Banc of California - Q4 2023
January 25, 2024
Transcript
Operator (participant)
Welcome to Banc of California's Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one. To withdraw your questions, you may press star and two. 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'd 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'd like to turn the floor over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.
Jared Wolff (President and CEO)
Good morning. Welcome to Banc of California's Fourth Quarter Earnings Call. Joining me on today's call are Joe Kauder, our CFO, and Bill Black, our Head of Strategy. Our investor presentation, along with our earnings release, were 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 one-time items related to our balance sheet repositioning actions. We aren't going to do a detailed walkthrough 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'll be happy to answer any specific questions to our fourth quarter results later in the call. I'm 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 30, 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 who are 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, were utilized to reduce the higher cost wholesale funding on the balance sheet. We retired the $1.3 billion repurchase agreement with Atlas 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 broker 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 decided 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 and an approximately 4-year effective duration that we determined were 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 position as a talent magnet. We have already added a number of individuals.
We'll 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 will provide some additional financial information, and I'll have some closing remarks before opening up the line for questions. Joe?
Joe Kauder (CFO)
Thank you, Jared. I'm going to start by providing the spot rates for balance sheet items as of December 31, 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 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 31 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 paydown 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 will be reasonable to expect our first quarter 2024 OpEx ratio to be in the range of 2.10%-2.20%. As we have indicated previously, the expected cost savings from 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 (President and CEO)
Thanks, Joe. I'd 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, are 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. 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. 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 2024, as well as to capitalize on our great market position that we have built in California to consistently enhance the value of our franchise in the coming years. With that, operator, let's go ahead and open up the line.
Operator (participant)
Ladies and gentlemen, at this time, we'll begin the question-and-answer session. To ask a question, you may press star and then one on your telephone. To withdraw your question, you may press star and two. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the numbers to ensure the best sound quality. Again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.
Matthew Clark (Managing Director and Senior Research Analyst)
Hey, guys. How you doing?
Jared Wolff (President and CEO)
Good morning. Great.
Matthew Clark (Managing Director and Senior Research Analyst)
Good. Just wanted to start on expenses for the upcoming quarter and the related run rate. I know you had a partial quarter in Q4, and you get another month of legacy Banc, or two months of legacy Banc. But can you speak to not only where that run rate might shake out ex-merger charges, but how much in the way of cost saves have you realized so far, and how much are left?
Jared Wolff (President and CEO)
We have a lot, a lot left to do, which is why, you know, we think that in the first quarter, the OpEx ratio is going to be between 210 and 220. It'll, you know, the glide path will be getting down to 2 by the end of Q4. The conversion isn't going to take place till May, and there's, you know, a number of things that come out after that, you know, across the company. Joe mentioned the facilities. You know, we are going to get a lift from the FDIC assessment that we think will reduce beginning in the first quarter. But, you know, there's a lot to take out that's going to come later in the year. Joe, I don't know if you have more color there.
Joe Kauder (CFO)
Yeah, no, I think you captured it correctly. I think there's a you know, we have a. You know, we manage a detailed list of savings initiatives. We have our plans in place, and you know, the big initiatives that Jared spoke to are some of the larger ones. We do expect to get the FDIC assessment favorability in the first quarter, and we will you will see it start coming out from there.
Jared Wolff (President and CEO)
You know, Matthew, we literally have a list of, like, 30 things with a person assigned, the deadline by which it's supposed to get done, and the impact. We're going through that list and check them off as we go, and we're not going to lose track of them, and they're all within our control, we believe. In addition to that, we obviously have the expense savings we think we can realize on the interest side by being proactive about making sure deposit costs are appropriate. You know, we don't need to pay necessarily the same levels we were paying in the past, given the strength of the franchise, but we want to protect relationships. And a lot of that's going to be based on the volume of new relationships that we bring in and new deposits that come back to the bank.
I solicited feedback for this call from a number of our colleagues, and I asked them to share client wins and stories of clients coming back beyond what I already knew about. And I got my inbox was full of stories of people, you know, talking about, you know, this client had $2 million, and they you know with tears in their eyes they moved it out during the you know the problems of early 2023, and they just brought it back. You know, they weren't happy at BofA or wherever they went, and they brought it all back. And so there's a lot of stories like that, but that's going to take place over the course of the year, and that will impact our ability to improve our interest expense as well.
