Q1 2024 Banc of California Inc Earnings Call

Participants

Jared Wolff; President, Chief Executive Officer, Vice Chairman of the Board; Banc of California Inc

Joseph Kauder; Chief Financial Officer, Executive Vice President; Banc of California Inc

Jared Shaw; Analyst; Barclays Bank PLC

Matthew Clark; Analyst; Piper Sandler & Co

Christ McGratty; Analyst; Keefe, Bruyette & Woods Ltd

Timur Braziler; Analyst; Wells Fargo Securities LLC

Gary Tenner; Analyst; DA Davidson & Co

Andrew Terrell; Analyst; Stephens Inc

Tim Coffey; Analyst; Janney Montgomery Scott LLC

Brandon King; Analyst; Truist Securities

David Feaster; Analyst; Raymond James & Associates Inc

Presentation

Operator

Hello and welcome to Banc of California's First Quarter Earnings Conference Call. Participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions through ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then 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 would like to direct everyone to the company's safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would now like to turn the conference over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.

Jared Wolff

Welcome to Bega Telcordia's first quarter earnings call Joining me on today's call are Joe counter, our CFO, and Bill block, our Head of Strategy. As I was saying earlier, we executed well in our first full quarter as a combined company. For those of you who have followed Banc of California for the past several years, you have heard us talk about our commitment to demonstrating success methodically by making continuous progress on key initiatives and consistently moving the ball down the field. That's what we did in the first quarter. And we made solid progress on the initiatives that will lead to us achieving the profitability targets that we have set for the fourth quarter of 2024. In the first quarter, we realized the benefits of the balance sheet repositioning. We executed following the closing of the merger. As a reminder, after closing, on November 30, we executed on the sale of more than $6 billion of assets and paid down nearly $9 billion in borrowings. This resulted in significantly higher levels of net interest income in Q1 and an expansion in our net interest margin. The first quarter also demonstrated initial progress on the deposit gathering engine, we have built a meaningful new business account relationships and absolute growth in non-interest bearing deposit balances, much of which came from these new relationships. The increase in NID. deposits, along with the benefits of the balance sheet repositioning, resulted in our cost of deposits declining 28 basis points and contributed to the significant increase we had in our average margin.
In terms of operating expenses, we are also making solid progress on realizing the cost savings from the merger and operating expenses are trending lower at a faster pace and we initially expected with our higher level of profitability and prudent balance sheet management. We generated an increase in our tangible book value per share this quarter as well as we've indicated profitability as our primary focus this year rather than growth. As a result, our total assets declined during the quarter, primarily due to our use of cash to pay down a bit over $1 billion of the bank term funding program as well as running off higher cost deposits and borrowings. Our loan balances remained relatively flat as we anticipated core loan production which grew at a 4% annualized pace in Q1 was offset by runoff in our discontinued loan portfolio, particularly those with lower yields such as our premium finance portfolio, which declined $77 million or 10.5%, not annualized. We've worked the runoff of those loans had a positive impact on our results, given that the premium finance portfolio has an average yield of 3.34%.
Despite the muted economic backdrop and what we perceive to be slow loan demand, we had good core production of light of our portfolios, which reflects the strength of our team and our market position. This is true while we are also remaining conservative for sure that loans meet our disciplined underwriting and pricing criteria with loans coming on the books at higher rates than what is running off. We are seeing an increase in our average loan yield, which was 41 basis points higher than the prior quarter.
On the credit side, as we had previewed, we remain appropriately proactive and conservative with respect to credit and downgraded various CRE credits for CRE credits drove the majority of the increase in nonperforming loans during the quarter, which includes three office properties and one retail property. We took specific reserves against two of the office credits that we believe are sufficient to protect against potential future losses and recorded a $10 million overall provision. Additionally, the legacy civic portfolio contributed to an uptick in both delinquencies and non and nonperforming loans so we see minimal potential losses in that portfolio. We continue to feel very good about the credit profile of our overall loan portfolio for CRE properties represented approximately 60% of the NPL increase. Civic loans accounted for approximately 29% of the increase. Sfr consumer loans represented approximately 7% and various loans contributed to the remainder. During the quarter, we also sold some of the Civic loans we have held for sale for approximately carry value. While we continue to be pleased with the credit profile of the portfolio, consistent with our conservative approach to credit management. These actions increased our level of loan loss reserves and raised our ACL to total loans to 1.26%. As we have previously mentioned, this ACL does not include the first loss position, legacy Pac-West sold the credit-linked notes on the SFR portfolio and also does not reflect the credit marks taken on the legacy Bank of California portfolio at the closing of the merger. When these are factored in, our ACL to total loans is well north of 1.8%.
Now I'll hand it over to Joe, who will provide some additional financial information. And I'll have some closing remarks before we open up the line for questions, Joe.

