ANZ Group Holdings Ltd

OTC:ANZGF

Good day, and welcome to the Banc of California Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Ann DeVries, Head of Investor Relations for Banc of California. Please go ahead, ma'am.

Thank you. Good morning, and thank you for joining Banc of California's Fourth Quarter Earnings Call. Today's call is being recorded, and a copy of the recording will be available later today on our Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliations for these measures and additional required information is available in the earnings press release and earnings presentation, which are available on our Investor Relations website.

Before we begin, we would also like to remind everyone that today's call may include forward-looking statements, including statements about our targets, goals, strategies and outlook for 2025 and beyond, which are subject to risks, uncertainties and other factors outside of our control, and actual results may differ materially. For a discussion of some of the risks that could affect our results, please see our safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation as well as the Risk Factors section of our most recent 10-K.

Joining me on today's call are Jared Wolff, President and Chief Executive Officer; and Joe Kauder, Chief Financial Officer. After our prepared remarks, we will be taking questions from the analyst community. I would like to now turn the conference call over to Jared.

Thanks, Ann. Good morning, everyone, and welcome to our fourth quarter earnings call. Before we dive into our quarterly results, I'd like to take a moment to express our support and sympathies for all who have been impacted by the devastating wildfires in Los Angeles. Many of our clients and several of our colleagues lost their homes, and countless more were evacuated and severely disrupted, and the effect is much larger when we extend this to our families and friends. As a bank deeply rooted in our community, we are committed to supporting the relief and rebuilding efforts.

Our charitable foundation has launched the Banc of California Wildfire Relief and Recovery Fund and donated $1 million to the fund. Our efforts will be ongoing as we work with local leaders to ensure the funds are directed in a way that will have the greatest impact. We are grateful that our team members are safe and accounted for and for the first responders who are working heroically and tirelessly to save our communities as the fires continue to burn. To date, we have not suffered damage to our facilities, and we are not aware of any material impact on our loan portfolio or collateral from the wildfires. But of course, we continue to monitor and assess the situation for potential exposure. Undoubtedly, the impact will be felt for quite some time, and I will comment on this a bit later in my remarks.

Moving on to our performance. We had a strong fourth quarter, which marked the end of a transformational year for our company. We made significant progress executing our strategy, optimizing our balance sheet and achieving operational efficiencies to set us up well for growth in 2025. These efforts resulted in meaningful growth in core profitability and a significantly strengthened balance sheet. A few accomplishments that I want to highlight.

We grew NIB to 29.1% of total average deposits, up nearly 7% from a year ago. We reduced wholesale funding down to 10.3% of assets compared to over -- nearly 17% in the fourth quarter of '23. And C&I loans grew to 30.1% of the core loan portfolio, up from 25.6% 1 year ago. Our NIM expanded 135 basis points year-over-year, and our noninterest operating expenses decreased by 36% from a normalized fourth quarter of '23 as we achieved our cost targets for the merger. As a result of these actions and many others, we achieved strong growth in EPS, tangible book value per share and CET1 in 2024.

Moving on to more of the specifics for our fourth quarter. We continued to execute well by realizing additional cost synergies from our merger as well as the full quarter benefit of our balance sheet repositioning that we executed on in the third quarter and earlier. This resulted in strong growth in core earnings, with EPS increasing to $0.28 and higher profitability metrics across the board.

As expected, we reduced our cost of deposits through both an improvement in our mix of deposits and reducing rates on interest-bearing deposits following the Fed rate cuts. These actions, of course, led to an expansion of our margin that we anticipated, which contributed to our high level of profitability in the quarter. On our last earnings call, we indicated that with the major integration milestones behind us, we had reached an inflection point and could now shift our focus to external growth, taking advantage of the strength of the franchise we have built. We are starting to see economic optimism and our bankers did an excellent job expanding client relationships and bringing in new relationships to grow both loans and deposits in the fourth quarter.

In the quarter, our loan production, including unfunded commitments, was $1.8 billion, resulting in portfolio growth of 1.5% or about 6% of our core portfolio on an annualized basis. Warehouse continues to perform well, driven by new clients and also increased line utilization among existing clients. We also had good loan growth in our fund finance business during the quarter, and this growth was partially offset by a decline in construction loans due to payoffs on completed projects, some of which moved to permanent financing in our CRE portfolio.

New loans continue to come on the books at higher rates than those that are paying off, with fourth quarter loan production rates above 7%, which is accretive to our average loan yields and net interest margin. As we look ahead into 2025, we expect continued growth in warehouse, fund finance and lender finance portfolios and a pickup in growth in all other core loan areas. With regards to credit, our loan portfolio continues to perform well on a broad basis. However, we have maintained our conservative approach. And when we see signs of weakness in any credits, we've been quick to downgrade and slow to operate.

The increase in most of our problem loan categories was largely driven by a single borrower relationship. We believe the risk is isolated to this specific situation and do not expect any losses given our collateral coverage. We also decided to charge off 2 NPL loans. One was in Life Sciences and the other was in the Civic portfolio. The circumstances around each loan were very specific to those credits. Our reserve levels were at 1.3% -- 1.13% of total loans and 142% coverage of our nonperforming loans. I think it's important to note that our economic coverage ratio is substantially higher at 1.72% of loans, which incorporates the loss coverage from our credit-linked notes as well as the unearned credit mark on the Banc of California loan portfolio acquired in the merger.

