Earnings Call Transcript
Banc Of California, Inc. (BANC)
Earnings Call Transcript - BANC Q1 2023
Operator, Operator
Hello, and welcome to Banc of California's First Quarter Earnings Conference Call. All participants will be in listen-only mode. 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.
Jared Wolff, CEO
Good morning, and welcome to Banc of California's first quarter earnings call. Joining me on today's call is Ray Rindone, our Interim Chief Financial Officer, who will talk in more detail about our quarterly results. Before discussing our performance, I'd like to express our sympathy for those affected by the recent tragic events in banking. The horrible shooting in Kentucky was an unspeakable tragedy, and the failures of two banks have unsettled the banking community generally. We understand the concerns and uncertainty that these events can create, and we remain committed to providing stability and support to our clients, communities and colleagues and to those displaced by these unfortunate events. We've been able to effectively manage through the recent turmoil in the banking industry due to the strong franchise, client base and balance sheet that we have built over the last four years. The fundamental strength of our franchise is reflected in all of our key metrics as of the end of the first quarter, including the following. Our average non-interest bearing deposits remain strong at 38%, ending the quarter at 36% with overall net core deposit outflow of only around 2% for the quarter. We have significant available excess liquidity with our cash and available borrowing capacity, representing approximately 2.2 times our level of uninsured and uncollateralized deposits, which were only 27% at quarter end. A low level of total unrealized losses with approximately $47 million and $958 million of available for sale securities, representing less than 4% of CET1 capital after tax. We have a very high level of capital and strong capital ratios bolstered by $1 billion of cash sitting on the balance sheet. We repurchased approximately 1% of our common shares outstanding under our recently approved program. We have strong asset quality, which includes a 20% decline in both delinquent loans and classified assets in the first quarter, and since mid-March, we have seen strong net inflow of core deposits with a solid pipeline of non-discretionary operating accounts and new relationships. As I have said for several quarters, the effect of the Fed's tightening has been to contract the economy and pull deposits out of the system across all categories. The recent events only accelerated the outflow of deposits for mid-sized banks to some of the largest banks. Given that backdrop, I think our team performed extremely well and validated not only the strength of our franchise overall, but the solidity of our deposit relationships. Our focus is on providing solutions to businesses who value our service and expertise that is unmatched with other banks. Those accounts are rate neutral and we continue to focus on clients that value what we have to offer. The strength of the relationships that we have with our clients has proven to be extremely valuable throughout this recent period. We were proactive in reaching out to remind them of the financial strength and stability of the Bank of California, and where appropriate, we used programs like ICS to reduce uninsured exposure for clients who express the desire for such coverage. We added many new clients over the past several weeks who were looking to move to a stronger financial institution, and one of the slides in our presentation shows the growth we continue to see in commercial deposit accounts. While the deposit base has been largely stable since the recent banking crisis began, given the uncertainty of the macro environment and our conservative approach to risk management, we increased our level of overnight borrowings and added some short-term broker deposits to increase our liquidity. The overnight borrowings brought cash balances to approximately $1 billion at quarter end, which was $750 million more than the approximately $250 million we have averaged in the past. While these actions had an impact on our profitability in the first quarter, we believed it was prudent from a risk management perspective and the short-term nature of the borrowings and broker deposits gives us the flexibility to quickly make adjustments in our liability mix in the future. In terms of new loan production, we have the capital and liquidity to continue serving our clients, and we are still finding good lending opportunities in many verticals that we focus on, including bridge real estate, healthcare, entertainment and media, and education. Overall, we continue to see loan demand muted in the current environment due to higher rates and concern about the potential recession, and our total fundings were lower than the prior quarter. We saw a decline in our C&I portfolio during the first quarter, which was entirely attributable to three loans totaling $90 million that matured, and we chose not to renew. These were legacy loans originated many years ago that didn't provide meaningful deposits, and we didn't like the risk-adjusted yield associated with the renewal of these credits. We are also in a strong position due to stable credit quality, relatively high levels of reserves, and very limited exposure to areas under scrutiny, such as general office. Our investor deck details our very limited exposure to this sector and the strength of our portfolio. As we indicated we would do on our last earnings call, if we didn't see enough attractive lending opportunities, we added to the investment portfolio given the higher yields that are now available. As part of this strategy, we grew our securities portfolio by $90 million or 8%, and our new securities purchases are relatively short-term maturities, which will give us the flexibility to redeploy these funds into the loan portfolio as economic conditions and loan demand improve. One of our key objectives of the past few years has been to right-size the expense base while investing to support our future growth. As part of our regular review of appropriate staffing levels, we made a reduction in FTEs of about 3% during the first quarter. This reduction will help us to manage our expense levels effectively while also enabling us to reallocate some of the cost savings to areas we are investing in, such as our payments processing business, which continues to proceed on the timeline we have previously indicated. As I mentioned earlier, we have focused on maintaining strong capital levels. Given the high level of capital that we have, we were able to increase the amount of capital we returned to shareholders by increasing our quarterly cash dividend by 67% during the first quarter while authorizing a new $35 million stock repurchase program. We were also able to take advantage of the market dislocation during the quarter to repurchase approximately 1% of shares outstanding, much of which we were able to do below tangible book value. We'll continue to be opportunistic with respect to implementing the stock repurchase program while ensuring that we maintain high levels of capital to manage through the current challenging operating environment and support the continued growth of our franchise. Over the past four years, as we have built Bank of California into the go-to bank for small and medium-sized businesses in California, we have focused on building sustainable franchise value and, in the process, creating an institution that can perform well and deliver for both clients and shareholders in a variety of economic and interest rate scenarios. It's worth mentioning again, that we are a true relationship-focused bank. We typically have the operating accounts that our clients utilize for businesses, and we are deeply connected to them through the services we provide. Quarter after quarter, this has proven to be a truly sticky deposit base that provides stability even during times of stress in the banking system like we are currently experiencing. Now, I'll hand it over to Ray. He will provide more color on our financial performance, and then I'll have some closing remarks before we open the line for questions.