Matthew Clark (Managing Director and Senior Research Analyst)
Got it. And then just on earning assets, trying to get a better sense of, you know, where those balances might be coming into the year here. You know, you spoke to the loan piece of it for the year, but just, knowing that you still have BTFP and some more brokered CDs than you probably would like to have, how should we think about overall average earning assets this year?
Jared Wolff (President and CEO)
Well, the Fed made our decision really easy on BTFP, right, with the announcement yesterday in terms of jacking the cost at the end of March. So I'm sure we'll probably get out of it by then, if not before. Joe, what's your sense for where our average earning assets will be or where they'll end up?
Joe Kauder (CFO)
I think they're going to be pretty flat. I think they're going to be pretty flat for the year. You know, you may see the balance sheet just shrinking a little bit, with the excess liquidity that we have coming into the new year, being deployed against the BTFP or high-cost deposits, depending on what's the right decision as we move forward. The earning assets should be pretty stable.
Jared Wolff (President and CEO)
Yeah, we are gonna, you know, prioritize profitability, as Joe rightly pointed out in the call. And so while our assets today total about $38.5 billion, it wouldn't be surprising to get lower by the end of the year, but we're not really focused on that. We're focused on hitting our profitability targets, regardless of the size of the balance sheet. And if it means we should be smaller, then we'll be smaller. If it means we should be a little bit larger, we're comfortable being a little bit larger because we have the ability to earn at the profitability levels we said, then we won't focus on it. But profitability is the number one goal.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay, great. And then last one for me. What's. You got CET1 now over 10%, 10-12, and tangible common, you know, rebuilding probably pretty quickly here. I guess, what's the appetite for a buyback, you know, with the stock below tangible book?
Jared Wolff (President and CEO)
Well, we obviously believe that we're going to be building up capital at a very healthy pace. Once we get to a level where we believe we have sufficient excess capital and that it's sustainable at that level, we will certainly have a variety of options. They're not mutually exclusive. We're going to obviously continue to reinvest in our company. We're also looking at ways to reduce share count, whether it's preferred or common. I think it's important that we demonstrate the sustainability of our capital and earnings, and that we build it up to levels that we consider excess, and from there, we'll have plenty of options.
Matthew Clark (Managing Director and Senior Research Analyst)
Great. Thanks again.
Jared Wolff (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Brandon King from Truist. Please go ahead with your question.
Brandon King (Equity Research Analyst)
Hey, good. Good afternoon.
Jared Wolff (President and CEO)
Hey, Brandon.
Brandon King (Equity Research Analyst)
Hey. So, could you just give us some thoughts of, you know, how you're thinking about the level of deposits? You mentioned, you know, legacy PacWest customers are bringing their operating deposits back, but then you also have customers with, you know, excess liquidity. And I know you're trying to manage the deposit costs pretty prudently. So if you could kind of give us a sense of how you think the level of deposits should trend as we go throughout the year.
Jared Wolff (President and CEO)
Yeah, it's, it's a good question, and what I focus on and historically have at Banc of California was on our level of non-interest-bearing deposits, along with our loan-to-deposit ratio. And so we'd like to maintain our loan-to-deposit ratio below 90%, preferably in the mid-80s, and we'll, we'll see how that goes. And as we watch our non-interest-bearing percentage rise, it gives us flexibility for other deposits that, that are of different, different types. So we have a whole bunch of initiatives in place here at Banc of California to grow our NIB, which is bringing over operating accounts from businesses. And we expect to grow from 26% and eventually, you know, over time, I'm not going to put a, a date on it, but we'll get to 30, and we'll get to 35, and eventually we'll get to 40.
At Banc of California, legacy, we went from 12% to approximately 40% NIB. We have a roadmap to do this, and how we do it and the pace at which we do it will dictate what, what happens with all these other deposits. We're not gonna—we're not gonna ask customers to leave. We, we value our customers and the relationships we have. The one thing I will focus on, though, early, and we've already started focusing on it, is concentration risk. I think we've all learned that we have to live within our means and not become too reliant on any one customer, on the loan or the deposit side. So that's something that we're going to manage very carefully.
We have tools to help our clients keep their relationship at the bank, but bring it off balance sheet, so we're not relying on it for lending. We have asset management, a great team of people here that can help with corporate asset management, should we need it. For some clients, that's the right solution. So, Brandon, there's kind of a delicate balance of how we move all these things together. We did it at Banc of California historically. So I would say that the things that we look at are the loan-to-deposit ratio and our percent of NIB, and that provides the flexibility for everything else.
