Banc of California Inc (BANC) 2023 Q1 法說會逐字稿

Hello, and welcome to Banc of California's First Quarter Earnings Conference Call. (Operator Instructions) Today's call is being recorded, and a copy of the recording will be available later today on the company's Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release, which is available on the company's 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, and 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 2 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 4 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 noninterest-bearing deposits remained 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. And since mid-March, we have seen strong net inflow of core deposits with a solid pipeline of noninterest-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 midsize 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 the 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 use programs like [ICS] to reduce uninsured exposure for clients, who express the 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 focused on, including bridge real estate, health care, 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.

And 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 3 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 rightsize 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 time line 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 4 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 it's 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.

Now I'll hand it over to Ray, who will provide more color on our financial performance. Then I'll have some closing remarks before opening the line for questions.

Thank you, Jared. Please feel free to refer to our investor deck, which can be found on our Investor Relations website 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 leave 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 brokered 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 Fed 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 Fed 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 noninterest 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 noninterest 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 has been charged off prior to the acquisition and higher income from equity investments of $750,000. Our noninterest expense in the first quarter included approximately $1 million in severance expense related to the reduction in staff that Jared mentioned.

Our adjusted noninterest 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% and down from the prior quarter's rate of 29.6%. For 2023, we estimate our annual effective tax rate to be approximately 27% to 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 3 loan payoffs that we had in the C&I portfolio that Jared mentioned and runoff in the SFR portfolio. The decline in these 2 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 brokered deposits. Our credit quality remained solid in the first quarter. We had stable nonperforming loan and nonperforming 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 remains 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. And 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 has leveraged 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.

(Operator Instructions) Our first question comes from Timur Braziler from Wells Fargo.

Jared, you had mentioned that post March, you see the 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 stresses or some of the other West Coast banks and if you can quantify kind of what those inflows on pipeline look like?

Sure. Happy to give some color there. We're a little bit at ground zero, right, for all the activity that's been disruptive in the market with a heavy presence of First Republic. And obviously, Silicon Valley, Signature had built quite a presence out here, and then you have some of the other names of some of our competitors who have been in the headlines that are -- have a heavy presence out here.

So a lot of disruption, a lot of concern from clients around uninsured deposits and what that means. And so overall, I would say that the first competitive event was really about safety and depositor confidence, where people's deposit safe. And 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, and I think that's proven out. And we're sitting at 36% noninterest-bearing deposits. I mean it's let's not lose sight of where that is, and I see that number growing from here on out.

I mean, we just -- I'm looking at our pipeline, it looks strong. And there could be outflow. And so again, the backdrop was a shrinking economy, where deposits were flowing out of the system. And so to stay flat, you had to bring in new relationships because your existing depositors weren't going to bring in more deposits to you because their balance sheets were shrinking. So we're being effective in terms of -- if you're flat, you're bringing in a lot of new relationships, and if you're growing, that's fantastic in terms of noninterest bearing.

So our treasury management solutions have really been able to shine. We benefited from a lot of the outflow that came from 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 we didn't want to end up in a concentrated position. And so I feel really good about overall where we sit. But the first thing was about safety. And the second was about, can you help people solve problems? And the third thing is about rate. And there is 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 -- and they're trying to -- if they're retail oriented, they're probably more likely to be highly rate sensitive. If they're business accounts, you're already providing some services for them and you can 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. So I think we're holding up really well. Our team has just done a remarkable job, and we're very good at what we do on the business side, and that's going to continue to be our focus.

Okay. Great. And then I guess, as you're looking out at the remainder of the year, I understand that lending opportunities are kind of slower than what they had been. But 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? And 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 going to continue coming from brokered space?

So 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. But as I said earlier in the year, I didn't think there was going to be much of a loan growth opportunities as I said, we were going to be low single digits, and that's probably where we'll end up as -- based on what we see now.

So it's kind of -- we're kind of trading out of loans and going into new loans, and it's kind of they're kind of replacing each other. So it's not really putting pressure on the balance sheet. If we saw really good opportunities because we -- 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 yield because, obviously, the borrowings and brokered are more expensive.

But 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 finding to replace them, which is -- and 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. And then one last one for me, again, bigger picture question. Just with all the dislocation that's taking place in your state, particularly, is there sorts of arm race in getting any kind of meaningful scale to better capitalize on that? And I guess, just what are your thoughts on broader consolidation activity taking place in California?