Raymond Rindone, CFO
Thank you, Jared. Please feel free to refer to our investor deck, which can be found on our Investor Relations website as I review our first 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 fourth quarter of 2022. Our earnings release and investor presentation provide a great deal of information, so I'll limit my comments to some of the areas where additional discussion is warranted. Net income for the first quarter was $20.3 million or $0.34 per diluted share. On an adjusted basis, net income totaled $21.7 million for the first quarter or $0.37 per diluted common share, when net indemnified legal cost and investments in alternative energy partnerships are excluded. This compared to adjusted net income of $26.8 million or $0.45 per diluted common share for the prior quarter. The fourth quarter's adjusted earnings excluded a $7.7 million loss on the sale of securities. Our net interest margin decreased 28 basis points from the prior quarter to 3.41%. Our overall earning asset yield increased by 20 basis points to 4.99%, while our total cost of funds increased 51 basis points to 1.68%, which was partly attributable to overnight borrowings and short-term broker deposits we brought on during March to temporarily increase our liquidity, which impacted the margin by seven basis points. Our average loan yield increased 15 basis points to 5.07% as variable rate loans in the portfolio continued to reprice, and we are seeing higher rates on new loan production. The average yield on securities increased 47 basis points to 4.66% due to portfolio resets and the impact of the repositioning we did in the prior quarter to sell lower yielding securities and reinvest the proceeds in higher yielding securities. Our average cost of deposits was 122 basis points for the first quarter, up 43 basis points compared to the prior quarter, while the average fed funds rate increased 86 basis points over the same time period. As a result, the difference between our average cost of deposits and the average cost of the Fed funds rate widened from 286 basis points last quarter to 329 basis points for the first quarter. As Jared mentioned, we are carrying approximately $1 billion in cash, which is about $750 million more than we normally hold. We intend to hold this excess cash until such time as we see sufficient stability in the banking landscape and specifically in overall depositor confidence. Our non-interest income increased $9.3 million from the prior quarter due partially to the previously mentioned loss on the sale of investment securities. Other areas of non-interest income were relatively consistent with the prior quarter with the most significant variances being in other income due to a $1.1 million recovery on a loan acquired and the Pacific Mercantile Bank transaction that had been charged off prior to the acquisition, and higher income from equity investments of $750,000. Our non-interest expense in the first quarter included approximately $1 million in severance expense related to the reduction in staff that Jared mentioned. Our adjusted non-interest expense increased approximately $800,000 from the prior quarter, which was primarily due to higher salaries, payroll taxes, and benefits that impact the first quarter. We also had an increase in FDIC insurance expense of approximately $300,000 due to higher FDIC assessments that are now in place. The effective tax rate for the first quarter was 26.7%, down from the prior quarter's rate of 29.6%. For 2023, we estimate our annual effective tax rate to be approximately 27% to 28%. Turning to our balance sheet, our total assets were $10 billion at March 31, an increase of approximately 9% from the end of the prior quarter due to the increase of our liquidity position. Our total equity decreased approximately $700,000 during the first quarter as $20 million in net earnings were partially offset by a $10 million shift in AOCI and capital actions, which included both common stock dividends and the repurchase of approximately $5.2 million of our common stock. Our loans were down approximately $61 million from the end of the prior quarter. This was primarily due to three loan payoffs that we had in the C&I portfolio that Jared mentioned, and runoff in the DSFR portfolio. The decline in these two areas was partially offset by an increase in the CRE portfolio as we continue to see good opportunities in our targeted lending areas. Our total deposits decreased $169 million from the end of the prior quarter. The decline was primarily due to outflows we saw during January and February, which was a continuation of the trend we had been seeing of clients seeking higher rates for their excess liquidity, combined with our focus to grow low-cost commercial deposit relationships. As Jared indicated, since the second half of March, our total deposits have increased, excluding broker deposits. Our credit quality remained solid in the first quarter. We had stable non-performing loan and non-performing asset balances while our delinquent loans declined by $19 million or 20%. While our asset quality was stable, we recorded a provision for credit losses of $2 million, which was primarily attributable to net charge-off activity and an increase in the general reserve, partially offset by changes in the portfolio mix and a decrease in total loan balances. Our allowance for credit losses at the end of the first quarter totaled $89.4 million compared to $91.3 million at the end of the prior quarter, and our allowance to total loans coverage ratio stood at 1.27% compared to 1.28% at the end of the prior quarter. At this time, I'll turn the presentation back over to Jared.
