationships because your existing depositors weren't gonna bring in more deposits to you because their balance sheets were shrinking.
We're being effective in terms of if you're flat, you're bringing in a lot of new relationships. If you're growing, that's fantastic in terms of non-interest bearing. Our treasury management solutions have really been able to shine. We benefited from a lot of the outflow that came from, you know, the resolution of Silicon Valley and Signature. We were careful.
There was a lot of stuff we turned down. We thought it was too large, and, you know, we didn't want to end up in a concentrated position. I feel really good about overall where we sit. The first thing was about safety, and the second was about, you know, can you help people solve problems? The third thing is about rate.
There's absolutely competitive pressure right now from the rate side. If depositors have excess balances, there isn't anybody who isn't asking for rate, which is, you know, and they're trying to, you know, if they're, if they're retail oriented, they're probably more likely to be highly rate sensitive. If they're, if they're business accounts, you're already providing some services for them, and you can, you know, talk about the value that you're giving them on other things which mutes the demand for rate to a certain extent, only to a point.
At some point you have to be giving them a decent enough return on excess balances. I think we're holding up really well.
Our team has just done a remarkable job. We're very good at what we do on the business side. That's gonna continue to be our focus.
Okay, great. I guess as you're looking out at the remainder of the year, understand that lending opportunities are kind of slower than what they had been. Just I guess looking at the loan to deposit ratio here ticking up over 100%, how are you thinking about that dynamic of loans versus deposits? To the extent that you are funding core relationships on the loan side, is there the ability to kind of fund those with incremental core growth, or do you think that incremental funding dollar, at least in the near term, is gonna continue coming from the brokerage space?
We sit today a little over 100% or just around 100%. It's kind of moving around that number. We're comfortable where we sit. With every new lending loan opportunity that's coming in, we obviously are asking for deposits. Most loans are not self-funding. As I said earlier in the year, I didn't think there was gonna be much of a loan growth opportunity. As I said, we were gonna be low single digits, and that's probably where we'll end up based on what we see now. We're kind of trading out of loans and going into new loans, and they're kind of replacing each other. It's not really putting pressure on the balance sheet.
If we saw really good opportunities because we, you know, in terms of volume and we wanted to lever up, if the deposits weren't there, we would have to pay for it with brokered, which would mean or some other borrowings, which means that we'd have to charge a higher amount on the loans to get the same, you know, yield because obviously the borrowings and brokered are more expensive.
Right now it seems to be moving kind of in tandem, in terms of the loans that are paying off and the loans that we're finally replacing them. If we grow a little bit, I think our deposits are good enough to keep our loan to deposit ratio around where it is.
Okay. One last one for me. Again, bigger picture question. Just with all the dislocation that's taking place in your state particularly, is there some sorts of arm race in getting any kind of meaningful scale to better capitalize on that? I guess just what are your thoughts on broader consolidation, activity taking place in California?
I think it's a little bit early, I don't think, you know, we're fully out of the woods yet in terms of how things are gonna play out. I think there's a lot that depends on what happens with First Republic and where it goes. I think they're supposed to report earnings on the 24th, and I know there are a lot of interest in that and kind of what they see as their path from here. I think there's a lot of things that are waiting for that event to happen. There's a lot of conversation about the future of banking and consolidation and you know, what that's gonna look like and what size levels are appropriate.
I really like where we sit from a scarcity value in terms of our franchise with the really, really strong deposit base that we have with, you know, really good credit quality and high levels of capital. It's gonna give us a lot of optionality to think about, you know, how we can grow and what we might wanna do. We have a lot of organic options.
Obviously, you know, we've shown that we've been an acquirer in the past. I think there are a lot of smaller banks that might decide that they just can't get enough scale. I think we're gonna be a beneficiary of that, both organically through our acquisition of talent and clients through this disruption in the market and potentially, transactionally if the right opportunity presents itself.
Great. Thanks for the color.
Thank you.
Our next question comes from Eric Spector from Raymond James. Please go ahead.
Hey, this is Eric Spector. I'm on the line for David Feaster. I appreciate you taking-
Yeah. Good morning, Eric.
I appreciate you taking the question. Just wanted to follow up a little bit on the, on the lending side. Curious where particularly you're seeing good risk-adjusted returns and then where maybe you might have less appetite for credit here. I know you mentioned low single-digit growth throughout the remainder of the year. Is it possible that you shrink if you don't see good risk-adjusted returns? Kinda just some additional color on the competitive environment too would be helpful.