Well, I think it's a little bit early, and I don't think we're fully out of the woods yet in terms of how things are going to play out. And 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. And so 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 what that's going to look like and what size levels are appropriate I really like where we sit from a scarcity value in terms of our franchise with a really, really strong deposit base that we have with really good credit quality and high levels of capital. It's going to give us a lot of optionality to think about how we can grow and what we might want to do. We have a lot of organic options. And then obviously, 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 -- they just can't get enough scale, and I think we're going to 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.

Our next question comes from Eric Spector from Raymond James.

This is Eric Spector, online for David Feaster. I appreciate you taking the question. Just wanted to follow up a little bit 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 risk-adjusted returns? Kind of just some additional color on the competitive environment, too, would be helpful.

Sure. Absolutely, there's a possibility that we shrink. We're going to optimize earnings and return to shareholder value. And we could shrink loans and go one of the securities portfolio pretty easily when you're getting returns close to 6% and pretty short duration. And obviously, in the 5s with a very safe place. So you've got to be able to see a good risk-adjusted return to want to 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 want to make sure you're lending to them, especially at times like this. But if we don't see anything -- I mean, I think that, 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 just not.

And 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. And 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, but I held a real estate roundtable the other night with some of our clients and some of our senior executives. And around the table, it was pretty quiet in terms of transaction activity. They were -- everybody sitting on the sidelines waiting for the next opportunity. But transaction volume in real estate right now is very, very slow.

We are seeing some good opportunities in our media and entertainment area. We're seeing some stuff in education, warehouse was -- 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. And 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. So 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. And then 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 to make California, where you're bringing those relationships over? And like how you think about noninterest-bearing balances going forward?

Yes. So thanks, Eric. We are able to bring in clients through sophisticated treasury management solutions. We target businesses that need those solutions. So they're -- generally, there accounts on earnings credit with analysis, where the earnings credit will offset the fees and charges if they keep sufficient balances. Oftentimes, these are clients that need multiple accounts and want to have some sort of centralized reporting. And oftentimes, there are loans and lines of credit that go with it, not always, but -- and there are certain verticals that we target that have specialty needs in this area. And so I don't want to give away too much because it's kind of how we differentiate ourselves in the market and compete against others. But it's just something that we've been building for the 4 years that I've been here and every year, it gets better and better.

When I was reading the reports that came out this morning, there were 2 things that caught me a little bit by surprise. One was the heavy focus from a headline perspective on earnings. Because, I mean, it wasn't more than 3 or 4 weeks ago that 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, and so the headline to see about earnings missing by $0.01 or whatever, it just was -- I just got a chuckle out of that.

But the second thing has to do with deposit strength, and I don't think this is really the quarter for people to be annualizing what happened in the quarter. I mean it's just this is one of the most unusual quarters in history from my perspective. And what happened this quarter is in no way indicative of what's going to happen in the future unless we experience a repeat of it this quarter. But most likely, things have stabilized. Again, we'll see what happens with the First Republic.

So the outlook for deposits, I don't think people can annualize a 2% outflow or whatever it was in any one category. I think they should look at kind of stability and strength in overall metrics. And we feel very good about where we sit with 36% noninterest-bearing. And I see that number maintaining or growing throughout the year. I mean it could be up or down 1%, but overall, we expect that to grow over time and get back to 38% and then to 40%.

I appreciate the color. And then just wanted to touch on interest rate management -- risk management 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? And then just curious how you're thinking about managing rate risk at this point. Whether you're looking at additional hedges or derivatives or any tools you have to manage rate sensitivity going forward? Any color there would be helpful...

So -- and 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. 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 the profitability in the quarter. But obviously, we have a perspective on where we think the margin is going to go over time. I could see the margin going down at this point slightly just based on where I see things. And then coming back as there is a lot of rate pressure, but it's really going to depend on how we grow noninterest-bearing and how quickly we do it.

Obviously, loan yields are not -- 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 want to do it right now. There's something I saw yesterday that 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.

So again, margin is a little bit of an output of just kind of how active we want to be. In terms of the hedge, we're selectively looking at things that will protect against future rate changes, but we're not going all in on any one direction. We're just doing kind of selectively bucketing a couple of things. This hedge was $300 million. And Ray, it was a 5-year hedge that we did or was it 3 years?

5 years, that's correct.