Brandon King (Equity Research Analyst)
Got it. That makes sense. And then in your prepared remarks, you mentioned how you're adding individuals and talent. Could you elaborate on that? What types of talent are you adding? And how should we think about that as far as how it could impact expenses? I know you have a pretty tight range you're expecting this year, but just going forward.
Jared Wolff (President and CEO)
Yeah, well, there were some positions in some areas that we want to grow. We just added a talented leader to head a venture in California, and lead our team here. We have—you know, before we announced the acquisition, we brought in a new head of corporate communications from City Debra Vrana, who's doing a great job for us. We have a head of underwriting on the community bank side that we brought in recently. There is a whole host of talented leaders and players at all levels that we're bringing in.
We obviously are going to have to manage it within our expense targets, and getting down to that 2% OpEx ratio is going to require us to exercise some discipline, but we're confident that we can do it.
Brandon King (Equity Research Analyst)
Got it. And then just, just lastly, you gave us the SPID yields, which is very helpful. Could you give us the SPID yield on the securities portfolio?
Jared Wolff (President and CEO)
Joe, do you have that?
Joe Kauder (CFO)
You know, I do. Just give me one second.
Jared Wolff (President and CEO)
Okay, Brandon. We'll, we'll take a look for that, Brandon.
Joe Kauder (CFO)
No, I got it here, Jared. It's 2.25%. I'm sorry, I read that wrong. 2.75%. I apologize. 2.75%.
Brandon King (Equity Research Analyst)
Thank you very much. Very helpful. Thanks for taking my questions.
Joe Kauder (CFO)
I couldn't read my own handwriting.
Operator (participant)
Our next question comes from Gary Tenner, from D.A. Davidson. Please go ahead with your question.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks. Good morning.
Jared Wolff (President and CEO)
Good morning.
Gary Tenner (Managing Director and Senior Research Analyst)
A couple of questions. One, the NIM guide of approaching 3%, just confirming that's inclusive of the expected loan discount accretion that you kind of lay out on an annualized basis in the slide deck?
Joe Kauder (CFO)
Yeah. Yes.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. All right. Full guide number. Okay, and Jared, you kind of answered part of this with your comment around the BTFP and repaying that, you know, probably before the end of the quarter. But in the deck, you know, it, it kind of—one of your checklist items was to complete restructuring of the balance sheet. Now, I know there's going to be kind of ongoing, obviously, for some period of time, kind of optimizing of the balance sheet, but just wanted to get a sense of any kind of, you know, clear, discrete items outside the BTFP repayment that are still planned for the first quarter.
Jared Wolff (President and CEO)
Well, I think it's expense reductions. You know, there are pieces of the discontinued loan portfolios that, you know, capital permitting, we might look to sell. You know, if we think the yield is so low that we can, you know, it's somewhat of a negative carry relative to other funding that we could pay off. We're constantly looking at that and looking at, you know, what the pricing is. And pricing is kind of moving around in the market as people settle in on where they think rates are going to be. So we're not ignoring that there are other things that we could sell. We just haven't made the decision to definitely sell those things absent one or two things. So I think that's something that you could expect, Gary.
You know, look, there, there's a lot of... These are somewhat unclear times from an economic standpoint, and I think a lot of banks are looking at the road ahead, and it's kind of filled with debris, and they're trying to figure out how they're going to drive down the road and kind of get to the end zone. I'm mixing my metaphors here, but, but we are, we're fortunate that we have a very clear path and I guess, a very clear road ahead, and we can see very clearly what we need to do, and we have it all laid out. And, you know, if we execute on the things that we set out to do, we believe it's largely within our control to achieve the earnings targets and profitability that we set. And, that includes potentially having some loan sales.
We have a lot of leverage to pull. So, you know, if we don't sell those loans, we got something else that we want to do. But I think loan sales is a possibility, along with, you know, all of those expense savings that I mentioned that we have, you know, listed out. Joe, I don't, I don't know if you or Bill have anything else to add here.
Bill Black (EVP of Strategy and Corporate Development)
Yeah. I would just say on the balance sheet, you know, as the liabilities is in addition to BTFP, you know, with other broker deposits, as they come due, you know, we'll look at the market, and we'll look at all the various options we have. Do we let the, you know, the wholesale funding ratio drift up, drift down? Do we, you know, loan deposit ratio, et cetera. So there's lots of options we have, and we're going to make thoseas Jared articulated, we're going to make those decisions, as they come to us and based upon the economic environment and the best—what's best for shareholders at that time.
