Banc of California, Inc. (NYSE:BANC) Q3 2023 Earnings Call Transcript

Banc of California, Inc. (NYSE:BANC) Q3 2023 Earnings Call Transcript October 24, 2023

Banc of California, Inc. misses on earnings expectations. Reported EPS is $0.3 EPS, expectations were $0.31.

Operator: Hello and welcome to Bank of California's Third Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded and 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 like now to turn the conference call over to Mr. Jared Wolff, Bank of California's, Chairman, President, and Chief Executive Officer. Please go ahead.

Jared Wolff: Good morning and welcome to Bank of California's third quarter earnings call. Joining me on today's call is Joe Kauder, our Chief Financial Officer, who will talk in more detail about our quarterly results, as well as Bill Back, Head of Strategy for PacWest, who will be joining bank of California in a similar capacity upon the closing of our merger with PacWest. I'd like to start off by congratulating the teams at Bank of California and PacWest on a terrific job obtaining regulatory approval. It is worth noting that we obtained regulatory approval for the merger and also obtained approval for the combined bank to become a member of the Federal Reserve, which really is its own process altogether. These approvals didn't just happen, and they required significant coordination.

A customer smiling as he signs a consumer loan agreement in a regional bank branch. Editorial photo for a financial news article. 8k. --ar 16:9

The results reflect the dedication and hard work of our colleagues and advisors. We also appreciate the dedication and equally hard work of our federal and state regulators, who had an important job to do. With regulatory approvals in hand and our shareholder meetings set for late November, we anticipate closing on or around November 30. We look forward to delivering a franchise poised to provide significant benefits to our shareholders, clients, communities and colleagues. Our two companies have made significant progress on integration planning, which is proceeding smoothly along with the preparation for the balance sheet repositioning actions that will occur in connection with the closing of the merger. I want to thank the bank of California and PacWest team members for their tremendous efforts, planning and dedication towards the successful close.

Turning to our third quarter performance, our results reflect many of our strategic decisions to position our balance sheet ahead of our merger with PacWest, which include limiting certain long term fixed rate deposits, resolving certain acquired credits, and hedging the interest rate risk associated with various assets we anticipate selling in connection with the closing of the merger. As a result of these initiatives. We generated net income of $42.6 million during the quarter, had increases in all of our capital ratios, and grew tangible book value per share by 5%. Joe is going to provide some of details, but our trends were positive and set us up well ahead of closing, expansion of our net interest margin, disciplined expense control, and continued growth in new commercial relationships.

As I've discussed in the past, against a backdrop of economic contraction and overall decline in deposit levels across the banking industry, we are focused on bringing new core deposit relationships to the bank. Through the first nine months of the year, we have generated over $200 million in new non-share [ph] deposits from new commercial relationships. These new relationships offset deposit outflows today and will continue to benefit our company in the future. Given the highly liquid balance sheet we expect to have following the merger, including a loan to deposit ratio at closing that is expected to be in the low 80s, we intentionally refrained from adding higher cost deposits to offset any deposit outflows. We continue to see healthy loan yields and have note in this quarter an increase in loan yields outpaced the increase in cost of funds.

Key asset quality ratios improved quarter over quarter and asset quality remained strong. We recorded a $5 million provision for credit losses, which was primarily related to loans from the PMB acquisition that we felt it was prudent to resolve ahead of the merger closing. At the beginning of the year, we indicated that one of our priorities was ramping up our new payments processing business, which we launched during the third quarter on track with our projected timeline. As we have said all along, we are being very prudent in the development of this business and we have steadily built our process and risk management systems as we have added clients. We continue to expect this business to begin making meaningful contributions during 2024, which will be accelerated with the PacWest merger and the larger client base to whom we can offer this highly differentiated payment solution.

In particular, we believe that there will be a high usage rate among clients in PacWest venture and HOA businesses. Now let me hand it over to Joe who will provide some more color on the performance and then I'll have some closing remarks before opening up the line for questions.

Joseph Kauder: Thank you, Jared. Please feel free to refer to our investor deck, which can be found on our investor relations website as I review our third quarter performance, I will 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 second quarter of 2023. Our earnings release and investor presentation provide a great deal of information, so I will limit my comments to some areas where additional discussion is warranted. Net income for the third quarter was $42.6 million, or $0.74 per diluted share. On an adjusted basis net income totaled $17.1 million for the third quarter, or $0.30 per diluted common share, when we exclude impacts from certain credit, certain merger related items, including a pretax gain of $46.2 million on derivative instruments and $9.3 million of transaction cost related to the proposed merger with PacWest Bank Corp, which we will discuss later.