Jared Wolff, CEO
Thank you, Ray. Our top priority will continue to be prudent risk management while economic conditions in the operating environment remain challenging. However, the work we have done to build our franchise the right way has put us in a position to capitalize in the current disruption and dislocation we are seeing in our markets. The attractive qualities of our franchise are even more scarce today than they were at the beginning of the year, and ultimately, we expect to be a net beneficiary of the current turmoil in the banking industry, both in terms of adding new clients and banking talent as well. We're going to continue to focus on what we do really well, which is leverage our strength and treasury management to bring in relationship-oriented business clients and capitalize on the attractive lending opportunities provided by these clients. In the second half of the year, our new payments processing business will further improve the value proposition that we offer clients and enhance our business development capabilities. As many businesses re-evaluate their banking relationships in light of the current environment, we believe our differentiated payment solution will be a distinct competitive advantage. We are focused on the creation of permanent franchise value by growing valuable deposits, continuing to produce earnings, and growing tangible book value. The environment we are currently in, which places stress on margin and growth, is temporary, and we will come out of it having continued to build on the fundamentals that we believe in. I want to thank our colleagues at Bank of California for all their efforts in this environment. We have a remarkable team. We take pride in our proven ability to execute, and we believe that we can effectively execute and capitalize on the current environment in a way that will create long-term value for our shareholders. With our solid foundation of low-cost deposits, significant available excess liquidity, high levels of capital, and strong credit quality, we are well positioned for the road ahead. With that operator, let's go ahead now and open up the line for questions.
Operator, Operator
Our first question comes from Timur Braziler from Wells Fargo. Please go ahead. Hi, Timur, is your line open?
Timur Braziler, Analyst
Jared, you had mentioned that post-March, you see the strong inflow of core deposits, and the pipeline there is strong. Maybe can you just kind of go through what the competitive landscape in California has looked like subsequent to the failure of Silicon Valley and the stressors or some of the other West Coast banks, and if you can quantify kind of what those inflows in pipeline look like?
Jared Wolff, CEO
Sure. I'm happy to provide some insights. We find ourselves at the center of significant market disruptions due to the strong presence of First Republic, Silicon Valley Bank, and Signature Bank, which had established a noticeable footprint here. This has led to considerable disruptions and concerns among clients regarding uninsured deposits and their implications. Overall, the primary competitive factor has revolved around safety and depositor confidence, particularly regarding whether people's deposits are secure. Our team has done an excellent job reassuring our clients and showcasing our strong balance sheet, which has resulted in us maintaining 36% in non-interest bearing deposits. I expect this number to continue to grow. Our pipeline appears solid, though there may be some outflows. The context here involves an economy that is contracting, prompting deposit withdrawals. To maintain flat deposit levels, we need to attract new relationships since existing ones are not yielding additional deposits due to their shrinking balance sheets. We have been successful in bringing in new relationships, and if we see growth, that's a positive sign for non-interest bearing deposits. Our treasury management solutions have stood out, and we've benefitted from the outflows resulting from the resolutions of Silicon Valley Bank and Signature Bank. We approached this carefully, declining transactions that we deemed too large in order to avoid concentrated positions. Overall, I'm pleased with our position. The focus has first been on safety, followed by addressing clients' problem-solving needs, and lastly dealing with competitive pressure regarding rates. Currently, there is pressure for competitive rates, as depositors with excess balances are increasingly inquiring about them. Retail depositors are particularly sensitive to rates, while business accounts tend to consider the value of the services we provide, which can lessen their sensitivity to interest rates to a degree. However, we must still offer competitive returns on excess balances. I believe we are performing very well, and our team has excelled, maintaining our focus on business efficiencies.
Timur Braziler, Analyst
Okay. Great. And then I guess as you're looking out at the remainder of the year, understand that lending opportunities are kind of slower than what they had been, but just, I guess looking at the loan and deposit ratio here ticking up over 100%. How are you thinking about that dynamic of loans versus deposits? And to the extent that you are funding core relationships on the loan side, is there the ability to fund those with incremental core growth or do you think that incremental funding dollar, at least in the near term, is going to continue coming from brokerage space?
