Banc of California, Inc. (BANC) Q4 2022 Earnings Report, Transcript and Summary

Hello, and welcome to Banc of California's Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] There will be a question-and-answer session following today's presentation. [Operator Instructions] Today's call is being recorded and a copy of the recording will be available later today on the company's Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release, which is available on the company's Investor Relations website. The reference presentation is also available on the company's Investor Relations website. Before we begin, we would like to direct everyone to the company's safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would now like to turn the conference call over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer. Please go ahead.

Good morning, and welcome to Banc of California's fourth quarter earnings call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results. Banc of California generated record net income in 2022 and I am tremendously proud of our entire team. Our results and overall performance reflect the strength of the franchise and high quality balance sheet that we have built over the last several years. We were able to achieve what we set out to do in 2022, which was to generate solid earnings by capitalizing on our strong stable deposit base and disciplined expense management. As we have continued to demonstrate over the last several quarters, our balance sheet has migrated to a balanced portfolio of high quality loans and stable commercial deposits. As we forecast on this call many quarters ago, we said that warehouse balances would migrate down, but we would continue to move our earnings forward. These last several quarters have proven out that plan. Our fourth quarter was strong even as we remain selective in our new loan production given the macroeconomic uncertainty. As a result, while we had a slightly smaller average balance sheet in the fourth quarter, our core earnings were a bit higher than the prior quarter and we generated a significant increase in our tangible book value per share. Our growth in tangible book value per share is important to highlight as it reflects our steady financial performance and prudent balance sheet management. For the full year, our tangible book value per share increased by more than 2% notwithstanding the impact of higher interest rates on AOCI, and the significant capital actions we took, including the completion of our $75 million stock repurchase program, our $24 million acquisition of DeepStack Technologies, and the repositioning of a portion of our securities portfolio this quarter that will contribute to our future earnings. Lynn will discuss this repositioning a bit later in the call. Our loan fundings were lower than the prior quarter due to a combination of lower loan demand resulting from higher interest rates and borrowers being more cautious given the economic uncertainty, as well as our decision to be more selective in the loans we are adding in the current environment. But excluding warehouse, we were able to slightly increase our commercial loan balances during the quarter and keep our overall loan balances essentially flat. We continue to see higher yields in the portfolio, which enabled us to realize more margin expansion. When combined with the actions we have taken this year to manage our funding costs, and our stable non-issuing deposit base that remained around 40% of total deposits. In terms of the launch of our payments business, we remain on track with our projected schedule. Earlier this month, we completed the integration of DeepStack Technology into our internal platform and we have begun processing payments on our rails with Banc of California as the sponsor bank for select smaller clients. We continue to build out the infrastructure necessary to process transactions at scale with targeted completion around the end of the second quarter, after which we will be more broadly developing our pipeline. Now, I'll hand it over to Lynn, who will provide more color on our financial performance. And then I'll have some closing remarks before opening the line for questions.