This compared to adjusted net income of $18.4 million, or $0.32 per diluted common share for the prior quarter. Our interest income was almost flat, with a $0.4 million decrease from the prior quarter, primarily due to a $360.4 million decrease in average earning assets, partially offset by an 8 basis point expansion of our net interest margin to 3.19%. The decline in average earning assets was driven primarily by the reduction in excess liquidity that the company carried through the first half of the year. The improvement in our net interest margin to 3.19% was a result of the impact of a 16 basis point increase in the overall earning asset yield to 5.36%, while our total cost of funds increased by only 9 basis points to 2.29%. Our average loan yield increased ten basis points to 5.38%, which was largely attributable to variable rate loans in the portfolio continuing to reprice, and higher rates on new loan production.

Rates on new loan production increased 19 basis points to 8.36%. Also, the average yield on securities increased 34 basis points to 5.17%, mainly due to CLO portfolio resets. Our average cost of deposits was 1.86% for the third quarter, up 19 basis points compared to the second quarter, and since the fourth quarter of 2021, our average deposit beta is 34%. The average cost of interest bearing deposits increased 27 basis points compared to the prior quarter, largely a result of overall higher rates. Our noninterest income increased $44.8 million from the prior quarter, primarily due to a $46.2 million mark to market gain on the derivative instruments we entered into in connection with the announcement of the proposed merger with PacWest. Excluding this mark to market gain, the other areas of noninterest income were relatively consistent with the prior quarter.

Our noninterest expense increased $7 million from the prior quarter, primarily due to transaction cost of $9.3 million related to our proposed merger with PacWest. Our adjusted noninterest expense decreased $2.2 million from the prior quarter due to lower salaries and benefit cost. Turning to the balance sheet, our total assets were $9.2 billion at September 30, a decrease of approximately 1% from the end of the prior quarter, which reflects the impact of the strategies we are employing to position our balance sheet prior to the closing of the merger. Our total equity increased by $44.7 million during the quarter, as $42.6 million in net earnings and $6.3 million in lower unrealized losses on AOCI were partly offset by common stock dividends.

Our total loans decreased approximately $195 million from the end of the prior quarter, as our outlook for loan originations remain cautious in the current economic outlook environment. Our total deposits also decreased $230 million from the end of the prior quarter. As noted, we've refrained from adding higher cost deposits to offset outflows given the highly liquid balance sheet that we expect to have following the closing of the merger. Our credit quality remained solid in the third quarter, and excluding our SFR portfolio, which is anticipated to be sold in connection with the closing of the merger, we had declines in all of our problem loan categories. A large percentage of our delinquent and nonperforming loans continue to be SFR loans that are well reserved for and have low loan to values, so we view the loss potential as low.

We recorded a provision for credit losses of $5 million related to loans. As Joe indicated, the provision was mainly related to loans added in the Pacific Mercantile acquisition, as were the related charge offs that we had in the quarter. In anticipation of closing the merger with PacWest, we took the opportunity to accelerate resolution of these credits. Our allowance for credit losses at the end of the third quarter totaled $78.4 million, compared to $84.9 million at the end of the second quarter, and our allowance to total loan coverage ratio stood at 1.13% compared to 1.19% at the end of the prior quarter. Although the total loan coverage ratio declined, the nonperforming loan and nonperforming asset coverage ratios each improved by 3 basis points in the quarter.

At this time, I will turn the presentation back over to Jared.

Jared Wolff: Thanks, Joe. Overall, our trends were strong and we like the way it sets us up for the closing of the deal. Expansion of our margin, increase in loan yields outpacing, increasing cost of funds, improvement in core credit metrics, strong buildup in tangible book value per share, and continued growth in new relationships to the bank. Loan origination volume remained muted during the fourth quarter while we continue to execute on our core fundamentals, we look forward to closing the merger and unlocking the power of the combined institution. The thesis and the power of our deal remains unchanged. We will be the third largest bank headquartered in California. Out of the gate we will have good and healthy capital ratios, a low loan to deposit ratio, relatively high ACL coverage ratio, high cash to assets, low wholesale funding, and expanded earnings.

