Banc of California, Inc. (NYSE:BANC) Q4 2023 Earnings Call Transcript
Banc of California, Inc. (NYSE:BANC) Q4 2023 Earnings Call Transcript January 25, 2024
Banc of California, Inc. misses on earnings expectations. Reported EPS is $-0.46 EPS, expectations were $-0.32. Banc of California, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to Banc of California's Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Today's call is being recorded, and a copy of the recording will be available later today on the Company's Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release, which is available on the Company's Investor Relations website. The reference presentation is also available on the Company's Investor Relations website. Before we begin, we would like to direct everyone to the Company's safe harbor statement on forward-looking statements, included in both the earnings release and the earnings presentation. At this time, I would like to turn the floor over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.
Jared Wolff: Good morning, and welcome to Banc of California's fourth quarter earnings call. Joining me on today's call is Joe Kauder, our CFO, and Bill Black, our Head of Strategy. Our investor presentation, along with our earnings release, we're designed to provide a great deal of information given the unusual nature of the fourth quarter, which was impacted by the closing of the merger and several 1x items related to our balance sheet repositioning actions. We aren't going to do a detailed walk through of the changes in various line items from the prior quarter. Instead, we'll utilize the time on our call today to introduce the new Banc of California, provide an update on the progress we have made on the balance sheet repositioning and lay out the timing for our integration and provide insight into the key financial metrics for Q1 and beyond.
We will be happy to answer any specific questions to our fourth quarter results later in the call. I am truly thrilled that we delivered on so many of the key objectives that we outlined when we announced the deal. Thanks to the hard work of our talented colleagues and advisors and the work of the regulators. We received approval for our transaction in record time and closed the transaction on the front-end of our range. We delivered CET1 on top of our 10% target, notwithstanding a complicated rate environment and considerable moving items on the balance sheet, and we nearly hit $15 in tangible book value, after guiding to the mid-to-low $14 range when we announced Q3 earnings. Many other key metrics were delivered in line as well. Since closing the merger on November 30th, our team has been collaborating exceptionally well, and we've made excellent progress on the balance sheet repositioning actions that we indicated at the time of the merger announcement.
As a result, we have created the well capitalized, highly liquid financial institution with strong earnings power and a strong position in California, as we envisioned. Today, we are the third largest bank headquartered in California based on assets with an enviable presence up and down the state, clean credit and an exceptionally talented team of colleagues were focused on serving businesses with high touch service and tailored solutions that our target clients aren't getting from others. The closing of our merger reflected the relentless execution that Banc of California has become known for. Among the most notable items, we completed the planned sales of legacy Banc of California's $1.7 billion SFR portfolio, approximately $700 million of the multifamily portfolio, and $1.2 billion of the investment portfolio as well as approximately $2 billion of PacWest securities.
The proceeds along with the excess cash from PacWest, we're utilized to reduce the higher cost wholesale funding on the balance sheet. We retired the $1.3 billion repurchase agreement with [indiscernible] and have also continued to reduce the volume of higher cost broker deposits, which are down nearly $4 billion from the time of the merger announcement through the end of 2023. We also repaid $2.3 billion of the bank term funding program balance, choosing to retain a portion in order to maintain a higher level of liquidity and pay down higher cost brokerage deposits. In total, we sold approximately $6 billion of assets with an average yield of 3.6% and paid down approximately $9 billion of wholesale funding with an average cost of 5.2%, contributing more than $90 million annually to the net interest margin.
This was nearly all completed in the month of December. As mentioned, we decide to retain a portion of our multifamily portfolio rather than selling the entire portfolio as originally planned. These are well performing loans and after the purchase accounting mark, they have attractive yields in an approximately four year effective duration that we determined we're in our best interest to retain, given the outlook for potentially declining rates. As noted, we were able to execute on most of our planned balance sheet repositioning actions in a short period of time, strengthening our balance sheet, and repositioning the company for improved performance and enhanced flexibility. We will continue to evaluate all available options as we seek to optimize our balance sheet going forward.
We have also started to see some of the potential benefits that we believed, we would have following the merger. With the strength of the restructured balance sheet and superior level of service that we can provide, we have started to bring back many of the operating deposit accounts of PacWest clients that left the bank during the turmoil early last year. We also felt that there would be opportunities to further capitalize on our positions of talent magnet. We have already added a number of individuals and will look to continue adding exceptional banking talent that we believe can positively contribute to the profitable growth of our franchise in the coming years. Now let me hand it over to Joe, who'll provide some additional financial information and I'll have some closing remarks before opening up the line for questions.
Joe?
Joe Kauder : Thank you, Jared. I'm going to start by providing the spot rates for balance sheet items as of December 31st to provide some visibility to our net interest margin for the first quarter. As of December 31, 2023, our estimated spot rate for loan yields was 6.18%. Our estimated spot rate for the yield of all interest earning assets was 5.63%. Our spot rate for the cost of deposits was 2.69%. Our spot rate for the cost of funds was 2.99%, and our estimated spot rate for our net interest margin was 2.75% compared to 1.69% for the fourth quarter and 2.15% for the month of December of 2023. We are exiting the quarter with a much higher net interest margin due to the benefits of the merger and our balance sheet repositioning actions and we expect our first quarter net interest margin to approach 3%.