So it was 5 years, and we locked in it. I think it was at 3.8% for 5 years for group of deposits. And the idea was -- okay, well, we think that the cost of these deposits is going to go higher over time. It was a whole group that was maturing. And our idea was that, okay, well, 3.8% for 5-year money is a good rate for us. And so in kind of any environment, you kind of borrow at 3.8% for 5 years. So 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 going to 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. And just you got to be comfortable that the cost is fair at the time you do it. And so 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.

Our next question comes from Gary Tenner from D.A. Davidson.

I wanted to ask about the brokered CDs added in the quarter. Can you give us a sense, right, in terms of the kind of term and rate just so we have a basis for how we're thinking about modeling those balances moving around going forward?

Ray, do you have the color on that?

Sure. So on the brokered CDs, we ladder those out over time to manage our cost of funds. And we have various durations, but we use that to manage our liquidity and give us some optionality to manage our interest expense.

We added about $300 million, Gary. They were laddered, as Ray said. So I don't know that we can give you a blended rate. And the other thing is we might bring them down and take them off. But Ray, I don't know if you have the -- just as an example, like what the cost is for a 12-month brokered CD right now or a 6-month brokered CD to give -- because they were mostly shorter duration.

Right. Those would be in about the 4.85% to 5% range.

Okay. That's fine. I appreciate that. And just in terms of the headcount reduction that you mentioned, will we see sort of a benefit there in the second quarter temporarily before there's reinvestment? Or does -- what would be the annual savings from the cuts initially and kind of thoughts on reinvesting?

Yes. I don't think you're going to see much because I think we're going to just use it in other ways. We've guided to kind of the $48 million to $50 million quarterly operating expense number, and we're in the mid 49s right now. And so I think that between $49 million and $50 million is probably where we're going to sit.

Okay. And then in your comments, Jared, you very briefly kind of mentioned the payment product. Can you kind of just update us? You said things are tracking on schedule. Can you kind of update us on where things are and kind of transactions or other kind of metrics you could provide for us?

Sure. Well, where we sit today is we intend to onboard clients beginning in the second half of the year, early in the third quarter and hopefully a little ahead of that, and we'll start building traction through the end of the year so that we think by early 2024. And then on through 2024, this will be a really big contributor and a meaningful one to our numbers that year in terms of being common and likely deposits. The way that we're looking at onboarding clients is we're going to walk before we jog before we run, and so we've been building our risk infrastructure, and we're testing it now and making sure that it's right.

And 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 got to bring on some real clients to then test the system and make sure it does what you think it's going to do, the way you think it's going to do it. And then you start adding more clients. And in fact, we've been in very close touch with the regulators as we've been doing this. And I think the approach that we're taking is the right one. And I don't have much more to add there, Gary, other than I fully expect us to be bringing on clients in the second half of this year, and there'll be -- 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.

Our next question comes from Matthew Clark from Piper Sandler.

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?

Yes. I don't think we've -- Ray, did we disclose that or not?

We didn't disclose the spot rate in March now.

Okay. I would say that just generally -- so this excess liquidity that we have on the balance sheet is -- affects our margin by, I don't know, 7 to 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. But it's about $2 million of expense and 7 to 10 basis points on the margin. And so I think you can expect to get a benefit there when we take that out. But on the other hand, costs in March were definitely higher than they were averaging for the first quarter.

And so I could see our margin being down 10 to 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 noninterest-bearing deposits. And I don't know that anybody can predict what that's going to look like. And 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. And so -- 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.

Yes, I'm just looking for a guidepost on the deposit side, at least. And then -- and then just on the noninterest-bearing deposit front, growing -- encouraging to see that you grew commercial accounts, but 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 other deposits.

There's definitely a lag effect. So I mean, that's part of what we see in the pipeline in terms of not only new accounts, but also the volume that we'll get in those accounts. It does take time to fund them after you open the accounts, although we bring it over pretty quickly. In terms of kind of chunkiness or things like that, I think anything that -- we didn't lose any relationships. And so I was really pleased that nobody said, hey, we're pulling our money. We're going over here. But like every bank, we -- it certainly banks our size. We experienced clients saying, look, I've got this new money coming in and my Board wants me to spread it here or spread it there. So 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 that were in the money center banks. And those conversations are definitely, definitely happening. So I think that they, of course, advocated for us and they said, hey, we want to get you on a call with Banc California, and we'll get their people on the phone. So that is happening, which is why 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. And so that's why I see our deposit base continuing to grow because we did so well in spite of all of that.

Okay. Great. And then just a housekeeping item, if you have it, the weighted average cost that you repurchased stock this quarter?