Sure. Absolutely, there's a possibility that we shrink. We're gonna optimize earnings, and return to shareholder value, and we could shrink loans and go into the securities portfolio pretty easily when you're getting returns close to six and, you know, pretty short duration. Obviously in the 5s with, you know, very safe place. You've gotta be able to see a good risk-adjusted return to wanna lend today. You have to be there for your best clients and the ones that are there that have proven themselves over and over again. You wanna make sure you're lending to them, especially at times like this.
If we don't see anything, I mean, I think that's really one of the strengths of our franchise is that we do have discretion and restraint, and we're not looking to grow just to grow in an environment that's not really a growth market. It's, it's just not. I think the outlook that we have that we said at the beginning was cautious, and we remain cautious. We're really focusing on our deposit franchise and being there for our clients.
You know, we'll lend if we see good opportunities. We are seeing some stuff in bridge real estate. There is some transactional activity that's happening. I held a real estate roundtable the other night with some of our clients and some of our senior executives.
You know, around the table, it was pretty quiet in terms of transaction activity. Everybody's sitting on the sidelines waiting for the next opportunity, but transaction volume in real estate right now is very slow. We are seeing some good opportunities in our media and entertainment area. We're seeing some stuff in education. Warehouse was, you know, their balances were relatively flat, but they're putting out some volume that's just replacing stuff that's running off, and that's working well.
On the C&I side, we actually had some good loan activity that would have grown, but for the $90 million, we decided not to renew just because we didn't think the risk-adjusted return was there and the deposit relationships weren't there.
We would have seen a little bit of activity there. It's just a very kind of low volume market right now where we sit.
Got it. That makes sense. Just also wanted to touch on the new commercial accounts you added. It looks like you added about 250 this quarter. Just curious what's attracting those clients, I think, California, where you're bringing those relationships over and, like, how you think about non-interest bearing balances going forward?
Yeah. Thanks, Eric. We are able to bring in clients through sophisticated treasury management solutions. We target businesses that need those solutions. Generally, their accounts on earnings credit with analysis where, you know, our earnings credit will offset the fees and charges if they keep sufficient balances. Oftentimes, these are clients that need multiple accounts and wanna have some sort of centralized reporting. Oftentimes there are loans and lines of credit that go with it. Not always.
You know, there are certain verticals that we target that have specialty needs in this area. I don't wanna give away too much because it's kind of how we differentiate ourselves in the market, but, and compete against others.
It's just something that we've been building for the four years that I've been here, and every year it gets better and better. You know, when I was reading the reports that came out this morning, you know, there were two things that caught me a little bit by surprise. One was the heavy focus from a headline perspective on earnings.
I mean, it wasn't more than three or four weeks ago that it was, it was like Armageddon in banking, and it was all about balance sheet strength and liquidity and access to available liquidity and uninsured deposit levels, and, like, nobody cared about earnings. The headline to see about earnings missing by $0.01 or whatever, I just got a chuckle out of that.
The second thing has to do with, you know, deposit strength. I don't think this is really the quarter for people to be annualizing, you know, what happened in the quarter. I mean, this was one of the most unusual quarters in history from my perspective. You know, what happened this quarter is in no way indicative of what's gonna happen in the future unless we experience a repeat of it this quarter. Most likely, things have stabilized.
Again, we'll see what happens with the First Republic. The outlook for deposits, I don't think people can annualize, you know, a 2% outflow or whatever it was in any one category.
I think they should look at kind of, you know, stability and strength and overall metrics. We feel very good about where we sit with 36% non-interest bearing. I see that number, maintaining or growing throughout the year. I mean, it could be up or down 1%. Overall, we expect that to grow over time and get back to 38 and then to 40.
Yeah, appreciate the color. Just wanted to touch on interest rate risk management and kind of your philosophy there. You've been very active with the restructuring last quarter and the cash flow hedge this quarter. Can you just elaborate exactly what you put on this quarter with the $300 million hedge? Just curious how you're thinking about managing rate risk at this point, and whether you're looking at additional hedges or derivatives or any tools you have to manage your rate sensitivity going forward. Any thoughts there would be good.