Thanks, Jared. Please feel free to refer to our investor deck, which can be found on our Investor Relations website as I review our fourth quarter performance. I'll start with some of the highlights of our income statement and then we'll move on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the third quarter of 2022. Our earnings release and investor presentation provide a great deal of information, so I'll limit my comments to some areas where additional discussion is helpful. Net income available to common stockholders for the fourth quarter was $21.5 million or $0.36 per diluted share. As Jared mentioned, we repositioned a portion of our securities portfolio during the fourth quarter and recognized a pretax loss on sale of securities of $7.7 million, which had a $0.09 impact on diluted earnings per share. On an adjusted basis, net income totaled $26.88 million for the fourth quarter or $0.45 per diluted common share when the loss on sale of securities, net indemnified legal costs and net losses on investments in alternative energy partnerships are excluded. This compared to adjusted net income of $26.7 million or $0.44 per diluted common share for the prior quarter. There were no securities sold in the prior quarter. It is also worth noting that on an adjusted basis, net income has more than doubled since the fourth quarter of 2021. Our net interest margin increased 11 basis points from the prior quarter to 3.69% as our overall earning asset yield increased by 46 basis points and our total cost of funds increased by 38 basis points. Our earning asset yield increased to 4.79% due to higher yields on both loans and securities during the fourth quarter. Our average loan yield increased 38 basis points to 4.92% due in part to the higher rate on loan production and the average yield on securities increased 81 basis points to 4.19%. The higher securities portfolio yield is due mostly to the CLO portfolio resets and the impact of the investment portfolio actions we accomplished in mid-November. We sold $119 million in securities, recognized a net loss of $7.7 million and reinvested in the net proceeds in securities with a higher average yield of approximately 230 basis points compared to the securities we sold. We estimate this allocation of capital has a tangible book value earn back period of about three years and will cause the overall investment portfolio yield to increase 20 basis points to 25 basis points going forward. Our average cost of funds was 117 basis points, up 38 basis points compared to the prior quarter and our average cost of deposits was 79 basis points for the fourth quarter, up 32 basis points. This increase in our average cost of deposits was primarily driven by rate increases in our money market and interest bearing checking accounts, as well as the impact of the CDs that we have added to lock in some longer term funding as market interest rates have continued to climb. This was partially offset by the positive impact of our average non-interest bearing deposits increasing to 41% of total deposits in the fourth quarter from 38% in the prior quarter. As market interest rates have increased and liquidity has continued to be absorbed by the market, the expectation of deposit yield has also increased. And while our cost of deposits increased 32 basis points quarter-over-quarter, the average federal funds rate increased 147 basis points over the same time period. As a result, the difference between our average cost of deposits and the average federal funds rate widened from 171 basis points last quarter to 286 basis points for the fourth quarter. The net interest margin drivers page in the investor presentation deck illustrates this information. Our non-interest income decreased $7.1 million from the prior quarter due to the loss on sale of investment securities. Other areas of non-interest income were relatively consistent with the prior quarter, with the most significant variance being higher gains from equity investments of $724,000. Our adjusted non-interest expense increased $1.1 million from the prior quarter, which was a reflection of an increase in a variety of areas focused on internal projects, including, but not limited to, DeepStack. All of our other areas of non-interest expense were relatively consistent with the prior quarter as we continue to maintain disciplined expense control while investing in areas of the business that we believe will create long term franchise value. The effective tax rate for the fourth quarter was 29.6% up from the prior quarter's rate of 29.1%. The higher effective tax rate for the current quarter decreased net income by approximately $170,000 compared to the prior quarter. For 2023, we estimate an annual effective tax rate to be approximately 28%. Turning to our balance sheet. Our total assets were $9.2 billion at December 31, down slightly from the end of the prior quarter. Our total equity increased by $7.6 million during the fourth quarter, that’s $21.5 million in net earnings and $1.7 million positive shift in AOCI were offset by capital actions, which included common stock dividends and the repurchase of $19 million in common stock. With the fourth quarter repurchases, we completed the $75 million stock buyback program announced earlier this year and during 2022 we repurchased 7% of our previous outstanding shares. Our non-interest bearing deposits remained strong, averaging 41% for the quarter and ended the quarter at 40%. We continue to use wholesale funding sources to strategically manage both liquidity and funding costs when we believe these sources are better options than rate sensitive client deposits. This included adding $100 million in FHLB term advances in the fourth quarter. Turning to credit quality. Our credit quality remained strong in the fourth quarter. Non-performing loans excluding single family residential loans or SFRs decreased slightly quarter over quarter. While SFR NPLs did increase, they are well secured with very low loan to value ratios and we do not see loss exposure in our SFR portfolio. SFR NPLs represented 38% of our NPLs at year end. In addition, at December 31, 35% of our non-performing loans were either loans and a current payment status but classify non performing for other reasons or the guaranteed portion of loans that have an SBA government guarantee. Similar to NPLs, most of the increase in delinquent loans was driven by SFRs, which totaled $60.8 million or two-thirds of total delinquencies at period end. As frequently happens, we saw a drop in delinquency after quarter end and our SFR delinquencies dropped by $23.7 million by the middle of January. We did not record a provision for credit losses in the fourth quarter given the lower loan balances which offset the impact of weaker economic forecasts. Our allowance for credit losses at the end of the fourth quarter totaled $91.3 million compared to $98.8 million at the end of the prior quarter and our allowance to total loans coverage ratio stood at 1.28% compared to 1.36% at the end of the prior quarter. The $76 million decrease in the allowance for credit losses was due primarily to a $7.1 million charge off of a specific reserve for a purchased credit deteriorated loan from the PMB acquisition. Excluding the reserves associated with loans individually evaluated for impairment, the total coverage ratio increased from 1.24% to 1.25% quarter-over-quarter. And excluding warehouse loans, which have lower relative risk in our reserve methodology, the ACL coverage ratio stood at 1.36% at December 31. Our ACL to non-performing loan ratio remained healthy at 165%. At this time, I will turn the presentation back over to Jared.