Joseph Kauder

Thank you, Derek. And the prior quarter only included one month of combined operations and had a number of significant one-time items I'm going to limit the quarter comparisons are reviewed at the review of our core financial results starting with the income statement, we generated $239.1 million in net interest income, which reflects the favorable change in our mix of interest earning assets and a lower amount of higher-cost wholesale funding resulting from our balance sheet repositioning actions.
Our net interest margin in the quarter increased to 2.78% versus 1.69% in 4Q 2023, and it increased to 2.82% for the month of March of 2024 versus 2.15% for the month of December 2023. Both increases driven by improvement in our average yield on interest-earning assets and a decline in our average cost of funds. The average yield on interest-earning assets increased 45 basis points from the fourth quarter of 2023, largely due to the full quarter inclusion of generally higher rate Bank of California loans, along with the origination of higher yielding loans in our core portfolio and an increase in yield associated with purchase accounting marks. The average cost of interest-bearing liabilities decreased 59 basis points from the fourth quarter of 2023 and 81 basis points from December of 2023, reflecting a full quarter of benefits of the balance sheet restructuring action taken post merger the use of excess liquidity to continue to pay down high-cost wholesale funding sources in Q1 of 2024 the lower cost of core deposits, driven by an increase in our non-interest bearing deposit ratio and targeted actions to the lower cost of our interest-bearing core deposits portfolio. As we have shared previously, we expect to improve our cost of deposits and cost of funds through specific strategies for both core and wholesale funding. While our model anticipates two rate cuts in 2024 both in the second half of the year, even in a static rate environment. We expect that to continue to move our deposit cost down. Accordingly, we expect to see improvement in our net interest margin as we move through the year as new loan production originates at yields in excess of the yields on loans rolling off. And we execute on our cost of fund strategy of reducing our reliance on high-cost wholesale funding and growing our low-cost core deposits. We are also finding that even in a flat rate environment, we are often able to reprice maturing deposits at lower prices than when they were originated, given that Pac-West needed to pay high rates for deposits a year ago, during the first quarter, we paid down $1.1 billion of our outstanding balances on the bank term funding program, we chose to retain the remaining $1.5 billion in order to hold higher liquidity as we continue to off expensive noncore deposits. At this point is likely that we will repay the remaining balance during the second quarter, but we could choose to retain it for a longer period of time based upon the deposit flows and the one funding trends that we see. Our noninterest income was $33.8 million with all of our major areas of non I'm sorry, of recurring noninterest income coming in relatively close to the expected level. This amount was consistent with the fourth quarter of 2023 when the quarter number is adjusted for various one-off items, including a legal settlement our noninterest expense was $210.5 million, down $73 million versus the December 2023 quarterly run rate. We are starting to see the lower FDIC assessment rate that we expected. However, in the first quarter, we also recorded an additional $4.8 million related to the FDIC special assessment. We continue to expect our assessment to decrease through the year, although the pace and timing of the reduction will be determined by the FDIC. Our other expense initiatives are gaining traction and deliver results in excess of expectations for the quarter.
Turning to the balance sheet, as Gerald indicated, our total loans were essentially flat. However, our core portfolio grew 4% annualized, primarily in commercial loans offset by lower specific loans and owned and other discontinued portfolio loans. Our non interest bearing deposits increased during the quarter, primarily as a result of new client relationships by our balance sheet management strategy allowed us to reduce total deposits approximately $1.5 billion during the quarter as we utilized our excess liquidity to pay down high-cost legacy Pac-West brokered deposit products. This resulted in a favorable shift in our deposit mix with noninterest-bearing deposits increasing from 25.6% to 27.1% of total deposits in addition, our wholesale funding percentage dropped 2% to 16.9% and our cash level was rightsized to approximately 8.5%, consistent with our original merger target note, we continued to retain robust liquidity with our total primary and secondary liquidity being 2.4 times our total uninsured and uncollateralized deposits. At this time, I will turn the call back over to Jared.

Jared Wolff

Thanks, Joe. Looking ahead to the remainder of the year, our primary focus will be on continue to execute well on the initiatives that will enable us to meet our stated profitability targets, most notably in reducing both interest expense and operating expense. Based on the progress we are making, we continue to expect to generate ROA of approximately 1.1% and ROTCE of approximately 13% in the fourth quarter of this year, while continuing to be conservative in our new loan production based on the current loan pipeline, we expect to be able to largely offset the runoff we have in non-core portfolios with new fundings, which should keep our total loans relatively flat, but the new loans are expected to average higher rates than what is running off. So production should continue to be accretive to our margin and improve our level of profitability.
We also have a good deposit pipeline, and we expect to continue to grow in IB, which will further improve our deposit mix. It reduced our cost of deposits, our ability to drive down our cost of deposits increase in ID and expand our margin as a result of solid execution by our team at a time when others are finding it hard to achieve the same objectives we have a very strong balance sheet with high levels of capital liquidity, loan loss reserves and solid credit quality and our strong market position in California and enables us to add attractive new client relationships at a time when many competing banks are not able to meet the needs of their clients due to capital and funding constraints or credit concerns while meeting our profitability targets remains our primary goal for 2024. We will continue to operate with a long-term approach and add new client relationships that we believe will lead to further profitable growth of our franchise and add value and additional value being created for shareholders in the coming years. And most importantly, Banc of California continues to benefit from having the best team in our markets, very talented bankers and professionals who know how to deliver on our goals and shop every day looking to deliver for our clients and communities in a way that separates us from our competitors. We continue to add talent to our workforce, and I believe that will remain a differentiator for Banc of California in the years to come.
As I said, at the outset, I am very pleased with our progress to date and expect to continue methodically moving the ball down the field towards specific targets in the coming quarters. With that operator, let's go ahead and open up for questions.