We believe our coverage levels are appropriate under CECL, given our portfolio mix, which is shifting with recent loan growth coming from low risk and low duration segments such as warehouse, fund finance and lender finance. Under the CECL rules, these loans attract very low reserves due to low historical losses and short duration of the loans. Let me hand it over to Joe, and then I'll have some closing remarks, and we'll open up the line for questions. Joe?

Thank you, Jared. We reported fourth quarter net income of $47 million or $0.28 per share, which reflects net interest margin expansion and a reduction in our noninterest expenses. Core profitability was strong across the board this quarter as we continue to benefit from the impact of balance sheet repositioning, cost-saving initiatives and growth in core business drivers. I know everybody has already or will be able to soon review our earnings materials, so I'd like to simply highlight some of our key drivers from a financial point of view, along with some information that may help you better understand our positive outlook.

We generated $235 million in net interest income, which was up 1% from the prior quarter. This was driven by expansion in our net interest margin, partially offset by lower average interest-earning assets. Interest expense declined $25.5 million or 12% quarter-over-quarter due to a reduction in funding costs. This was partially offset by an interest income decline of $22.4 million, largely driven by the impact of rate cuts on cash balances, employee rate loans and securities and lower average cash balances in the quarter.

Our net interest margin in the quarter increased 11 basis points to 3.04% due to a 27 basis point decline in our cost of funds, partially offset by a 15 basis point decrease in the yield on average earning assets. The decrease in the cost of funds reflected the full quarter impact of prior balance sheet repositioning actions as well as a lower rate environment. Cost of deposits declined 28 basis points from 2.54% to 2.26% as we achieved a 54% beta on interest-bearing deposits following the most recent cut.

We also benefit from average NIB as a percentage of total deposits growing to 29.1% from 27.7% in the prior quarter. Regarding the yield and average earning assets, we saw a 17 basis point decline in our average loan yields, partially offset by a 5 basis point increase in our average yield on securities resulting from the securities portfolio repositioning completed in the third quarter. Rates on new loan production came in at 7.02% for the quarter, with commercial new production loan rates of 7.6%, offset by lower yields on new real estate production.

In terms of interest rate sensitivity, our balance sheet mix has shifted with growth in interest rate sensitive assets, particularly warehouse loans, which are floating rate, and we are close to a neutral interest rate risk position. Although we have $6.2 billion more in liabilities repricing or maturing than assets over the next year, the higher interest-sensitive asset betas offset much of the impact of this asset liability gap. We expect continued expansion in our net interest margin as we reduce our cost of funds.

While our 2025 outlook for our net interest margin for the entire year is currently targeting a range of 3.20% to 3.30%, that assumes no further Fed rate cuts in 2025. Our NIM is largely an output as we prioritize long-term profitability over any specific NIM target and will adjust this target as appropriate to optimize our earnings. Our total noninterest income of $29 million in the fourth quarter includes a negative -- I'm sorry, our total noninterest income of $29 million in the fourth quarter includes a negative mark-to-market adjustment and lower dividend income in our CRA equity investments relative to the prior quarter.

Noninterest income can be somewhat volatile, but we expect it to average $10 million to $12 million per month. While we had lower noninterest expense of $181.4 million with a significant decrease from the prior quarter, this number is seasonally low and is expected to normalize in Q1 and for 2025. Compensation expenses are generally seasonally lower in the fourth quarter and seasonally higher in the first quarter due to resets of accruals for payroll and benefits.

In 2025, we expect quarterly noninterest expenses to average $190 million to $195 million as we balance continued focus on managing costs with the investments to grow our business. Our effective tax rate was lower in the fourth quarter due to tax benefits resulting largely from a state tax adjustment recorded in the fourth quarter to increase our deferred tax assets resulting from the filing of our 2023 state tax returns. For 2025, we expect our normal tax rate to be in the range of 27% to 28%.

Turning to our balance sheet. As Jared mentioned, we have broad-based loan growth across the core portfolio. We are targeting loan growth in the mid- to upper single-digit range in 2025, assuming a relatively stable economic environment, good growth coming across all of our core areas. Our total deposits of $27.2 billion, increased $364 million in the fourth quarter. Average NIB deposits grew 1.4% from the prior quarter, while end-of-period noninterest-bearing deposits declined slightly due to the year-end outflows that we mentioned earlier on this call.

Looking ahead into 2025, we are targeting deposit growth in the mid- to upper single digits. Noninterest-bearing deposit growth remains an important -- remains important to our growth strategy, and we are targeting NIB at over 30% of our total deposit base for 2025. At this time, I will turn the call back over to Jared.