We have reaffirmed our EPS range for 2024 of a buck 65 to a dollar 80. We've been monitoring PacWest performance closely, and we remain on track from an earnings perspective. , even if AOCI is higher and tangible book value per share comes in lower, that creates significant upside, especially if you think we are at or near peak rates. All of the cost saving opportunities and balance sheet repositioning remain positive, and we, along with our investors, remain fully committed to closing around November 30. The fundamentals of the deal and the earnings and capital outlook remain very strong, and we are excited to get this done. Our track record of execution, doing what we say we're going to do will continue to be demonstrated now and going forward.

The strong market position that the combined institution will have has become even more apparent. Given the number of banks that have completely exited or significantly pulled back from the market over the past 18 months. There is a tremendous amount of excitement through both organizations about the ability to capitalize in our various markets, to add new clients and expand relationships with existing clients, as well as to continue to attract the very best talent. Given these opportunities, we believe that we are extremely well positioned to steadily increase our client roster, generate long term profitable growth, and enhance the value of our franchise in the coming years. With that, let's go ahead and open up the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Timur Braziler of Wells Fargo. Please go ahead.

Timur Braziler: Hi, good morning. My first question is around PacWest NII. It was a little bit softer than we were looking for. I think some of that had to do with probably loan sales versus improvements on the funding side. But I guess as we're going into deal close, can we just kind of get an update on what you think PacWest's NII run rate is going into the deal? And then are you still confident in the $90 million net benefit from further restructurings? And is that $90 million now off of a lower base, or has that entire number relatively stayed unchanged?

Jared Wolff: Yeah. Thanks, Timur. Rather than going through kind of because there are a lot of moving parts just achieving earnings, I think the most important thing for us to do is to reaffirm specifically the earnings range that we said before. And there are a lot of different ways to get, you know, rather than going specifically through NII, which has a lot of implications for what we have for loan yields, we're kind of updating our pro formas weekly. I mean, we're that close to PacWest looking at their results and looking at the pro forma numbers, which is why we feel very comfortable reaffirming our range. We remain confident in the pro forma earnings power, as we discussed on the merger call in July. And looking at the third quarter bank earnings, plus the significant benefits of the planned deleveraging of the pro forma balance sheet, with the asset sales, reducing the high cost funding, paying off the Atlas facility at PacWest with existing cash, plus the stated cost saves, and importantly, the reduction and normalization of their FDIC assessment.

Right. That's a very high number that is going to be normalized out of the gate in Q4. So the PacWest balance sheet is carrying a lot of excess high cost liquidity impacting their overall numbers and they have not fundamentally executed on the cost saves, which is going to occur post close. So we feel excited about the kind of improving earnings power for the deal ahead. And so I think that's kind of the most I can give you about the specifics. We're absolutely reaffirming the range of 165 to 180.

Timur Braziler: Okay. And then I guess without delving too far into the specifics, but you brought up the FDIC surcharge and PacWest expenses were a little bit elevated. Given that, I guess, what's the combined number for FDIC surcharge on a go forward basis or FDIC expenses on a go forward basis?

Jared Wolff: What is the number that we're projecting it to be? Is that what you're asking?

Timur Braziler: How much of a reduction will that.

Jared Wolff: Joe, how much guidance are we giving on that? What's the range that we're expecting off of where PacWest is today?

Joseph Kauder: Yeah, I think we expect it to run annually going forward, around $36 million a year.

Timur Braziler: Okay, great. And then Jared, you had brought up the AOCI effect. Can you guys provide what the unrealized loss position is on the mortgage book at quarter end for...

Jared Wolff: Well, let me provide it more broadly, which is that the AOCI that PacWest experienced through recently, we think moves tangible book value from around 15 to around 14. So that's kind of where it is now. Interest rates are obviously moving. It could be higher than that, it could be lower than that. And there are some things that we can do to kind of affect it between now and closing. But that's kind of the impact of where it is. It moved at about a buck from where we were and it hasn't affected, as I mentioned in my comments, it has not affected the earnings power of the company at all. It hasn't affected the key capital ratios that we're focused on. And if anything, it provides upside going forward. Because if you think we're at or near peak rates, then we're going to get the benefit of improvement in AOCI going forward.