Gary Tenner (Managing Director and Senior Research Analyst)
Great. Appreciate it. And if I could ask one more. Jared, you mentioned that, you know, you got several stories about, you know, former PacWest depositors coming back into the fold, as it were, you know, post-deal. You talked about the experience as to how those are coming back. Are they kind of, you know, utilizing a sweep or a kind of shared deposit product? What kind of format are those balances coming back in?
Jared Wolff (President and CEO)
It's all different formats. I mean, I got a story right here from someone in one of our offices. During the liquidity crisis, a longtime small business client withdrew $1.3 million out of his account, and he was incredibly apologetic. He took the $1.3 million cashier's check to BofA and opened the account. Our client quickly realized that he did not receive the same service that he always enjoyed. As he continued to bank with us with much smaller balances, we continued to encourage him to bring the money back. After the renewed strength of the bank and the merger, and how dissatisfied he was with the impersonal service at this other bank, the client brought back the $1.1 million and attributed it to our service and our particular banker that took care of them every week.
I mean, I have pages of stories like this, and it obviously is very gratifying, and it's not surprising to me at all. You know, we did this at Banc of California when I joined. We really focused on service and solutions. PacWest is really good at it. They had outflows based on fear that were unfounded, but they had a very, very loyal client base. And I know that if we do what we say we're going to do, and we do it on time, and we continue to execute the way we always have, we will be very successful in that effort.
Gary Tenner (Managing Director and Senior Research Analyst)
Great. Thanks, guys.
Jared Wolff (President and CEO)
Yep.
Operator (participant)
Our next question comes from Andrew Terrell, from Stephens. Please go ahead with your question.
Andrew Terrell (Managing Director)
Hey, good morning.
Jared Wolff (President and CEO)
Morning, Andrew.
Andrew Terrell (Managing Director)
Just a couple of quick ones for me. One, just to confirm on the kind of balance sheet size expectations. It sounds like from an average earning asset and then total asset standpoint, I mean, relatively kind of stable expectations throughout the year. Is that fair?
Jared Wolff (President and CEO)
Yes.
Andrew Terrell (Managing Director)
Okay. What's a comfortable level of cash you'd be willing to run at?
Joe Kauder (CFO)
I think about 8%. Is that right, Jared?
Jared Wolff (President and CEO)
Yeah, I think 8%-10%. I mean, we're higher than we want to be right now, but I think 10% would be the high watermark. And, you know, as we bring it down and historically, we ran with, you know, 2%, you know, 3%
I think banks today are running with a little bit more, especially because you can get such a good yield on liquidity. So it's a function of, you know, what we can get right now. I think, I think Joe's target's right.
Andrew Terrell (Managing Director)
Okay, perfect. And if I could ask, all the commentary is super helpful, in terms of I know there's a lot of moving pieces here, so I want to appreciate all the color. Just wanted to ask on, on kind of the exit ROA for 1.10, and for Q 2024. I'm trying to get a better sense of just what type of exit margin you would expect. The expense part is helpful, but it seems like the one kind of detail that I'm trying to get to here is the NIM. So any kind of color you could provide on an exit for Q NIM that would underpin the 1.10 ROA would be helpful.
Jared Wolff (President and CEO)
Yeah. You know, the NIM is we haven't, we haven't defined that yet, I don't think. Joe, have we?
Joe Kauder (CFO)
Well, our we haven't defined, but we did our exit. We did say our estimated spot rate for net interest margin was 2.75% at 12/31. Andrew, is that what you're looking for?
Jared Wolff (President and CEO)
No, no, he's asking for, for Q4 2024, where we're going to be.
Joe Kauder (CFO)
Oh, oh.
Jared Wolff (President and CEO)
Andrew, Andrew, the reason why we're not there is because the NIM is, is pretty much an event output for us. You know, if we're, if we're a little bit larger or a little bit smaller, it obviously will, will affect the NIM and, you know, kind of the mix of, of our portfolio, and so we just haven't guided to it yet. We, we know we have all these levers, we have all these models. We've looked at three different ways to get there, and the NIM is different in these different models, but we still achieve the same ROA, and so we, we haven't provided guidance there yet.
Andrew Terrell (Managing Director)
Okay. Yep.
Joe Kauder (CFO)
Andrew, the easy way to back into that, though, is that if, if you think about it, of the three main income statement components, fees, you know, net interest, income and expenses, if you're comfortable with your estimate for fees and expenses, you can essentially, you know, in some cases, you go through that and back into it.