Thanks, Joe. With the successful year of merger integration and balance sheet repositioning actions behind us, we are primed for profitable growth going forward. Given the strength of our balance sheet with high levels of capital and liquidity as well as our attractive position in key markets, our company is very well positioned. We're starting to see a higher level of loan demand, which we saw pickup at the end of the fourth quarter. We are optimistic that loan demand will continue to improve in 2025, but we still expect more of the growth to come in the back half of the year as the market is anticipating the economy will expand.

We will capitalize on these opportunities to grow with the economy -- to grow with the economy, while still maintaining our disciplined and conservative underwriting and pricing criteria. We see good opportunities to grow across all loan areas, given the talented teams we have in our markets. And our deposit gathering efforts, which remain a primary focus of the bank, continue to produce good results, and we expect to fund our loan growth with low-cost deposits added from new clients as well as current high levels of liquidity.

We also expect to see expansion in our margin as we continue to reduce our cost of deposits and loans that are maturing or resetting -- as loans that are maturing or resetting are doing so at higher rates. The first quarter is typically slow and flat with Q4. As Joe mentioned, this is partly due to a reset of accruals, taxes and other expenses, while pipelines are building. We typically see some seasonal weakness in overall deposit flows and loan demand in the first quarter each year, but we feel very confident in our ability to deliver strong results ahead.

We remain optimistic about the opportunities that lie ahead in 2025 to grow our business and drive higher returns. We believe we are well positioned to generate strong financial performance in '25 and create additional value for our shareholders. Let me say a few more words about the wildfires and the impact on Los Angeles County. As you have heard, the fires have been truly devastating and among the most expensive in California history. It is going to take billions of dollars with current estimates exceeding $100 billion to remedy and rebuild the affected areas.

That said, the fires burned a little over 1.5% of the acreage of LA County. And by and large, most of the areas of the city were not affected at all, and the areas that were affected were largely residential. L.A. already had a housing shortage, and as you have no doubt read, the impact of the fires is compounding that issue. Further, we are watching very carefully what I call the spillover effect of the fires. The economic effect that trickles down to other areas of the city because the small businesses that were supporting the affected communities are now impacted too and they can't bring home revenues to their communities.

The banking industry can and should play a critical role in helping to support, stabilize and revitalize impacted communities, and we are expected to do so here as well through targeted lending, payment relief and other tailored programs. That is all in the initial phases, and we are committed to supporting it and playing an important role. Without in any way removing focus from the real tragedy that has occurred and is still ongoing with the fires. There is a silver line to all of this as well. That is likely to be some -- means some very positive things for our city, county and region in the years ahead. First, the city and state have enacted executive orders, which are focused on streamlining development and clearing hurdles to ensure we can quickly get back and get to the rebuilding phase.

Second, the Mayor has appointed an experience to be a point person for much of this, and we have numerous business leaders joining together to envision LA 2.0. Third, if we look at what happened in Houston following Hurricane Harvey in 2017 or New Orleans following Katrina in 2005, there was an initial period of economic disruption followed by a multiyear economic boom spurred by development. Given the size of the L.A. economy and the fact most of it was spared, I'm very optimistic about the prospects of this region and believe that we, too, will organize and build back better in a way that could spur very substantial growth for such an important part of our nation's economy.

As the largest independent bank headquartered in Los Angeles, we are poised to play a leadership role and to help our clients and communities. I'm incredibly proud of everything that our talented team has accomplished during the course of '24 and how our company has performed. We always say that banking is a team sport, and that is true now more than ever. Our team banded together and worked tirelessly during the recent wildfires to support each other, our clients and our local communities.

I'm privileged to this team and look forward to what we can accomplish together in '25. And I hope that I have been very clear about how much opportunity for growth we see ahead. With that, let's go ahead and open up the lines for questions.

[Operator Instructions] Today's first question comes from Timur Braziler with Wells Fargo.

Jared, maybe starting on expenses. Can you maybe help us just bridge the gap between the current rate? It's been a couple of quarters of being able to work those down pretty well. Just the current rate versus guidance. And maybe the timing there. Is that all expected to bounce back in the first quarter? Or do you expect to grow into that guided range?

Yes. Let me start, and then I'm going to turn it over to Joe for the details and the timing. If we achieve the low end of our range -- the low end of expenses for '24 -- or excuse me, for '25, that would represent 3% savings relative to a normalized '24. If we achieve the high end of our range, that's 6% again. So even though there's some increase in expenses relative to kind of the low point of Q4, we're still expected to continue saving through '25. That being said, we really need to grow this company, and we expect to grow this company.

And the expenses will not grow if growth doesn't come along with it. We're looking to expand our margin and expand our earnings, and we think that these estimates are maybe conservative but probably reasonable in light of the growth that we expect. Joe, why don't you add detail there?

Yes. So we would -- as we mentioned earlier, Timur, the first quarter is seasonally high usually for things like comp expense versus the fourth quarter. And that's -- as payroll taxes reset, certain benefits, like, for example, 401(k) matches, all these other things reset. You also have -- that's usually the quarter that some of the inflation kicks in for wage inflation and stuff. And so I think we will see it go up. And then as the year progresses, it will hopefully trend down. But I want to reinforce what Jared said, we have a real focus on cost. And it's something that we certainly think about every day and will continue to work.