Timur Braziler: Okay, and then just a last one for me, just seeing what the stock price is doing and I think I know the answer to this, but is there anything in the three key results that you think puts the shareholder risk at vote or shareholder vote at risk?

Jared Wolff: Absolutely not. And I hope I was fundamentally clear in my comments that Bank of California and our investors are fully committed to closing this deal on November 30. I think the legal terms are on or around November 30. The shareholder vote is the 22nd and we're going to close it promptly. And we're just kind of timing it to the month end which makes sense from an accounting perspective since we're at the end of the year. So we're excited to get this deal done and we're moving forward.

Timur Braziler: Great. Thanks for that color.

Operato: Thank you. Our next question comes from Matthew Clark of Piper Sandler. Please go ahead.

Matthew Clark: Hey, good morning, everyone.

Jared Wolff: Morning.

Matthew Clark: Maybe just thinking through kind of standalone bank here as we go into what will know a lot of moving parts, but on your NIM, I mean, it was up nicely this quarter, but just trying to get a sense for kind of the upcoming fourth quarter. Do you have the average NIM in the month of September? I saw the spot rate on deposits in your deck, but just want to get a sense for whether or not there might be some additional lift in the NIM here in 4Q.

Jared Wolff: Joe, you want to take that?

Joseph Kauder: We generally don't give out monthly NIM amounts. I will say that the continued pressure on the deposit side of the balance sheet is probably having that come in a little bit softer than what you're seeing in the third quarter, but not by significant amounts.

Matthew Clark: Okay. And on expenses, they were down on a core basis, I think a few million bucks to $46 million. Anything unusual or how do you think about that standalone run rate going into 4Q?

Jared Wolff: Well, 4Q is going to be a mess because of the merger, but absent the deal, I mean, I think it was just consistent. It was nothing unusual. It's just continuing to manage expenses and run this company as efficiently as we can in the market that we're in. And so it was nothing unusual. There is what I would say. Matthew. And just to comment back on the mean in looking at kind know, month end, although we don't give them out, I will say that I would say the threat to deposit cost seems to be declining quite a bit, and we're not seeing the same pressure that we saw earlier. Our margin, the average margin was not terribly far off from where we ended up. I think Joe's appropriately being conservative, that saying the margin could slip a little bit, but we're just seeing less pressure overall on deposits right now.

Obviously, when we close the deal, our margin is going to go down because we're going to be absorbing PacWest margin, and then we're going to be improving it by getting rid of all of their high cost deposits with all the liquidity we're creating through the deal. But then we're going to be building it back up pretty aggressively as we execute on our strategy on the deposit side.

Matthew Clark: Yes. Okay. And then just I know it's kind of taken a backseat here since the deal was announced, but any update on Deepstack with going live with some customers?

Jared Wolff: Just that we're on track. I mean, as I've said before, I don't want to give out numbers of customers and volume of transactions because I think it's too low to be meaningful. We still believe that on a standalone basis, Deepstack in 2024 would contribute meaningfully to fee income and meaningfully enough that we would call it out and say what it is. And I think that's where we're going to get to by mid, late 2024. And we think the PacWest deal is only going to accelerate that. Obviously, in the combined company, it'll be less material, but I think to provide context, we said it would be material on a standalone basis, and we're excited to begin sharing that as we ramp it up.

Matthew Clark: Okay. And then the acquired credits that you addressed here in the quarter through the provision, were all those PCD loans and were all of them marked to some degree? Just trying to get a sense for whether or not they were identified at the time of the deal.

Jared Wolff: No, they weren't all identified at the time of the deal. Two out of the three. So there were three charge offs. Two out of the three were marked at the time of the deal. And then - I'm sorry. And then there was one that wasn't a charge off, but we substantially wrote it down and had to provide a provision for it. That one also was marked at the time of the deal. So three out of the four overall and three out of the four were Pacmer [ph] credit. So the three out of the four were marked, one wasn't. I think it's notable though, that we recorded a $5 million provision and we still hit consensus earnings and we just decided to accelerate stuff and we could have carried it along. But part of what I believe in is transparency.

And in the course of the deal in the Q4, obviously everything's going to get jumbled together and there's going to be a lot less transparency. And so part of it for me was being transparent about what we're doing and just saying, okay, let's move it along now and we're still going to have a great quarter.

Matthew Clark: Got it. Okay, thanks again.

Jared Wolff: Thank you.