Andrew Terrell (Managing Director)
Yep, yep.
Joe Kauder (CFO)
Just to give your own. I mean, to pressure test it on your own.
Andrew Terrell (Managing Director)
Yeah, I was running that analysis, Bill, and it just seemed like the margin I had to plug in was pretty high, so I just was trying to spot check it. Okay, I can move on. The one other I wanted to ask about was the $16.8 million of additional expense you guys called out as related to the HOA business this quarter. Can you talk about specifically what drove that, and was that more transitory in nature, so we should view it as one time?
Jared Wolff (President and CEO)
It was one time. It was one time. It was a catch-up expense for a specific client, and we took care of it in the fourth quarter.
Andrew Terrell (Managing Director)
Got it. Okay. And then actually, last one, the borrowing facility termination for $19.5 million, did that come through operating expense or was it in your interest expense?
Joe Kauder (CFO)
Operating expense.
Andrew Terrell (Managing Director)
Okay, perfect. I appreciate it.
Jared Wolff (President and CEO)
Thank you, Andrew. Appreciate it.
Operator (participant)
Our next question comes from Timur Braziler, from Wells Fargo. Please go ahead with your question.
Timur Braziler (Director of Mid-Cap Bank Equity Research)
Hi, good morning.
Jared Wolff (President and CEO)
Morning.
Timur Braziler (Director of Mid-Cap Bank Equity Research)
Jared, you had made a comment regarding loans that balances more or less flat as demand is okay, but you're continuing to see some runoff or maybe expecting some runoff. I'm just wondering, as we're looking at the categories today, where could we see some additional trimming off of loan balances?
Jared Wolff (President and CEO)
So in the discontinued portfolio, you know, premium finance loans, and we laid this out in a table, in the deck of what the discontinued portfolios are versus, you know, kind of the what we consider core portfolios going forward. And you have, you know, premium finance, lender finance, all those things. And the lender finance is coming off at about $100 million quarter-over-quarter, is what it was last quarter. And, you know, I don't know if it's going to continue at that pace, but. That 7.32 is running down and it's a lower yield, you know, a little below 3.5%. We have some good yields on some of the other stuff. Civic's coming down for sure.
Half, you know, a portion of that is bridge, and the other portion is kind of for rent, single family. So those are two of the categories that I think student loans, you know, there's barely any national lending left, but this stuff's running down. We think the loan portfolio overall will be flat to slightly down. And, you know, this is obviously an environment where you can get reasonable yields with your liquidity relative to the stuff that's paying off. But obviously, we want to deploy the funds in good loans because the rates right now are very good for lending. As Joe said, 7%-8% is what we're getting, and in many cases higher than that.
We want to deploy any good loans, but we're being conservative, and we're making sure that, you know, it's the right relationships. We really want to use our balance sheet for our clients and for full relationships. We're ensuring that when we are lending today, it comes with a real relationship. With the reduction in banks overall, it's been easier for us to require larger, you know, components of the overall relationship to bank with us and to lend. And in the past, it was much, much more complicated. Given the position of our bank and the options available to the clients that are speaking to us, we're in a much better position to demand more. It's not to say that every client is going to have a single banking relationship.
I talked to somebody yesterday, I ran into at a restaurant, and a well-known real estate guy, and he, he said: "Can I call you after lunch?" I said, "Of course." And he called me, as he said he would. And he said, "Look, we've been with, we've been with First Republic, which is now Chase. We've been with City National, and they're pulling back. And are you open to talking to us? We have about $40 million-$50 million in balances. We're not going to put it all at one bank, but we do need to put our operating account somewhere." And I said, "We'd love to talk to you." I said, "I want to make sure that we can serve you with what you need and how you need it.
And so let us look at all that and then come back to you to make sure that we can meet you where you're going." There's a lot of opportunities like that.
Timur Braziler (Director of Mid-Cap Bank Equity Research)
Okay, great. And then maybe, again, just circling back to your comments about bringing back legacy PacWest deposits that left last year. I'm just wondering what industries those are in and to what extent you're getting some of the venture tech-related deposits reengaging with the bank?
Jared Wolff (President and CEO)
I would say the deposit outflows that PacWest had and that Banc of California had as well, but they were obviously more, more dramatic at PacWest, were in all areas. And so there isn't an area where we're not looking to bring deposits back. But the headline, of course, was the deposits that went out on the venture side and how PacWest classified those. I would say that, you know, my observation and the data that we have is that those relationships are very, very strong. We've been able to positively promote the strength of our bank, and this combination really, really gave people a lot of comfort. You know, our credit ratings came out obviously very strong, and so we have been successful at bringing back relationships and deposits that left in those areas. And we're, we're gonna continue to do that.