We have lots of initiatives going on. But we also want to grow our balance sheet, and we want to grow earnings. And so we believe that if you look at our -- our forward guidance on loan growth and NIM expansion that we think that we'll continue to -- with this expense base, we'll continue to grow operating leverage and it's -- we're well positioned to have a good 2025.

I guess I would add there that for us, this is kind of optimistic. In that, we see -- we need expenses to support growth. And if we were kind of trending down and going down, it might suggest that we were intending to be a little bit flatter. But -- and as we've guided previously, we thought we would be low single digits in terms of loans. Now we're guiding to mid- to upper single digits. And we're just seeing some good shoots in the ground right now and feel good about '25 where we sit today. Obviously, all economic dependent. We don't think there's going to be any rate cuts in '25, and if there are, that's great.

Okay. And then maybe just sticking on the loan growth expectations. I just looking at 4Q, production was up quarter-on-quarter, line usage was up, but also payoff and paydown activity was a little bit elevated. I guess as you look towards that higher mid- to high single-digit guide for '25, is that more payoff stabilizing? Is that expected line usage loan production kind of what are the dynamics within that '25 guide that you expect to go from?

I think that if there's -- if you're starting to see a lot more activity, I think that paydowns and payoffs have to be up there as well because that's just kind of normal. It's just the part of the overall cycle of -- other banks are experiencing paydowns and payoffs, and we're taking out lines and other banks and putting them here, and some of our clients we might not want to renew them. We're going to try to minimize the payoffs and the paydowns that we think we can hold on to. But there's a lot more money circulating the economy when that happens.

So we just -- we think about it in terms of what's the net growth number that we want to target, and we're going to maintain -- obviously, to net grow, you want to keep your base stable and grow on top of it. So we're going to try to minimize the paydowns and payoffs. And if they happen, we're going to have to grow on top of it. So we think about it in terms of net growth, we're prepared for it, but that's part of the normal cycle. And in some ways, it's really good when that happens because there's a lot more money circulating in the economy. We saw -- if you look at our table on Page 16, I mean, you can really see the pickup in activity relative to where it was. And so that's, I think, a good sign.

Great. And then just last for me. On the deposit side, just maybe talk to the broader competitive landscape, what you're seeing in terms of some higher cost runoff in the coming quarter? And then maybe one for Joe, just the deposit spot rate at the end of the year.

Yes. We see less competition on deposit pricing. We're starting to see less demand for higher rates. So that's going to allow us -- as we get a little bit further from the rate cuts, we're going to take another bite at the apple and start moving deposit cost down again. We've been doing it effectively. Our teams have done a great job with it. We do have deposits that are coming off still in the 5s that we have the opportunity to reprice down, and that's going to continue to be a tailwind for us.

Yes. Timur, do you want to me add on to that?

Spot range, Joe, anything you want to -- Joe, did you want to provide a spot rate? Do we provide a spot rate at the end of the year on deposit...

We haven't provided a specific spot rate, but I think you can assume is just right around maybe slightly below the cost that we provided to you for 4Q, which was cost deposit of 2.26%. So just probably a little bit below that. So we are -- but I do want to say when you look out into 2025, we still have a fair amount of higher-cost deposits like brokered CDs and other things that we put on at the beginning of this year as we were going through all of our restructuring. And those things are going to roll over.

And as a rollover, we're looking at picking up even if -- whether they roll over in and we are able to replace them with core deposits or even if we have to replace them with brokered again, it's meaningfully lower rates that we're rolling those things over at. And so we feel good about our ability to continue to bring down the cost of deposits.

And our next question today comes from Chris McGratty at KBW.

Question on NII. Jared, you said 2 quarters in a row of sequential but modest growth in net interest income. Taking the seasonal factors of Q1 out the cadence as we kind of go through the year that you'd grow off of this mid 2 30s base?

I think so. I think with loan growth, and we -- like -- I was on the Credit Committee this morning. And we had a $10 million loan that -- for a great customer of ours that is going to -- it's coming off in the mid-4s and we're repricing it in the mid-6s. And so we're seeing a fair amount of that. And so it just feels like we should keep expanding there. Our margin is going to expand. We're going to keep -- I'd like to do more than what we guided to, but I just don't know. We're not going to -- the margin is largely an output for us.

We kind of know it when we get there. And we have Loan Committee. We price loans, I think, fairly conservatively. It seems to be like we're getting good momentum. Our loan yield for new production was just above 7% on average, but it can be a little bit higher than that. We had some lower rated residential and CRE loans that kind of brought the average down that came on in the quarter. So overall, Chris, I think the answer is yes for those reasons.

And Chris, I'd just layer in the same factors I talked about like for the cost of deposits, how we think it's still going down. So the same trend on the loan side. So the loans that roll off or rolling off at lower rates and loans are rolling on and rolling on significantly higher rates. So that -- we expect that trend to continue in 2025 as well.

Okay. And just to put a bit of a finer point on the net interest income, Jared. The cash and liquidity, the securities and cash, like if you're targeting mid- to high single-digit loan growth, presumably, some of that will get funded. So earning asset growth might be positive, but less than the guide that you've given for loans. Is that right?