Question and Answer Session

Operator

We will now begin the question and answer session. To ask a question. You may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jared Shaw with Barclays. Please go ahead.

Jared Shaw

Hey, guys, good afternoon. Maybe hey, maybe just starting on on the margin and on spread. If you go back to the January call and the expectation for yield pickup in funding cost improvement coming from the end of the year, it feels like you maybe that didn't come through quite as quickly or fully as you had expected. Is that is that the right way to look at it and it's just sort of being pushed into second quarter or are there other dynamics there? And then I guess a corollary to that, just looking at accretion accretion, $32.5 million was much higher than, I guess sort of the run rate expectation. How should we be thinking about accretion in the scheme of margin and spread income for the rest of the year?

Jared Wolff

Thanks, Joe. Let me start and I'll turn it over to Joe on. As we've said in kind of prior quarters, our margin is definitely an output and while we have a sense for where it's going to be, we don't manage to it what we achieved our objectives for the quarter. We are right on top of our budget on almost every measure. And so we're able to get there. As we said, we have a lot of levers to pull. So we're going to do our best to give guidance. But if it comes in a little light, we're going to still get there some other way to hitting our earnings targets. And that's what we did this quarter. Again, we were right on top of our budget on. So let me it was a little lighter than we thought it would be, but we were able to get there anyway, which is one of the things that we've said from the beginning of the year, which is we've got a lot of levers to pull in a lot of ways to get where we need to go and so on, I'll let Joe explained why it was a little bit lighter than we thought.

Joseph Kauder

Yes.
So you know, as George said, I do want to echo we did for our internal plan, we did come in right on top of our plan for the quarter. We've been appropriately been conservative in that estimate. The UM during the quarter as you guys all know, interest rates are at a lot of the tenor, especially the shorter tenors increase quite a bit versus probably what people were expecting at the beginning of the year. So as we went to refinance some of the brokered deposits that were coming due at it from Pac-West, they refinanced add net savings to the bank, significant net savings to the bank, but at slightly higher rates than we might have anticipated. And so that those are just market factors and we make up for that by what we can control which is on our core book, growing non-interest bearing and bringing down the cost of our some of our interest-bearing core deposits and also originating know new loans at higher spreads.

Jared Wolff

Joe you want to touch on the accretion.

Joseph Kauder

The accretion is, you know, April first, I don't think we publicly disclosed that number, so I'm not sure where you are where you got that number from, but the accretion came in line pretty much as we expected it. And it was, you know, it's not it's not an insignificant piece of our results, but it's not it wasn't a enormous component of our results for the quarter.

Jared Shaw

Okay. All right, thanks. Then just on the operating expenses, where can we should be seeing savings there too and to bring that ratio up more down into the middle of the range.

Jared Wolff

There's a there's a whole bunch of places. I mean, we're seeing it. I mean, first, we've said the FDIC expense is a place where we expect that to come down on in normal times. Pac-west quarterly FDIC assessment was $8 million to $10 million a quarter. And you know at the height, you're right before we acquired them and the merger was about $36 million a quarter. So you can imagine how much savings we're going to generate from the FDIC expense normalizing, which which we expected to do over the course of the year. We're in very close contact with and with our regulators on that, we're monitoring it closely and it's just a function of time and a couple of other things that happened. And so we have line of sight to that normalizing through the course of the year, our system conversion wherever it represents some savings that will be completed by the end of the third quarter. And that will realize some savings. We have a whole bunch of facilities that will generate savings on. We have overlap in a number of locations and rationalizing those facilities. And then there's a whole host of other kind of traditional operating expenses that you would have you would you would expect to see a change over time?
It just we said it's going to be back-end loaded and we're going to see those expense savings up pickup as we go through the year.

Jared Shaw

Great. Thanks.

Jared Wolff

Yes.

Operator

Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark

I'm wondering I want, Mike, maybe for Joe to start, could you could you give us the spot rates on our earning assets and either the cost of deposits or cost of funds, probably the cost of funds would be more helpful just to give us some line of sight into 2Q.

Joseph Kauder

So we decided after last quarter that we were no longer going to give spot rates we gave. I think I gave you the monthly average in my on my speech and I can go back over that at the end of the year, we found that the but the step-off number that we provided included a very large amount of one-time accretion due to a high volume of payoff activity and in retrospect was probably not an appropriate indicator of our 1Q 24 normalized net run rate going forward, we're only going to speak to the the monthly averages as we feel that's the most appropriate indicator of our kind of future run rates that makes sense.