The expected increase in our net interest margin in the first quarter from December 31st spot rate will be driven by an approximate 15 basis point improvement in earning asset yields, driven mostly by loan repricing and new originations at higher rates currently between 7% and 8%, and an approximate 10 basis point improvement in cost of funds driven by the pay down of higher cost wholesale funding, and an increase in the relative percentage of lower cost core deposits. Putting aside changes in interest rates, we expect to see a steady decline in our interest expense as we move through 2024 and continue to replace higher cost wholesale funding sources with lower cost deposits acquired through our business development efforts. There are also some additional actions that we may take that could have a positive impact on our net interest margin, including additional asset sales and using off balance sheet options for higher cost customer deposits.
At this point, we are moderately liability sensitive and will benefit from a reduction in interest rates. Once we have completed our balance sheet repositioning, including reaching our internal targets for low-cost deposits, we intend to manage the bank to a neutral or slightly asset sensitive position. Looking at non-interest expense, it'll be reasonable to expect our first quarter 2024 OpEx ratio to be in the range of 210% to 220%. As we have indicated previously, the expected cost savings in the merger will be phased in over the course of 2024. Major contributors to the cost savings include the completion of the systems conversion, which is scheduled to occur in May. A reduction in FDIC assessment expense, which we anticipate to start declining in the first quarter, and office consolidation with approximately 18% of the leases on PacWest offices expiring during 2024.
By the fourth quarter of 2024, we expect our OpEx ratio to be down around 2.0%, and we are targeting the quarterly run rate for non-interest expense to be approximately or below 2% of total assets from that point forward. With all of the integration and balance sheet repositioning actions proceeding on schedule, the guidance we provided for our level of returns that we announced at the time of the merger has not changed. Rather than focusing on the full year, our primary focus is on ensuring our ending Q4 run rate is in line with our targets of approximately 1.10% ROAA, and 13% ROTCE. Given the timing of achieving cost savings throughout the year. At this time, I'll turn the call back over to Jared.
Jared Wolff : Thanks, Joe. I would like to wrap-up with some comments around our vision we have for the company and the broader outlook. We are organized around two primary areas. First, the bulk of our assets are centered in our community bank, which is comprised of our talented bankers who focus on in-market relationship lending across California, in Denver Colorado, in Durham, North Carolina, and a few other locations. We provide full service commercial banking across real estate and C&I, including asset-based lending. Paired with our community bank, our specialty alliance, which provide expertise in specific verticals including homeowners and property management solutions, media and entertainment, warehouse lending, corporate asset finance, SBA, fund finance, and venture banking.
Whether in our community or specialty areas, we offer best-in-class depository and treasury management solutions, corporate asset management, and the payments ecosystem we are building, which includes merchant processing card solutions as an issuer and third-party processing. We believe, we have great market position in California given the strength of our franchise and superior level of service and expertise that we can provide, particularly given the significant changes we have seen over the past few years in the California banking market. With so many of our competitors exiting or significantly pulling back from the market. We believe this presents us with significant opportunities to consistently add attractive new client relationships that provide low cost deposits and high quality loans.
And as we continue to build-out our new payments ecosystem, which we believe will only further enhance our value proposition, it will differentiate us from competing banks and positively impact our business development efforts. As we've indicated, we expect to be a high performing institution with strong earnings power. A portion of that will come from restoring the high-level of profitability that PacWest businesses have historically generated. In recent years, there were some lower yielding assets added that were funded with higher cost funding sources that negatively impacted PacWest's historical profitability. With the balance sheet repositioning actions we have taken, we have significantly reduced these assets and funding sources, which creates a path to a higher level of returns for the combined institution.
As we start 2024, while there remains some degree of economic uncertainty, we are already seeing the positive impact of being a larger, stronger financial institution on our loan production with a greater volume of opportunities for us to consider. We're seeing a reasonable level of loan demand, which is enabling us to generate meaningful level of new loan production, while continuing to be conservative and highly selective in the loans we choose to make. In most cases, loans coming on the books are being done at the same or higher rates than those paying off. Given the volume of runoff we anticipate, while there is some uncertainty regarding the pace and the timing. At this point, we are expecting to end 2024 with total loan balances that are flat to slightly down from the year-end 2023 level and then growing during 2025 as economic conditions improve.
As we move through 2024, we will provide an update to our expectations based on any changes we see in economic conditions that have a material impact on loan demand and loan production. Regardless of the rate curve and pace of changes in interest rates, we are well-positioned to capitalize on such opportunity given the highly liquid balance sheet that we now have. I want to note that we feel very good about the credit quality of the loan portfolio. The merger process dictated that we take a close look at every loan in the portfolio of each legacy bank and make sure that they were appropriately rated as well as resolve some of the weaker credits. As a result, the bank has cleaner credit and a higher level of reserves following the provision that we recorded in the fourth quarter.
And from an asset quality standpoint, we are comfortable with where we stand. It's fair to say, that based on our Q4 actions, the new Banc of California has cleaner credit today than either of its predecessors. I want to specifically thank the dedicated and talented colleagues at Banc of California for their amazing efforts, contributions and many sacrifices for helping to create this new and exciting franchise. I have witnessed heroic undertakings, and I feel very privileged to be leading such an incredible group of colleagues. Thanks to all of them, I'm confident in what we have set out to accomplish this year and beyond. In closing, we believe we are well-positioned to deliver strong financial performance for our shareholders in '24 as well as to capitalize on our great market position that we have built in California to consistently enhance the value of our franchise in the coming years.
With that, operator, let's go ahead and open up the line.
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