Joe, what do you think?

I think it's pretty pre consistent. I think one thing you might see for us in 2025 is we're working hard on our -- looking at some of our liquidity numbers and we might bring our cash numbers down slightly in 2025, which will help us fund that growth and grow nonearning assets or earning assets...

Our -- yes, go ahead, Chris.

No, no, go forward, Jared.

No, I was going to -- you're asking if our cash balances come down, we're going to reduce the earnings on the cash because we're going to get a higher return on yield. So I think that's probably true, but it's -- net-net, it's going to be higher.

Okay. Got it. And then if we do get a cut, I see on Slide 6, you gave the ECR cost of 27% to 29%. What's the sensitivity to that number if you get a cut?

Well, we -- I'm trying to figure out how to answer this with the information that we've provided because I don't want to give out more than we have. The -- a certain portion of our HOA balances are tied to Fed funds, and there is a 100% beta with Fed funds. So it might be that our formula is we're paying them 75% of Fed funds. But when Fed fund goes down, that whole thing goes down by as much as however much Fed fund goes down. So I don't know that we've disclosed the dollar amount that is tied to that ECR. And -- but that's how it works.

But directionally, if we get a cut, that number shouldn't be higher, it should be lower.

No, it's going to be lower and it's going to be -- it's going to help. And actually, you can probably figure it out by looking at what happened quarter-over-quarter, right? We don't have a full quarter of it yet, but we said how much of it was from ECR and so you can figure out how much it changed quarter-over-quarter. Our business -- our HOA business is really great. Alan and his team do a great job, and it's something that we are looking to grow.

As I mentioned, we had some customers that were kind of more expensive, and we try to reduce the impact of those customers by shrinking those relationship balances and growing other balances that were with other customers. And so -- and bringing in new relationships, and we're very focused on doing that.

Chris, on Page 12, it says ECR-related expenses of $27.5 million, were down 8% quarter-over-quarter, and that was -- were down 8%, and that was without a full quarter of rate cuts. So you can see that there.

And our next question today comes from Matthew Clark from Piper Sandler.

Can you give us the average margin in the month of December?

We haven't been providing monthly margins, yes. Go ahead, Joe.

Yes, I was just going to say, we stopped providing that just because there's a lot of -- there's going to be noise in that and we didn't necessarily find helpful. I would just say that it's pretty much where -- is close to where we ended for the quarter.

Okay. And then just on the comp line, the $77.7 million, obviously, going to bounce back here, but can you give us a sense for how much reversal of comp accruals might have impacted that number? I'm just trying to get a sense for where that run rate of comp might go here in the first quarter.

I don't think we've put out that level of specificity. I'll just say that we -- it will go up a bit, maybe 10% or so. This might be a good somewhere in that range. It's driven by all the things we talked about on the call.

And -- well Joe, let me ask this, is our comp expense -- is the ratio of comp in our noninterest expense about the same? So if noninterest expense is all going up, is it all going up proportionately or some lines going up more than others?

Some lines grow more than other. It's mostly comp and maybe one or two other things, but the small things, but it's obviously comp increase.

So that increase, Matt -- Matthew, I think a disproportionate amount is going to be comp.

Yes. I'm just getting a sense that maybe that run rate is below the $190 million in the upcoming quarter, but we can deal with that. Okay. And then on the ECR deposits, can you give us the average ECR deposits in the quarter? I think they were $3.7 billion last quarter.

Yes, I think that was in ECR, right?

I think that was end of period though, I was trying to get a sense for the average.

Ann, would you mind forward...

yes. We look at it, yes.

Okay. I can move on. Okay. And then just on the -- your continues to grind higher. Any updated thoughts on the buyback this year?

Look, we're continuing to look at it. We're really pleased with the fact that our capital keeps growing. And we're going to make sure that we are actively considering all possibilities to use our capital. We have a couple of things in mind that we'd like to use it for, and we're going through some analysis now?

Okay. And then just back on the ECR costs. Assuming those ECR balances were flat, it would imply kind of a 50% beta in the quarter. I mean is that how we should think about ECR costs with our assumption around Fed zones?

Well, for the deposits that are impacted, it has been 100% beta. But it's also -- you also got to look at the timing of the cut and everything. -- to figure out what the impact is. But for those deposits that have that have ECR. They are largely -- as I said, 100% now going forward, we've been -- we believe that trend to be largely weakened to continue.

Okay. Great. If you can dig up that average, ECR deposit balance, that would be great.

Our next question comes from Gary Tenner of D.A. Davidson.

I guess another expense question. I just want to make sure, Joe, that I heard an initial answer you gave correctly in terms of that 1 90 and 1 95 range. I think you suggested earlier that it would be maybe towards the upper end and then come down over the course of the year. I just want to be sure I heard that correctly in terms of setting first quarter expectations, obviously, given some of the seasonality, but I just want to make sure I heard your comments correctly.