Thank you, Lynn. 2022 was a very successful year for Banc of California in terms of executing on our strategic initiatives, delivering strong financial performance and continuing to build long term franchise value. And I want to thank all of our colleagues at Banc of California for their outstanding effort and performance. One of the pages in our deck lays out what we set out as goals for 2022 and how we checked each of those boxes. It is important we continue to deliver for our shareholders by doing what we say we are going to do. Turning to 2023, we believe that the franchise we have built positions us well to manage through the current environment and to continue delivering strong financial performance. We have a very stable base of non-interest bearing deposits as a result of the work we have done over the past several years to bring in high quality commercial relationships that value the level of service and expertise that we provide. We have a well-diversified conservatively underwritten loan portfolio and we have a high level of capital with our total capital ratio and TCE ratio finishing the year at 11.4% and 9.3% respectively. We have been very successful in attracting talent to the company and we expect that to continue this year as we see many highly productive bankers that want to be part of Banc of California. We also continue to invest in technology to further enhance efficiencies and elevate the client experience, with a priority being placed on investments that will further improve our ability to attract low cost deposits. Since my first day as CEO, our goal has been to build a robust core deposit gathering engine, which we have successfully done. We firmly believe that franchise value is driven by the deposit base. And we remain committed to ensuring that we have the best-in-class technology, service levels and specialized expertise for targeting deposit rich verticals that will enable us to continue taking market share and adding more commercial deposit relationships. 2023 has begun with economic uncertainty, which makes it challenging to forecast at this point, most notably around the level of loan growth, which is going to be largely dependent on the economic environment and there's a wide range of possible outcomes. But with our consistent success in deposit gathering, we expect to have opportunities to profitably invest those inflows and generate higher earnings. If we don't see enough lending opportunities that we like, then we can put money to work in the securities portfolio, given the attractive yields that are now available. Absent an economic turnaround, we would expect earnings to be slightly up in 2023 compared to 2022's core results. Recognizing that the first quarter tends to be slower than the fourth quarter and we expect earnings to build throughout the year. We remain steadfastly focused on credit quality and continuing to grow a high quality deposit base by bringing new commercial relationships to the bank. Let me take a minute to touch on the vision we have for this company going forward. Today, we have over $9 billion in assets with 40% non-interest bearing deposits, a slightly asset sensitive balance sheet with a healthy net interest margin, growing earnings, plenty of capital, a very safe credit portfolio of which approximately 65% is secured by residential real estate at low loan to values and we are located at the heart of the fifth largest economy in the world. We have a core banking business serving commercial clients with exceptional solutions and niches in real estate, entertainment, healthcare, education and in few other areas. As the world moves away from checks and toward card and cashless transactions, we are building on payment and core merchant processing solutions that allow us to be the hub of this ecosystem. Processing card transactions directly on behalf of the merchant without intermediate software or sales partners with a promise of greater visibility into transaction activity and faster receipt of funds for the client. And eventually, card issuance as well, helping our clients with payments in a very complete way. We have a significant number of existing clients that will benefit from these solutions and we know there are an even greater number that we will target that are not our clients today. The synergy of banking and payments should be abundantly clear and our track record of execution should also be very clear by now. While we have laid out general timing, it is important to stress that we are building solutions for the long term and focused on doing it right. While our progress remains on track, we are building a true business line and these things take time to do it right and we will not be deterred however long it takes. Even with an uncertain economic backdrop, given the fundamentals I just laid out and the strategic initiatives we have underway, 2023 is going to be an exceptional year for Banc of California. I can't be exactly sure where the loan growth will shake out, but I do know we have amassed an incredibly talented team, we have an exceptional mission driven and values based culture and with the vision and roadmap we have ahead, 2023 will be a year that continues our track record of driving even greater returns and long term value for shareholders. With that, operator, let's go ahead now and open up the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Matthew Clark at Piper Sandler. Please go ahead.

Hey, good morning, Jared and Lynn.

Good morning.

Maybe just starting on the earning assets. I know loan growth is difficult to pinpoint, mortgage warehouse may be nearing the bottom. But give us a sense for how you're trying to manage maybe overall earning assets? Is the plan to kind of stabilize them from here and maybe even grow them incrementally with some leverage or not?

Sure. Good morning. I think we'd like to keep assets relatively flat. If we can grow them great, there's probably opportunities to use a little bit of leverage and maybe grow them a little bit more. But we'd like to at least target asset level staying flat where they are to keep earnings power where it needs to be. And then if we see opportunities to grow a little bit, we'll do it. The pipelines are not huge right now. They're probably the slowest they've been since I've been at the company, but we're not -- we’re also not pressing, the environment is pretty uncertain and we're being very selective in the deals that we do.