We have not -- we haven't disclosed that. And Matthew, I think we did say that a lot of it was purchased below tangible book. It was -- we said the number that we did through the end of March and then how much we got -- we bought after the end of March. So you can kind of figure out where we might have been.

The next question comes from Kelly Motta from KBW.

I'll carry on, on the repurchase commentary. Clearly, you were in the market and continue to be this quarter. As you look ahead, the capital levels are really strong, which bodes well in this environment. What's your appetite for repurchases here and maybe an outlook for capital management going forward?

Yes. Thanks, Kelly. Look, we feel really good about our company and where we sit for all the reasons we mentioned in our prepared remarks. And the fact that we're choosing to kind of be a little bit more conservative here and just focus on growing our deposit base and building 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 kind of pretty low relative to our capital levels, but we wanted to be prudent, not knowing what the environment is 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...

Kelly, one other thing, I mean, just to reflect on that, I mean we're sitting with such low levels of unrealized losses in our available-for-sale portfolio. And even in our HTM that we know that in our securities portfolio is also highly liquid in terms of its moderate-to-low duration. And so 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 36% noninterest-bearing. And so there's a whole bunch of reasons why we should keep buying our stock. And as long as it sits down here, I think we'll be appropriately opportunistic.

Got it. Switching to credit with the charge-offs you had this quarter. Can you provide any color as to what compose those charge-offs? And as we kind of look ahead, 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.

Yes. 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 basic cautious outlook. I don't see anything specific that I'm concerned about. We have -- obviously, we disclosed our very, very low levels of office exposure. I think talking about CRE is too general because multi-family is technically CRE. And so we like to break that up. And so as it relates to CRE Office, general office is a very, very small number for us. And so that's why we laid out those numbers.

So I'm not predicting any credit problems going forward. And I think our reserve levels are adequate, and relative to others, they're actually pretty high who have similar portfolios to us. But we -- from a modeling and we follow our model. And from a model perspective this quarter, we felt that this amount was appropriate.

Can you expand upon just like the composition of that multi-family portfolio? Just what a typical credit looks like size, why you feel confident there? Just because we are feeling questions out on CRE. So just any color on your comment...

Multi-family or office?

Multi-family, since you mentioned it.

Yes. I mean our multi-family portfolio has held up extremely well over all cycles. And 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 are approximately 300,000 units short, and they're only bringing online about 10,000 units a year. So the catch-up is not looking very good. And in seeing across the street in my office in Brentwood from a building that's going up, that's going to be sold out really quickly. We don't have a single nonperforming multi-family loan, and I don't expect it to happen.

A lot of the conversation has been around how do you stress multi-family for rate changes. And let's say, you have a loan that's at 3.5% or 4%, that's maturing over the next 12 months. And the rate for that loan today might be 7%. It might be 7.5%, depending on the loan. Well, most of these buildings are fully stabilized. And if they are, there's a whole bunch of options. If, for some reason, rents have not caught up and kept up with where rates are going from an interest rate perspective over those or 5 years that, that loan has been outstanding, then the borrower is likely going to 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 -- to bring down the loan. Most of them do. They could sell the property. They'd be able to sell it pretty easily. Also, the bank technically doesn't need to bring the loan up to 7.5%. I mean we -- if the loan is on at 4% and we bring it up to 6% 6.5%, we still have a better loan than we did before from a rate perspective, but we wouldn't do that. We would bring it up to market rates.

And then the other thing is Fannie and Freddie are very, very active. So Fannie and Freddie are letting right now on multi-family properties in the mid- to low 5s. So 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 have to leave the loan outstanding longer, so you lose some flexibility. So for all those reasons, I don't see any problems in multi-family, but starting with just the tight demographics and the lack of the high demand for housing and the shortage of housing in our market. But there are all these other reasons why I don't think multi-family will have stresses.

Those same conditions don't exist for office, which is why I think there is a potential problem with office, and 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, and we put some of the stats in there and we have just such low exposure to general office. It's -- and 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 that 17 months, 16 months. So 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.

Our next question comes from Tim Coffey from Janney.

Jared, if I can just follow up on the CRE commentary there. So 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. 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 in a desert. Some of these buildings are in San Diego, like they're just all pocketed in where you would -- when we underwrite loans and we look at what we want to lend on, that's part of the understanding that we have to do is look at what is the aptitude and the attitude for possible tenancies based on the turnover that we might foresee during the duration of our loan. And are they going to be able to get rents that would and find tenants and that's all part of the appraisal process and the evaluation of the loan.