Matthew Clark

Yes, understood. And then just again,(multiple speakers)

Jared Wolff

And that's due to that to that point. I mean, if you on page 5 of our investor deck, one of the things that we wanted to put in there was to show people the significant progress that we made. So if you look at and it's got the monthly ones in there. So September was 143. December was two 15, March was 282. We continue to see that stepping up, and that's just that rather than being that one day at the end of the month, we're providing the monthly the monthly margin to show where it's going. So hopefully that's helpful so that you can think about that 282 as a stepping off point or for Q2. And obviously, we're going to trying to improve it from from there.

Matthew Clark

Yes.
Okay. Got it. And then just maybe Jared, on interest expense, maybe between you and Joe, there's I know you're very much focused on it in reducing that interest expense. But can you just remind us of of kind of what the plans are from here to reduce that materially, both on the wholesale side and core deposit side?

Jared Wolff

Well, there's a couple of things. I mean, if you the chart on page 9, I think shows the the reduction that we've had to date in terms of our cost of deposits and this cost of liabilities overall. So there's a couple of levers. One is obviously NIB. has a big impact on it because every dollar we bring into the 90s basically saving 5% of broker money or whatever their cost of deposits we're going to get rid of and our teams have done an exceptional job in a very short amount of time of bringing in an idea. And I was very pleased with the progress you made in the quarter as we bring in deposits of all types we can reduce either the more expensive deposits and brokered deposits that we have are kind of moving down. So when you see a decline in overall deposit, that's because we're releasing deposits that we don't need. We're also doing this while balancing our loan-to-deposit ratio. We've said that we want to stay at around 90% or below, and we're trying to be very careful with that and just kind of be good risk managers as we think about our overall loan-to-deposit ratio. And there are some other things that we can do, including hedging to guarantee that we lock in the forward curve if it doesn't materialize and we're being very strategic and making sure that we're going to benefit from on potential rate reductions now in the future, which is why we said that even if the rate curve doesn't materialize, the way people think it will in terms of two rate cuts, are there things that we can do to kind of protect ourselves and make sure that we benefit from that anyway, and so we're trying to be strategic there as well.

Matthew Clark

Okay.
Thanks. And then last one for me, just on the preferred and is there any appetite to maybe pull that pull that forward and redeem it in 4Q to help you get to your to your goals? And should we assume we don't need 25?

Jared Wolff

Yes, no, no, you should not. We will get to our goals without redeeming the preferreds. And one of the things that we think we need to do is show stable and a buildup of capital before we can start retaining capital. And so we think that we want to get through this full year and show that we are good stewards of capital and in building up capital. And then we'll figure out what we're going to do with our excess capital on. That's not to say we would never do it. That's not to say that it's not a possibility. I just wouldn't plan for it. And then if we're able to do it, it will be something extra.

Matthew Clark

Got it.
Thank you.

Operator

Your next question comes from Chris McGratty with KBW. Please go ahead.

Christ McGratty

But I guess your DM, the fourth quarter goals, the one one approximate and 13, um, as you stand here today, what do you think the biggest either risk or opportunity to those are and you talked about the expense cadence. He also talked about the rates moving up a little bit on the repricing. But but what's changed if anything.

Jared Wolff

I mean nothing really. I mean from when we set up, I mean, we're right on top of our budget on. We are very focused on it. We've got four or five different ways to get there. And I think we have a sheet that has seven on it, but I think there's only five kind of good ways to get there and we're tracking really closely as of right now. It looks like we're light on it. And I mean the impediments to getting there are obviously rates going up, I think would be a lot would be, I think something that everybody thinks is unlikely. But if that does happen, I think there's a lot we're seeing are going to be going on if rates go up and so I don't know that our profitability goals are going to the most important thing in the world. If that happens, obviously, any sort of material economic shock that could disrupt because the markets generally. But based on the way things sit right now, we believe that we have within our control, certainly the execution on the operating side for operating expenses and we believe that we have within our control within a reasonable amount of control for the reasons Joe laid out how we're going to nail it on the interest expense side on revenue synergy to take care of themselves in terms of loans are coming on nicely. Our team's doing a great job of obviously, I was very pleased with kind of the core production you had this quarter and given that given kind of the muted that drop. And so it looks like things are working very, very well on. So that's what I would say to it, Chris, like I don't, I don't want to come up with a whole bunch of strong. And I just right now it feels like we're going to get there but if we were not able to get there, I think it's because rates do something that people can foresee.

Christ McGratty

Okay.
Thanks, Liam. I guess maybe what else what else might be on the table, you're accountable to the street to the fourth quarter, but you've got a couple of quarters in between what else might be on the table for either balance sheet repositioning some kind of an acceleration to get to those goals?

Jared Wolff

Sure. We've talked about Civic, as you know, our appetite to potentially, you know, sell pieces of the portfolio that are non-core, whether it's civic or something else. We have some loans that were held for sale that were civic that we moved off the balance sheet that we had for sale that were sold, as I mentioned in my comments that we sold for approximately carry value. We have a little bit more that's probably going to follow this quarter. And then looking at that portfolio overall, we would be open to doing that. We haven't made the decision that we're going to do it for sure, but we're open to doing it. And we're certainly it had people inbound inquiries on it on. So I think something like that could be pretty interesting. If we if we didn't move it, it would we've modeled it and it looks pretty interesting for them to do it. So that might be an example of something which could accelerate some of our partners.