Okay, great. And then maybe for Lynn, just your thoughts on the non-interest expense core run rate, the $48.5 million this quarter, where that might go this coming year?

Sure, sure. I think we've provided previously a range of $48 million to $50 million, we were at the lower end of the range. I think our expectation is $48.5 million probably the lower end. I think the range is still appropriate though at $50 million. Maybe I think we'd be at the higher end of the as we look into first quarter has seasonally higher expenses. And then as the year unfolds, I think we've continued to invest in many initiatives. And I think that will put us, like I said, closer to the higher end of the range.

Okay. And then just any updated thoughts on your interest bearing deposit beta where you think it might settle out this cycle, 39% in cycle to date? And I think it was in the mid-50s last cycle?

Yes. I mean, we continue to focus on bringing in low cost deposits and I'm really proud of kind of how our -- I know there were questions. We grew non-interest bring deposits from 12% to 40% and people said, is that real? Is it going to hold up? And what we've said last quarter and the prior quarter was, as the economy contracts, we expect there to be outflows of liquidity, but we don't expect our mix to change very much because it's -- the economy is moving downward overall and that's what we're seeing in our book and that's what's been holding up. So we're going to try to keep growing our non-interest bearing percentage and our deposit beta is really -- it's not something we track very much honestly, Matthew, because it's an outflow. Excuse me, it's an output of kind of all the other efforts that we have. And this quarter what Lynn pointed out to me was that, our% of the Fed increases was much lower than prior quarters, which meant we did a better job of not increasing deposit costs as much relative to the market. So I don't know that we have a target number. We just want to -- we're still slightly asset sensitive. We think there's probably a little bit of room for our margin to expand. But I would say that given we're getting closer to peak interest rate increases based on what the Fed has indicated they're going to do. We're likely to move at some point to neutrality to optimize earnings for the long term. And we'll be smart about it and protect shareholders. So we don't have a specific deposit beta number. It really is -- we don't know where it's going to end up in the quarter. We just keep trying to grow non-interest bearing and we'll make sure that we have enough deposits to fund the growth that we see or make investments. I know that's not a direct kind of specific answer to your question, but that's how we talk about it internally. Lynn, I don't know if you have anything to add there.

I think the only thing I would add is, I think you were looking at it relative to prior cycle and the trend of us being lower beta from the numbers that you provided is I think a result of the fact that our non-interest bearing deposits are a higher% of our deposit base or our funding base. So to that extent, when we look at a prior period versus now or prior interest cycle compared to now, I think our expectation is that it would generally be lower. And then to Jared's point, the focus on non-interest bearing deposits and managing our core funding base, we expect that mix to continue and to have a positive impact on deposit beta as we move forward.

Okay, Great. Thanks for the color. And then last one for me. Just on capital. You started to accrete capital here again, 11.9% CET1 buybacks done. What are your thoughts on authorizing another share repurchase program at this point of cycle?

Well, we've got a -- we haven't made any announcement there. I mean, I think there's a couple of things that we could do here. We're going to be looking at and we have Board meetings coming up in early February. Looking at what are the investments we have planned for the company of the year, including the number of initiatives we have. And what's the best use of capital going forward in terms of dividend, buyback and all those things. So we're going to look at all that stuff. If our stock is trading at a low level, then obviously buying it back in many cases makes sense, and hopefully it won't be there for very long.

Okay. And then actually if I could sneak one in, just a point of clarification. In your opening comments, I think you mentioned that you expect earnings to be up modestly in 2023 relative to 2022 on a core operating basis. I just want to make sure we're using the right base. I assume that's on a pre-provision basis since you had a big recovery last year [Multiple Speakers]

Yes, I was thinking about -- Exactly. I was thinking about that -- backing out that. That recovery was the thing I was thinking about when I made those comments. That was, obviously, one time and unusual. And so when you back out the unusual stuff, we would expect to be a little bit higher and have it built through the year. Where we sit now, that's kind of how it looks.

Great. Thank you.

And our next question today comes from Timur Braziler with Wells Fargo. Please go ahead.

Hi, good morning.

Good morning.

Maybe just following up on the last line of comments. So is that assuming that there's essentially a zero provision for the year if kind of current asset growth projections play out and there's no real change in the CECL methodology?