The area where I want to be careful is we've all agreed that we're gonna manage concentration better so that we don't end up with depositors that are too large for our balance sheet. We have corporate asset management. We have a great tool that we can use to have have balances in the family, but not on the balance sheet. We might be successful, Timur, by bringing back relationships, even if they don't show up in our deposit numbers, because they're they're, you know, in asset management off balance sheet. So we're doing both. We want them back. We want them in the family. We want them here. We think we can serve them better than others, but we're gonna be careful what we keep on balance sheet and what we lend against.
Timur Braziler (Director of Mid-Cap Bank Equity Research)
Okay. And then, I guess just last for me, and you again, you touched on this a little bit, but looking at the payment rollout and where Deepstack fits into all of this, originally, when that was introduced, the update was kind of revenue contribution back end of 2023. I'm wondering if, A, the PacWest deal delayed that a little bit, and then, B, if you can provide some update on the magnitude of what the payment vertical might look like, and what PacWest does to that run rate.
Jared Wolff (President and CEO)
Absolutely. So we said that Deepstack, on a standalone basis, old Banc of California, we said that Deepstack would start contributing meaningfully to fee income in 2024. PacWest has fee income historically at $10 million-$12 million per month. And, you know, that, that is, that is continuing. So the ability of Deepstack to make an impact on a fee basis, on a revenue basis to the combined company is, is no longer there in 2024 to the same magnitude it would have done on a standalone Banc of California. So just to put it in context, that, you know, on a standalone basis, it would have contributed meaningfully, but it's, it's obviously diluted now.
The payments business that we're building is three things: It's merchant processing, which is our ability to go direct to merchants to process credit cards without any third-party intermediaries. It's issuing credit cards directly on our balance sheet to clients to whom we have credit. This isn't, this isn't selling consumer credit cards broadly. This is giving card solutions to our existing clients, to whom we already provide credit, and benefiting from the interchange as the issuer of those cards. And third is using our rails, our infrastructure that we've built, and the BINs, the identification numbers that we have with Mastercard and Visa, to process third-party transactions for trusted partners like Worldpay, like others who are well known in the business. Those are the three layers of our ecosystem, and those are all rolling out now.
I think, you know, I'm hoping that later in this year or by the end of the year, it's making enough that we want to call it out specifically. Making enough so I call it out specifically means meaningful enough on this combined balance sheet. That doesn't mean it's not contributing anything. But we're not going to call it out till we think we have something to talk about that's of a good enough number. It's obviously going to have to be a bigger number now, but there are many ways in which we think this is going to accelerate the merger. For example, the HOA business is going to be using Deepstack as a digital payment acceptance tool for their clients. You know, it's got $4 billion in deposits.
It's got hundreds of clients, and they think Deepstack is a great feature to allow them to accept payments and to provide a tool that their clients really would like to make their payments acceptance easier. The venture business has embedded clients interested in our payment tools. PWV was actually further along than we were at Banc of California in digital account opening, which is a huge part of rolling out our payments business. So there's lots of positive synergies that we're going to realize through the year that I think will benefit us, you know, hopefully this year, but certainly in 2025. We're also focused on optimizing the FIS integration and setting up payments in a truly optimal way. I'm meeting with the FIS CEO and Worldpay executives at their headquarters in Jacksonville in February to discuss this.
They've been very focused on what we're doing in payments. We're very unique. Worldpay is obviously the 100-pound gorilla out there, and we're excited to partner with them and see if we can find some ways to accelerate our progress.
Timur Braziler (Director of Mid-Cap Bank Equity Research)
Great. Thank you for that color. Appreciate it.
Jared Wolff (President and CEO)
Yep.
Operator (participant)
Our next question comes from Kelly Motta from KBW. Please go with your question.
Kelly Motta (Managing Director and Equity Research Analyst)
Hi, thanks for the question.
Jared Wolff (President and CEO)
Hey, Kelly.
Kelly Motta (Managing Director and Equity Research Analyst)
Hey, I thought maybe we could talk a bit about fees and not Deepstack, but just fees more broadly in general. You know, on a combined basis, I know you're bringing together two banks with different capabilities. I'm just wondering where you see, like, complementary opportunities to maybe, you know, sell one product or another to either PacWest or Banc of what you may have not had before. And kind of how what your run rate fee income looks like as we start next year and kind of how that could be additive to it. Thanks.