So we believe that they're sufficiently well located to hold up to the extent that office is going to hold up at all. I mean that's not going to be the reason why these properties don't do well. It's going to be because of a transition away from office. But again, our loans are recourse. We hold our borrowers. We get frequent monitoring. And we just had a loan where we didn't like the occupancy, we went to the borrowing, put up all a bunch of money and pay down the loan. So that's why we were a recourse lender, where we -- our loans are guaranteed by people that have the wherewithal to carry the loans.

Okay. Okay. And then I wanted to get your thoughts on the CLOs. Part of Western Alliance is derisking 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.

Well, we're in a very different position than Western Alliance, I think, in a number of perspectives. I don't know the size of their portfolio. When I joined the bank, Tim, as you remember, I think our portfolio was over $1.5 billion of CLOs. We're sitting now, I believe, at under $500 million. And so it's kind of self-liquidating. It obviously was tested through COVID. And as you know, they trade on credit spreads. And so that's something that we monitor very carefully, but we're in AA and AAA CLOs. It's a one of -- it's part of our asset sensitivity.

It's something that's more asset sensitive because they're short term. And so 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. 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 wouldn't -- 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 wouldn't sell any -- I certainly wouldn't sell it at a loss.

All right. Those are my questions. I appreciate the time.

I guess I should also say never say never, but that's at least the way I feel today.

Our next question comes from Andrew Terrell from Stephens.

Most of might 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 in 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?

Yes. So ours are -- so ours are recently appraised recent numbers, we do it annually, and these are relatively recently done. So I feel very good about our portfolio. So I wouldn't take away from our numbers that -- well, it's 55% loan to value, but that was based on an appraisal 2 years ago, and it's really 85%. That's not the position of our portfolio. But I will tell you that generally, yes, office properties have gone way down in value, and it has to do with the size of the property primarily and the location and kind of a whole bunch of other factors, large office buildings are under tremendous stress. We don't have any of those.

We got B&C low-rise buildings where you got the CPA working there because he doesn't want to work from home or she doesn't want to work from home and you got somebody else there kind of sweet based buildings that are not very large. Large office buildings under tremendous amount of pressure unless they have long-term anchor tenants. And so there -- I think the Wells Fargo building in San Francisco just traded for $200 a square foot 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.

Yes. Okay. And then similar thing on the debt service coverage. Do you get -- like how recently is that debt service number refreshes as similar as to how often you get appraisals on properties?

No, it's more frequent. Because we -- yes, we're looking at this stuff almost quarterly in terms of understanding rent rolls and cash flow buildings and things like that. It depends on each loan, but 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.

Yes. Okay. On the 3 credits for $90 million or so that were sold this quarter 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, there might be legacy in nature that you could be looking to trim up over the next couple of quarters?

Yes. There's a whole bunch of stuff where the deposit relationship just is not there for the size of the loan. And so as this stuff comes up, we're sizing and saying, look, you got to put more compensating balances in our company or you're going to have to go borrow from somebody else. And there were loans that were made before I got here that just didn't have deposits associated with them. And 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.

And so once the loan is made, we're committed on the loan. And so 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. And that's been the way it's been since I've been here, but it's even more true today.

Yes. Okay. And apologies, I might have missed this. Can you talk to noninterest-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.

Yes. No, 36%, I mean, where we sit today, where we sat at quarter end, that feels right, and we expect it to grow from there. 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 when the meltdown happened and then a lot of it came back. And then we have a pipeline now where we've got some really good opportunities in front of us that I feel good about.

And so I think our NIB is going to be stable and growing. It's hard as I mentioned at the beginning of the -- I've been saying this for a while that the economy has been shrinking and deposits were -- I think Bank of America had 2% decline in deposits. And so it's not an unusual number, given the way the economy is shrinking. But we're competing pretty hard right now, and I think our team is doing a really good job, and it's a big focus of ours.

And so I'm optimistic. I don't know what the answer is. I don't know where the number is going to be. Right now, it feels like 36% is pretty stable, and I see the opportunity to grow it from there. But if something else happens and there's another little chink in the armor and there's something else happens, then you could -- all banks could see some outflow and then will be down, and we'll bring it back up. But NIB is really using services at our company, and it's kind of the last money to kind of want to leave.

Right. Okay.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.