Yes. Ray, I'll let you jump in here on the hedge, but let me just give an introduction. I mean, we're rate neutral at this point. You know, we were slightly asset sensitive last quarter. We're rate neutral at this point. We don't manage to our margin. It's an output. We're trying to manage to profitability in the quarter, but obviously we have a perspective on, you know, where we think the margin's gonna go over time.
I could see the margin going down at this point, slightly, just based on where I see things. You know, coming back because there is a lot of rate pressure, but it's really gonna depend on how we grow non-interest bearing and how quickly we do it.
Obviously loan yields are not you know, loan yields are really good, but there's not enough volume to offset kind of just the overall rate pressure at the bottom. We could make a lot more loans. I mean, we see loans all the time. It's just we're just not seeing stuff that we love enough to wanna do it right now. There was something I saw yesterday that we just, we just turned down. It would have been safe, but it just didn't feel like it was the right time to be doing it.
Again, margin's a little bit of an output of just kind of how active we wanna be. In terms of the hedge, we're selectively looking at things that will protect against, you know, future rate changes, but we're not going all in on any one direction.
We're just doing kind of selectively bucketing a couple things. This hedge was $300 million. Ray, it was a five-year hedge that we did, or was it three years?
Five years. That's correct.
It was five years, and we locked in at I think it was at 3.8% for five years.
That's correct.
For a group, for a group of, thank you, for a group of deposits. The idea was, okay, well, we think that the cost of these deposits is gonna go higher over time. There was, it was a whole group that was maturing. Our idea was that, okay, well, 3.8% for five-year money is a good rate for us. You know, in kind of any environment, you kind of borrow at 3.8% for five years. If rates go down, well, it was still a good cost at the time. If rates go up, we kind of make a little more money.
The model obviously said based on the forward curve that we were gonna make a lot of money on this hedge, but we're not, we're not trying to bet really. We're just trying to kind of bucket little things that we see that might be maturing where we can lock in cost. Just you gotta be comfortable that the cost is fair at the time you do it. If rates move up or down, you're kind of agnostic to it because you just thought it was a fair trade at the time. I hope that provides some color, Eric.
Great.
Yeah. That's helpful. Thanks for taking the questions, and I'll step back.
Our next question comes from Gary Tenner from D.A. Davidson. Please go ahead.
Thanks, guys. Good morning.
Good morning.
I wanted to ask about the brokerage CDs added in the quarter. Can you give us a sense, Ray, in terms of the kinda term and rate, just, you know, so we have a basis for how we're thinking about modeling, you know, those balances moving around going forward?
Ray, do you have the color on that?
Sure. On the broker CDs, you know, we ladder those out over time to, you know, manage our cost of funds. you know, we have various durations that we use that to help manage our liquidity and, you know, give us some optionality to, you know, manage our interest expense.
We added about $300 million, Gary. They were, you know, laddered, as Ray said. I don't know that we can give you a blended rate. Ray, I don't know if you have just as an example, like what the cost is for a 12-month broker CD right now or a six-month broker CD 'cause they were mostly shorter duration.
Right. those would be in about the 4.85%-5% range.
Okay. That's fine. I appreciate that. Then just in terms of the head count reduction that you mentioned, will we see sort of a benefit there in the second quarter temporarily before there's reinvestment? You know, what would be the annual savings from the cuts initially and kind of thoughts on reinvesting?
Yeah. I don't think you're gonna see much because I think we're gonna just use it in other ways. You know, we've guided to kind of the $48 million-$50 million quarterly operating expense number, and we're in the mid-$49 millions right now. I think that, you know, between $49 million and $50 million is probably where we're gonna sit.
Okay. Thanks. In your comments, Jared, you very briefly kind of mentioned, you know, the payment product. Can you kind of just update us? You said things are tracking on schedule. What kind of update us on where things are and kind of, you know, transactions or, you know, other kind of metrics you could provide for us?
Sure. Well, where we sit today is we intend to onboard clients beginning in the, in the second half of the year, you know, early in the third quarter and hopefully a little ahead of that. We'll start building traction through the end of the year so that we think by, you know, early 2024 and then, and then on through 2024, this will be a really big contributor and a meaningful one to our numbers that year in terms of fee income and likely deposits.
The way that we're looking at onboarding clients is, you know, we're gonna, you know, walk before we jog, before we run. You know, we've been building our risk infrastructure and we're testing it now and making sure that it's right.