I don't think it's reasonable to expect zero provision this year. I think that we're going to have to look at the landscape. And we feel really, really good about our credit quality. There's an uptick in [DQs] (ph) and some SFRs, but we've never seen any loss in that portfolio. And we don't expect it now based on how it's underwritten. Overall, our quarter was really solid. We do, as Lynn laid out, I thought really well in her comments, like our coverage ratio is pretty darn high. It's certainly relative to peers with similar portfolios and every time we stress our portfolio, we come out well. I'd like to have some loan growth this year that makes sense. And if so, we'll have to look at whether provisions are appropriate and they would be for growing our portfolio. If the portfolio stays flat and the economic climate deteriorates, I would think that provisioning would be appropriate. And we just haven’t seen it yet and so it’s a little bit economy dependent to more, but I see what everybody else sees in terms of where things are going right now.

Yes, that all makes sense. And then maybe just circling up again on DDA, which you guys have done an excellent job in keeping in house and appreciate the comments that it will keep kind of the mix shift unchanged, while the liquidity picture plays out. I guess how much liquidity is still at risk here? Is there much visibility and does that kind of outflow lag the last rate hike or is much of that already effectively in the numbers?

Let me -- Lynn, I don't know if you have any immediate thoughts, but I would say that we're continuing to see pressure on -- if I'm answering your -- if I understand your question correctly, we're continuing to see pressure on deposit pricing. It's not fully baked in. I mean, there was an interesting article that came out yesterday about what could happen if the government defaults on debt and how that could cause liquidity problems for banks? We feel obviously very good about all of our sources of liquidity, primary, secondary and tertiary and they're meaningful and very, very healthy. We are managing at a 100% loan to deposit ratio, I think extremely comfortably and holding earnings to where we want them to be. But I would say that liquidity stress still exists in the market. It doesn't concern us based on all the things that we've been able to do and the ways that we can pivot. One thing I think it's really important to keep going back to is our tangible book value growth and our lack of ACI -- AOCI impairment relative to others. I mean, we really have true very, very little and Lynn and her team have done an exceptional job of managing our securities portfolio and that's real liquidity for us. We don't have these big marks that would keep us from having to sell it or cause a big drop in capital if we chose to tap into that. We don't see any of that coming to play. We think that things are stable for us and we think we're managing it well, but I think it's a differentiator that's worth pointing out, especially with our existing high levels of capital we have that on top of it.

Great. And then just last from me, looking at the expense base at $48 million to $50 million range. Is that encompassing the investment needed to stand up DeepStack? And then I guess how should we be thinking about that investment both in magnitude and kind of timing?

Lynn, do you want to take that?

Sure. Yes. Thanks for following back up on that. I should have sort of added that. The $50 million does include the additional expense from the fourth quarter with DeepStack. And I think as we look forward, we do expect that it will move with some higher fee income. So we expect to be able to leverage the expense base that we have for some of the initiatives including DeepStack. So I think it answer your question, yes, it includes it Timur.

Great. Thank you for the color.

Thanks, Timur.

Thank you. And our next question today comes from Gary Tenner with D.A. Davidson. Please go ahead.

Good morning. Lynn, I wanted to ask about the broker deposits added in the quarter. If you could kind of give us an idea of what the timing and kind of term and rate is on those deposits? [Multiple Speakers]

[Multiple Speakers] go pull maybe some of the detail. I think just a general comment. Our observation, we've kept our balance sheet I think fairly nimble. So as we've brought down some of the warehouse balances, we've let some of the funding associated with that also migrate off. So a portion of the broker deposits are shorter term in nature versus using maybe overnight advances, so they can be 30 to 60 days. They're actually less expensive to a certain extent compared to overnight. And then the rest have terms that move out to about two years. So [indiscernible] pull more specific information.

Okay. No, thank you. That's helpful. And then just in terms of DeepStack, Jared, I appreciate your confidence and obviously you're going to be thoughtful about kind of building that business out. I had thought that you might be providing a little more in the way of kind of expectations or initial expectations for how you're thinking about that business for this year. Whether it's in terms of kind of -- or maybe I'll just ask, how you're thinking about in terms of deposit flows or KPIs to be thinking about over the course of the year as it relates to that business?

Sure. I think we want to get it completely stood up. As I mentioned in my comments, we've now started onboarding client on our rails. We're doing it very slowly, making sure we get it right. There's a lot of things that we want to get right, particularly on the regulatory side and compliance side and make sure that all the systems are working well so that we get all the feeders and we're exercising our right of -- our responsibility of oversight of all the transaction volume that we expect to be able to handle. And so, we have a roadmap of how we're rolling this out. And I think our team is doing a really good job with it. We are slated to be, as I mentioned, by the end of the second quarter to kind of be closer to scale. And by then, I'll be more comfortable saying, okay, look the pipeline and how do we give people indication of what we should expect. For now, it's going to be kind of in the rearview mirror, as it happens, we'll be sharing it. And as we get through the second quarter, it will be easier to be a little bit more forward looking.