Operator: Our next question comes from Gary Tenner of DA Davidson. Please go ahead.

Gary Tenner: Thanks. Good morning. Hey. Wanted to ask about the plant disposition within the PackWest AFS portfolio, the $2.3 billion. Obviously, as you pointed out a moment ago with regard to AOCI, it's got a bigger mark against it now. The plan was to sell about half of that portfolio. There would be greater hit, obviously, to regulatory capital if you were to do it at current fair value mark. So is the plan still to go forward with that full amount or would you adjust it and kind of manage to regulatory capital impact versus the previous plan?

Jared Wolff: So our pro formas currently have us still hitting our CT 1targets with the sale of the planned securities at closing, based on the marks they currently have, we can retain full flexibility. It's just a timing question so we can retain flexibility and sell that stuff later if we choose to, if the marks accelerate and we're like, all right, well, let's hold a little more capital, let's sell it a little later. But as of today or yesterday or whatever the last measurement date was, very recently, we were still hitting our CT 1ratio and executing day one on all the sales that we had announced that we planned to do. Joe, please correct me if that's wrong.

Joseph Kauder: No, that's correct. And what we've been doing, in addition to tracking the interest rates, is we've been updating all sorts of assumptions and estimates in the model. And I just want to reiterate what Jared said, that we forecast that even with the sale that we can hit our targeted our projected regulatory capital levels.

Gary Tenner: All right, great. Thank you. And then you kind of hit on my second question, which is with the kind of earlier timing of the sale relative to the range that you had put out initially, other than the Atlas repurchase agreement, which I think comes up in December, does everything else happen concurrent with closing? Or are there any other kind of timing items as far as the sales and dispositions?

Jared Wolff: Yeah, it's around closing. I mean, it's pretty fluid. Whether it's sometime in December, I think we'd like to take the risk off the table and things that we can execute on, we just will, because it'll allow us to reduce higher cost borrowings at PacWest much quicker. On the term funding facility, Atlas, as you mentioned, is something that we can take out in December. The bank term funding program is interesting, which is another kind of borrowing that they have that everybody's familiar with because it's a positive carry. And they get that benefit, I believe, until March. Bill, isn't that right? I think you guys have that facility can be repaid through March, so that might be something. Even though we plan to pay it off at closing, since it's a positive carry, because it's a lower cost funding, we could carry it a little longer, make a little bit more money, and pay it off later.

So we're looking at all those things. As of right now, though, we have it being paid off pretty quickly.

Gary Tenner: Okay, thanks, guys.

Jared Wolff: Thank you.

Operator: Our next question comes from Kelly Motta of KBW. Please go ahead.

Kelly Motta: Hi, thanks for the question.

Jared Wolff: Good morning, Kelly.

Kelly Motta: Good morning. Congrats on regulatory approvals as well. I was going through the S4 [ph] and I just wanted to confirm I couldn't see any provisions in there that would allow or permit private equity to potentially renegotiate any of what they've committed. From what I can gather, that's committed capital. Can you just enlighten us any sort of thresholds or any potential opportunity that could come from that side to change the terms of the deal?

Jared Wolff: Sure. So we are fully committed to the deal, as are our investors. We talked to them about the closing date. We all circled around the closing date and agreed on the closing date. We're all excited to get this deal done. The agreements are publicly available and people can read them. But as a reminder, the private equity partners that we have, Warburg and Centerbridge, don't have outs that we don't have ourselves, and I don't see any outs anytime soon. We're all excited to get this deal done, and the outs are very narrow and very hard to hit because we were all committed to this deal. And as we've said, even with the marks that exist, we're still hitting our target capital. And the other fundamentals of the deal are strong, and all the expense savings are there for us to do.

We believe if you can absorb a deal at the high watermark of AOCI marks, that's only upside going forward. Which means we properly structured the deal, we properly sized the deal, we brought enough capital to the deal, and so we don't see any outs that anybody could exercise at this point. And we're fully committed to the deal.

Kelly Motta: Thank you for elaborating on that, Jared. I appreciate it.

Jared Wolff: No problem.

Kelly Motta: I was hoping to touch a bit about just the run rate of expenses. I appreciate the color on the FDIC charge that's outsized at PacWest. I think the release cited tangible book value might be lighter because of PacWest earnings came in a bit light relative to what you had been expecting, and I think one of that was expenses. Just how much of that was related to timing. And how are you feeling? It seems like you still are on track for the $130 million cost saves, but I was hoping you could touch on just the run rate as you combine in the first combined quarter as a combined company and just the trajectory of full realization of those cost saves.