Jared Wolff (President and CEO)
Yeah. So I'll start with cards. I mean, you know, PacWest was much further along than we were in kind of their card partnerships. They weren't an issuer of cards. They were basically a reseller of others' cards, but they had. They were doing it in a good way with a virtual card program. And I was just looking at materials this morning that I think were great. And Susan Tang leads that group, and they did a great job with it. And we were looking at how we can, you know, accelerate that and build off the momentum that they had previously. The $10 million-$12 million per month of fee income wasn't solely from that. PacWest did a good job of collecting fees in a variety of ways.
But for now, we think that that fee income per month is the right level that people should expect. And then hopefully we can build on it from there. You know, we have a little bit of retooling to do as an issuer. The way we're going to build this out and roll it up is we have to close down the partner programs and then start with our new programs. And so it's not going to slow down the fee income, but I don't think we're going to see any acceleration in it till later in the year.
Kelly Motta (Managing Director and Equity Research Analyst)
Got it. That's helpful. It was really good to see the tangible book value number come in higher than what you had expected last quarter. I was hoping, maybe this is a question for Joe, but if you could help us kind of bridge the gap on how we should be thinking about AOCI with the, you know, what that's against in the securities book duration and how we should be thinking about the accrue back of that over time. Just trying to get a sense of the cadence of tangible book value growth.
Joe Kauder (CFO)
So on the AOCI, you know, we've come down significantly to $434 million, compared to where the PacWest was on a standalone basis, which was, I think, you know, $800 and some change in the third quarter. You know, our duration of that portfolio is, you know, north of 5 years, up in the 6-year period. We'd like to, over time, bring that duration down, and add higher-yielding securities to that portfolio. You know, we feel pretty good about where we are on the unrealized loss. These are high-quality securities, and as interest rates, if interest rates do continue to come down, as the forward curve suggests, then the unrealized loss as an AOCI will continue to come down as well.
Kelly Motta (Managing Director and Equity Research Analyst)
Thanks. I'll step back.
Jared Wolff (President and CEO)
You know, I should have mentioned, you know. Yeah, I should have mentioned, we've got a whole team working on this payments ecosystem. And, you know, I've mentioned before, it's led by Jagdeep Sahota, who's our Chief Payments Officer. And what I've been so impressed with is how, as we brought the banks together, you know, we found the best pieces of each to kind of move this forward. There's a development team that PacWest has, that we didn't have at Banc of California, that's really jumped in and done a great job of helping to build the user interfaces and the things that we want to move forward on payments. And so there's a lot of good things going on, and I wish I could mention them all, but we'll be excited to see how this rolls out later in the year.
Kelly Motta (Managing Director and Equity Research Analyst)
Thanks.
Operator (participant)
Once again, if you would like to ask a question, please press Star and One. To remove yourself from the question queue, you may press Star and Two. Our next question comes from Tim Coffey from Janney. Please go ahead with your question.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Thank you. Good morning, gentlemen.
Jared Wolff (President and CEO)
Morning.
Joe Kauder (CFO)
Good morning.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
I appreciate all the details in the press release today, especially the spot rates. If I were to look at the spot rates and apply them to period-end balances, I start getting a net interest income number closer to $300 million. Is that a reasonable estimate for the profitability of that company today?
Jared Wolff (President and CEO)
You know, I don't know that we're ready to say that yet. You know, we to confirm that number as being high or low. The reason being is there's a lot of moving pieces, and I think we understand why it's difficult, because we only had one month of combined balance sheet with a whole bunch of stuff moving around. What we'd like to do is deliver a Q1 balance sheet and income statement, and I think it's going to be much easier for us to guidance off of that. But to forecast today what Q1 kind of run rate PPNR or other things are going to be, we're not. We don't want to do that yet. We want to make a little bit more progress.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Okay.
Jared Wolff (President and CEO)
Hopefully, people took away a lot of confidence from what we've done. I mean, I think what we accomplished in Q4 was tremendous. We did this at Banc of California. We always did it faster than we said we were going to do it, and I can't promise that that's going to happen here, but I have every level of confidence in our ability to execute and be successful. And so I'd like to get through Q1, Tim, to be able to guide from there.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Okay, appreciate that. Then I also appreciate the, the cadence and the cost saves throughout the year. I'm wondering, as it comes to restructuring the balance sheet, redoing the balance sheet, is there anything coming up in 1Q of significance?