So I guess what I don't -- I didn't mean to give any more refinement other than to give the range that we had the 1 95 to 1 90. I think you can assume that comp expense in and of itself. Comp expense is seasonal, and comp expense tends to peak in the first quarter with respect to certain metrics. Now there's other things that might impact it going forward. But that's what I meant to say.

Okay. Appreciate that. And can you just remind us in terms of seasonality within the HOA business, is it -- what's the kind of low point typically in the year?

It's actually -- go ahead, Joe.

I believe it's towards the end of the year. It's usually when it flows out and it tends to flow back in at the end of the year.

That's right. We see outflows at the end of the year and then it starts flowing back in to the year. The other thing you see is you see it build up at the beginning of the month and then you see it flow out at the end of the month because people make their HOA payments at the beginning of the month and then it gets distributed out from our bank throughout the month and builds down and then it builds back up at the beginning of the month and then it goes out through the month.

So -- but I would say if there is a low point to it, it's toward the end of the year. And Gary, let me go back to a question that Matthew asked about the average ECR deposits, it's about $3.7 billion. Most of our HOA deposits have an ECR tied to them. The formulas are all different, but the average is about $3.7 billion.

I got a refining number, 3.65. Right on top

3.65, there we go, right? 3.65.

3.65 for the quarter.

Okay. So obviously, all [indiscernible] lower rates brings the cost down, but I think you implied in the past, that's still a business you would like to actively grow, correct?

We are trying to actively grow it, absolutely.

Okay. Okay. So dollar terms may trend a little bit differently. Okay. And then last question, if I could. I know, Jared, you had been pretty positive on the pull-through in terms of rate cuts on the deposit side, at least in the first 75 basis points cuts. Could you give any indication if that's kind of held with the December cut and what you've seen around that?

Yes, we've achieved approximately 54% beta. And you kind of have to measure it over time and see what happens and make sure that you have the stability. But look, we had a really good quarter. Our cost of deposits, our team is managing them exactly the way they should. We're showing deposit growth as we're bringing costs down. We're bringing in the right types of relationships. We're in a market that's absolutely poised to grow. We had solid loan growth from certain segments of our company without it being broad-based loan growth across the entire company, and it was meaningful.

And so the opportunity to grow loans across our entire company in all of our segments is, I think, what we see ahead, which is pretty exciting. The real estate markets were completely locked up in California and now they're starting to open back up again. And so we're starting to see some activity in many perms and other things that will, I think, provide a lot of opportunity and a lot -- real estate transactions to employ a lot of people. Every transaction has a broker has an appraiser, has an adjuster. I mean it's just a lawyer. There's a lot of people involved in escrow title. Tons of people involved in real estate transactions and so. It really drives the economy when that starts picking up. And as everybody knows, this is -- this economy is really -- in Southern California, there's a lot tied to real estate. So I'm excited about what we're seeing here.

And our next question today comes from Andrew Terrell with Stephens.

Jared, I want to go back to a point just a minute ago on capital that you made. I think you mentioned you were looking at a lot of kind of different options throughout the year. I'm just curious, you've got $2.3 billion of held-to-maturity securities still on the balance sheet. Is one of the options or leverage you're kind of looking at repositioning of HTM book?

Yes. I think there are some very specific dynamics around that. That takes -- obviously, our intent and capacity to hold to maturity exists, and that's our position today. Whether we would change our intent is a factor of a whole bunch of things. But that doesn't mean that you wouldn't do any analysis to look at how that would work, what it would mean, what that would look like, and we have to figure that out. But it is hanging over us, right, very low-yielding, long-duration HTM book.

There have been a couple of other banks that have taken that bite and repositioned their HTM and seeing a big uptick in earnings. And so I think it's incumbent upon us to evaluate that and figure out what that means and understand what opportunities are out there, but we have not, in any way, changed our intent as of now.

Okay. I appreciate the added color there. If I could ask, Joe, just on the tax rate this quarter, could you quantify the impact of the DTA benefit that you recognized in the tax line this quarter?

I think it was about $5 million.

Okay. And then I wanted to ask on just the -- I was maybe a little surprised to see the pickup in the nonaccrual loans this quarter, given -- I think you mentioned the charge-offs this quarter with the loans that had previously migrated NPL. Just curious if you could speak to -- I know it was about $20 million, but could you speak to the step-up in the nonaccrual loans this quarter?

Yes, it was primarily one relationship. The borrower died. We have 2 properties that are one is multifamily and one is a medical office that are occupied, full cash flowing, but we're dealing with the trust. It's kind of a family. The guy died and now they've got to settle it and the kids are working it out, and it just -- it's been, I think, a little bit been disruptive for the family.

And so the -- those 2 loans are $34 million. So that's a huge part of the increase in nonaccruals. As we said, it's a big part of it, if not most of it. So that's the story there. We're going to get paid back, but it's going to be disruptive until we can work through it with the estate and the trustee.

Got it. Okay. I appreciate it. And actually, if I could ask just one more for the charge-offs you took this quarter, can you -- could you bifurcate how much was the Life Sciences versus Civic?

$14 million was Life Sciences. The rest was Civic fundamentally, rough numbers.

Is that larger than most of the typical almost the Life Sciences loans were generally smaller than that. Is that on the larger end of the Life Sciences spectrum?