Okay. And just to clarify, when you say onboarding clients to bank rails, that means you're moving existing DeepStack clients over to your platform, correct, as opposed to onboarding?

No, the new clients. We on boarded one or two new clients so far this quarter, which is great. And we wanted to do it in what I call it a soft test environment. You don't want to put on massive volume. You want to put on the volume that you can monitor and if something happens, you can -- it breaks, you can fix it without it disrupting. So it's moving the way we thought and our team is doing a great job. We're excited to share and really to open up the floodgates as it were to get this thing moving at a faster speed. We're just not ready to do that yet until we've pressure tested in and make sure that we can fulfill our compliance obligations.

All right. That's helpful. Thank you.

Thanks, Gary. I was able to pull that one piece of detail for the benefit of everybody. So our brokered CDs have a tenure of about nine months and our rates are -- weighted average rate is about 3.85%.

Thank you, Lynn.

Thank you. And our next question today comes from David Feaster with Raymond James. Please go ahead.

Hey, good morning.

Good morning.

So you guys have been -- just kind of following up on the DeepStack stuff, you've been pretty active in the tech and the payments side with the Finexio investment and DeepStack now and you've been pretty forward looking from that standpoint. I guess at a high level, as you step back and think about it, are there any other innovative aspects in banking that you're interested in expanding into, any other pieces that may be additive to these businesses that you have now? And just kind of how do you think about that? Or do you have all the pieces now that you need and it's really just execution and growth from what you have?

Well, I think we have all the pieces and certainly all the people. We just added a new head of payments risk [indiscernible] who's got a deep background in payments and she joined us yesterday and she's going to provide a big lift to the team. There aren't a lot of people in the industry that have been in payments that long and also have been at banks. And so we're thrilled to have her here. Continuing to add really, really high quality talent. I would say, David, that from a vision standpoint, we have the people, we have the technology, but we see, as I mentioned in my comments, being able to build out a complete ecosystem for payments. And so we're pursuing in parallel paths both what we have on the DeepStack side as well as what we think we can do on the issuing side. And our Chief Operating Officer, John Sotoodeh has both of these pass underneath him and he's kind of pursuing them directly and in parallel. And there -- so we're rolling out solutions for clients that we think will provide complete solution. So we can also be the issuer as well as the merchant processor. And what JP Morgan created many years ago was a closed loop system where they were on both sides of the transaction and that's obviously very attractive if you have the systems to get there. So we are forward looking. I think we're thinking about it potentially differently than others and we're putting the pieces together that will allow us to capture as much as possible, but it's early. So I'm just -- I'm excited to share the vision, but we obviously have to execute and demonstrate each of these pieces before we get too excited about the endgame.

And still kind of thinking about it kind of breakeven this year more contribution in 2024?

Yes. And if we're able to outperform that, that would be great. But I think that's right with a look at it.

Okay. And you touched on this several times about having maybe a bit more of a cautious outlook, which makes a ton of sense. I'm just curious, where are you seeing loans come across your desk that still bring risk -- attractive risk adjusted returns? And just any other thoughts on or commentary from the demand side from your standpoint, where demand is slowing, where it still remains solid, especially just in light of some of new hires that you've made?

Sure. That's a good question. So where we see opportunity that we think is attractive, we continue to see good opportunities in financing streaming content. It's slowed a little bit, but there's still a lot of content creation going on. These channels have to get filled even as other things slow down. And that's been really stable for us. We've carved out a really good niche. Our team is excellent at it. And we've now got a lot of people coming to us asking for our financing and we've put together really good programs. So I would also say healthcare as an area that continues to thrive in our market and there are opportunistic things to do in specialty hospitals and financing physician practice groups and things like that and our team is smart there. Education charter schools is something where we have a niche, that is deposit rich and continues to be good in terms of financing charter schools with basically revolving lines of credit that help them bridge the receivables they get from the state. And there aren't a lot of banks that know how to do that. And so we've been successful with that. On the real estate side, it's very, very slow, certainly on the permanent financing side, the things that are getting done today are the things that need to get done because people basically just flipped into a floating rate note or they reach maturity. There is some bridge stuff. So our most sophisticated borrowers are the ones that are seeing people who are in -- who are caught in a situation where they can no longer afford the loan and are trying to be opportunistic to take stuff out. So when we have strong guarantors who know what they're doing and they did this in the last cycle, we want to be there to support them. They personally guarantee the loans, they're a loan to values and they have a track record of execution. So -- but that's a lot slower than it was. That activity is still being impacted by rates. Everything else is pretty slow. I mean, C&I is, as we said is very, very slow. I worry about businesses that get caught with oversupply and then they get slow paid by their own buyers. So we're just being super cautious, but that's some color.