Jared Wolff (President and CEO)
Well, the FDIC assessment is pretty big, isn't it, Joe? Yeah.
Joe Kauder (CFO)
Yeah. So on the cost, the FDIC assessment, if, you know, assuming we get, that's a very big, you know, run rate item, and then there are some other initiatives we have, which, you know, they come in throughout the year. There are other things that are happening in the first quarter. But I think were you asking about the balance sheet restructuring in the first quarter? Because on that, I think you could see us deploying some of our excess liquidity against, you know, for example, the BTFP, which is going to come due in March.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Right. Yeah, that's actually what I was asking about. It's on the balance sheet side.
Joe Kauder (CFO)
Yeah.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Is it just the BTFP then that's for considering?
Joe Kauder (CFO)
Well, there's other, you know, higher-cost broker deposits which are coming due in the first quarter. And that's, you know, I made a comment earlier about how we evaluate them as they come due. We look at the, you know, the situation, the economic environment at the time, and we make decisions that what's best, you know, to try to manage the portfolio optimally on a day-by-day basis.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Okay, I appreciate that. Thank you. And then, Jared-
Jared Wolff (President and CEO)
Tim, there's a... Tim-
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Yeah.
Jared Wolff (President and CEO)
Tim, one other thing. We, you know, I, we did mention that we are constantly looking at loan sales, and so I don't know that we're going to execute it. It depends on the price, but I wouldn't be surprised if we did, you know, because we have opportunities to do that.
Joe Kauder (CFO)
Yeah.
Jared Wolff (President and CEO)
But if we don't get the right price, we obviously won't do it.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Oh, okay. But just to be clear, that piece of the multifamily is off the market now, right? You're going to hold on to that?
Jared Wolff (President and CEO)
Yes. Yes, we're going to hold on to that.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Okay.
Joe Kauder (CFO)
I would say there might be a very small subset of the multifamily, that very small subset that there seems to be a lot of interest in, that piece of it we may, but it would not be a large portion.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Okay. Okay, I understand. Thank you. And then my final question is, Jared, on the size of the balance sheet, and I'm not being critical because I think you guys, what you do is, you know, pretty much, you know, unprecedented in banking, this merger. But I thought at announcement, you know, the balance sheet was going to be smaller than it is today. And I'm just kind of wondering, did you kind of just run out of time to do all the stuff you want to do, or was this more, or was there a strategic reason for keeping it bigger?
Jared Wolff (President and CEO)
Well, the first piece of it was keeping, you know, the extra piece of multifamily.
We have more cash, I think, than we planned, but I do think—I do see it coming down. Like I said, it, we're not, we're really managing to profitability and to that 1.10 ROA, and obviously, 1.10 ROA on a bigger balance sheet means more earnings. So if we might need to bring down the balance sheet, if based on where we see earnings, and it's a delicate balance, obviously, because you get rid of assets and they're earning something, and where are the expenses that go along with it? But we're managing all of that to make sure we get to that 1.10 ROA right out of the gate at Q4, you know, to start 2025. So I don't know where we're going to land, but I'm confident we're going to get to our profitability targets.
Timothy Coffey (Managing Director and Associate Director of Depository Research)
Okay. Great. Those are my questions. Thank you very much.
Jared Wolff (President and CEO)
Thanks, Tim.
Operator (participant)
Our final question is a follow-up from Timur from Wells Fargo. Please go ahead with your question.
Timur Braziler (Director of Mid-Cap Bank Equity Research)
Hi. Thanks for the follow-up. Just one quick one: What are the assumptions for purchase accounting that are embedded in your estimates for 2024?
Jared Wolff (President and CEO)
I know that question wasn't directed to me, so I'll let-
Joe Kauder (CFO)
Yeah.
Jared Wolff (President and CEO)
I'll let Joe answer that.
Joe Kauder (CFO)
So, you know, in the deck, we included a page which showed the, how the accretion, we estimate the accretion will roll off. And so, I think it's on page 29 of the deck. But I think, you know, our current assumption is that we will have a, we estimate that it'll be about $0.15 EPS impact for the year, which includes loan marks consistent with, you know, in an aggregate way, consistent with the yields that we're seeing on our new originations.
Timur Braziler (Director of Mid-Cap Bank Equity Research)
Great. Thank you for that.
Operator (participant)
Ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.