Jared Wolff, CEO
We are currently just over 100%, fluctuating around that figure. We feel confident about our position with the new lending opportunities coming in. We are indeed seeking deposits since most loans do not self-fund. Earlier in the year, I anticipated limited loan growth, and I believe we will end up in the low single digits based on current trends. We are transitioning from old loans to new ones, and if we see some growth, our deposits should be sufficient to maintain our loan-to-deposit ratio where it currently stands.
Timur Braziler, Analyst
Okay. And then one last one for me again, a bigger picture question, just with all the dislocation that's taking place in your state, particularly, is there some sort of arms race in getting any kind of meaningful scale to better capitalize on that? And I guess just what are your thoughts on broader consolidation activity taking place in California?
Jared Wolff, CEO
Well, I think it's a little bit early and I don't think we're fully out of the woods yet in terms of how things are going to play out. And I think there's a lot that depends on what happens with First Republic and where it goes. I think they're supposed to report earnings on the 24th, and I know there are a lot of interests in that and kind of what they see as their path from here. And so I think there are a lot of things that are waiting for that event to happen. There's a lot of conversation about the future of banking and consolidation and what that's going to look like and what size levels are appropriate. I really like where we sit from a scarcity value in terms of our franchise with the really, really strong deposit base that we have with really good credit quality and high levels of capital. It's going to give us a lot of optionality to think about how we can grow and what we might want to do. We have a lot of organic options and then obviously, we've shown that we've been acquirers in the past. I think there are a lot of smaller banks that might decide that they just can't get enough scale and I think we're going to be a beneficiary of that both organically through our acquisition of talent and clients through this disruption in the market and potentially transactionally if the right opportunity presents itself.
Operator, Operator
Our next question comes from Eric Spector from Raymond James. Please go ahead.
Eric Spector, Analyst
Hey, this is Eric Spector on the line for David Feaster. I appreciate you taking the question. Just wanted to follow up a little bit on the lending side. Curious where particularly you're seeing good risk-adjusted returns and then where maybe you might have less appetite for credit here. I know you mentioned low single-digit growth throughout the remainder of the year. Is it possible that you shrink if you don't see good risk-adjusted returns, kind of just some additional color on the competitive environment too, would be helpful?
Jared Wolff, CEO
Sure, absolutely. There's a possibility that we shrink. We're going to optimize earnings and return to shareholder value, and we could shrink loans in one of the portfolios pretty easily when you're getting returns close to 6% in pretty short duration and obviously in the 5% with very safe places. So you've got to be able to see a good risk-adjusted return to want to lend today. You have to be there for your best clients and the ones that are there that have proven themselves over and over again, you want to make sure you're lending to them, especially at times like this. But if we don't see anything, I think that that's really one of the strengths of our franchise is that we do have discretion and restraint, and we're not looking to grow just to grow in an environment that's not really a growth market. It's just not. And I think the outlook that we have that we set at the beginning was cautious. And we remain cautious. We're really focusing on our deposit franchise and being there for our clients, and we'll lend if we see good opportunities. We are seeing some stuff in Bridge real estate. There is some transactional activity that's happening, but I held a real estate round table the other night with some of our clients and some of our senior executives and around the table it was pretty quiet in terms of transaction activity. Everybody's sitting on the sidelines waiting for the next opportunity, but transaction volume in real estate right now is very, very slow. We are seeing some good opportunities in our media and entertainment area. We're seeing some stuff in education, warehouse. Their balances were relatively flat, but they're putting out some volume that's just replacing stuff that's running off, and that's working well. And on the C&I side, we actually had some good loan activity that would've grown, but for the $90 million, we decided not to renew just because we didn't think the risk-adjusted return was there and the deposit relationships weren't there. So we would've seen a little bit of activity there. It's just a very kind of low volume market right now where we sit.
Eric Spector, Analyst
Got it. That makes sense. And then just also wanted to touch on the new commercial accounts you added. It looks like you added about 250 this quarter. Just curious, what's attracting those clients to make California where you're bringing those relationships over and how you think about non-interest bearing balances going forward?
Jared Wolff, CEO
Thank you, Eric. We have been successful in attracting clients by offering sophisticated treasury management solutions tailored for businesses that require them. These clients often have accounts that earn credits which can offset fees if they maintain sufficient balances. Typically, they need multiple accounts and prefer centralized reporting, often alongside loans and lines of credit. While not every case fits this, there are certain sectors we focus on that have specialized needs in this area. I want to keep some of our strategies under wraps since they help us stand out in the market and compete effectively, but we've been developing this approach over the last four years, and it continues to improve each year. When I reviewed the reports released this morning, I was surprised by two things. First, the significant focus on earnings in the headlines. Just a few weeks ago, the conversation was dominated by issues like balance sheet strength, liquidity, and levels of uninsured deposits, with little emphasis on earnings. So, it was amusing to see earnings missing by a small margin being highlighted. The second point concerns deposit strength. I don't think this is the right quarter for anyone to project annualized outcomes based on what occurred. This quarter was highly unusual from my perspective, and the events we experienced are not likely to predict future trends unless we see a similar situation recur. However, I believe things have stabilized. We will have to monitor developments with First Republic. As for the outlook on deposits, I don't think people should annualize a 2% outflow in any specific category. Instead, they should focus on the overall stability and strength of our metrics. We feel confident about our position with 36% non-interest bearing deposits, which we anticipate will maintain or grow throughout the year. While it may fluctuate by 1%, we expect it to increase over time, eventually reaching 38% and then 40%.