Maybe staying on that topic, what are some -- just from your perspective, I know you guys are sitting kind of in the catbird seat with really low risk loan portfolio. But if you look at the market, I mean, what are you seeing that is causing you some concern? I mean, investors are obviously focused on CRE and notably some of the segments within there like office and those types of things. But just curious, maybe from your standpoint, what are some of the segments that you might be more cautious on and continue pull back on? And just the credit environment and the market for -- from a credit standpoint in your opinion?

Well, so hospitality is not something that we traffic in. And so I would start by staying away from that. Second is office. We don't really have much and we would stay away from it now for sure. I mean, there aren't a lot of -- there isn't a business that I have heard of that isn't thinking about reducing their space. And so there begs a lot of questions. When leases come up, how that's going to perform. Construction is obviously something that you got to be careful. Now the good side of construction is that, supplies are more available, teams are more available and the best developers know that downturn is sometimes the best time to build because you're building when there's no demand and then soon as you come out of the ground, you can fill it up pretty quickly. And certainly for infill housing, there's opportunity. So I wouldn't say that you would avoid all construction, but what's the price of the land that they're contributing. What's the building cost today? Some of the building costs have actually gone down that can offset some of the rate increases. But I would say that on most cases, you're going to be extremely careful on construction. And I go back to just core C&I, things that are -- things that are going to get triple hit with interest rates, labor shortages and supply chain. And you think about distribution and warehouse and things like that that could be hard hit. If you're doing C&I right now, you better have a good ABL team, because that's one of the safer ways to do C&I in this sort of environment, but even there you have to be super cautious. I would say on the other side, SFR remains safe and we continue to see opportunities on the SFR side that look very attractive. And if it makes sense to pull the trigger, we will. We don't originate, but we have -- as you know, unique channels to get that asset. And if we see good stuff, we wouldn't hesitate.

Okay. That's helpful. Thanks everybody.

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

Hey, good morning.

Good morning.

Jared or maybe for Lynn, just looking at the 2023 strategic objectives. Hoping you could just maybe expand on what type of balance sheet opportunities you might look to take advantage of when speaking about enhancing kind of longer term earnings? Just maybe some incremental color there.

Yes, I mean, I think we just touched on a little bit and it was touched on the beginning. It's a good question. We can -- there are opportunities to buy securities that might be more attractive than loans. You could borrow to buy securities if you're able to match it right and really benefit as when rates come back down, you're going to have your funding costs come down and your securities yields probably going to go up. So there's good opportunities there. We are seeing lending opportunities, so they're just not robust. And then Lynn, how else would you augment that?

I agree with your comments. I think we started out talking about looking at average earning assets maintaining them and to the extent that there's not opportunities in loan portfolio. I think we view that there's opportunities in securities portfolio. Especially as we continue to manage funding costs. So I think those are primarily and I think we have to recognize the economic landscape that we're going to be operating within, but I think there's an ability to accomplish that.

Yes. Okay. That's helpful. Thank you. And maybe if I could move really quickly to the non-interest bearing deposits. I know the end of period was down maybe a bit more than the average was throughout the quarter. I was hoping just to hear any kind of color you have regarding trends so far in January?

I'd say we're running about the same place we were at the end of the quarter. The average for the quarter was 41% and the period end was 39.5%, so it's pretty close. We look at within a 5% band up or down as kind of reasonable, though we didn't expect to be that wide. So right now we're running where we were at the end of the quarter. I would say that, as I mentioned earlier, I think the pressure on pricing continues to -- it continues. I wouldn't say it's increasing, it just continues. And said it's probably going to bump rates here a few more times and that's going to roll down the hill the way it has. And so we're just trying to optimize our relationships. The way that we're looking at this is, we're trying to be selective and not reprice our entire deposit portfolio by just promoting rates. So we still have a strategy where we are pricing relationships individually and monitoring relationships, reminding them the service that provide and then when people ask for higher rates, we're having direct conversations. It's a lot more work and -- but it's I think protected our overall deposit base and that's one of the reasons why we've grown out to the brokered market or even the whole -- the non-core market to get funding so that when we want to buy it in bulk, so we don't have to reprice groups of deposits here by providing that rate to everybody, because a lot of people aren't asking for it, believe it or not. And a lot of our CDs just roll over automatically. And so we're trying to be pretty selective about it and strategic about it.