Jared Wolff: Sure. Joe, you want to take that?

Joseph Kauder: Yeah. So we're still on track for the cost saves that were in the original investor presentation, and in fact, we hope to exceed those. The FDIC normalizations we talked about earlier. Pack actually, I think our saves versus the investment presentation will probably be a little bit in excess because PacWest assessments went up in the third quarter related to the, you know, those two things together puts us on a really good run rate. With respect to the first quarter and by that I would think you would say the first quarter of 2024 we'll start to realize cost savings then. But really the cost savings are going to be realized throughout and the assessments will happen immediately. But on the other cost savings, those will come in throughout the year.

Really, it's really the back half of the year when they really start to pick up, starting the first and second quarter gain steam, and then the third and fourth quarter when the core cost savings really kick in hard.

Jared Wolff: Yeah, that's a good point, Kelly. Our conversion date is at this point likely going to be in May, which is pretty quick and we want to do it right, but it's a big deal and so that's why some of that stuff won't kick into the second half. There are people that are staying through transitions like conversion. There are a lot of costs that come out after you get the conversion done and so that's going to trigger a whole bunch of stuff. And as of now, that's targeted for May.

Kelly Motta: Got it. Maybe - maybe a last one for me. The new DDA accounts, I mean, it's been a huge part of the bank of Cal story and it was nice to see the new accounts. You laid out about 50 million this quarter. Just wondering if there's any kind of themes there in terms of types of new clients you're winning, as well as on the PacWest side with the DDA runoff that has been seen there, if you've identified any opportunities to perhaps win back some core operating accounts there that have left.

Jared Wolff: Sure. So let me start with the PacWest first, and I'll come back to Bank California. So we look at their daily deposit results daily, and they're doing an excellent job. And without getting into their specifics because it's for them to report, the trends are very positive, including at the Community Bank, which is a big part of their growth engine. And so I'm very pleased with what I'm seeing. They've put in place some programs that are going to jumpstart the combined company. I asked them and Paul's been very cooperative and collaborative, as has the entire team in terms of putting in place programs that focus back on bringing in operating accounts as opposed to selling rate. I mean, they're in the low 80s and loan to deposit ratio now, so there's no need to worry about some of these higher cost deposits as necessary funding.

And their deposit base has stabilized remarkably well. And so I think that there's going to be a lot of opportunity to bring back some depositors. On the other hand, they have some deposits that probably need to be moved off balance sheet that are higher cost deposits as well as deposits that might be more flexible, that are more liquid, that they carry, like on. The venture side and I've talked about that that there's no reason to carry these highly liquid excess deposits on the balance sheet and make you think that they're available for you at all times. And so they have an off balance sheet vehicle that I think is going to be effective to use. It keeps it in the family, it keeps it within the company, and you're providing a very good option for the client.

But you don't have to kid yourself about whether it's true liquidity and a true stable deposit that you could lend against. And so that's part of the conservatism that we're going to build in here. And I think we'll provide a benefit from an operating perspective to the company in terms of living within our means and making sure that we don't have outsized deposits that pose concentration risk. I've talked about that from the day we announced this deal that we want to limit concentration risk equally on the deposit side as we do on the lending side. And that's something that they've been I would say, the folks at PacWest are very focused on and they're very good at addressing these sorts of things and we're doing it together. So that combined with the programs that they've put in place, I'm very pleased with the momentum that we're seeing.

And then at Bank of California, we're not in a high growth lending environment right now. I think that we will see some lending expansion after the merger. There's some whole bunch of stuff we're looking at. But given our loan to deposit ratio, I've been holding back a little bit and prioritizing other lending for clients that's been holding us back. That's an opportunity for the combined company. And so to generate these sorts of deposits when we're not lending the way that we were is a real bright spot. That proves out our deposit gathering engine that we can bring in new commercial relationships. You asked about the type that we're bringing in. We're bringing in businesses that are frustrated with a lot of them are at larger banks and a lot of them are at some of our mid sized competitors who are not getting the tailored solution that we can provide on the deposit side in terms of providing really dedicated treasury management.