Eric Spector, Analyst
Yeah, I appreciate the color. And then just wanted to touch on interest rate risk management and kind of your philosophy there. You've been very active with the restructuring last quarter and the cash flow hedge this quarter. Can you just elaborate exactly what you've put on this quarter with the $300 million hedge? And then just curious how you're thinking about managing rate risk at this point and whether you're looking at additional hedges or derivatives or any tools you have to manage your rate sensitivity going forward?
Jared Wolff, CEO
Ray, I'll let you add to this regarding the hedge, but I'll start with an overview. Currently, we're neutral on interest rates, whereas last quarter we were slightly sensitive to changes. Our focus isn't solely on the margin; rather, we aim for profitability this quarter while being aware of the long-term margin outlook. I anticipate a slight decrease in the margin due to prevailing rate pressures, but it could recover depending on the growth of non-interest-bearing deposits and the speed of that growth. Although loan yields are strong, the volume is insufficient to counteract the overall rate pressure. We have opportunities to lend more but are not seeing projects we find compelling enough right now. Just yesterday, we declined a loan that, while safe, didn’t seem timely for us. The margin reflects our level of activity. Regarding the hedge, we're carefully considering options to safeguard against future rate fluctuations, without committing fully in any single direction; instead, we're diversifying our approach. This hedge amounted to $300 million, Ray, was it a five-year hedge or three years?
Raymond Rindone, CFO
Five years? That's correct.
Jared Wolff, CEO
We locked in a rate of 3.8% for five years for a group of deposits. The idea was that we anticipated the cost of these deposits would increase over time. As we had a whole group maturing, we believed that securing 3.8% for five-year money was a favorable rate for us. In any environment, borrowing at 3.8% for five years seemed wise. If rates decrease, it remains a good cost, and if they increase, we can potentially earn more. Our model suggested that based on the forward curve, there was significant potential for profit from this hedge, but our goal wasn't to speculate; we aimed to identify maturing items where we could lock in costs. It was important to ensure that the cost was fair at the time of the decision. Regardless of whether rates rise or fall, we felt this was a reasonable trade when we made it. I hope this clarifies things, Eric.
Eric Spector, Analyst
Yeah, that's helpful. Thanks for taking the questions, and I'll step back.
Operator, Operator
Our next question comes from Gary Tenner - D.A. Davidson. Please go ahead.
Gary Tenner, Analyst
I wanted to ask about the brokerage CDs added in the quarter. Can you give us a sense, right, in terms of the kind of term and rate just, so we have a basis for how we're thinking about modelling those balances moving around going forward?
Jared Wolff, CEO
Ray, do you have the color on that?
Raymond Rindone, CFO
Sure. So, on the broker CDs, we ladder those out over time to manage our cost of funds and we have various durations that we use that to help manage our liquidity and give us some optionality to manage our interest expense.
Jared Wolff, CEO
We added about $300 million Gary. They were laddered as Ray said. So I don't know that we can give you a blended rate. And the other thing is we might bring them down and take them all. But Ray, I don't know if you have just as an example, like what the cost is for a 12-month broker CD right now, or a six-month broker CD to give, because they were mostly shorter duration.
Raymond Rindone, CFO
Right? Those would be in about the 4.85% to 5% range.
Gary Tenner, Analyst
I appreciate that. Regarding the headcount reduction you mentioned, can we expect to see some temporary benefits in the second quarter before any reinvestment occurs? What would be the initial annual savings from these cuts, and what are your thoughts on reinvesting?
Jared Wolff, CEO
I don't think you're going to see much because we're going to use it in other ways. We've guided to a quarterly operating expense of $48 million to $50 million, and we're currently at around $49 million. So, I believe we'll likely remain between $49 million and $50 million.
Gary Tenner, Analyst
Okay, thanks. And then in your comments, Jared, you have very briefly kind of mentioned the payment product. Can you kind of just update us? You said things are tracking on schedule, what kind of updated us on where things are and kind of transactions or other metrics you could provide for us?
Jared Wolff, CEO
Sure. We plan to onboard clients in the second half of the year, aiming for early in the third quarter, possibly even sooner. We anticipate gaining traction by the end of the year, with significant contributions to our metrics in early 2024 and throughout that year, particularly regarding deposits. Our strategy for onboarding clients is cautious; we're ensuring our risk infrastructure is solid before scaling up. We're currently testing this system, but real-client onboarding will be essential to validate our processes. We've maintained close communication with regulators during this phase, and I believe our approach is sound. I expect client onboarding to begin in the second half of this year, starting with smaller clients that will increase in size and volume as the year progresses.