I'd say it is. And the other thing I would say is that this portfolio has performed exceedingly well. We're very committed to it. We like it. I spent a lot of time with it. it's going to happen. I mean it's just -- look, we have $4 billion of deposits and $1.5 billion of loans in our venture book and -- rough numbers, and it's going to happen. This hasn't happened since I don't know, 2018 or '19. But again, we were very aggressive. We could have probably taken another stance. It's not a 0. We have an opportunity to get some money back later.

And I just said let's do it. I think I've been very clear with everybody that I didn't want there to be any headwinds in '25 that we had the ability to control in '24. We are really focused on clearing the decks for '25 and making sure that it is a really great year for us and for our teams. And so this was something, I think, was fairly aggressive that we thought was the right thing to do. It's on the larger side.

And fortunately, we had the capacity to do it. Our provision in the quarter was $30 million, which was larger than we've been able to do in prior quarters, and we still earned $0.28. So those things all factored in. It's not saying we wouldn't have charged it off if it meant we were going to earn less money. I would have because I wanted to make sure that we could, again, clear the decks for '25, but it's isolated. It happens. I'm proud that we have the ability to do it. And I think our team did a great job getting to this point, and we'll move on.

And our next question comes from David Feaster with Raymond James.

Just I wanted to start on the loan side. It sounds like it's going to be a bit more back half weighted. I think you alluded -- but have you started to see an improvement or a shift in sentiment thus far? Have you started to see any improvement in the pipeline early in 2025? And just what are you expecting to be the key drivers? It sounds like it's going to be much more diversified than we've seen recently. You've had early success in the venture and warehouse segments, but just thoughts on the sentiment and demand in the pipeline? And then what do you expect to be some of the key drivers?

Sure. So we expect warehouse fund finance to continue to perform. We expect lender finance to start picking up as our team has now been here for a little bit, and they're starting to show some deals that we really, really like. We saw another deal this morning from our equipment finance team that look great. So there's a lot of things that are going to continue to move. I think our general just lending in our community banking space, which is our regions that are across California as well as Colorado and North Carolina. I think that's where we're seeing a lot of pickup and a good part of that is just your run of the mill real estate and C&I loans. Those seem to be coming with more volume at this point, and there seems to be a pickup in activity. And so we're excited about that.

My bias is still that we're going to see it more at the back half of the year than the front half of the year, meaning the volume of loans is going to be higher later just because I don't think people just turn on the spigot and then it all comes at once. And so I think the momentum will just kind of build and that's naturally going to occur. But I'm still optimistic that Q1 and Q2 will be good, generally because of other factors, even if loans grow, I think earnings in Q1 tends to be relatively flat with Q4, and maybe it's a little bit better, maybe it's flat or whatever. It's not a huge delta because expenses kind of right up in Q1 and then they start tapering down again. But I feel very good about where we are, David.

Yes. Okay. Do you see a similar dynamic on the deposit front, just from a timing perspective? I mean your growth targets are really strong. I'm just kind of curious the time line of that? Do you expect that to be similarly back half weighted? And where are you seeing the most opportunity? It sounds like there could be some HOA growth? And just kind of what's the marginal cost of new core deposit growth on a blended basis?

I think it's all moving together. I think the loans and deposit volumes really come together. I think we're still seeing a lot of inflow from the banks that have left the market where people ended up at some bank that acquired the bank that left and -- or -- and we're getting opportunities there. It's pretty spread out, and we are very focused on noninterest-bearing deposits, but we had growth in our -- just our average deposits in the quarter because we are -- we'll pay a reasonable rate for deposits, and we want our folks to bring in all sorts of deposits.

And so we're not adverse to other types of deposits. They're coming in at lower -- it's allowing us to let higher cost brokered and higher cost CDs run off. And so we're -- David, I think it's going to -- in terms of your two questions, I think it's going to flow in concert with loans. I think those things kind of go together. And second, I think the cost is it's going to come down from where we are now, and we're focused on NIB, but we'll take money market and savings accounts, too .

Great. And then just last one for me. I'm just curious, we've talked a lot about the expenses side. And I'm just curious, what are some of the investments that you've got embedded in there? Obviously, there's natural expense growth from raises and normal inflation. What kind of investments are you focused on right now? And people, systems, processes or even additional build-out of some of the other initiatives that you've got or other business lines like Deep Stack or the payments. So I'm just kind of curious, what are some of the investments and initiatives that you've got embedded in there?

Sure. We'll take off a couple of things. First is always people and making sure we have teams, and we are hiring business teams in our key markets right now and very focused on that to support the growth that we know is there. And when you hire business teams and the growth shows up, you have to make sure your gearing ratios are right in the back office and make sure that you have the right support teams in there, so you're not gearing your team. So we're going to need to do that and make sure that our credit teams are supported and our risk teams are supported and our branch teams are supported, and we're going to have to do that if the growth shows up, which we expect it to do.