We expect to be onboarding clients here, very shortly because you can test as much as you want in kind of a non-live environment, but I think, you know, you gotta bring on some real clients to then test the system and make sure it does what you think it's gonna do, the way you think it's gonna do it, and then you start adding more clients.
In fact, we've been in very close touch with the regulators as we've been doing this, and I think, you know, the approach that we're taking is the right one. You know, I don't have much more to add there, Gary, other than, you know, I fully expect us to be bringing on clients in the second half of this year.
You know, We'll start with clients that are of a certain size, and obviously they'll grow in size and volume as we get through the year.
Thank you.
Yep.
Our next question comes from Matthew Clark from Piper Sandler. Please go ahead.
Hey, good morning. Thank you.
Good morning.
On the, on the margin front, do you happen to have the spot rate on deposits at the end of March and the monthly margin in March? Just to give us some visibility.
Yeah. I don't think Ray, did we disclose that or not?
We didn't disclose the spot rate in March, no.
Okay. I would say that, you know, just generally. This excess liquidity that we have on the balance sheet affects our margin by, I don't know, 7-10 basis points. It's about $2 million of expense, of interest expense that we're carrying until we choose not to carry it. I certainly want to wait and see what happens with First Republic, and then we'll take it down. It's about $2 million of expense and 7-10 basis points on the margin. I think you can expect to get a benefit there when we take that out.
On the other hand, costs in March were definitely higher than they were averaging for the first quarter. I could see our margin being down 10-15 basis points in the second quarter, maybe 20.
I mean, I just don't know. It's going to really depend on the flow of non-interest-bearing deposits. I don't know that anybody can predict what that's going to look like. obviously, if we see good loan opportunities and we choose to do it and we want to borrow to do that, it might affect our margin, but we're going to make more money. It could be 20 basis points down, Matthew. I just don't know where it's going to be. We were looking at it last night, and there's a whole bunch of factors that affect it, so I hope that color helps, though.
Yep. Yep. I'm just looking for a guidepost.
Yep.
On the deposit side at least.
Yep.
Just on the non-interest-bearing deposits front, you know, encouraging to see that you grew commercial accounts. Can you give us some sense of what you witnessed in terms of the runoff and whether or not there was anything chunky in there, whether or not you expect some of that to come back, and whether or not there's some lag effect in terms of opening new commercial accounts and bringing over deposits?
There's definitely a lag effect. I mean, that's part of what we see in the pipeline in terms of not only new accounts, but also the volume, you know, that we'll get in those accounts. It does take time to fund them, after you open the accounts, although, you know, we bring it over pretty quickly. In terms of, you know, kind of chunkiness or things like that, I think anything that. We didn't lose any relationships. I was really pleased that, you know, nobody said, "Hey, we're pulling our money."
"We're going over here." like every bank, you know, we certainly banks our size, we experience clients saying, "Look, I've got this new money coming in, and my board wants me to spread it here or spread it there." We think that there's opportunity for some of those funds to come here. I was on a call with a client the other day who has an infusion of some money from a private equity firm, and the private equity firm said, "Hey, I know that's your primary bank, but we'd like you to maybe put this money, this infusion somewhere else at one of the money center banks." Those conversations are definitely happening.
They, of course, you know, advocated for us and they said, "Hey, we want to get you on a call with Banc of California, and we'll get their people on the phone." That is happening, which is why that, you know, we're not losing any money at this point. It's all the opportunities ahead of us to bring that stuff back or to bring in new clients. That's why I see our deposit base continuing to grow because we did so well in spite of all of that.
Okay, great. Just a housekeeping item, if you have it, the weighted average cost of that you repurchased stock this quarter?
We haven't disclosed that.
Okay, that's fine. Thanks.
Thank you. Matthew, I think we did say that, you know, a lot of it was purchased below tangible book. It was, you know, we said the number that we did through the end of March and then how much we bought after the end of March. You can kind of figure out where we might've been.
Yep, that's fine.
The next question comes from Kelly Motta from KBW. Please go ahead.
Hi. Thanks for the question. I'll carry on the repurchase commentary. Clearly, you were in the market and continue to be this quarter. As you look ahead, capital levels are really strong, which, you know, bodes well in this environment. What's your appetite for repurchases here and maybe an outlook for capital management going forward?