Christ McGratty

That's great.
Thanks.
And then just one housekeeping for Jody, on the accretion income from, I guess to put a finer point on it, the 32.5, is that the I guess, what's the scheduled accretion or what's the pool from which to draw over the next several quarters?

Joseph Kauder

Well, that that's that number is the total accretion. And if you look back at Pac-West financial statements, they had accretion on purchased loans that predated the accounting acquisition of Banc of California. So that's a total number. And so there's a portion of that that relates to the Banc of California loan portfolio but that's a number we haven't disclosed yet publicly, but that number's not a super meaning, as I said earlier, not a super meaningful number for the quarter.

Christ McGratty

Okay.
So so that totally get the two different parts, but generally stable accretion is kind of the message near term or maybe a downward bias, I think to the stable.

Joseph Kauder

I think you should think about stable accretion going forward.

Christ McGratty

Right.
That's helpful.
Thanks. Joe.

Operator

The next question comes from Timur Braziler with Wells Fargo. Please go ahead.

Timur Braziler

Hi, good morning. I hate to belabor the topic here, but just back on accretion, I think the scheduled accretion number was $63 million for the year. More than half of that was booked in 1Q. Was there a lot of it accelerated accretion in that number. Is that delta entirely from the dynamic that you're talking about from kind of the carry forward on Pac West side?
And Joe did I hear you correctly that part of why you're not giving the spot rates was because you had some accelerated accretion kind of inflate that initial number. Just trying to get a better sense on the 30m and the 30 some-odd million versus the scheduled accretion of $63 million that we were told earlier.

Joseph Kauder

So the $32 million includes accretion from that depot that let's go back to the number that was report that we put out at the end of last year was on just the Banc of California portfolio. The $32 million, which was disclosed is the total accretion on all loan portfolios that were acquired by Bank of by nuisance. Pac-west was the accounting acquirer in this transaction, which included includes accretions on other loan portfolios beyond just the Banc of California loan portfolio on the the there was excess accretion and the four in the fourth quarter, that was a large payoff activity towards the end of the year. And so when we were looking at the spot rate, it was hard to separate out. We could see we could see interest income numbers but it was hard to kind of allocate out or what how to how to think through the accretion we were seeing. So as I said, in retrospect, maybe that wasn't the best number to put out, but there was excess accretion in the fourth quarter in the first quarter. There may have been a very small amount of catch-up adjustment on something that we booked just for a couple $1 million or $2 million, but other than that, it was pretty much that was the accretion level that written off with the Banc of California Number two, it was the stable accretion number that we expect to see, coupled with the accretions on the other portfolios that Pac-West previously acquired.

Timur Braziler

Okay, got it. And then maybe looking at the transformation of the deposit base. So the cost for the quarter was to 63 from from Amazon. The spot rate at the end of the quarter was I was 254. I think you had mentioned that you're going to continue working that lower. I guess just as we think about the restructuring of the deposit base and maybe excluding some of the things that you're doing to bring in more non-interest bearing deposits, but how close are we to reaching a level of stability on that deposit costs? I mean, is that to 54 pretty indicative number of where things are, how much lower could that go as you continue to work into that book?

Jared Wolff

I mean, look, my view, my view is that we're going to we're going to keep pushing it down. And we're it's all a function of how good we do on bringing in an IV and anybody that followed the Banc of California history knows that we were pretty good at it and we're using the same playbook. We've got a great team who knows what they're doing and they know how to do it. And it's just a function of time for us to kind of build it back up. Pac-west historically ran with an idea of well about 30%, 35% to 40%, I think of California got close to was around 40%. So I think between kind of the history of these two organizations, we're going to be able to do that. It's just going to take time. And I and I'm really pleased with how our teams are mobilizing around that right now.

Timur Braziler

Okay. And then it looks like on there was some usage of cash towards the end of the quarter. I think last quarter it's kind of 8% to 10%. We're getting close to that 8% bogey. I guess a should we assume the cash balances are more or less flat here? And then just the remix at quarter end, are we assuming a pretty meaningful bump up in margin once again in 2Q is that average effect is fully baked in?

Joseph Kauder

Yes, I think I think the cash levels you can assume we'll be fairly stable. I mean, though they may move a little bit just because the nature of the dynamic nature of our balance sheet. But right around the levels we're currently at and then on, I think we would as we've said in this call, a couple of different points. We do expect we continue to see margin improvement and net interest income improvement throughout the year.

Timur Braziler

Okay.
And then just last for me on the three office loans that were on the one hand migration into nonperformers. Can you provide geography and any other kind of maybe on tying threads between those three credits.

Jared Wolff

if they were, I think they were all California on and we are on our credit. I would look at the credit migration, of course, fairly normal. You know, we were being I think appropriately conservative. We obviously have the capital and the ability to take to take a provision we wanted to take on, I think, running with really, really low NPLs that 26 basis points or whatever we had in the first quarter was probably a little bit abnormal for just historically and for markets generally. And now we're close to 60 basis points, which is probably a more normal level to be below 1% and still very, very healthy. And I don't know what other banks you're going to do. But for me, it just felt like it was a normalization of credit and we were taking the marks that we thought were appropriate at the time. So I don't know that there's more color to provide on these loans. I mean, I think we were just so we thought was right, and I think we're well reserved.

