BANC - NYSE

Hello, and welcome to Banc of California's First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Today's call is being recorded and a copy of the recording will be available later today on the company's Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release, which is available on the company's Investor Relations website. The reference presentation is also available on the company's Investor Relations website. Before we begin, we would like to direct everyone to the company's safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would now like to turn the conference call 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 Ray Rindone, our Interim Chief Financial Officer, who will talk in more detail about our quarterly results. Before discussing our performance, I'd 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 2.2 times 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 and $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 non-discretionary [ph] 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 for 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 with 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 Bank 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 were 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, 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 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 of 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 returned 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 group purchase 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 Bank 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 is 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. We'll provide more color on our financial performance. Then I'll have some closing remarks before open 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 totalled $21.7 million for the first quarter or $0.37 per diluted common share, when net indemnified legal cost 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 seven basis points. Our average loan yield increased 15 basis points to 5.07% as a 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 non-interest income increased $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 and 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% 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 three loan payoffs that we had in the C&I portfolio that Jared mentioned and runoff in the DSFR [ph] 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 client 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, totalled $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 in 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 in 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 is leverage our strength and 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 re-evaluate 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 Bank 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.

[Operator instructions] Our first question comes from Timur Braziler from Wells Fargo. Please go ahead. Hi, Timur, is your line open?

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 the failure of Silicon Valley and the stressors or some of the other West Coast banks and if you can quantify kind of what those inflows in 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 have 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 and were people's deposits 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% non-interest bearing deposits. Let's not lose sight of where that is and I see that number growing from here on out. 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 flown out of the system and so to stay flat you had to bring in new relationships because your existing deposits 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 non-interest 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'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 -- 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 is 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, understand that lending opportunities are kind of slower than what they had been, but just, I guess looking at the loan and 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 brokerage space?

So we sit today a little over a 100% or just around a 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 opportunity. 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 old -- 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 brokers 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 finally to replace them, which is, and if we -- 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 some 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 is 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 the 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 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 ransactionally, if the right opportunity presents itself.

Our next question comes from Eric Spector from Raymond James. Please go ahead.

Hey, this is Eric Spector on the line for David Feaster. I appreciate. 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 good 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 portfolio pretty easily when you're getting returns close to 6% in pretty short duration and obviously in the 5% with 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 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 set 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 round table 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's 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 median and entertainment area. We're seeing some stuff in education, warehouse. 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've 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've 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 non-interest bearing balances going forward?

Yeah, so, thanks Eric. We are able to bring in clients through sophisticated treasury management solutions. We target businesses that need operating -- that need those solutions. So, they're -- generally their accounts on earnings credit with analysis where the r 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 in lines of credit that go with it. Not always, but when 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 four 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 two things that that caught me a little bit by surprise. One was the heavy focus from a headline perspective on earnings, because it wasn't more than three or four 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 a penny 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. It's just -- this was 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 and overall metrics. And we feel very good about where we sit with 36% not interest bearing. And I see that number maintaining or growing throughout the year. 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%.

Yeah, I appreciate the color and then 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've put on this quarter with the $300 million hedge? And then 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.

So and Ray, I'll let you jump in here on the hedge, but let me just give an introduction. 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 to 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 because there is a lot of rate pressure. But it's really going to depend on how we grow non-interest bearing and how quickly we do it. Obviously low 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. 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've been safe, but it just didn't feel like it was the right time to be doing it. So, again, margin's 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 things. This hedge was $300 million and Ray what -- it was a five-year hedge that we did, or was it three years?

Five years? That's correct.

So, was five years and we locked in it, I think it was at 3.8% for five years for a group of -- thank you, for a group of deposits. And the idea was, okay, well we think that the cost of these deposits is going to go higher over time. There was -- it was a whole group that was maturing and our idea was that, okay, well 3.8% for five year money is a good rate for us. And so, in kind of any environment you kind of borrow it 3.8% for five years. So if rates go down, well it was still a good -- 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 Ford 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.

Yeah, that's helpful. Thanks for taking the questions and I'll step back.

Our next question comes from Gary Tenner - D.A. Davidson. Please go ahead.

I wanted to ask about the brokerage 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 modelling those balances moving around going forward?

Ray, do you have the color on that?

Sure. So, on the broker CDs, we ladder those out over time to manage our cost of funds and we have various durations that we use that to help 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 all. But 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 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 then 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?