If you're a property management company and you've got 50 accounts and you can't see them on a single screen and you can't move money seamlessly between accounts and you can't get statements printed the way you like and you've just been grinding it out, we can provide a better solution. A lot of commercial companies have multiple accounts and they need them handled the right way. We don't overcharge our clients for treasury management services. We have a very competitive product and we realize that there is some scale involved here and it doesn't cost us every time somebody writes a check the way the big banks might make you feel like it does. And so we're trying to be efficient here in helping our clients. And as a result, I've said in this in the past, we're not going to run with as much fee income off the deposit account side.

We're going to get our fee income elsewhere and our payments business is going to be a big part of that. It is a tough environment. I mean, deposits are contracting but I firmly believe in the strategy of bringing new relationships to the bank every day and those relationships will grow with our bank. We are not losing clients. We are seeing deposit balances shrink as accounts shrink due to the economy contracting and we track it weekly, we see what sort of deposits are leaving, what sorts are going out, and whether we're losing accounts. And fundamentally, we're not. We're growing our relationships. And so given the low lending that we've had relative to kind of the last year and quarters in the past, I'm pleased with the deposit results.

Kelly Motta: Thanks for all the color, Jared. I really appreciate it. I'll step back.

Jared Wolff: Thank you, Kelly. Thank you.

Operato: Our next question comes from Andrew Terrell of Stevens. Please go ahead.

Andrew Terrell: Hey, good morning.

Jared Wolff: Hey, Andrew.

Andrew Terrell: Hey, Jared. Quick question on some of the asset dispositions. I know the single family, I think, was forward the BANC [ph] single family was forward sold when you announced. But any status update on the multifamily portfolio?

Jared Wolff: Joe, you want to take that?

Joseph Kauder: Yeah. We continue to in the process of marketing that portfolio. The timing trying to get the timing of that right in conjunction with the close now that we have a little bit more line of sight to the closing date. A lot of interest in the portfolio. Obviously, we're in a slightly different interest rate environment than we were when we entered into the process, but we had a hedge on that portfolio for the interest rate component. So we feel pretty good about it and we'll see how things play out here as we get to the close date.

Andrew Terrell: I'm surprised how much interest there's been. Andrew, it's been a robust Joe's downplaying it a little bit. I mean, it's been a robust process with tons of interest, and so we're confident we're going to get it sold. And obviously the hedge was a good idea.

Jared Wolff: Yeah, absolutely. So I guess the right way to think about the hedge and the gain you took this quarter is when you close the deal, the pricing on the multifamily could be a little bit worse. So technically, it'll kind of wash out the gain that you saw this quarter. Is that fair?

Joseph Kauder: Yes, exactly. There's a possibility that we could, given the interest in activity level that we're seeing through the marketing of the portfolio, it's possible that we could come out a little bit better than what the hedge has fully provided for us and so we could get a little extra capital out of it. Right now, we're assuming the hedge is just going to cover it and so it's going to be a wash.

Andrew Terrell: Yeah. Understood. Okay. And then another question, maybe just on the margin. And I get there's a lot of moving pieces, but Jared, I wanted to go back to a comment you made just a minute ago about the margin would clearly be down when you immediately close the deal, but the plan would be to work it up pretty quickly thereafter with some of the balance sheet repositioning efforts. Do you have just on a pro forma basis where you think the margin kind of could shake out? Once those balance sheet actions are taken and assuming no real changes in rates.

Jared Wolff: I think that we're going to start off below three and I think through the end of Q4, we're going to start moving up, and we'll be above three by the end of 2024. But that's going to be a function of rates and a whole bunch of things. So just we're going to start off in the upper twos and then we'll start growing above three. Call it halfway through the year and we'll go from there. I don't know that I should provide you more color than that because I don't actually know. We think we know, and we think there's a lot of things that we can flex, but if loan yields aren't as high, then deposit costs are probably lower too, right? So all that stuff is moving around and then it becomes a volume question. So I think hopefully that's helpful.

Andrew Terrell: Yeah, I know. Not trying to back you into anything, just trying to spot check my model maybe. But no, that's very helpful and I really appreciate it. Okay, that's it for me. Thank you.

Operator: Our last question comes from David Feaster of Raymond James. Please go ahead

David Feaster: Hey, good morning, everybody.

Jared Wolff: Good morning.