Timur Braziler

Great.
Thanks for the questions.

Jared Wolff

Yes, thanks.

Operator

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner

Thanks. Just a quick follow up on the last question. Were those credits with the legacy bank count or here are legacy Pac-West.

Jared Wolff

And they were and mix.

Gary Tenner

And then I just wanted to ask you've got in the deck, I think as it relates to the kind of year-end targets of the asset size kind of say you think it will be stable 36, but it could be between 34 and 36 as we think I think you talked about the TARP repayment in the probably in the second quarter, is it reasonable to anticipate sort of a dip and then grow back towards 36 at the end of the year?
Or just kind of what it or where do you see that kind of balance sheet flows or trends kind of on a quarterly basis for the rest of the year?

Jared Wolff

You know, Gary, I don't actually know the answer to the question. I think on I can tell you what could happen, which is if we if absent selling kind of a large portfolio. We're going to pay down bank term funding our balance sheet shrinks by that much. And then I think we're relatively safe after pension funds, putting aside venture funding, we do something specific and it's more dramatic, right? It could be $2 billion. So that's why I don't know. There might be other assets that a lot of these just continued portfolios. We've had a lot of inbound inquiries on. And so whether it's student loans or lender finance or whatever. And so we can we can exit these loans if the pricing is right and if it makes sense for the Company going forward where there's not a size that we're focused on, it's more profitability. So I think those are the moving parts that could impact the balance sheet. But if we if we take out any dramatic moves, I think you can think about a term funding coming off shrinking by that much. And then it's stable from there.

Gary Tenner

Okay. I appreciate that. And then if I just ask one last question. As I was a question earlier about of the cash balance relative to the size of the balance sheet overall With that in mind, is BTFP. effectively replace? I mean, it sounds like from what we're just saying, it's paid off balance sheet contracts. So and do those cash balances by definition? And are they lower than that 8% range that I think, Joe, you referenced from a prior question.

Jared Wolff

Joe, what do you think.

Joseph Kauder

I'm sorry.
I didn't quite understand the question because we've had more time.

Jared Wolff

Yes, sorry.

Gary Tenner

I mean, first of all, I was just trying to clarify if the TARP repayment is done out of existing cash based on what your comments were about the current cash level being kind of roughly where you'd wanted as a percentage of overall balance sheet.

Joseph Kauder

The subsequent paydown of BTFP. will come from not would not. It would not result in a big reduction in our cash balance. That's why I think I qualified in my comments and those in the script that qualified the yes, you will have to look at deposit inflows and other outflows before we make a final decision whether you're going to pay it down. But we you should not expect to see it step down in cash.

Gary Tenner

Okay. Thank you.

Operator

The next question comes from Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell

Hey, good morning.

Jared Wolff

Good morning.

Andrew Terrell

Jerry, if I could just start on the non-interest bearing deposits, some pretty nice build kind of in the quarter. And was curious if you could give any color on how the IB deposits have trended so far in the second quarter, have you seen continued growth or any kind of moderation there?

Jared Wolff

We have seen continued growth on like an update this morning and we get reports on a regular basis. I'm hesitant to tell everybody that that's what's going to happen because I know that this stuff can vaporize, you know, and pipelines are only as good as what actually gets booked. But I like the momentum and I like the progress that we're making, and I think it's just going to quarter to quarter are hard to know over the course of the year and IB is going to grow. And so it could be uneven. I hope it state. I hope it's kind of consistent. But right now it looks like it will be consistent and I guess we'll know at the end of the quarter, but it's looking, Paul.

Andrew Terrell

Okay. No, I appreciate it. And then sorry to go back to just the margin question, but and last quarter, I mean, we talked about 15 basis points of earning asset yield improvement in the first quarter. And I understand it sounds like the maybe the base was a little too high to start because of the purchase accounting. But now that we're kind of that's behind us, would you still expect 15 basis points of earning asset yield expansion per quarter, just from booking loans at higher yields and replacing the lower-yielding loans. I guess 15 is still a good number.

Jared Wolff

I don't think it's unreasonable. I mean, I think I think it's definitely again, it's an output for us in terms of, you know, where we end up. We have a lot of levers to pull, which is why we can still hit our numbers, even if the margin is, we can make it up on volume rate. And there's there's there's other levers that we have to pull on expenses and other things to kind of get our numbers to a place where we think it's sustainable on. If the if the interest rate curve doesn't cooperate early then we can take out expenses earlier more earlier and the interest rate curve will catch up with us. We'll catch up with the interest-rate curve later and take out those expenses in terms of interest expense later as an IV ticks up and other things is 15 basis point of improvement on a reasonable goal for the quarter.
Yes, I think so. Are we going to get all the way they are going to be 10, is it going to be 16? I know I don't know, but it's not unreasonable. what do you think Joe.