So -- but we try to balance that. You don't necessarily hire head of the growth. You can try to hire in tandem and do it in a smart way. Second is we are investing in our systems. And so we have an Encino project that we've been working on, that's really good. We have sales force. We're about to finish our program that will allow us to open accounts digitally across the bank, which we're excited about. That's been an important investment for us.

We have some cloud migration projects for IT, where we have to move from 4 remote locations to 2 colocated facilities, and then we want to move it to the cloud. These things are investments. We have a big data project. We have too many systems in our company. And one of the things that we're trying to do is harmonize the data, which will really inform, give us incredible reporting, will allow us to modernize our financial systems.

These things you have to invest ahead of -- you have to invest early and you get the benefits later. You don't necessarily see the money, see the benefits while you're doing it, but there are huge, very, very important projects for us to be the company that we want to be a couple of years from now. We don't aspire to be where we are today. We aspire to have the systems and visibility and data to be a much more profitable company that might be larger than we are today. And so we have to invest as if we're going to be here for a while. And so those are some of the investments that we have on top of where we are now.

And our next question today comes from Jared Shaw of Barclays Capital.

I guess most of my questions have been asked. But looking at capital around this time last year, you had called out sort of 11% CET1 as a level that you would look at reconsidering options after you got to it. Do you think you still need to be at 11%? A lot has changed in the industry positively over the last year? Do you feel like an ultimate CET1 level could be could than where we are in sort of the near to midterm?

I think so. I think it really matters all of your metrics. And when we sit down with our regulators and look at how the company is performing across the board, how quickly we're building up capital, how much liquidity we have and what the quality of that liquidity is and the quality of our loan portfolio and how well reserved we are. All of those things are taken into account when we ask for permission to dividend up enough money to redeem capital.

And so I don't think that there is a line in the sand. And I think it could be lower than 11%. It's just -- they do look at peers, too. They want to make sure you're in line with peers, and you're not somehow constantly below them, but you're seeking to do something that your other peers are not. So we have to look at all of those things, but I don't think there's a line in the sand.

Yes. It sounds like from a couple of other companies that reported this quarter. They're waiting for the first mover as well. So maybe once you get that first one and then the peer group, all changes quickly. It could happen...

It's possible, absolutely. And we're probably not the first mover for a bunch of reasons, but I think we are very intentional and are very focused on when we build up capital, deploying it the right way. These things are not mutually exclusive. We can invest in our company, we can reduce our share count. We can do a whole bunch of things simultaneously, but we want to do it in a very prudent way.

One -- I'll just add one other thing, Jared, that like take, for example, the preferred shares, that we're paying the preferred shares doesn't impact CET1. Now it impacts other ratios that we'd have to consider. But that might be something you want to want to think about.

Yes. That's -- it's a good point, Joe. Our preferred is something that we talk about a lot. The issue with the preferred, of course, is that it's not callable. So we have to buy what we can get in the open market or you have to tender for it or it's -- you got to wait until maturity. If you wait until maturity, you can take it out at par ahead of maturity, you probably have to factor in some premium to get people to be willing to tender it to you and then you got to do the math on that.

Yes. Okay. And then, I guess, just finally for me. You talked about the yields on new loans and the opportunities there. What's going on with the spreads on new loans? Are you seeing spread compression with competition at this point? Or are spreads holding up?

I'd say a little bit. I mean, look, just to throw a couple of numbers out there, but the numbers are still pretty good. I mean, our multifamily, I would say, is where you would see the spread compression, the permanent multifamily loans, is where we're seeing spread compression. But on all of our other areas are really in the mid-7s and higher. And so they're holding up really, really well. Multifamily is low to mid-6s right now.

And so -- and maybe even lower. I mean I think Fannie and Freddie are doing permanent financing in the mid- to upper 5s, we have $5 billion in multifamily. We got a project called Project Reset where when these loans are coming up for maturity, we go out to our borrowers and we ask them if they want to keep their loan with us. And the benefit is they don't need to do a reappraisal and the documentation is a lot easier. And so they should be willing to pay us a little bit more than going through that whole process with an agency where they're also tied up for a while.

We're doing 3 years at between 5 90 and 6 10 or 6 15, which we think is a pretty good rate. But that's where we've seen kind of more of the compression. By the way, those loans are coming off at the low 4s. So we're keeping our portfolio flat. We're getting a nice uptick in price. We already know these loans. They're performing well. There's no problems. We're not taking any loans that have any scars on them. We're not setting it out too far out, and we're getting a nice uptick in pickup in yield.

And our next question comes from Chris McGratty of KBW.

Just a quick follow-up on the margin. Within the guide of 3 20 to 3 30, what was the -- what's the level of accretion income that's factor in there?

It's just our baseline -- yes, it's our baseline accretion does nothing accelerated in there.

Okay. So we can use the schedule you guys provided, I think it was last spring as kind of the annual cadence for NII?

I'll have to go back -- yes, I believe so.

I don't think that...

Accretion goes down a little bit each quarter, right, because as stuff does pay off and then the baseline is a little bit smaller every quarter. So the total accretion for 2020 like in the 2025 plan is a little bit below what we actually experienced in 2024.

Thank you. And this concludes today's question-and-answer session and today's conference. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.