Operator, Operator
Our next question comes from Matthew Clark from Piper Sandler. Please go ahead.
Matthew Clark, Analyst
On the margin front, do you happen to have the spot rate on deposits at the end of March and the monthly margin in March, just to give us some visibility?
Jared Wolff, CEO
Yeah, I don't think we disclosed that or not.
Raymond Rindone, CFO
We didn't disclose the flat rate in March, no.
Jared Wolff, CEO
Okay. I would say that, just generally. So this excess liquidity that we have on the balance sheet affects our margin by, I don't know, seven to 10 basis points. It's about $2 million of expense of interest expense that we're carrying until we choose not to carry it. I certainly want to wait and see what happens with First Republic, and then we'll take it down, but it's about $2 million of interest expense and seven to 10 basis points on the margin. And so, I think you can expect to get a benefit there when we take that out, but on the other hand, costs in March were definitely higher than they were averaging for the first quarter. And so I could see our margin being down 10 basis points to 15 basis points in the second quarter, maybe 20 basis points. I just don't know. It's going to really depend on the flow of non-interest bearing deposits, and I don't know that anybody can predict what that's going to look like. And obviously if we see good loan opportunities and we choose to do it and we want to borrow to do that, it might affect our margin, but we're going to make more money, and so it could be 20 basis points down. Matthew, I just don't know where it's going to be. We were looking at it last night, and there's a whole bunch of factors that affect it. So I hope that color helps though.
Matthew Clark, Analyst
Yeah, I'm just looking for a guidepost on the deposit side at least. And then just on the non-interest bearing deposit front, growing is encouraging to see that you grew commercial accounts, but can you give us some sense of what you witnessed in terms of the runoff, and whether or not there was anything chunky in there, whether or not you expect some of that to come back and whether or not there's some lag effect in terms of opening new commercial accounts and bringing other deposits?
Jared Wolff, CEO
There's definitely a lag effect. So, that's part of what we see in the pipeline in terms of not only new accounts but also the volume that we'll get in those accounts. It does take time to fund them. After you open the accounts, although, we bring it over pretty quickly. In terms of chunkiness or things like that, I think anything that we didn't lose any relationships. And so I was really pleased that nobody said, hey, we're pulling our money, we're going over here, but like every bank, we certainly banks our size, experience clients saying, look, I've got this new money coming in and my board wants me to spread it here or spread it there. So we think that there's opportunity for some of those funds to come here. I was on a call with a client the other day who has an infusion of some money from a private equity firm, and the private equity firm said, hey, I know that's your primary bank, but we'd like you to maybe put this money, this infusion somewhere else at one of the money center banks. And those conversations are definitely happening. So I think that, and they of course, advocated for us and they said, hey, we want to get you on a call with Bank of California and we'll get their people on the phone. So that is happening, which is why we're not losing any money at this point. It's all the opportunities ahead of us to bring that stuff back or to bring in new clients. And so, that's why I see our deposit base continuing to grow because we did so well in spite of all of that.
Matthew Clark, Analyst
Okay, great. And then just a housekeeping item, if you have it, the weighted average cost of that repurchased stock this quarter?
Jared Wolff, CEO
We have not. We haven't disclosed that. And Matthew, I think we did say that a lot of it was purchased below tangible book. We said the number that we did through the end of March, and then how much we got it we bought after the end of March, so you can kind of figure out where we might have been.
Operator, Operator
The next question comes from Kelly Motta from KBW. Please go ahead.
Kelly Motta, Analyst
Hi, thanks for the question. I'll carry on the repurchase commentary. Clearly, you were in the market and continued to be this quarter. As you look ahead, capital levels are really strong, which bodes well in this environment. What's your appetite for repurchases here and maybe an outlook for capital management going forward?
Jared Wolff, CEO
Yeah, thanks Kelly. Look, we feel really good about our company and where we sit for all the reasons we mentioned in our prepared remarks, and the fact that we're choosing to kind of be a little bit more conservative here and to focus on growing our deposit base and build, and focusing on our strength, and I think it's fine. Absolutely we'll take the opportunity to buy back our stock. We have a repurchase authorization for $35 million. I think it's kind of pretty low relative to our capital levels, but we wanted to be prudent not knowing what the environment was going to look like, and we'll be opportunistic in buying back our stock. I certainly don't like our stock at these levels, but if it is going to be at these levels, we think it's an incredibly good bargain to buy our stock here.