Yeah. Thanks, Kelly. Look, we feel really good about our company and where we sit for all the reasons we mentioned in our prepared remarks. You know, the fact that we're choosing to kind of be a little bit more conservative here and, you know, to focus on growing our deposit base and building, you know, and focusing on our strength, I think is fine. Absolutely, we'll take the opportunity to buy back our stock. We have a repurchase authorization for $35 million.
I think it's, you know, kind of pretty low relative to our capital levels, but we wanted to be prudent not knowing what the environment was going to look like, and we'll be opportunistic in buying back our stock.
I certainly don't like our stock at these levels, but if it is going to be at these levels, we think it's an incredibly good bargain to buy our stock here.
Understood. Switching over to credit.
Wait, Kelly, one other thing. I mean.
Yeah.
Just to reflect on that. I mean, you know, we're sitting with such low levels of unrealized losses in our available-for-sale portfolio and even in our HTM that, you know, we know that and our securities portfolio is also highly liquid in terms of its, you know, moderate to low duration. Our tangible book value doesn't have the numbers running through it.
We continue to grow tangible book, and so it's just kind of surprising kind of where the stock is sticking out even with, you know, 36% non-interest bearing. There's a whole bunch of reasons why we should keep buying our stock. As long as it sits down here, I think we'll be appropriately opportunistic.
Got it. Thanks, thanks for the color. Switching to credit with the charge-off you had this quarter, can you provide any color as to what composed those charge-offs? As we kind of look ahead, in a normalizing credit environment, what would you view as a normalized level of charge-offs? Would it be similar to this 20-ish basis points you had here? Any puts or takes would be helpful.
Yeah. I think if I remember correctly, it was like $500,000 was the charge-off. I mean, it was a small event that we had prepared for. We did put aside $2.5, and so the net number was $2. It was just based on what we saw. It was kind of based cautious outlook. I don't see anything specific that I'm concerned about. We have, you know, obviously we disclosed our very, very low levels of office exposure. I think talking about CRE is too general because multifamily is technically CRE.
You know, we like to break that up. As it relates to CRE office, general office is a very, very small number for us. That's why we laid out those numbers.
I'm not predicting any credit problems going forward, and I think our reserve levels are adequate and, you know, relative to others they're actually pretty high who have similar portfolios to us. We from a modeling and, you know, we follow our model, and from a model perspective, this quarter we felt that this amount was appropriate.
Thanks for that. Can you expand upon just like the composition of that multifamily portfolio? Just what a typical credit looks like, size, why you feel confident there? Just because we are feeling questions lot on CRE. Just any color on your confidence there.
Well, multifamily or multifamily or office?
Multifamily since you mentioned it.
I mean, our multifamily portfolio has held up extremely well over, you know, all cycles. You know, we are lending primarily in California to infill housing that is in some of the densest demographic areas in the country, with a huge housing shortage. Like San Diego, for example. I've mentioned this before. They're approximately 300,000 units short, and they're only bringing online about 10,000 units a year.
You know the catch up is not looking very good. In, you know, seeing across the street in my office in Brentwood from a building that's going up, you know, that's gonna be sold out really quickly. We don't have a single non-performing multifamily loan, and I don't expect it to happen.
You know, a lot of the conversation has been around how do you stress multifamily for rate changes? Let's say you have a loan that's at 3.5% or 4% that's maturing over the next 12 months. The rate for that loan today might be 7%, might be 7.5% depending on the loan. Well, most of these buildings are fully stabilized. If they are, there's a whole bunch of options. If for some reason rents have not caught up and kept up with, you know, where rates are going from an industry perspective over those four or five years that that loan has been outstanding, then the borrower is likely gonna have to come up with equity.
There are a whole bunch of people I mentioned I was at this real estate dinner the other night. I mean, there are all these people sitting on the sidelines that are willing to put in GP equity next to somebody if they don't have the liquidity to put in the, to bring down the loan. Most of them do. They could sell the property. They'd be able to sell it pretty easily. The bank technically doesn't need to bring the loan up to 7.5%. I mean, if the loan's on at 4% and we bring it up to 6.5%, we still have a better loan than we did before from a rate perspective. We wouldn't do that. We would bring it up to market rates.