David Feaster: You know, look, the timing of the closing has been incredibly fast. It's great to see a testament to your team's hard work. As we think about the closing of a deal this size and getting everything set in place, does essentially having a four month lead time pose any challenges for your integration team? I'm just curious, especially with all the balance sheet moves that you have, I guess, what processes and procedures I mean, you've got a lot of experience doing this, but I'm just curious what processes, procedures that you put in place to help ensure a seamless integration as close approaches quickly?

Jared Wolff: Well, the conversion and integration formally take place in May, so we're closing the books and the two banks are kind of running as one, but there are things that will remain separate, and in fact, by keeping it till May, we're substantially minimizing the risk. There was a chance we were going to do it in March, and we pushed it to May to make sure that we do it right. And so I think that's part of the experience of the team saying, no, that's too fast. We're going to do it in March and we're going to do it in May and make sure we get it right. And it's going to cost us a little bit more, but we're good. And so I think our teams are doing a great job working very closely together. We got a senior management committee of 25 people that's the leadership of the combined company that's been meeting every week.

We have a larger work stream that meets every week as well. And our teams have worked incredibly closely together, and it's made up of a mix of people from both companies. So I think that risk is well managed. There's risk in every deal. We actually had a third party consultant come in and look at our process on the outside and make sure there weren't any gaps, and we got very high marks and so couldn't be more pleased with the combined effort of the teams.

David Feaster: That's great. And I guess as you've gotten deeper into this and with the deal closed, now approaching, it sounds like maybe that there's some additional cost saves that you've kind of got in your back pocket. But are there any other balance sheet restructuring opportunities that you've identified or even just, you know, these companies really well? Is there anything that you're maybe more excited about today with the deal than when you even initially announced it just a couple of months ago?

Jared Wolff: Well, as I said at the outset, I think PacWest did a remarkable job of repositioning their company. And Paul and his team know, and everybody at PacWest worked really hard to reposition that company under very difficult, you know, Bill Black and everybody who was involved in really trying to figure out a way to restructure that company and get assets sold, they did it in remarkable time, and that really derisked that bank. And so we've been through that company exhaustively. I just had an hour and a half call with their team the other day on a whole bunch of things, and I had, I don't know, 45 or an hour call on credit. And things are what we think they are. And what we think they are is much better than other people might think that they are.

I mean, we're looking at this and our investors know because they were in there at a very granular level. The background of the merger is clear at how long the investors were in there before we were. So I think the company is much better positioned than people see on the outside. And I'm okay with holding some of that upside for us. There's going to be things that don't go the way we think we're going to go. So I'm not prepared to give away all the upside yet. I'm very comfortable, though, reaffirming our range of earnings and feel very good about it.

David Feaster: Okay, that's terrific. And last one, just you talked about origination and kind of slowing, and it sounds like a lot of that is just strategic from your standpoint. You kind of pumping the brakes just given some of the funding challenges and the loan to deposit ratio. But I'm just curious maybe how demand is trending from your perspective? Where are you seeing good opportunities? And once the balance sheet optimization occurs and funding kind of frees up, where do you see the most immediate opportunities for you to start really driving growth?

Jared Wolff: Yeah, I see lending, actually, given that the Fed recently seems to have paused a bit, and Paul's comments suggested that they're going to take a wait and see approach, and he was much more cautious on rate rises than he's been in the past. I think that gave the market a little bit of a more positive outlook. And if rates stabilize, I think you're going to see a return to economic activity. I think there were some real concerns about what people were getting themselves into, and so we see kind of a built up demand and that economic activity is going to start returning. Even at these rates, there's plenty of business to do, especially if people think that they can absorb rates at this level, knowing that they're probably peak and we'll be going down from there.

And so also, if you have visibility that rates aren't rising, it allows people to fix rates for a reasonable period of time as well. And so all of those things banks can make decisions about what a good fixed rate loan looks like, because once you stabilize the market, I just think that there's going to be a lot more opportunity that appears. And so the timing is going to be very good. I think it's going to be across all sectors. David, I think, obviously, service activity slowing with real estate activity slowing, those things all intertwine transactions move our economy, and transaction volume is down, except for consumers. The restaurant business seems to be humming in our neighborhood. I don't know what it's like where you are, but we're not seeing any slowdown of spending on the consumer side.

But business has slowed, but we expect it across the board to pick up as rates stabilize.

David Feaster: All right. That's helpful. Color. Thank you.

Jared Wolff: Thank you.

Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.