Kelly Motta, Analyst
Understood. Switching over to credit…
Jared Wolff, CEO
Oh wait, Kelly, one other thing, just to reflect on that, we're sitting with such low levels of unrealized losses in our available-for-sale portfolio and even in our HTM that, we know that our tangible book value doesn't have the numbers running through. We continue to grow tangible book and so it's just surprising kind of where the stock is sticking out even with 36% non-interest bearing. So there's a whole bunch of reasons why we should keep buying our stock, and as long as it sits down here, I think we'll be appropriately opportunistic.
Kelly Motta, Analyst
Got it. Thanks. Thanks for the color. Switching to credit with the charge-off you had this quarter, can you provide any color as to what composed those charge-offs? And as we kind of look ahead in a normalizing credit environment, what would you view as a normalized level of charge-offs? Would it be similar to this 20-ish basis point you had here? Any puts or takes would be helpful.
Jared Wolff, CEO
Yeah, I think if I remember correctly, it was like $500 was the charge off. It was a small event that we had prepared for. We did put aside 2.5%, and so the net number was 2%. It was just based on what we saw. It was kind of a cautiously outlook. I don't see anything specific that I'm concerned about. We have, obviously we disclosed our very, very low levels of office exposure. I think talking about CRE is too general because multi-family is technically CRE, and so we like to break that up. As it relates to CRE office, general office is a very small number for us, and so that's why we lead out those numbers. I'm not predicting any credit problems going forward, and I think our reserve levels are adequate and relative to others, they're actually pretty high who have similar portfolios to us, but we follow our model, and from a model perspective this quarter, we felt that this amount was appropriate.
Kelly Motta, Analyst
Thanks for that. Can you expand upon just the composition of that multi-family portfolio? Just, what a typical credit looks like size why you feel confident there just because we are feeling questions about CRE. So just any color on…
Jared Wolff, CEO
Our multi-family portfolio has performed very well across various market conditions. We are primarily lending in California, focusing on infill housing located in densely populated areas facing significant housing shortages, such as San Diego. To give you an idea, there is an estimated shortage of around 300,000 units, while only about 10,000 units are being added each year, making the outlook for recovery quite challenging. I can see a construction project from my office in Brentwood that is likely to sell out quickly. We currently do not have any non-performing multi-family loans, and I don't foresee that changing. There's been a lot of discussion about how to assess multi-family loans in light of interest rate changes. For instance, if you have a loan maturing within the next year at an interest rate of 3.4% or 4%, the current rate for a similar loan could be around 7% to 7.5%. Most of these properties are fully stabilized, which provides borrowers with multiple options. If rents haven’t kept pace with rising interest rates over the four to five-year period that the loan has been active, the borrower might need to provide additional equity. During a recent real estate dinner with clients and senior executives, the conversation was subdued regarding transaction volume. Everyone seems to be waiting for the right moment to act. The current transaction volume in real estate is quite low, but we are identifying favorable opportunities in areas such as media, entertainment, education, and warehouses. While their balances have remained steady, we are actively placing new loans to offset those maturing. On the commercial and industrial side, we experienced some good loan activity which could have grown further if not for the $90 million loan we chose not to renew, as we didn't see sufficient risk-adjusted returns or strong deposit relationships. Overall, it's a low-volume market at the moment.
Kelly Motta, Analyst
I really appreciate all the color. I'll step back. Thank you.
Operator, Operator
Our next question comes from Tim Coffey from Janney. Please go ahead.
Tim Coffey, Analyst
Hey, if I can just follow up on the CRE commentary there. So, good details in the deck on the different property breakdowns. I'm wondering of the general office, how much of that is in a central business district?
Jared Wolff, CEO
Los Angeles doesn't have a central business district. Instead, we have various neighborhoods like Downtown, Brentwood, Westwood, Century City, Woodland Hills, Santa Monica, and Culver City. These areas are not isolated, and some buildings are even located in San Diego. When we assess loans, we consider the potential demand for rentals based on turnover during the loan term and whether rents will attract tenants. This evaluation is part of the appraisal process. We believe these properties are well-located enough to perform as long as the office market remains viable. The challenges they face will stem from a broader shift away from office space, not from their locations. Our loans are secured by the borrowers, and we maintain regular oversight. Recently, we noticed low occupancy in one loan, and the borrower responded by contributing additional funds to pay down the loan. That’s the advantage of being a recourse lender, ensuring our loans are backed by capable borrowers.
Tim Coffey, Analyst
Okay. And then I want to get your thoughts on the CLOs. Part of Western Alliance's de-risking is that they've considered selling some of their CLO holdings. I was wondering what your thoughts were on continuing to hold the CLO portfolio?
Jared Wolff, CEO
We are in a significantly different situation compared to Western Alliance for several reasons. I’m not familiar with the size of their portfolio, but when I joined the bank, we had over $1.5 billion in CLOs, and now we are under $500 million. This portfolio is self-liquidating and was tested during COVID. We closely monitor it as it is dependent on credit spreads, and we primarily hold double A and triple A CLOs. This is part of our asset sensitivity, which is more pronounced because these are short-term assets, and we currently have no plans to sell them. The portfolio has reached a reasonable level within our overall securities portfolio and is performing well. We have received offers to buy it, but since it is in a low unrealized loss position, we wouldn’t sell it at a loss. If it were trading at a gain and we could exchange it for another short-term asset of similar quality, we might consider it, but selling it at a loss is not an option for us.