Okay. And then last one for me. I just wanted to ask on the -- I think the non-accrual loans were up about $12 million or so this quarter. Just was hoping to get maybe a little bit of color on what drove the uptick and was this an acquired credit with the PCD mark already against it or one that that BANC originated?

Well, we consider -- I don't think it was a -- the charge off that we took that was specifically reserved against, that was a PMB credit and that was -- that kind of proceeded as planned and I think we were well reserved on it. The other ones, I don't remember if the loans came from PMB or not at this point. And I just -- we own the loans and we're responsible for them. And I don't know that they had specific reserves on them, but we think that we have reserved properly at this point and we don't see a lot of credit noise down the road. So far, in my history here, we really haven't had any from the way that we've been underwriting and I think we'll be able to manage these just fine. It's certainly not a trend from my point of view.

Okay. Very good. Well, thank you for taking the questions.

Yes. Thank you very much.

And our next question today comes from Kelly Motta at KBW. Please go ahead.

Hey, good morning.

Good morning.

Thanks for the question. Most of mine have been asked and answered already, but if I could swing back to the warehouse book. I know that's difficult to predict, but wondering if there's any sort of minimum amount of activity you expect that to bottom out at? As well as if you remind us the deposit relationships that come with that in terms of either loans deposits [indiscernible]?

First of all, we have a really, really good warehouse team that does a fantastic job of kind of managing relationships and managing kind of quality of credits. And so, they're very selective in who we're going to lend to and how we're going to manage it. And so we've been fortunate that things for us have gone smoothly despite kind of the rundown and kind of that industry generally. Let me tackle the deposit piece first. We have a good amount of deposits with that business. Those deposits are very stable, they're institutional depositors who -- they operate through warehouse but not necessarily on the origination side, sometimes they're on the buy side, they're buying loans that have already been funded. So in that way, it's true C&I. And they're kind of sitting there with cash buying loans as needed and we're helping to fund that. So there's -- the deposit flows have been very stable and as warehouse balances have come down, warehouse as a business, a higher percentage of it is self-funded. And so we monitor that very closely, but it's pretty stable. In terms of where the balances are going to flow out, I'm trying to pull up the most recent numbers. And Lynn, you may have them in front of you have kind of where we think warehouse will fall out. I tell you, I don't know like whether it's going to go down more. At the end of the fourth quarter it was $600 million, $603 million. I don’t know -- yes, go ahead.

I think maybe just -- Yes, maybe just to add, I mean, we expect the warehouse to continue to pull back. I think the decline was mostly in line with maybe what we observed across the entire market. I think as we look forward, I think that decrease is expected to moderate given where rates have gone. So it may be that it comes down somewhat, but not at the levels that we observed I think in the fourth quarter. And I think maybe the averages will pan out to be about the same. So I think it's less of a headwind as we look forward and we've obviously built up the book in other places.

Yes, I think to that point, Kelly, if I can just add. We certainly feel like we've done a good job of diversifying our portfolio outside of the concentration warehouse that we before and continue to grow earnings through that. And so we don't see warehouse getting way back up even as rates come back down, but our team has done a good job of staying within a band. And so we've always said like up or down $100 million, warehouse was kind of the band. As it shrunk, maybe that's too big a band now, but we're going to be, I don't know, between $600 million and $650 million probably. It's hard to peg it exactly. But it’s our guessing today, I'd say that's probably pretty close.

I appreciate all the color on both sides. That's very helpful. Last question from me, a bit nitpicky, but I saw customer service fees are down quarter-over-quarter from where they've been running the past couple of quarters. Wondering if that’s activity driven, just less customer activity or if there's anything structural in -- I don't know if that's positive service charges and maybe some change in the way you're charging there? Just interested in any color that would be helpful on a go forward basis.

I can probably add a little bit. Yes. So included -- I would say that included in there is both deposit and loan customer service fees. And so with some of the loan production volume being a little bit lower that I think impacted the number for the quarter. And then I don't see much in the way of the deposit service fees. I think those -- while we are still competing heavily for our customers business. I expect that we would have a similar deposit customer service fees. So I think what we're seeing just in the fourth quarter is mostly to do with the loan side. And I don't know that we would see it going any further down.

Got it. That's helpful. Thank you so much.

Thanks, Kelly.

And ladies and gentlemen, this concludes today's question and answer session and today’s conference --

Excuse me, operator. Was there one more question or did that question drop?

They dropped. They removed themselves from the queue.

Got you. Thank you.

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