Joseph Kauder

I would echo what Jerry said.
There's a lot of moving pieces. It depends upon our ability, what loans we originate in the quarter. Also what loans to have new, maybe paydown ahead of the head of had a plan, but there's no, but just to give you a sense, if we're looking at the first quarter, our new loan production yield was up north of 8% now up getting up towards towards 8.5%. So as you imagine, a lot of the loans that are rolling off are much, much lower than that. So we have we have good trajectory there. Good, a good glide path, and we'll see how it comes out.

Jared Wolff

Yes. One of the things that Joe and I talked about was on the spot rate as we gave. That's really just a moment in time on the margin. There's a lot of pieces to it. And so we just feel like giving the margin for the quarter for the month is probably a better better things to do going forward, which is why we laid out that chart in the deck.

Andrew Terrell

Yes, understood. It's helpful. I appreciate it. Back to the there's a question around the preferred and potential redemption there. And it sounded like Jarrett, in your response, the preference would be to continue to build capital, at least in the short run. Can you just remind us kind of goalposts on the capital front? I forget which metric you're paying close attention to button. Can you just refresh us on your kind of capital targets?

Jared Wolff

Yes, I think, Steve, the one thing that closer to 11 is probably when we feel like we'll have excess capital and so from there, I think it be easy conversation you have about how we're going to deploy.

Andrew Terrell

Got it. Okay. If I could sneak one more and just I appreciate the color you guys gave around the delinquencies and the nonperformers, but the classified loans, what drove the step-up in classified this quarter.

Jared Wolff

So Joe, you want to touch on it.

Joseph Kauder

Because I think it's a lot of the same drivers that impacted delinquencies and NPLs.
But I'm not sure if you have further color.

Jared Wolff

No, is the same Sincor.

Andrew Terrell

Okay, understood.

Operator

Thank you for taking the question is the next question comes from Timothy Coffey with Janney. Please go ahead.

Tim Coffey

Gentlemen, thanks for the question from Jared, you are in the prepared remarks, you said the cost saves are coming in better than expected. You have any color on that? And will it cause you to update your estimate for cost savings like these around $130 million pretax?

Jared Wolff

I'm definitely not going to update our our our you know, kind of our guidance for where we think we can get to. We said we get to between two and two 10 expense ratio. I think that's good. You know, not everything is going to go our way. I know that we just had a really good quarter in terms of expense savings a little bit ahead of schedule. So that gives us a little breathing room if something else doesn't go our way, but hopefully we can outperform.

Joseph Kauder

Yes, I would I would echo what Jerry says just people executing just slightly ahead of schedule.

Tim Coffey

Okay, thanks. And can you remind me what the dollar value of the credit-linked note sales or how much of all single-family residential portfolio recovers?

Jared Wolff

Yes, Bill, do you have that handy?

Joseph Kauder

Yes.
Look, in Jared, it's about $125 million on the balance sheet. It covers about $2.65 billion of loans.

Tim Coffey

Great.
Thanks. And Andrew.

Jared Wolff

I think I heard that right, right.

Joseph Kauder

Bill absorbs the first 5% loss, right?

Jared Wolff

Yes.

Tim Coffey

Great. And then my last question, I just wondered if you could provide a little bit of color on specific of the deck says loans a low LTV well-collateralized, but there seems to be a lot of migration for business that was shut down by a year ago. I'm wondering if you have any operating or so.

Jared Wolff

So the loans are just as a reminder for everybody. We have about a little over about $2.3 billion of wholesale funds, $2 billion approximately are for rent single-family homes that are investor owned and the remaining balance are bridge loans, you can think about them as fix-and-flip primarily on single-family, but they could be on the on multifamily as well as multifamily. It's on it operates in many ways like the single-family portfolio, which as a lot of delinquency, people pay in one of the ways that it was being managed before Pac-West bought it was because it wasn't a bag that it might if they went the to because they just charge them more fees. And obviously, that's not our profile. That's not the way that we want to run things. And so as the portfolio transitions and Pac-West discontinued it and kind of brought it more in-house there, they had to change the borrower behavior. They're not experiencing losses on these loans. It's just our behavior is was I guess it was conditioned to behave differently than what we would like in a bank. And so look, it's serviced by a third party on the asset manager. There's ourselves in-house. We've got a great team on it. It makes money, but it's it's just not what I would call a great portfolio to own inside of a bank and so it's either going to run off and overtime or we'll figure out a way to exit if we get a price that we like. And we would look at both Is that does that help?

Tim Coffey

Yes, extremely Sure. Those are my questions. Thanks a lot.

Operator

To next question comes from Brandon King with Truist Securities. Please go ahead.

Brandon King

Hey, so you're sticking to the profitability target in the 4Q run rate, but could you help frame what you're expecting NI to be? I know there's a lot of moving pieces, but I think is helpful if you could frame what the dollar in a high amount could be too high. Those targets?

Jared Wolff

I don't think we've given that guidance granted. So what do we said about what have we said on that?

Joseph Kauder

We've not put out specific NII. or income statement numbers and I don't think we have intend to.