Yeah, I don't think -- 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 $49 million right now and so I think that between $49 million and $50 million is probably where we're going to sit.

Okay, thanks. And then in your comments, Jared, you have very briefly kind of mentioned the payment product. Can you kind of just update us, you said things are tracking on schedule, what kind of updated 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 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, 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, they'll be -- we'll start with clients that are 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. Please go ahead.

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 we've -- I rated, did we disclose that or not?

We didn't disclose the flat rate in March, no.

Okay. I would say that, just generally. So this excess liquidity that we have on the balance sheet affects our margin by, I don't know, seven 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, of expense and seven 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 basis points to 15 basis points in the second quarter, maybe 20 basis points. I just don't know. It's going to really depend on the flow of non-interest 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 that color helps though.

Yeah, I'm just looking for a guidepost on the deposit side at least. And then just on the non-interest 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, 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 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. 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 one of the money center banks. And those conversations are definitely, definitely happening. So I think that, and they of course, advocated for us and they said, hey, we want to get you on a call with Bank 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 of that you repurchase 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 it 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. Please go ahead.

Hi, thanks for the question. I'll carry on the repurchase commentary. Clearly, you were in the market and continued to be this quarter. As you look ahead, 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?

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 and, the fact that we're choosing to kind of be a little bit more conservative here and to focus on growing our deposit base and build and focusing on our strength and 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 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…

Oh wait, Kelly, one other thing, just to reflect on that, 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 our -- and 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. We continue to grow a tangible book and so it's just kind of surprising kind of where the stock is sticking out even with 36% non-interest 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. 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? And 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 point you had here? Any puts or takes would be helpful.

Yeah, I think if I remember correctly, it was like $500 was the charge off. 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 basically 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 lead 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 modelling and 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 multi-family portfolio? Just, what a typical credit looks like size why you feel confident there just because we are feeling questions lot on CRE. So just any color on…

On multi-family or office,

Multi-family since you mentioned it.

Yeah, 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're 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 I'm sitting 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 non-performing 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 3.4% or 4% that's, that's maturing over the next 12 months. And 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 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 four or five 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 say, I mentioned I was at this real estate dinner the other night. 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 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%. If the loan's 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 Freddy are very, very active. So Fannie and Freddy are letting right now on multi-family properties in the mid to low fives. 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, don't see any problems to multifamily, 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 were all these other reasons why I don't think multifamily will have stressors. 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, 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 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. Thank you.

Our next question comes from Tim Coffey from Janney. Please go ahead.

Hey, 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. 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 is that we have to do is look at what is the aptitude and the attitude for possible tendencies based on the turnover that we would, 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. 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've just had a loan where we didn't like the occupancy. We went to the borrower and he put up all bunch of money and paid down the loan. So, that's why we we're a recourse lender where we -- our loans are guaranteed by people that have the wherewithal to carry the loans.

Okay. And then I want to get your thoughts on the CLOs. Part of Western Alliance is de-risking is that they've considered selling some of their CLO holdings. And 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 from 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 are sitting now, I believe at under $500 million. And so it's kind of self-liquidating. It's 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 double A and triple A CLOs. It's 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 certain -- 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 the 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 that's at least the way I feel today.

[Operator instructions] Our next question comes from Andrew Terrell from Stephens. Please go ahead.

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 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, 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 appraisal two 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 and C low rise buildings and where, you got the CPA working there because it doesn't want to work from home or she doesn't want to work from home and you got somebody else, they're kind of suite based buildings that are not very large. Large office buildings under tremendous amount of pressure unless they have long-term anchor tenants. And so, they're, I think that 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? Is it similar as to how often you get appraisals on properties?

No, it's more frequent because yeah, we're looking at this stuff almost quarterly in terms of understanding rent roles and cash flow of 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 roles and stable tenants, There's not as much need to look at it.

And then 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 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 loans are 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. 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 non-interest bearing deposit flows, since quarter ran? 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%, 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 NIBs 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's been shrinking and deposits are -- I think of it, Banc of America had 2% decline in deposits. And so it's not an unusual number given the way the economy is shrinking, but we are competing pretty hard right now and I think our team's 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's 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 shrink in the armor and there's something else happens, then you could, all banks could see some outflow and then we'll 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. Well very good. Thank you for taking the questions. I appreciate it.

Yeah. Thank you, Andrew.