The other thing is Fannie and Freddie are very, very active. Fannie and Freddie are lending right now on multifamily properties in the mid to low 5s. The reason people don't go there is because they lose some flexibility in terms of the timing of the loan, and you have a defeasance, and you know, you have to leave the loan outstanding longer, so you lose some flexibility. For all those reasons, I don't see any problems in multifamily.
Starting with just the tight demographics and the lack of the high demand for housing and the shortage of housing in our market. There are all these other reasons why I don't think multifamily will have stressors.
Those same conditions don't exist for office, which is why, you know, I think there is a potential problem with office. That's why I'm glad that we have such low exposure. Our loans are recourse. They're performing very well to people with high liquidity. You know, we put some of the stats in there, and we have just such low exposure to general office. I have a list on my desk.
We only have about $80 million of office that is maturing in the next through the end of next year, which is, what is that? You know, 17 months, 16 months. You know, I have a list on my desk of those loans, and I don't see one that's a problem.
I really appreciate all the color. I'll step back. Thank you.
Sure. Thanks, Kelly.
Our next question comes from Tim Coffey from Janney. Please go ahead.
Great. Thanks. Morning, Jared. How are you doing?
Good morning. Good. Good morning.
Hey, if I can just follow up on the CRE commentary there. You know, good details in the deck on the different property breakdowns. I'm wondering of the general office, how much of that is in a central business district?
Well, there's no central business district in Los Angeles. You know, we have downtown, we got Brentwood, we got Westwood, we got Century City, we got Woodland Hills, we got Santa Monica, we got Culver City. I mean, there are pockets throughout. There's no none of these buildings are sitting like, you know, in a desert.
Yeah.
You know.
Okay.
Some of these buildings are in San Diego. Like, they're just all pocketed in. When we underwrite loans and we look at what we wanna lend on, that's part of the understanding is, you know, that we have to do is look at, you know, what is the aptitude and the attitude for possible tenancies based on the turnover that we would might foresee during the duration of our loan.
You know, are they gonna be able to get rents that would, you know, and find tenants, and that's all part of the appraisal process and the evaluation of the loan. We believe that they're sufficiently well located to hold up to the extent that office is gonna hold up at all. I mean, that's not gonna be the reason why these properties don't do well.
It's gonna be because of a transition away from office. Again, our loans are recourse. We hold our borrowers, we get frequent monitoring and, you know, we just had a loan where we didn't like the occupancy, and we went to the borrower, and he put up a whole bunch of money and paid down the loan. You know, that's why we were a recourse lender where our loans are guaranteed by people that have the wherewithal to carry the loans.
Okay. Okay. Then I wanna get your thoughts on the CLOs. You know, part of Western Alliance's de-risking is that they've considered selling some of their CLO holdings. I was wondering what your thoughts were on continuing to hold the CLO portfolio.
We're in a very different position than Western Alliance, I think, and from a number of perspectives. I don't know the size of their portfolio. You know, when I joined the bank, Tim, as you remember, I think our portfolio was over a billion and a half of CLOs. We're sitting now, I believe, at under $500 million, it's kind of self-liquidating. It obviously was tested through COVID. As you know, they trade on credit spreads, that's something that we monitor very carefully. We're in double A and triple A CLOs. It's part of our asset sensitivity. You know, it's something that's more asset sensitive because they're short term. We don't have any plans to sell it right now.
I think it's gotten down to a reasonable level of our overall securities portfolio, and it's performing well.
Okay.
We've had offers to buy it because we've had offers to buy it, but it's got a pretty low unrealized loss position right now, and I think we certainly wouldn't sell it at a loss because there's no reason to do that. If it was trading at a gain and we could trade into something else that was equivalently short term, would we look at it potentially, but I certainly wouldn't sell it at a loss.
Okay. All right. Those are my questions. I appreciate the time. Thank you.
Yeah. I guess I should also say never say never, but, you know, but that's, that's at least the way I feel today.
Understood. Thanks.
Thank you.
Again, if you have a question, please press star then one. Our next question comes from Andrew Terrell from Stephens. Please go ahead.
Hey, good morning.
Morning.
Most of mine have been asked and answered already. I did have a couple just going back to the office commercial real estate book. I understand it's a low portion of loans for you guys, and the underwriting looks solid at a 54% LTV. I'm just curious, have you seen, Jared, any office properties, either within your book or across, your markets get recently reappraised and what the value change was on the property? Just trying to get a sense of kind of incremental comfortability here with how low leverage, or how low the, leverage points are across your portfolio.