Brandon King

Okay.
Okay.
And then for deposit the deposit runoff. Could you just frame just what kind of deposit runoff you saw in the quarter? I guess what amount of that was intentional in what is left to anticipate runoff going forward.

Jared Wolff

So I would characterize most of it is there's two parts of the runoff. Some is just seasonal movements and balances by customers. And the other is intentional runoff of deposits because we don't need the majority was runoff of deposits as we just chose. We don't need it because the rates too high and it was non-core. It was broker otherwise, we looked at the relationship and they only had one account with us. It was an interest bearing account and they weren't using any other services of the bank. And so when we said we're not going to pay the rate that they wanted and one account rate somewhere else. So I would say that some of it was just seasonal movements of customer deposits, but overwhelming majority was the latter type, which was rate-sensitive deposits that we didn't need any longer.

Brandon King

Okay.
And do you think that's largely over and going forward or are you expecting maybe some more incremental?

Jared Wolff

Well, no, I think I think as we replace as we build up our momentum in terms of bringing in relationship deposits, both in IV and other deposit types that come with those relationships, we will feel good about letting go more expensive deposits that are fundamentally they might be appropriate. They might be core, but they're they're probably not true relationship deposits that we would like. And so we will see that migration over time, but we'll be we're focused on our loan-to-deposit ratio. I want to make sure we stay comfortably within kind of our campus.

Brandon King

Okay. I guess is my question.

Operator

Thinking placement for next question comes from David Feaster with Raymond James. Please go ahead

David Feaster

More than what it was on. Just kind of circling back to the NIB. growth look like you alluded to, this is in stark contrast to what most other banks are seeing right now in the industry, you highlighted the new account growth in the pipeline looks good. I'm curious if there's any segments that you're seeing more success early on where you see the most growth opportunity? And maybe just could you walk through what do you think is allowing you to be so successful on the growth side?

Jared Wolff

So we had good traction in HOA in terms of accounts that were opened and we had good traction in in venture and fund finance and warehouse in most of our segments in the community bank, we saw good inflows of accounts, and we have a kind of a deposit contest that we do. And so we track it very carefully, and it's about bringing new relationships to the bank and making sure that people understand why we can provide a better experience than our competitors. And the lead cycle to bring in deposits is longer than loans. And so people have to start early. And that's why showing good traction in the first quarter is great, because I know it's going to build up, we should be able to show better traction going forward where we find these deposits are generally competing against the larger banks. A lot of people don't choose to be at the larger banks. They end up at the larger banks and some specific examples of that are First Republic customers that and at the JPMorgan and Union Bank customers that ended up being cut out of U.S. Bank and you know, customers that ended up at First Citizens, which is becoming a larger bank. And so I think that we've done a good job of being a great option in the market. People know our name. They know who we are, where people say, hey, I need to think about banks now that Banc of California is definitely on their list because of the marketing that we've done in the position that we have. And so we're trying to optimize that. And we still bring in a lot of accounts from Wells Fargo, which is a very good local competitor, but we seem to have really good traction against them. And there's a ton of great banks in California. And in the other markets where we operate that are very strong banks are very good competitors, but we seem to be holding our own. So that's some color that in.

David Feaster

That's great. And or how I'm just curious how deep STACK plays into that. Can you talk about age away in the venture business and believe that you had you you are excited about the deep STACK could do on those businesses and maybe more broadly where we are in the rollout with the STACK? And when do you think that that can be a more meaningful contributor?

Jared Wolff

Well, we expected it to be a meaningful contributor this year to Banc of California on a standalone basis. But because of the increased fee income that 50 that Pac-West brought to the combined company, you know, feedstock won't have the ability to make a meaningful impact on that this year. And so we said it will have a meaningful impact next year. Nothing would make me happier than to be able to highlight and disclose the specific contributions that feedstock is contributing, both in terms of card and and the other things they're doing on our payments platform really has three things. It's feedstock, which is merchant acquiring cards. We've started issuing credit cards directly to clients. And then the third side is just sponsorship, meaning we're helping other parties process transactions over our rails and all of those things will be contributing on the fee income side and and we believe on deposits as well. But David, I don't have any targets to put out there right now on that.

David Feaster

Yes.
Okay, that's helpful. And then last one for me. Just you talked about the hiring initiatives and you've had several announcements over the past few months. Curious that. How do you think about hiring and the team that you've assembled, maybe where you're looking to add additional talent and whether it's more deepening the bench or expanding into new segments.

Jared Wolff

We've had really, first of all, we've got an amazing team here of just there is obviously the talent at both companies. And so we're benefiting from that right now. There are pockets where we felt like it's prudent to add talent. And we just we just had two great folks come over to our finance team from another bank started this week. We've added people in most of our lending areas, and we're offering we're adding people in our functional areas as well. I mean, there's we're absolutely open to adding the right talent across the bank and are there some key spots that we have opened that we'll be adding very shortly. But on we continue to add talent, even though we have a deep bench here.

David Feaster

That's helpful.
Thanks, everybody.

Jared Wolff

Thank you.

Operator

This concludes our question and answer session and Banc of California's First Quarter Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.