Tim Coffey, Analyst
Okay. All right. Those are my questions. I appreciate the time. Thank you.
Jared Wolff, CEO
Yeah, I guess I should also say never say never, but that's at least the way I feel today.
Operator, Operator
Our next question comes from Andrew Terrell from Stephens. Please go ahead.
Andrew Terrell, Analyst
Most of might have been asked and answered already. I did have a couple just going back to the office commercial real estate book. I understand it's a low portion of loans for you guys and the underwriting looks solid at a 54% LTV. I'm just curious, have you seen Jared, any office properties either within your book or across your markets get recently reappraised, and what the value change was on the property? Just trying to get a sense of kind of incremental comfortability here with how low leverage or how low the leverage points are across your portfolio.
Jared Wolff, CEO
Our portfolio has been appraised recently and we conduct these appraisals annually. I feel very confident about our numbers. While we have a loan to value ratio of 55%, this is based on recent appraisals and not outdated figures. It's important to note that the value of office properties has generally declined, largely due to factors such as property size and location. Large office buildings are facing significant challenges, but we do not own those; we have B and C low-rise buildings. These are suited for tenants who prefer working in an office rather than from home, and they are typically smaller, suite-based buildings. Large office buildings are under substantial pressure unless they have long-term anchor tenants. For example, the Wells Fargo building in San Francisco recently sold for $200 per square foot, which is surprising considering the replacement cost. Most large buildings are being sold for much less than what it would cost to replace them, while smaller buildings are not experiencing the same level of decline.
Andrew Terrell, Analyst
Yes. Okay. And then similar thing on the debt service coverage; do you get, like how recently is that debt service number refreshed? Is it similar to how often you get appraisals on properties?
Jared Wolff, CEO
No, it's more frequent because we're looking at this stuff almost quarterly in terms of understanding rent rolls and cash flow of buildings and things like that. It depends on each loan, but we obviously things that have low debt service coverage. We're looking at and are in constant conversations, things that are higher that have been performing with good rent rolls and stable tenants; There's not as much need to look at it.
Andrew Terrell, Analyst
And then on the three credits for $90 million or so that were sold this quarter or exited, I think it's good to see some balance sheet kind of pruning where it makes sense. Do you feel like there's, as you look out, anything else across the loan portfolio that might be legacy in nature that you could be looking to trim up over the next couple of quarters?
Jared Wolff, CEO
Yeah, there's a whole bunch of stuff where the deposit relationship just is not there for the size of the loan, and so as this stuff comes up, we're sizing and saying, look, you got to put more compensating balances in our company or you're going to have to go borrow from somebody else. And there were loans that were made before I got here that just didn't have deposits associated with them, and we’ve tried to bring in deposits from those relationships over time, but you can't necessarily cause somebody to bring them over with you unless they have a new request. Once the loans are made, we're committed on the loan. I think that's the easiest opportunity is looking at any of those relationships where we haven't been able to bring in deposits for whatever reason on that specific loan. We just won't renew it. Everybody here knows that we are not making any loans without a deposit relationship, period. That's been the way it's been since I've been here, but it's even more true today.
Andrew Terrell, Analyst
Yes. Okay. And apologies, I might have missed this. Can you talk to non-interest bearing deposit flows since the quarter ran? Have you seen a slowdown in the cadence of NIB outflows? Does it feel like that's improved so far? Just trying to get a sense of as we work into 2Q kind of the level of stability for the NIBs?
Jared Wolff, CEO
Yeah. Currently, we are at 36%, which feels appropriate as we move forward and we anticipate growth from this point. We experienced some initial outflows at the beginning of the quarter, which we were expecting. There was an increase in outflows, not necessarily in volume, but in the number of occurrences during the market downturn, though a substantial amount has returned. We now have a solid pipeline with promising opportunities that I am optimistic about. Therefore, I believe our non-interest bearing deposits will remain stable and grow. As I mentioned earlier, the economy has been contracting, and deposits are affected by this; for example, Banc of America saw a 2% decrease in deposits, which isn't surprising given the economic conditions. However, we are competing fiercely right now, and I think our team is performing well, making it a major focus for us. I remain hopeful, although the future direction is uncertain. At the moment, 36% seems stable, and I see potential for growth. However, if unexpected events occur and there is a further decline, all banks might experience outflows, and we would need to recover from that. Non-interest bearing accounts are typically the last to leave our company.
Andrew Terrell, Analyst
Right. Okay. Well very good. Thank you for taking the questions. I appreciate it.
Jared Wolff, CEO
Yeah. Thank you, Andrew.
Operator, Operator
This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.