Yeah. Ours are recently appraised, you know, recent numbers. We do it annually. You know, these are relatively recently done. I feel very good about our portfolio. I wouldn't take away from our numbers that, you know, well, it's 55% loan to value, but that was based on an appraisal two years ago, and it's really 85%. That's not the position of our portfolio. I will tell you that generally, yes, you know, office properties have gone way down in value, it has to do with the size of the property primarily and the location and kind of, you know, a whole bunch of other factors. Large office buildings are under tremendous stress. You know, we don't have any of those.
We have B and C low-rise buildings and, you know, where, you know, you got the CPA working there because he doesn't wanna work from home or she doesn't wanna work from home, and you got, you know, somebody else. They're kind of suite-based buildings that are not very large. Large office buildings, under a tremendous amount of pressure unless they have long-term anchor tenants.
You know, I think that these the Wells Fargo building in San Francisco just traded for $200 a sq ft in downtown, which was crazy given what it would cost to replace that building. Most of these large buildings are selling for well below replacement cost, and smaller buildings, less so.
Yeah. Okay. Similar thing on the, on the debt service coverage. Do you like, how recently is that debt service number refreshed? Is it similar as to how often you get appraisals on properties?
No, it's more frequent. Yeah, we're looking at this stuff, you know. Almost quarterly in terms of understanding rent rolls and, you know, cash flow of buildings and things like that. It depends on each loan. You know, we obviously, things that have low debt service coverage, we're looking at and are in constant conversations. Things that are higher that have been performing with good rent rolls and stable tenants, there's not as much need to look at.
Yep. Okay. Then on the, on the three credits for $90 million or so that were sold this quarter or exited, I think it's good to see some balance sheet kind of pruning where it makes sense. Do you feel like there's, as you look out, kind of anything else across the loan portfolio that might be legacy in nature that you could be looking to trim up over the next couple of quarters?
Yeah. There's a whole bunch of stuff where, you know, the deposit relationship just is not there for the size of the loan.
Mm-hmm.
As this stuff comes up, we're sizing and saying, "Look, you know, you gotta put more compensating balances in our company or you're gonna have to go, borrow from somebody else." There were loans that were made before I got here that just didn't have deposits associated with them. We've tried to bring in deposits from those relationships over time, but you can't necessarily cause somebody to bring them over with you unless they have a new request.
Once the loan's made, you know, we're committed on the loan. I think that's the easiest opportunity is rather, is looking at any of those relationships where we haven't been able to bring in deposits for whatever reason, on that specific loan. We just won't renew it.
I mean, everybody here knows that we are not making any loans without a deposit relationship, period. That's been the way it's been since I've been here. You know, it's even more true today.
Yeah. Okay. Apologies, I might have missed this. Can you talk to non-interest-bearing deposit flows since quarter end? Have you seen a slowdown in the cadence of NIB outflows? Does it feel like that's improved so far? Just trying to get a sense of as we work into 2Q, kind of the level of stability for the NIBs.
Yeah. No. 36%, I mean, where we sit today, where we sat at quarter end, that feels right. We expect it to grow from there. you know, it's just we had some early outflow in the beginning of the quarter that we knew was coming. There was some acceleration of outflow, but not in size, but in terms of kind of numbers that happened, you know, when the meltdown happened. A lot of it came back. We have a pipeline now where we've got some really good, you know, good opportunities in front of us that I feel good about. I think our NIB is gonna be stable and growing.
Yeah.
It's hard, as I mentioned at the beginning of the, you know, I've been saying this for a while, that the economy has been shrinking and deposits are you know, I think it was Bank of America had 2%, you know, decline in deposits. It's not an unusual number, given the way the economy is shrinking. We're competing pretty hard right now, and I think our team's doing a really good job, and it's a big focus of ours. I'm optimistic. I don't know what the answer is. I don't know where the number is gonna be. Right now it feels like 36% is pretty stable, and I see the opportunity to grow it from there.
You know, if something else happens and there's another little chink in the armor and there's a, you know, something else happens, then all banks could see some outflow and then we'll be down and we'll bring it back up. NIB is really using services at our company.
Mm-hmm.
It's kind of the last money to kind of wanna leave.
Right. Okay. Well, very good. Thank you for taking the questions. I appreciate it.
Yeah. Thank you, Andrew.
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